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Supply network management of Chennai Engineering Ltd


About the Company Chennai Engineering Ltd (CEL) is a large engineering company of over 45 years of existence. The company has been involved in power sectors producing auxiliary equipment and now has become a leading balance of plants power sector player in India. Annexure 1 provides details of CELs balance of plants scope. The company collaborates with capital equipment players from Germany, Japan and India and supply balance of plants to power projects. The company is more than Rs.4000 crores in size and does a number of turnkey projects in mid-size power sector and for corporate who want to have in-house captive power generation for manufacturing. Power sector in India Power sector has received a major thrust in power generation in the recent years. There are a number of challenges that lies ahead of the economy as the demand and supply gap is increasing. Project delays are not only expensive from vendor side with penalties but also a phenomenal loss to the society in terms of the socio - economic costs.
Power sector is ranked among sixth among the leading players of the Indian economy. According to the Ministry of Commerce and Industrys Department of Industrial Policy &

Promotion (DIPP), the power sector has attracted US $ 4.6 billion in Foreign Direct Investment (FDI) between 2000 and 2012. The power ministry is believed to have set a th target for adding 76,000 MW of electricity capacity in the 12 Plan (2012 -17) and 93,000 MW in the 13 Five year pan (2017 -22). FDI up to 100 per cent is permitted under automatic route for: 1. Generation and transmission of electric energy produced in-hydroelectric, coal/lignite based thermal and gas-based thermal power plants 2. Non-Conventional Energy Generation and Distribution 3. Distribution if electric energy to households, industrial, commercial and other users and 4. Power trading There are innumerable challenges that result from the gaps that exist between whats planned versus what the power sector has been able to deliver. One of the reasons for the gaps is delay in execution of Balance of Plant (BoP) jobs which is primarily due to absence of competent BOP players who can execute the job within stipulated time and cost. Challenge Mr.Suresh Ram, Chief Executive Officer of CEL invited for a meeting with Mr.RaviKhanna, Chief Information Officer and Ms. Deepa Pillai, Vice President Supply Chain for a discussion
th

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on technology deployed for supplier network and how it could bring in more efficiency. Suresh is an IIT, Madras engineer and has a management degree from one of the premier institutions in India. He has over 20 years of experience in the sector. He is a professional CEO and does not belong to promoter family. He has been recently recruited for helping CEL to achieve over 30% CAGR in the next five years and has been empowered for any structural change within the organization as well as with the partnering firms. Suresh has track record of working effective management change systems especially on a large supply networks of focal firms. Ravi is an IT expert with over 18 years of experience in automotive sector including with experience of having implemented a large ERP for manufacturing and other functions. Deepa is an electrical engineer from a premier institution in Tamilnadu and was placed in the campus in CEL. She has over 15 years experience and took a break to do an executive management programme in a premier management institute in India. She is passionate about supply chain functions and believes that the supply chain ecosystem must be well integrated and be focused on group decisions instead of silo approach to strategy, policy and operations. Suresh invites Deepa and Ravi and briefs them about the dinner meeting he attended in the previous day evening wherein he was invited as a guest for launch of cloud based solutions especially in supply chain domain. This is launched by Chennai based supply chain Products Company named Take Solutions Ltd along with HP. Suresh told that he had a decent interaction with other CEOs in the function who were of the opinion that cloud would be the way forward. If smart phone can catch up or ERP for SMEs can be deployed, Suresh mentioned that he tend to believe that cloud based IT for infrastructure, business processes and enterprise application could be important. Also he opined that since they are located in a cluster of engineering firms where their 90 per cent of suppliers are located a cloud based cluster community could bring efficiency in supply chain. He suggested that Ravi and Deepa must explore and submit a plan on how to approach getting CELs IT and its supplier network on cloud based IT especially for SCM. He wanted a road map and asked them to bring out clearly the benefits for CEL and suppliers and how it could improve overall supply chain goals of cost efficiency and responsiveness. Deepa and Ravi mentioned to Suresh that they would present to him in a weeks time after exploring the details. Cloud computing Deepa suggested to Ravi that they must spend some time on understanding cloud based solutions and its benefits. Ravi explained to her on cloud and key points are as follows: 1. An end-to-end cloud service offering can be designed using a combination of any of the four layers comprising of Software as a Service [SaaS], Platform as a Service [PaaS], Infrastructure as a Service [IaaS] and Desktop as a Service [DaaS] which is the cloud clients.

