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Supply Chain Cost ReductionOpportunities for Indian

Companies | Special Report

AAQQUUAAMMAANNAAGGEEMMEENNTTCCOONNSSUULLTTIINNGGGGRROOUUPP

SUPPLY CHAIN COST REDUCTION IN INDIA


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Aqua MCG Special Report SUPPLY CHAIN COST REDUCTION IN INDIA

Page 2 AQUA MCG LEADERSHIP REVIEW | www.aquamcg.com

SUPPLYCHAINCOSTREDUCTIONININDIA

Supply Chain Cost Reduction Opportunities for Indian Companies

SUPPLYCHAINCOSTREDUCTIONININDIA

THE MARKET AND SUPPLY CHAIN NEED

Failed companies. Rescued banks. Panicked markets. Our current economic suffering is being hailed as one of the

worst of all times. With a sharp decline in spending & wealth, now more than ever, have organisations realised the

need for strategic thought and structured planning. This is where cost reduction has assumed its insurmountable

position.

Cost saving initiatives need to be shaped and implemented by all departments in the organization; the entire

process of planning, monitoring and measuring needs the support of all. Everyone from the top to the bottom

must be actively involved, and work towards the new goals set. Expense reports are obviously the most logical

place to start. These should be over a relatively long period of time in order to remove any seasonal variations. Itis also important to stay focused on the key areas that account for the major 80% of costs.

Many organizations believe in myths like an informal program for cost reduction is fine; or even that reducing

costs have a negative impact on quality. Nothing could be further from the truth. The most efficient cost reduction

programs are those that very formal / specific and have clear objectives & accountabilities attached to it.

Companies that have been successful in cost reduction realised that its not enough to just reduce expenses to

remain competitive; rather it takes innovative measures to emerge as leaders. This is why the role of knowledge

advisory groups is so important. They help provide a much needed innovative & structured program, designed

through practice-proven tools and strategies from specialists.

For example, it is easy to see why so many companies choose to downsize their workforce so that employeecosts, which often account for more than 40% of a companys operating budget, can drastically reduce overall

expenses. But how many have actually considered outsourcing non-core functions, like outsourcing the entire

supply chain. Many auto & chemical companies around the world have outsourced their logistics, and are saving

considerable amounts of money.

Even in the domestic Indian market (sans the effect of globalization) there is a tremendous need for companies to

improve their supply chain processes due to:


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FASHIONING AGILE SUPPLY CHAINS

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Well informed, powerful customers The level of customer satisfaction is often driven by the supply chain.

Customer expectations today stand at very high levels where responsive, demand-driven ones meet the desired

service levels. For this supply chains need to be well integrated & at the same time help maintain low costs and

high margins.

Shorter product lifecycles Product lifecycles are getting shorter and shorter mainly led by technological advances.

Take for example the tremendous impact that the invention of a tiny microchip had on so many products across

industries.

This means that companies need to continuously introduce new products to stay in business. Unless one has a well

co-ordinated and collaborative supply chain, the entire new product introduction will be a failure- right from the

development costs to the time-taken-to-market.

Reaching the rural customer More than 70% of Indias population lives in its villages. This bottom of the

pyramid represents a huge untapped market potential. Companies are striving on new ways to reach out to this

huge market. This requires huge investment in infrastructure development, Information Technology and the local

people. It requires a robust supply chain to reach out to these markets and achieve the desired ROI.

Business leaders are going on record to say that although Asia has been a growth story for so long, many

businesses have not paid enough attention to pricing & costs. This is the time to do it they say.

LEVERS TO IMPROVE ECONOMIC PERFORMANCEThis section provides a brief look at some levers that help boost economic performance. We will be examining

some of these points, especially those related to supply chain, further on in this report.

Although it is imperative to maintain lean costs to boost economic performance in the current market scenario,

what is oft forgotten is the need to maintain lean cash. By this we mean:

Cash tied to inventoryby improving service levels through delivery and turns

Improve working capital flows this will help unlock the potential of this one-time cash

Rationalize the operational CAPEXthis can help in reduction and postponement of CAPEX expenditures

Under the maintenance of lean costs we need to look into the following key areas:

Departmental costs optimize the all division costs; be it HR, Legal, Finance, Public Relations and so on

ITfind new ways of automating processes and reducing manual human interventions

Supply chain companies might want to outsource non-core activities and stop reverse logistic processes likereturns, damages etc

Service levels reduce extra service costs like warranty

Product development improve productivity & efficiency with focus on lowest costs

Manufacturingadopt lean measures


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Reduce indirect procurement such as travel & healthcare

Organization streamliningreduce management layers and improve span of controls.

