Logistics & Supply Chain Management

K.S.Srinivasa murty 12th February 2005

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Agenda

• Review the role and relevance of Supply Chain Management and its historical evolution.

• Importance of strategic fit between the product market scope / product type and Supply Chain Management and steps to achieve it.

• Role of Logistics Service Providers

• Brief over view of an Indian Case

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Success in business today is all about

‘Delighting’ the customer and growing

profitably

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• Enhancing Customer Satisfaction.

• Reducing Working Capital

• Ensuring cost-effectiveness

• Improving competitiveness, being ahead of competition

So, The Thrust Is On...

To be ahead of competition we need to be

*Fast *Economical *Dependable

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The Traditional Vision of Supply Chain Constrained Itself to the Boundaries of an

Organization

Purchase

Production

Inventory /Warehousing

Transportation

SOURCESOURCE MAKEMAKE MOVEMOVE STORESTORE SELLSELL

This approach was however inward looking

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An Evolved Definition of the Supply Chain Web Emerged in the Last Decade

Collaboration and Quick Response ( QR)Collaboration and Quick Response ( QR)

•Collaboration with partners

•Rapid Response

•Information visibility

•Shortened product life cycles

•Time to market (SPEED)

•Product variety proliferation

New ResponsesKey Challenges

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A Supply Chain means more than physical flow of goods

Physical FlowPhysical Flow

Fiscal FlowFiscal Flow

Information FlowInformation Flow

Supply chain has 2 critical functions

Physical function Market Mediation Function

Ensure that the variety/ supplies match what customer wants to buy.

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Supply Chain Excellence Supports the Realization of the Strategic

Objectives of a Business, Through…..

• Reduced Costs (C)

• Shorter Lead Time (T)

• Best Quality (Q)

• Flexibility (F)

• Enhanced Service (S)

• Better Product availability

& reliability (R)

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Strategic Fit Is Critical

• A company must ensure that its supply chain capabilities support its ability to to satisfy the targeted customer segments.

• Depending on the market segments targeted, the company will focus on either

– Functional Products, or– Innovative products.

The supply chain design would vary depending

on the nature of the product / market segment.

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Comparison Of Efficient And Responsive Supply Chains

Efficient supply chain Responsive supplychain

Primary goal Supply demand atlowest cost

Respond quickly todemand

Product designstrategy

Maximizeperformance atminimum productcost

Create modularity toallow postponement ofproduct differentiation

Pricingstrategy

Lower margin / priceis prime customerdriver

Higher margins / pricenot prime customerdriver

Manufacturingstrategy

Lower costs throughhigh utilization

Maintain capacityflexibility to meetunexpected demand

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Comparison Of Efficient And Responsive Supply Chains

Efficient supplychain

Responsive supplychain

Inventorystrategy

Minimize to lowercost

Maintain bufferinventory to meetunexpected demand

Lead timestrategy

Reduce, but not atthe expense of cost

Aggressively reduceeven if the costs aresignificant

Supplierstrategy

Select based oncost and quality

Select based onspeed, flexibility andquality

Transportationstrategy

Greater reliance onlow cost modes

Greater reliance onresponsive modes

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Strategic Fit

Mature

Effective supply Chain

Responsive supply chain

Functionalproducts

Innovative products

Match

Mismatch

Mismatch

Match

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Efficient Supply Chain

Strategic Fit : Establish the differentiators for each class of

products.

Invest / Divest

Future Products

Responsive Supply Chain

Mature Star Performers

Service/ Responsiveness Focus

Cost

Focus

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Some Illustrative Conversion(manufacturing) Policies

Could Be...

Invest / Divest

• Opportunistic capacity

Mature Products

• Dedicated lines• Large Batch Sizes• Large inventories

Future Products

• Small batch sizes• Large capacities that

are product substitutable

Stars

• High speed dedicated lines

• Focus on non-service cost drivers

• Inventory as decoupler

Service/ Responsiveness Focus

Cost

Focus

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An Illustration of Strategic Fit : The Dell Experience

In 1994, a struggling second-tier PC maker; manufactured to inventory.

Implemented a new business model

Converted operations to a build-to-order process Eliminated inventories through a just-in-time system Sold its products directly to consumers

Results were spectacular

Went far beyond the simple pursuit of efficiency and asset productivity

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An Illustration of Strategic Fit : The Dell Experience

• Other strategies like product development strategy

– Dells’ new product development strategy emphasized designing products that are easily customizable, which may include designing common platforms across several products and using common components.