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Source: http://upload.wikimedia.org/wikipedia/commons/3/3c/Cloud_computing_layers.png

2. Cloud could be deployed through: a. Public cloud which is storage and other resources are made available to the general public by a service provider. These services are free or offered on a pay-per-use model. Generally, public cloud service providers like Amazon AWS, Microsoft and Google own and operate the infrastructure and offer access only via Internet. b. Community cloud which shares infrastructure between several organizations from a specific community with common concerns (security, compliance, jurisdiction, etc.). This can be managed internally or by a third-party and hosted internally or externally. The costs are spread over fewer users than a public cloud. c. Hybrid cloud is a composition of two or more clouds (private, community or public) that remain unique entities but are bound together, offering the benefits of multiple deployment models. Hybrid clouds lack the flexibility, security and certainty of in-house applications. Hybrid cloud provides the flexibility of in house applications with the fault tolerance and scalability of cloud based services. d. Private cloud is cloud infrastructure operated solely for a single organization, whether managed internally or by a third-party and hosted internally or externally. Undertaking a private cloud project requires a significant level and degree of engagement to virtualize the business environment. They have

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attracted criticism because users "still have to buy, build, and manage them" and thus do not benefit from less hands-on management. 3. An IDC study commissioned by Amazon Web Services (AWS)found that the five-year total cost of ownership (TCO) of developing, deploying and managing critical applications on AWS represented a 70 per cent savings compared with deploying the same resources on-premises or in hosted environments. As stated earlier, IDC findings show the average five-year ROI of using AWS is 626 per cent. Moreover, over a five-year period, each company saw cumulative savings of $2.5 million per application, IDC said. And TCO savings included savings in development and deployment costs, which were reduced by 80 per cent. In addition, application-management costs were reduced by 52 per cent and infrastructure support costs cut by 56 per cent, and organizations were able to replace $1.6 million in infrastructure costs with $302,000 in AWS costs. The IDC study also showed that benefits also increased over time. The study found a definite correlation between the length of time customers have been using AWS services and their returns. At 36 months, the organizations are realizing $3.50 in benefits for every $1 invested in AWS; at 60 months, they are realizing $8.40 for every $1 invested, according to the report. 4. While calculating Return on investment (ROI) in cloud offering, one must note that the IT capacity and IT utilization would play a significant impact on infrastructure. IT capacity is measured by storage, CPU cycles, and network bandwidth or workload memory capacity as indicators of performance. IT utilization is measured by uptime availability and volume of usage as indicators of activity and usability. There are other benefits that determine ROI on cloud offerings. They are: a. The speed and rate of change: Cost reduction and cost of adoption /de-adoption is faster in the cloud. Cloud computing creates cost benefits by reducing delays in decision costs by adopting pre-built services and a faster rate of transition to new capabilities. This is a common goal for business improvement programs that are lacking resources and skills and that are time sensitive. b. Total cost of ownership optimization: Users can select, design, configure and run infrastructure and applications that are best suited for business needs. c. Rapid provisioning: Resources are scaled up and down to follow business activity as it expands and grows. They are redirected. d. Increased margin and cost control: Revenue growth and cost control opportunities allow companies to pursue new customers and markets for business growth and service improvement. e. Dynamic usage: Elastic provisioning and service management targets real end users and real business needs for functionality as the scope of users and