FACTS ABOUT INDIA & ITS SUPPLY CHAIN

India's diverse economy ranges from traditional village farming, modern agriculture, handicrafts, to a wide range of

modern industries, and a multitude of services. Services, however, form the major source of economic growth,

accounting for more than half of India's output with less than one third of its labour force.

About 60% of the work force is still in agriculture, leading the government to focus on improving the lives of the

rural poor by developing basic infrastructure, and boosting the economic performance. The government has also

reduced controls on foreign trade and investment; for example it has raised the limits of foreign direct investment

(FDI) in key sectors, such as telecommunications.

The Indian logistics industry is also poised for a significant leap forward in the coming years because of the viewthat India would become the leading global hub for manufacture of automobiles, auto ancillaries, pharmaceuticals

,high technology electronics, processed foods, textiles etc. as well as the services sector like IT, tourism, health

services, finance, education, BPO's etc .

In the early 2000s, when companies undertook supply chain management studies of a large magnitude, the top

objective of leading supply chains was to increase profitability while, at the same time, reducing costs and

improving quality. Now, companies are moving away from a direct focus on cost reduction to put increasing focus

on customers, by putting

responsiveness and customer

servicing within its set of three

top objectives.

As you can see here, the top

three objectives (from a

choice of eight), as rated by respondents in each of the 2006 Value Chain studies conducted in the United States,

Europe, Japan, ANZ and India, compared to worldwide 2003 results shows how responsiveness has emerged as

the single largest focus. 1

HOW ARE INDIAN COMPANIES PERFORMING ON KEY SUPPLY CHAIN

METRICS?Now, a key question to ask here is: how are Indian companies performing on key supply chain planning metrics?

The on-time delivery performance of Indian companies has improved over the years and compares favourably to

global counterparts. However, this is primarily due Indian companies using less stringent metrics for this

measurement; leading companies are redefining key supply chain metrics and setting up programs to monitor and

improve their performance.

1Source: IBM Institute for Business Value 2003 and 2006 Value Chain Studies


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For about one-third of these

respondents, the standard

lead time from order to

shipment is within a week.

The cash to cash cycle of

about half the respondent

companies in India is less than

a month; however, 30% of

respondents have a cash to

cash cycle of greater than 2

months.

To take this one step higher,

the break-up of typical supply

chain costs in India is as

indicated in the figure below.This clearly indicated how

over 55% of costs come from

transportation whether

outbound or inbound. Other

major costs include inventory carrying costs and warehousing costs.2

Inbound

transportation

Cost

28 %

Ou tboundtransportation

Cost

28%

Warehousing Cost

7%

Inventorycarryingcost

13%

Costoftransist losses

5%

Costofdamages

5%

Othercosts(insurance,

international freight&

clearances)

6%

Returninventorycost

4%

Return processing cost

4%

Breakup OfSupplyChain Costs in India

Now lets take a look at the Automobile industry in India, which is the tenth largest in the world. In todays

competitive landscape and economic down-turn, automobile companies worldwide are shifting their attention

towards understanding & implementing an integrated supply chain. In such a context it is important to understand

the current supply chain metrics being followed by the Auto and Auto Ancillary Industries in India.

2Source: IBM Institute for Business Value 2003 and 2006 Value Chain Studies


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A recent IIMM (Indian Institute of Materials Management) survey of the supply chain management practices in India

revealed the major supply chain practices and metrics being followed. This survey was carried out among 27 Auto

and 51 Auto Ancillary companies.

In this context, Automobile companies can be broadly grouped into the following categories:

1. Cars & utility vehicles,2. Tractors3. Trucks4. Two wheelers

Auto ancillary companies on the other hand, can be grouped into the following:

1. Engine parts2. Transmission3. Electrical

4. Ancillaries others

As in any industry, the four broad supply chain metrics considered were:

1. Cycle-time metrics2. Cost metrics3. Service quality metrics4. Asset metrics

For the first metric i.e. the Cycle-time (measured by the no. of days elapsed from the moment a customer placesan order to the moment of receipt of payment) for around 37% of the companies is between 10 - 18 days. Forsome of the companies (4 percent), it is above 45 days.In service quality metrics (% of On-Time Deliveries, Supplies made as per the quantity ordered and Supply on

desired quality) around 64% of companies have an on time delivery of 95- 100% & around 12% of the companiescontacted have an on time delivery of less than 80%.Asset metrics include aw Materials Inventory Holding (No. of Days), Work in Progress Inventory Holding (No. ofDays), Finished Product Inventory Holding (No. of Days) and Inventory Turnover (Times). Results show thataround 26% of the companies have a raw material inventory holding of less than 9 days and about 8% of companieshave this holding above 28 days.