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Supply Chain Excellence…

Supplier network

DELL FACTORY (Ireland)

Web site

Call center

1

1

1

11. The customer orders via Dell’s

web site or by calling Dell’s call center

2. DELL relays the order to its network of suppliers, specifying number and types of hard-drives, motherboards, modems, …, that are needed and when

2

3

3. Suppliers ship all required goods back to Dell’s assembly line.

At all times, suppliers have real-time

access to information about Dell’s orders, which enables them to ensure their production line is moving smoothly.

44. Dell assembles all parts within a few

hours

Customer network

5

5. Dell ships the custom-built PC to the customer. At all times customers can track the progress of their order via Dell’s web site

Sells $15m worth of computers from its website each Sells $15m worth of computers from its website each dayday

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Supply Chain Excellence…

“Its not just that we sell direct, it’s also our

ability to forecast demand - It’s both the design

of the product and the way the information from

the customer flows all the way through

manufacturing to our suppliers.”

- Michael Dell (Source: HBR, March/April 1998)

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Avoiding the vicious spiral of Supply Chain inefficiency will require

• Partner Collaboration ( information sharing w.r.t demand patterns, pipe line inventory)• Tracking demand variability through more effective forecasting and demand

communication• Synchronisation at all points of commit in a supply chain

BuyBuy MakeMake MoveMove SellSell

SuppliersSuppliers FactoriesFactories Depots/CFA’sDepots/CFA’s DistributorsDistributors Retailers/customer’sRetailers/

customer’s

Partner Collaboration is crucial to supply chain successPartner Collaboration is crucial to supply chain success

Use of Technology can catalyse and transform the supply chains

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Logistics Service Providers

• A 3PL ( logistics provider) is a company which has expertise in logistics management ( transportation, warehousing, inventory management, distribution, customer support and service).

• They are in the business of supplying / coordinating the logistics function across multiple links in the supply chain.

• They would have invested in technology that would allow them to manage information on consignment movement, billing, auditing and payment efficiently.

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Logistics Service Providers

• The use of such service providers can help a company to focus on its core business activities / core competencies and simultaneously benefit from the best practices of service providers to increase efficiency and flexibility of its supply chain.

• Success in 3PL arrangements would need a strategic alliance and a long-term commitment as it involves multiple functions / processes in the supply chain - like the design and operation of in-bound and outbound logistics, inventory management, customer service - on time delivery etc.

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Logistics Service Providers

• Asset owning 3PL :– Advantages : Economies of scope and scale due to the

infrastructure and systems in place and large customer base and human resources

– Disadvantages : They may tend to favor their own divisions in awarding work, be somewhat bureaucratic and longer decision making cycles.

• Non asset owning 3PL: – Advantages : More flexible and able to tailor services and the

freedom to size and match providers. They may also have low overhead cost and specialized industry expertise.

– Disadvantages : Limited resources and lower bargaining power.

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Outsourcing in SC: 3 PL and 4 PL

Warehousing Transportation Delivery Inventory control

Special Handling Requirement

Cost Control

Customer Service

Supply Chain Optimization

Value added Service

Change Management

+

Activities carried out by a traditional distributor

Activities carried out by 3 PL

+ + Activities carried out by 4 PL

SERVICES

Supply Chain Planning, Forecasting

Managing Upstream & Downstream Players

Workflow Management

Warehouse Management

Inventory Management

Transaction Management

Information Technology Management

Reverse Logistics Management

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3PL Successes – KPI Gains*

Reduced Inventory HoldingReduced Inventory Holding 10-20d10-20d 7-12d7-12d

Improved Lead TimeImproved Lead Time 48-24h48-24h 24-6h24-6h

Inventory AccuracyInventory Accuracy 80-90%80-90% 95-99%95-99%

ProductProduct AvailabilityAvailability 90-95%90-95% 95-99%95-99%

Picking AccuracyPicking Accuracy 98%98%99.5%99.5%

Pick/Pack Throughput per EmpPick/Pack Throughput per Emp 150-157150-157 225-250 225-250 OM/MA, OM/MA,

hh

Overall Throughput per EmpOverall Throughput per Emp 75-10075-100 125-150 125-150 OM/MA, OM/MA,

hh

Space UtilizationSpace Utilization 100%100% 70-70-80%80%

Reduced Damaged ProductsReduced Damaged Products 1-2%1-2% 0.1-0.5%0.1-0.5%

In-sourcedBaselines

OutsourcedResults

A Selection of Indicators

•Actual results from a 3PL outsourced program for an international beverage brand leader, August 2001, Malaysia

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Supply Chain Efficiencies in India

Performance Indicators All India Average(2000)

Cash to Cash Cycle Time 116.49 Days

Inventory Turnover 22.70 For FinishedGoods10.09 For Raw Material

Total Supply Chain ManagementCosts

26.4% of Gross Sales

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Some Best in Class and Median Performances in Supply Chain Management

• Cash - to - cash cycle time ( the number of days between paying for raw materials and getting paid for product)

– Best in class ..Best in class .. 30 days or less30 days or less– Median ..Median ..100 days100 days

• Delivery performance to request ( the % of orders fulfilled on or before customer’s request date)

– Best in class ..Best in class ..94%94%– Median …Median …69 to 81%69 to 81%

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Summary - Recap•In a business environment that requires more responsiveness and focus on the bottom line, supply chain performance management is vital to competitive advantage and sustainable business Improvement.