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services evolve seeking new solutions. This would be helpful in case of cluster and business community network where business process solutions are to be deployed. For example, ERP for SMEs through cloud in a cluster using cloud would help for dynamic usage. f. Enhanced capacity utilization: IT avoids over-and under-provisioning of IT services to improve smarter business services. Capacity additions can be staggered as economies of lumpiness in capacity can be spread among users instead of set up function in case of individual deployment. g. Access to business skills and capability improvement: Cloud computing enables access to new skills and solutions through cloud sourcing on demand solutions. These measures define a new set of business indicators that can be used to create a "score card" of an organizations current and future operational business and IT service needs relating to cloud computing potential. Ravi altered stating that though cloud has a numerous benefits there are certain challenges when cloud is to be implemented for an ecosystem. Deepa suggested that the challenges can be reviewed after they discuss about current IT applications in to their supply chain domain and then look at feasibility of supply chain business process application in cloud and their challenge. Supply Chain structure of CEL Supply chain network wherein CEL is the focal organization is depicted below in exhibit 1. a. Power project promoter identifies the project scope and decides on engaging an EPC contractor for the project either internally or from the market. b. EPC contractor places power island equipment order based on the engineering services recommendation c. Power island scope also provides scope for balance of plants. There would be a few vendors who would be handling BOP along with CEL. In our discussion CEL is the focal organization d. CEL will work with power island suppliers for information exchange and supply its plant as directed and approved by EPC contractor e. BOP will have its own manufacturing units and would work a number of fabrication and other ancillary support units for completing the project items and supply to site where its supply chain depend on sequencing and completion by other players f. BOP would have a number of material and services suppliers who could be also operating with competition as well as with power island equipment suppliers g. Information exchange and completion of project components on time is critical. Sequencing of equipment supply in the whole project by a numerous vendors decides on the project. Typically, these projects have huge penalty for delays and failures

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Exhibit1. Supply chain network of Power equipment plant

In the year 2008, Deepa convinced that there are a number of issues in the supply chain management. CEL incurs a supply chain cost of about 12 per cent of their cost of goods sold. These include: yard management, inventory, transportation (in-bound and out-bound), and sourcing and information technology management costs. There is an innumerable discussion on appropriation of management cost in follow up, discussions and rescheduling as well as on penalty. Deepa mentioned that the plant operations head Mr. Rahul Purnikar has been harping on adding 10 per cent of cost of goods to her while about 50 per cent of this which Rahul also agrees cannot be attributable to supplier network. The typical problems of supply chain included: Long procurement cycle times Material delivery delays from suppliers leading to penalty costs for the supplier and for the system as the subsequent material could be ready but held up in the system

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Late payments to suppliers Unfavourable Days Purchases Outstanding (DPO) Manual processing of transactions on both sides Lack of end to end control and visibility High cost of processing transactions

IT in SCM In 2009, Deepa submitted improvements of implementing an integrated supplier network system by a leading supply chain solutions company at Rs.8 crores which was again integrated to ERP. Before this, ERP used to take care of supplier relations management wherein mails would be sent to suppliers. Annexure 4 shows how it was operating earlier and what improvements in processes where brought in. The project was executed in 90 days wherein about 750 plus suppliers have automated their sourcing processes with CEL. The benefits were: 1. Reduction in procurement cycle by an average of 12 days 2. RFQs are converted into PO and issued on the same day for many of the job works 3. AP invoices matching were reduced by 50 per cent which made vendors happy. 4. Elimination of redundant processes, data entry and thereby there was improved process efficiency 5. Only exceptions in procurement processes are handled through email alerts and phone follow up which is reduced by 90 per cent 6. Delays were brought down significantly and resolved with the project sponsor Overall, supply chain cots reduced by 8 per cent. This means that supply chain cost reduced from 12 per cent to 11 per cent of cost of goods sold which is a substantial savings. It also reduced a number of follow up meetings and activities and thereby hidden costs as suggested by Rahul were also addressed. According to Deepa, if the turnover was then Rs. 2700 crores, cost of goods sold would be around Rs.2000 crores and supply chain costs would have been around Rs. 240 crores. If it comes down by one per cent, then the savings is around Rs. 20 cores. The payback is less than six months. Year on year maintenance expenses of Rs. 2 crores is too insignificant for this size of operation was what Deepa felt. However, Ravi had a different perspective on her working. He was of the view that all savings cannot be directly attributed to technology investment as well. Also, he is of the view that though Rs. 8 crores was the cost of the IT project SCM, there was a number change management cost which could be estimated at Rs. 20 crores. The discussions were not complete there as well. Every function and its activities were to be streamlined and claim the benefit of change. The challenge was not just estimating benefits from business efficiencies but something beyond.