As the theme of this report suggests, we will primarily be focusing on the cost metrics and dwell on this in detail.The main components of costs in this industrys supply chain are highlighted below:

In-bound transportation cost This is the cost of transporting raw materials / products etc fromsuppliers. It is typically denoted as a % of the total manufacturing costs. Here, for 44% of thecompanies it was found to be 1-2%. The break-up is shown in the pie-chart (Fig. 1).

Out-bound transportation cost This is the cost involved in transporting the finished products / services to thedistributors / customers, and denoted as a % of total sales. Asindicated in the chart (Fig. 2), for majority of the companies theoutbound supply chain cost is close to 2-3%.

Warehousing cost These costs are incurred at the warehouse andinclude elements such as storing, receiving, picking, and shipmentetc of the finished goods; this is again denoted as a % of total sales. About half the companies

Fig 1

Fig 2 Fig 3


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have warehousing costs less than 1% (Fig. 3)

Inventory carrying cost This is the cost involved in holding the inventory andrepresented as a % of total sales. For about 50% of the companies this cost stands at 1-

2% (Fig. 4).

Total supply chain cost In the automobile & auto ancillary companies thetotal supply chain cost for majority of the companies i.e. 48% it is about 8-12% (Fig. 5).

SUPPLY CHAIN PROCESSES IN INDIAAmong the many supply chain processes, the three ranked the highest by respondents were: Customer service,

Demand management & Inventory management.

In inventory management, the inventories looked at are raw materials, WIP, finished goods, goods in transit,

accounts receivable, accounts payable, inventories at CFAs/DCs, distributors & retailers.

In India, the primary inventory replenishment process is the push system versus the pull system. It is often quoted

in the industry that up to 85% of companies adopt the push system.

In a push-based supply chain, products are pushed through the channel, from the production side up to the

retailer. The manufacturer sets production at a level based on historical buy patterns. However, it takes longer for

a push-based supply chain to respond to changes in demand, which may result in overstocking or bottlenecks &

delays (the bullwhip effect), unacceptable service levels & product obsolescence. On the other hand, in a pull-based

supply chain, procurement, production and distribution are demand driven so that they are coordinated with

actual customer orders, rather than forecasted demand.

Push-Based Model:

Pull-Based Model:

The major divisions of logistics costs in India are: cost of materials, labour, production operations, inbound /

outbound transportation, warehousing, primary/secondary movements and distributors margin. Delivering on

these costs is itself a challenge and added to that companies must deliver on profitability & responsiveness.

Fig 4

Fig 5


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Delivering on all three i.e. cost, profitability and responsiveness can therefore be the real test. In the surveys of

many nations it was found that the reduction in cost has been replaced by the focus on quality in the top three

objectives. And to meet these multiple objectives, supply chain leaders have realized that supply chain effectiveness

requires more than efficiency and low cost. Supply chains are also an important driver of revenue growth and

profitability, as well as the primary source of responsiveness. Many companies therefore are evolving toward the

on-demand i.e. customer-driven supply chain.

The shared vision is to have an integrated end-to-end, customer-driven supply chain integrated across the

business and with key customers, partners, suppliers and service providers. All top-performing supply chain

companies are actively adopting leading management practices, such as:

Synchronizing supply and demandthrough more efficient planning & forecasting Developing mutually beneficial outcomes to strengthen supply chain relationships. This also

means sharing information & risks with partners to reduce overall exposure

Coordinating business functions horizontallyacross the supply chain Managing supply chain cycles for example, for planning or for order-to-delivery Developing variable cost structures as alternatives to fixed costs Using real-time information to create responsive, customer-driven processes

In India too, organizations are responding to the challenges of cost control & customer responsiveness in five key

supply chain areas:

Synchronizing supply, managing demandby making planning customer driven The perfect product launch and lifecycle management Effective customer order management through real-time information The procurement opportunityby realizing the benefits of holistic sourcing Efficient logistics services by driving efficiencies in logistics operations

Another major development is the e-enablement of supply chains through various IT applications across the supply

chain: computer aided process planning, manufacturing execution system, engineering data management, demand

management, process control & optimization, supply chain management, warehouse management, scheduling &

loading, CAD/drafting, sales, distribution, ERPs etc

THE NEED TO REDUCE COST IN THE INDIAN SUPPLY CHAINThe aim of any manufacturing/services firm is to produce goods to meet the end-customer requirements. One of

the key differentiators which influences a customers buying behaviour is the price of the product. This is especially

true for a mass market like India, where volumes are more important. Another reason for this is the increasing

maturity of many industries and the mass commoditization of products. In such a case, the product price and on-time delivery becomes a very critical factor. With the cut-throat competition and increasing input prices, cost

reduction is a must to help maintain/increase margins. The competition is so intense that a small price rise of a

product might cause huge reduction in demand for that product. Secondly, there is always a push from the

shareholders to maximize their return on investments. As operations cost for a major part of the cost that goes

into the product, supply chain cost is the single most important area for cost reduction. However supply chain

cost reduction needs to be followed with the customer in focus i.e. there should be no compromise on either the

quality of the product or technology or customer service. Also cost reduction has to be a continuous