•Set in place SCM performance measurement matrices consistent with your strategic business goals

•Identify performance exceptions, understand issues and alternatives, act on high impact problems and opportunities and continuously validate actions relative to objectives and results.

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•By adopting such systems, companies have

increased responsiveness and customer

service, reduced inventory and procurement

costs and improved the utilization of production

and distribution assets. The benefits are

compelling & the path to success has been

validated.

•The time to act on supply chain performance

management is now.

Summary - Recap

Integrated Supply Chain Management

An Indian Case

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Supply Chain Strategy• Better customer service

– Daily Replenishment between Depots & factories

– Buffer Depots for “B” category SKUs– Reduced Response time / Fill rate

• Manufacturing Flexibility– Buffer Depots for “B” category SKUs

• Significant Reduction in Total Supply Chain Cost– Improved working capital management– Improved Fixed asset productivity– Driving down costs of materials - “win - win” for

strategic partners.

Leverage IT capabilities for on line data transfer / access and effective MIS

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Fact. 1 Fact.2

DC 1 DC 2 DC 3

Fact. 1 Fact.2

DC 1 DC 2 DC 3

Buffer Depot

Pre-Buffer

CentralisedProduction &

DespatchPlanning

Fortnightlyservice

3 wk. stock at JITs

DailyReplenishment.

DecentralisedDespatch Planning

5 days stock at JITs

Improved Servicing of “B” Category SKUs

Centralised Production Planning

Post-Buffer

Distributioncenters

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Supply Chain Strategy

• Manufacturing Focus on :

– Flexibility: A shift in focus from Production orientation to plan compliance• Reduced change over times dramatically to

enhance response time.

• Increased regionalized servicing of demand

– Quantum improvement in productivity through• Rationalization, restructuring, debottlenecking

and TPM

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Quest For Further Improvements

• Business drivers

• NPS Growth

• Profitability

Focus on supply chain to directly impact

the above

• IT enablers

• Availability of next generation IT Tools

• Improved Communication Infrastructure

• Advent of eCommerce

An End to End Supply Chain Solution

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Project Leap

An integrated Supply Chain System for Continuous Replenishment of RSs stocks

RS’s stock(Agreed norm)

Receipt of Goods from Depot/

Factory

(Replenishment)

Despatch to Trade

(Secondary Sale)

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Continuous replenishment Across the Extended Supply Chain

FactoryFactory BufferBuffer JIT DepotJIT Depot

FactoryFactory BufferBuffer JIT DepotJIT Depot RSRSSupplierSupplier

RS ( Redistribution Stockist) Connectivity

RS Connectivity : Objectives

• Main Objectives

– Facilitate replenishment based

primary sales

– Information and analysis of

secondary sales

• Secondary Objective

– Interactive communication with the

RS

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Continuous Replenishment System For RS

C & FAC & FA

RSRS

Automated Primary SalesAutomated Primary Sales

Stock Norms, Promotions

HLL RS NetHLL RS NetHLL RS NetHLL RS Net

Sales, StockSales, StockSales, StockSales, Stock

Sales systemSales system

Suggested order

Confirmed order

Confirmed RS Orders

Stocks

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Replenishment Planning

JIT Depot Buffer Depot

Factory

RSs

Central DSS

Direct Despatch Info.

Despatch Info

Orders

Stock,Receipt,Sale Despatch Plan

D

A

I

L

Y

Order Servicing

Order Servicing

Dispatches

Dispatches

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Back-end Supply Chain : Process Areas

• Operations Planner

• Source Network Optimizer

• Supply Chain Planner

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BACK - END PLANNING SYSTEM

JIT DepotBuffer

Factory

Supplier

Central DSSW

E

E

K

L

Y

D

A

I

L

Y

Activities

Annual Plan

Costs

Capacities

MRP

Operations Plan

Optimised Network

Weekly Production Plan

Central Purchase

ReplenishmentReplenishment

Exception Handling

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Logistics Management is a key part of Supply

Chain Management. The design and operation

of the Logistics impacts both costs and

responsiveness. Logistics Management

achieves efficiency and effectiveness through

a focus on - optimizing the network design,

improving demand forecasting , reducing the

cash to cash cycle time and leveraging IT for

information transparency all across the supply

chain.