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However, they agreed that the supply chain business process automation has facilitated: 1. Increased revenue for CEL and suppliers as the transparency helped to release redundancies and blocking of capacity. 2. Improved financial flows for better which helped suppliers to ease their fund flow and thereby committed to work schedules 3. Reduced supply chain risk and scope to delineate risk and handle it better to ensure that there were no penalties 4. Increased business for suppliers as the network exposed to better information on their offering and capability. Ravi also concurred that there were other benefits when they implemented the sourcing procurement suite. These include: 1. 2. 3. 4. No platform investment cost for additional participants Minimal business process change enforced Minimal internal resource requirement for change over Ease of training and adoption

Case Question Deepa is confused on whether to probe further on cloud computing for supply chain network. Would that prelude CEL having to move on bringing supply network into cloud? Also, the estimated cost from the experience in case of supply chain suite could be lower at Rs. 4 crores, the change over at CEL could be larger. Also, there may be a need to convenience the supplier to switch to cloud. This may not involve additional cost as they have systems and been operating. However, the challenges could be that of: 1. What could be driver and challenges for adopting domain based SCM solution? 2. What are the benefits and gaps in the solutions adopted for SCM domain with respect to ERP deployed at CEL? 3. If the suppliers have to pay per use subscription, how many could they afford? Transaction fee per user could be Rs.1000/- per month and hence the total cost could be less than what they spend. How this can be explained to them and make them transit to cloud? 4. Why would CEL move SCM solutions to cloud? When they switch to CEL for cloud based solutions, if they are also working with other vendors and power island players, how would they handle technology of different customers? There could be a lot cluster driven benefits and how one could quantify and drive as a movement so that this cluster is ahead of other in technology adaption?

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Annexure 1 CELs balance of plants business in power sector The BOP or Balance of Plant system comprises of all the system and utilities which are required to run thermal power plants starting from raw material input to waste output apart from the power island which includes the generator, turbine and boiler with its auxiliaries. CEL is offering also includes the system interface engineering between various packages and between main plant and BOP packages. BOP unit Coal/lignite handling plant Ash handling plant Cooling tower Water system Chimney Fuel oil handling & storage system Compressed air System Mill reject handling system Heating, Ventilation and air conditioning Fire protection system Switchyard & Electrical system for BOP and so on. Remarks for a typical 500 MW power plant Value Rs. 80 crores; About 10+ component suppliers Rs.90 crores; 5 to 6 component suppliers Rs.100 crores; About 3 component suppliers Rs.15 crores; About 10 component suppliers Rs.40 crores; About 3 component suppliers Rs. 7 crores; About 4 component suppliers Rs. 3 crores; About 3 component suppliers Rs. 3 crores; About 3 component suppliers Rs. 6 crores; About 4 component suppliers Rs.15 crores; About 3 component suppliers Rs.70 crores; About 20 24 component suppliers

Note: The remarks column is indicative in terms of value and number of component suppliers. Also one must note that there could be parallel projects and supplier customer relationships running. More importantly, for each order a number of discussions, amendments and transaction guidance take place. Whenever there is a variance, it is followed with a number of touch points. Since these are engineer to order or make to order kind of projects the transaction touch points become critical.