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Goals &

Objectives

ASTRUCTURED APPROACH TO COST MANAGEMENT

Define Goals & Objectives A structured approach to cost management would obviously first involve defining its

goals & objectives. The supply chain cost management & reduction exercises should be well aligned with theoverall business

strategy. With overall

business strategy we

mean key business

plans, customer

expectations,

opportunities &

threats, supply chain

road-map, marketing plans and last but not least, a clear understanding of the relationships shared between various

functions and departments. Those that are not tied to these long-term strategic goals are often misguided and

create havoc due to the myopic focus on short-term productivity gains.

Team goals should be set with the involvement of all departments & functions, so as to infuse the interest &

concern of all. Again, a pure department-focused cost reduction exercise will only motivate a single department

and not multi-departments that actually forms a team.

Just as in any strategic exercise, cost management drives also require a core team entrusted with adequate

responsibility & authority to drive manage and monitor all cost management initiatives. They should also keep in

mind that goals should be realistic, focused, measurable and quantifiable. It should be breakable into clear units of

Supply Chain Cost Management Framework


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work which can then be assigned to each team. On the other hand, unrealistic or vaguely defined goals can dampen

motivation and guarantee the failure of cost management

Identify Supply chain costs Now that the Goals & Objectives have been identified, it is now important to classify

all the supply chain costs and its flow. From the primary costs that have been stated in the previous step, the

secondary costs and sub costs will emerge. Now the team can drill down on all the activities to be taken up in

order manage all these costs step by step. At each stage one can review this process and the core team, to

continually improve both. If needed, more relevant / value-add individuals and teams can be added

Define the key cost drivers Identification of the cost drivers and the interaction between these identified drivers

is very critical in gaining a clear understanding of the cost behaviour. Traditionally cost behaviour was analysed

solely based on the volume of output. However, such a cost driver analysis does not give a proper picture when a

long term analysis is done. In a typical strategic cost driver analysis, cost drivers are classified into two categories

(Shank & Govindrajan):

Structural: these drivers relate with the strategic choices made by the companyo Economies of Scaleo Scope: the extent of vertical integration in the firmo Learning and experience curve effectso Technology requirementso Complexity/broadness of the product line

Execution: these drivers are related to the organizational skills i.e. they depend on the way managementuses the resources available to meet the customer needs

o Capacity utilizationo Workforce Involvement and commitment to continuous changeo Efficiency of plant layout, production processes and other internal operationso Efficiency of linkages with suppliers and customerso Time-to-market of new productso Commitment of workforce towards quality

Thus a firm needs to identify the key cost drivers in order to make strategic decisions aimed at supply chain cost

reduction.

Identify opportunities for cost elimination/reduction Cost reduction is a direct function of controlling the cost

drivers related to each activity in the value chain. Hence the team needs to clearly identify the areas for cost

elimination/reduction by quantifying each of them and perform a cost-benefit analysis for each cost reduction

opportunity. Then classify the opportunities based on two criteria: investment required and time taken to

implement. It is advisable to first target the quick hits and then address the other identified areas

Develop Road-Map, Implement & Monitor The road-map that follows aims at breaking each activity orexercise into clear tasks and units of work. Therefore, this should possess clear action statements and action

owners similar to a RASCI matrix. RASCI stands for:

o Responsible: the clear owner of the exerciseo Accountable: the authority who approves and signs-off initiatives; R is accountable to him/hero Support: person who supports & assists


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o Consult: person who provides the information & expertise necessary for the success of theinitiative

o Inform: person who should be notified and informed of the resultsAfter developing a similar matrix, the schedules i.e. start and end-dates with time-lines for critical activities should

be listed out. KPIs (Key Performance Indicators) should also be set to measure the effectiveness of the

implementation.

This entire road map should be easily implementable and the results / details should be fed back. This in turn will

be checked against the KPIs to review the process & its success; it will at the same time help in continual

improvement.

KPIs and KPI-reporting can be done through Dashboards and Metrics that allow top management to get an instant

window into how effective the various cost management initiatives have been, and the current implications of it.

They also provide instant feedback on what is working, and what is not; tracking progress and monitoring

schedules. In case the need arises, this forms the foundation for modelling various other scenarios / initiatives toalternatively take.

COST MANAGEMENT INITIATIVES

The importance of Sales & Operations Planning

An S&OP process helps in balancing supply and demand with the help of a single operating plan spanning across all

functions to achieve profitable growth. It also helps align the companys strategic business goals with the daily

operations plan in the most cost-effective manner. Effective planning results in better forecast accuracy and better

visibility. Effective planning of the supply chain helps in maintaining balanced inventory levels, increase inventory


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turns and a better utilization of the resources. All these three factors together help achieve supply chain cost

reduction.

The demand forecasts developed by the Sales personnel are generally inflated to buffer the effect of late deliveries

from the manufacturing plant. The manufacturing personnel in turn give an inflated projection to the sourcing and

procurement team. The finance team gives another set of forecasts to the manufacturer purely targeted at meeting

goals of the finance group, without any idea of either the capacity constraints or the inventory levels. The result is

a number of forecast figures most of which are inaccurate and unreliable. On the other hand a poor planning

process results in higher costs due to expedited shipments, frequent stock-outs, higher inventory levels, higher

transportation costs due to large number of small shipments and lower customer service levels. The chart below

shows a typical 5 step S&OP process.

Most companies today have some sort of an S&OP process in place. However, in most cases the existing process

in place is far from an ideal state. Even in companies where there is a rudimentary traditional S&OP process where

a forecast number is agreed by marketing, sales, finance and production planning teams; forecasts tend to be poor.

A company thus needs to first do a diagnostic to determine at what stage of maturity it is at present, and then aim

for the next higher stage. Given below is a 4 stage S&OP process maturity model (From the Journal of Business

Forecasting, 2005 Spring Edition, MIT).

S&OP Maturity Model

Stage 1, Marginal Process: The

companies in this stage do not

have any formal meetings for the

S&OP planning process. Even if

there are meeting scheduled, then

are frequently cancelled or are

given very less importance. This

results in different plans being

created by different functions

across the organisation with no or

little collaboration. Each of these

functions act as individual silos

with their individual goals, which

more often than not are conflicting to the goals of other departments resulting in locally optimal decision makings

and higher supply chain costs. Even the supply plan is not aligned with the demand plan.

The use of software technology is at a minimum, mostly limited to the use of spreadsheets as each of the functions

develops their individual plans and there is no integration whatsoever.

For companies in Stage 1 to move to Stage 2, they need to have a more formal meeting process, with each of the

functions actively involved in working towards a common plan.

Stage 2, Rudimentary Process: Companies in this stage have formal meetings for S&OP, however the

participation is minimal and there is very little integration in the planning process. There is a lack of a consensus

based plan due to minimum interaction between the functions, or a lack of preparedness for the S&OP meetings.


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The demand side functions develop multiple demand plans through the use of Demand Planner applications which

are then transmitted to the supply side. The supply side in turn reconciles these plans and develops a supply plan

aligned to it. This supply plan is generally not shared with the demand side.

For companies in Stage 2 to move towards Stage 3, it is very important to have support from the management

team. The management team needs be first convinced of the need for a well designed S&OP process, which is then

transmitted to the all the functions by the management so that the S&OP meetings are given due accordance. The

intent should be towards arriving at a single consensus plan by the concurrence of the supply and demand plans.

Stage 3, Classic Process: Companies in Stage 3 have an established formal S&OP process and have their supply

and demand plans aligned. The S&OP meetings are held at regular intervals as decided and find full participation

and support from all the functions. The planning process is totally integrated resulting in a single consensus plan.

Companies in Stage 3 can move to Stage 4 by having more frequent S&OP meetings and a constant emphasis on

the building sustained relationships with as many suppliers and customers as possible.

Stage 4, Ideal Process: This Ideal stage should be used as a benchmark by companies for achieving further

improvement. In this ideal state scenario, S&OP meetings are generally event-based and are done only when there

is a need to make amendments to the plans. The supply and demand is continuously monitored in real time, which

in effect makes the decision making very fast and proactive. The moment an imbalance is detected between the

supply and the demand, a meeting is immediately held involving all S&OP attendees on a global basis usually

through the use of advanced technology. Thus the plan can be quickly modified and put into action.

Furthermore, there is extensive collaboration with the suppliers and the customers, which gives ready access to

information to align the plan with those of the external agents i.e. the suppliers and the customers.