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Annexure 2 Trends in Installed Generating Capacity of Electricity Non-utilities in India from 1970-71 to 2010-11
(Mega Watt) = (10 *Kilo Watt) Utilities As on Thermal* Hydro Nuclear Total Non-utilities **SelfRailways Generating Total Total Energy Consumption in billion KWH 1,562 2,132 3,101 5,504 8,613 11,787 16,157 21,468 22,335 24,986 26,980 28,474 32,900 16,271 22,249 33,315 52,273 74,699 95,081 1,17,783 1,45,755 1,54,664 1,68,047 1,74,946 1,87,872 2,06,526 663.99 840.53 1012.58 1477.50 1902.75 2436.77 3154.28 3909.37 4226.78 4508.26 4845.25 5462.31 5693.54 Per capita energy consp. (kwh) 1204.39 1361.74 1471.09 1928.51 2232.5 2593.58 3047.81 3497.59 3727.24 3928.16 4171.56 4646.87 4816.44
3

Industries 31.3.1971 31.3.1976 31.3.1981 31.3.1986 31.3.1991 31.3.1996 31.3.2001 31.3.2006 31.3.2007 31.3.2008 31.3.2009 31.3.2010 31.3.2011 (p) 7,906 11,013 17,563 29,967 45,768 60,083 73,613 88,601 93,775 1,03,032 1,06,968 1,17,975 1,31,279 6,383 8,464 11,791 15,472 18,753 20,986 25,153 32,326 34,654 35,909 36,878 36,863 37,567 420 640 860 1330 1565 2225 2860 3360 3900 4120 4120 4560 4780 14,709 20,117 30,214 46,769 66,086 83,294 1,01,626 1,24,287 1,32,329 1,43,061 1,47,966 1,59,398 1,73,626 45 61 60 85 111 158 1,517 2,071 3,041 5,419 8,502 11,629 16,157 21,468 22,335 24,986 26,980 28,474 32,900

Growth rate of 2010-11 over 200910(%)

11.28

1.91

4.82

8.93

15.54

15.54

9.93

4.23

3.65

CAGR 1970-71 to 201011(%)

7.09

4.42

6.11

6.21

7.79

7.72

6.39

5.38

3.44

*From 1995-96 onwards, Thermal includes Renewable Energy Resources **Capacity in respect of Self Generating Industries includes units of capacity 1 MW above CAGR: Compound Annual Growth Rate=((Current Value/Base Value)^(1/nos.of years-1)*100 Source: Central Electricity Authority

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Annexure 3

Source: Dr.Z.Radovilsky, New Development in ERP systems; http://www.docstoc.com/docs/110297046/APICS_SCM_presentation_2007_1

Annexure 4 Business Process of CEL sourcing Exhibit 1 Before SCM suite implementation

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Exhibit 2 After SCM suite implementation

References 1. ERP A manufacturing perspective www.leonleon.com/it/erpdse/downloads/appendixc.pdf 2. Optimizing the IT business supply chain utilizing cloud computing; Donald F. Ferguson & Ethan Hadar http://www.isaca.org/Groups/Professional-English/cloudcomputing/GroupDocuments/Optimizing%20The%20IT%20Business%20Supply%20C hain%20Using%20Cloud%20Computing.pdf 3. http://mobile.eweek.com/c/a/Cloud-Computing/Amazon-Web-Services-UseYields- 626-ROI-More-IDC-748758/ 4. http://www.networkworld.com/news/2012/080612-cloud-roi-261431.html 5. https://www.roccloud.com/roi 6. www.takesolutions.com 7. Energy Statistics 2012, Central Statistical Office, NSO, www.mospi.gov.in

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Acknowledgements: Author
Dr. N.Chandrasekaran, Vice President Corporate Affairs, Take Solutions Ltd & Director, Centre for Logistics and SCM, LIBA, Chennai ------------------------------------------------------------------------------------------------------------------------

Author acknowledges the support of Mr.S.Sridharan, Managing Director, Take Solutions Ltd Mr.Ramesh G, Vice President, Take Solutions Ltd and Mr.Sai Sridhar H, Supply Chain Management Consultant, Chennai for their comments.

Disclaimer
The views expressed here are of individual capacity and to be used strictly for academic discussions only. The facts, figures and financials are illustrative and not factual or observed on any company. Neither the author nor the company is responsible for any commercial decision based on this case material. The contents of this document cannot be reproduced without prior permission of the author.

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