As emphasised earlier, to make the best use of this maturity model, a company first needs to do a as-is analysis

of its S&OP process and then make a sustained effort to move to the next stage. It should then identify the gaps,perform a cost benefit analysis, identify the quick hits and target these first.

Other Cost reduction areas

This section gives an insight into other areas in the supply chain where there exists tremendous scope of cost

reduction specifically in the Indian market context.

Inventory Management More than Rs 1, 00,000 crores is tied up in industry inventories in India. One of the main

reasons for the huge pile-up of inventories is the separation of the inventory strategy from the S&OP planning. The

lack of a holistic overall approach results in locally optimal inventory decision and in turn higher inventory holding

costs with frequent stock-outs. To add to the industry woes, 84% of inventory replenishment processes in the

Indian manufacturing sector are push based (according to a report published by FICCI in 2004).

Thus, there is a clear need of integration between the inventory optimization process and the S&OP. This will help

solve not only the inventory holding costs but the over-arching strategic problems that link into other issues. Also,

moving from a push based system to a pull based system helps drastically reduce inventory across the supply chain.

Efficient production planning and an integrated, responsive supply chain network are all critical to reducing

inventories. Inventory segmentation for decisions into service levels, is another popular approach to reduce

inventory and retain customer-centric focus on the key products.


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In addition to this, the 2007 benchmark report on Working Capital Optimization (WCO) surveyed 400

corporations from across the world and found that for more than 65% of them, WCO was a high-priority at any

given point of time. The need to focus on WCO is primarily driven by financial stakeholders who continually urge

companies to improve their financial metrics. However financial & inventory strategies are not enough to mitigate

this; technology platforms to cushion the impact of inventory, by enabling better access to funding, and helps

stream-line & automate various processes.

According to a report published by FICCI, a supply chain improvement program can help reduce Finished Goods

Inventory by 32.1%, raw materials by 25.1% and Work in Progress by 38.7%.

Implementation of SCM in Mahindra & Mahindra led to an inventory reduction of a whopping 50% (this also

increased the replenishment lead time from 52 days to 19 days).

Typical Indian companies are manufacturing centric. Directly or indirectly, supply chain decisions are made or

heavily influenced by either production or sales departments. It is typical to find manufacturing second guessing

forecasts because of production personnel with large number of years of experience and instinctive understanding

of historical forecasts. But introduction of new products and SKUs and changing market conditions result in stock

outs and high inventory because of forecast unreliability.

Ironically, inventory scenario can be a mix of both stock outs and high inventory levels; stock outs of required

material and high inventory levels of unwanted or not in demand items. This is typically because of poor forecast

reliability; people tend to over forecast so not to miss sales demand. This increases obsolescence cost and

warehousing costs.

TechnologyBeyond ERP and robust enterprise systems, managers have done their supply chain planning using

tools ranging from Excel based to huge software products. From capacity planning, forecasting to inventory

management, transportation planning these tools tend to make supply chain managers life easier.

In an environment of high growth, multiple product introductions, shifting economic conditions, drop in exportsand rising costs, companies have felt the need for Decision Support Systems to aid in inventory management

(safety stock levels, stocking locations etc.), transportation planning, warehouse management and many other

areas.

In addition, a well designed and robust S&OP process requires a good technology support to achieve the desired

results. For companies using spreadsheets, even though a low cost option, for developing demand and supply plans

as part of the S&OP process, it becomes very difficult to integrate these to arrive at a consensus plan. Reconciling

all these plans might become a very frustrating and time-consuming task, which brings in the additional danger of

data being outdated. This can have costly and far reaching implications for the supply chain in the form of stock-

out, improper mix at the shelves and inventory pile-up across the supply chain. Thus companies need to have an

advanced (depending on requirement) and effective technology to support their S&OP process. This helps in co-

ordinating between all the functions across the value chain (both internal and external) and quickly adapting to any

changes in the supply demand imbalance.

Logistics and Distribution In India the logistics cost is very high compared to other developed countries

comprising of around 14% of the GDP. Transportation alone accounts for 35% of this. There is a huge scope for

Indian companies to reduce cost in this domain by route optimization, contract optimization and increased vehicle

utilization. Apart from this reduced turnaround time of trucks and number of expedited shipments are a couple of

more areas that can be targeted.


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Collaboration across different companies for freight consolidation, use of efficient equipment and proper packaging

are some of the other areas where there is a potential of logistics cost reduction.

The use of IT can be a key enabler for achieving cost reduction in this domain. The use of IT coupled with

advanced tracking technologies like RFID/GPS increases visibility of the movement of goods across the supply

chain, thus helping in better decision making and proactive decisions rather than reactionary. This also reduces the

number of expedited shipments. It also helps in the time of unwanted interruptions like road blockades, emergencysituations etc since now they can be rerouted onto a different path due to the increased visibility of the whole

transportation process.

There is a tremendous need for development of transportation infrastructure in India in road, rail and ports. As

much as 97% of cars in India are moved by road due to the lack of availability of proper rail infrastructure. Also the

cost of transportation within the country is tremendously high. In the port sector, all the major ports in India are

running much above their capacity which causes congestion at the ports thus increasing the turnaround time of

ships at Indian ports. Government investments to make the transportation infrastructure more efficient can also go

a long way in reducing costs.

Sourcing & Procurement and Supplier partnership On an average, Indian companies typically have more

number of suppliers compared to global best practices. For example, in the automotive industry, typically an autocompany sources materials from 250 suppliers compared to the best practice of 100 suppliers (According to a CII

2002 report). This increases the complexity of the whole sourcing and procurement process. Supplier

consolidation not only simplifies the purchasing but also

leads to better utilization of resources. A number of

Indian automotive companies are reducing the number of

suppliers to achieve this.

Typical procurement cost management strategies include

negotiating price by leveraging volume, price and cost

analysis (industry cost profiles, process cost models, total

cost of ownership models).

Supplier partnership is also needed to enable processes

such as cross docking. Cross docking can be an effective

way to keep costs low. But implementation issues abound.

A huge percentage of suppliers still use email as their

primary means of order related communication, with telephone and fax coming as

other means of communication. Cross docking requires Advance Shipment Notifications (ASNs) and barcoded

shipping labels.

Status 00-01 01-02 02-03 03-04 04-05

Vendor Base 1017 950 738 612 400

ISO / QS Certified 245 281 364 382 400

Self certified vendors 210 240 260 290 350

JIT% of PO value 62 72 74 77 82

LCL% of PO value 5 5 6 7 9

MRP% of PO value 26 23 20 16 19

Sr.No ElementsofLogisticsCosts Contribution%1 Transportation 35%2 Inventories 25%3 Losses 14%4 Packaging 11%5 Handling&Warehousing 9%6 Customersshopping 6%

Vendor Base Rationalisation


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ESourcing/eProcurement is another important step that can lead to substantial cost savings. Many Indian companies

are now using the power of internet to source materials internationally. This gives the companies 2 advantages: 1)

get best quality raw materials 2) at the best prices. Also the use of technology increases transparency in the whole

process.

Aggregation of purchasing across all business units can result in substantial cost savings. Typically in India, most of

the business units may be sourcing same raw materials from the same company, but the orders are placed

separately. On the other hand, if the companies aggregate their purchasing across all business units, it gives them

greater purchasing power in the form of bulk discounts.

The figure shows how Ashok Leyland through its project Oscar Inbound went about rationalising its vendor base

and reducing inventories by JIT and LCL. This project also included other initiatives like global sourcing and

eSourcing. Inventory levels were reduced from 23 days to 18 days. eSourcing helped it achieve savings to the tune

of 11.5% of total material cost.3

OutsourcingOutsourcing the non-core activities in the supply chain is an important avenue for cost reduction,

especially in the pharmaceutical and electronics industries. As shown in the chart below 27% of outsourcing is

done to achieve cost reduction.

The diagram below shows the extent of

outsourcing of supply chain activities in India.

The host of benefits supply chain outsourcing will

bring are extremely relevant to current times,

where costs are of primary concern. SC

outsourcing will drastically reduce overall supply

chain costs which form a major chunk of revenue

costs.

3AutoSCM India 2006


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FUTURE VISION OF SUPPLY CHAIN IN INDIAWhere is supply chain management headed?

The diagram below illustrates how supply chain is evolving into a more integrated end-to-end, customer-driven

supply chain which is well integrated across the business and all its stakeholders and service providers.

The On-demand supply chain would focus on elements such as:

Excellent synchronisation between supply & demand through efficient planning & forecasting Integrating & co-ordinating business functions horizontally across the supply chain Developing outcomes that have been mutually decided & beneficial, to strengthen relationships Managing the supply chain cycles for planning to order-to-delivery Developing flexible cost structures that focus on variable cost structures rather than fixed costs Collaboration and sharing of information & risks with partners to reduce overall exposure Efficiently using real-time data to create customer-centric supply chains that are totally demand

driven and customer-driven

We will look at some of the key points in detail.

Synchronising supply & demandUnderstanding demand patterns and efficient planning of supply is the constant

endeavour of all supply chain planners. Responsive supply chains are typically characterised by an early

understanding of demand signals through minimum distortion of the POS (point of sales) data in near real time.

But why?


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Ability and flexibility are key strengths that come through from responsive supply chains. This kind of synchronised

supply chain planning leads to competitive advantage that helps provide superior customer service; it also reduces

waste and losses due to the suboptimal planning and inventory deployment.

In a growing economy like India, the constant fluctuations in demand and bottle-necks due to infrastructure, pose

additional challenges to supply chain planning; but this must still be the area of continued focus as this can enable

organizations to respond to constant changes in the market place.

New Product Introduction Innovation is the key to future success. It is also critical for a company to maintain

profitable growth especially in view of the increasingly competitive Indian marketplace.

But why?

All successful companies are distinguished by their ability to efficiently bring innovation to the market- quickly and

ahead of the competition. Effective product launch is obviously a key element in the innovation process. This

however requires process integration and alignment of objectives across the internal and external elements of the

value chain.

Leveraging the capabilities of value chain partners, like suppliers and channel members, in a collaborative approach

can help bring products / services to the market faster, smarter and cheaper. This means integrating with suppliers

& supply chain providers during the entire process of design, development, production and service. After

identifying and evaluating these capabilities / resources it is also important to nurture them. Innovation is

undoubtedly the biggest competitive advantage and differentiator in the future, but your supply chain needs to

support it!

Efficient Customer Order Fulfillment Customer orders start with the order entry process and involve efficient

maintenance of customer database, opportunity evaluation for cross- sell, up-sell, back-order processing and post

order fulfilment transactions. Customer Order Management being an important customer touch-point means a

direct impact on customer satisfaction levels. The companys ability to receive customer orders through multiplechannels, and subsequently understand and respond to customer needs forms part of customer order

management.

But why?

Many companies have adopted new technologies that churn data and extract meaningful insights to further

enhance fulfilment capabilities. Companies are leveraging technology to enable supply chain visibility to efficiently

accept orders & adhere to promised delivery dates. This helps in facilitating processes down the line like planning

& scheduling.

Therefore, technology has played an important role in integrating the companys order management process with

the customers planning and procurement processes. Overall, this means an evolved on-demand supply chain.

Logistics services

Todays market demands:

o More stocking locationso Frequent orderingo Smaller order sizes


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o More sophisticated modes of transportationo Multi-channel distributiono Configure-to-order capabilities, among others

Customers are becoming more knowledgeable & demanding. They have higher service-level expectations which

mean higher degrees of responsiveness and customisation from the company. Customers today expect on-time

deliveries and value-add services like real-time order tracking information. Innovations in technologies & logistics

solutions have also been able to create new customer distribution channels and even existing channels are under

pressure to change, to retain the market position a company holds.

But why?

Accurate & efficient logistics management and servicing means Customer satisfaction & retention coupled with

continued sales growth. This type of decentralised supply chain models and tighter trading partner collaborations,

especially in view of rising transportation costs and other complexities in the system, means new and improved

visibility.

Management tools can also help combat any inefficiency that arises in warehouse management, manpower,

transportation, space utilisation, inventory management and shipments. To summarise, it has ever more critical for

companies to implement scalable yet cost-effective strategies in logistics.

This rings ever more true in the back drop of the current economic conditions, which fiercely call for an increase

in profitability, improvement in quality & reduction in costs. A mammoth challenge, but possible to execute.


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Clients come to us when they need help to reduce cost, improve quality standards, introduce new products or

increase market share, gear up operations to meet business objectives, utilize capacity etc. through a lean and

efficient supply chain and we at Aqua MCG, with our hands-on expertise and thought leadership in several sectors,

understand the need and serve it with due diligence and integrity.

For more information, please contact:

Mumbai: Ram Mantravadi [email protected]

Shiv Kumar [email protected]

Bengaluru: Gopal [email protected]

Manish K Singh [email protected]

New Delhi: Sanjeev Ganesh [email protected]

Technology: Anshuman Mukherjee [email protected]

Or contact us through our website: www.aquamcg.com

About Aqua Management Consulting Group

Aqua Management Consulting Group (Aqua MCG) is a premier advisory and execution group committed to

delivering superior operations & supply chains and maximizing business value for our clients. We help transformand manage supply chains for better business performance. We do this by providing -

High value consulting advice and complete execution support Business and functional leadership, on a BOT model Supply chain outsourcing solutions and services Steady-state operations monitoring & continuous performance improvement

Our team comprises professionals with strong consulting experience, good domain knowledge and execution

leadership. We use structured methodologies, analytical rigor and defined metrics to deliver value for every

project we undertake.

Our vision is to be globally recognized as highly valued partners for achieving supply chain leadership.

Visit us at: www.aquamcg.com

633773271593028750supply chain cost reduction in india

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