1

The Role of Supply Chain Management

in Economy
 Learning Objectives

Why is the supply chain important?

What are the key supply chain decisions
made by a firm?
How has the supply chain evolved over the
last century?
What are the unique challenges of
managing a supply chain in India?
Supply Chain Management: Success
Stories
Dell: Inventory turn-over ratio of 58.7
compared to industry average of 12 (Net
Profitability of 5.3.%) ( Drop from 7.8% in
2006)
Wal-Mart: Inventory turn-over ratio of 9.9
compared to industry average of 5.5 ( Net
profitability of 3.5%)
Zara Corporation: Lead-time from new
product to stores is 15 to 20 days compared
to industry average of six months ( Net
profitability of 11.3%)
Supply Chain Management: Horror
Stories
Cisco: Cisco wrote off 2.2 $ billion worth of
inventory in May 2001. Biggest write-off in
history.
Sony: PlayStation IIa lost opportunity
SONY could supply only 25% of the potential
demand for Christmas market
Nintendo Wii Game Console : Shortage expected
in year 2007
Kmart Launched supply chain initiative in
May 2000 worth $1.4 billion in software and
services. In 2001-02, announced that it was
abandoning most of the software purchased
and taking $130 million write-off
Nike- i2 Technology Controversy: Lost
$100 in sales in last quarter of 2000 i2
Supply Chain Management: A
Definition

Encompasses all activities associated with

the transformation of goods from the raw
material stage to the final stage when the
goods and services reach the end
customer.
Involves planning, design and control of
flow of material, information and finance
along the chain in order to deliver value to
the end customer in effective and efficient
way.
Supply Chain Management: A Pictorial Representation

C1

C2

C3

C4

C5

C6

VENDOR INBOUND INTERFACILITY DISTRIBUTION OUTBOUND

PLANTS CUSTOMERS
TRANSPORTATION TRANSPORTATION CENTERS TRANSPORTATION
 Managing Flows in A Supply
Chain

Material Flow
Information Flow
Financial Flow
 From An Automobile Manufacturer

Our aim is always to arrange the material

and machinery and to simplify the operation
so that practically no orders are necessary.
Our finished inventory is in transit. So is
most of our raw material inventory. Our
production cycle is about eight-one hours
Historical Evolution of the Supply
Chain
First Revolution: (Ford Motor Co. 1910
1920)
Single product, that is, no product variety
Vertical integration
Second Revolution: (Toyota Motor Co.
19601970)
Wide Variety
Long-term relationship with suppliers
Third Revolution: (Dell Computers 1995
Current)
Customized products
 Key Supply Chain Concepts

Concept of focal firm

Supply chain decisions
Design
Operations
Logistics and SCM
Reverse Supply Chain
 Supply Chain Design

Deciding Scope ( What activities to be done

in-house and what activities to be
outsourced)
Design of Network
Plant location and capacity decisions
Warehouse location
Vendor selection
Nature of relationships
 Managing Supply Chain Operations

Demand forecasting
Procurement planning
Production planning
Inventory management
Transportation
Order processing
Relationship management
 Importance of The Supply Chain

Proliferation of Product Lines

Shorter Product Life Cycles
Cell phone, Laptop, Automobile
Higher Level of Outsourcing
Dell computers, Bharti Tele ventures
Shift in Balance of Power in Chain
Impact of organized retail chain
Globalization of Manufacturing
Impact of tariff structure
 Enablers of Supply Chain
Performance

Improvement in communication and IT

Better understanding of inter-firm
coordination issues
Entry of third-party logistics service
providers
 Ratio of Logistics Cost to GDP for
Selected Countries*

Does logistics cost capture every thing?

How do we capture logistics cost of India versus
China?

* Source: Raghuram and Shah 2003

Logistics Costs for the Indian Economy*

Rs billion 93-94 prices

Total GDP Logistics
Logistics Cost/GDP
Cost (%)
95-96 1201.27 8995.63 13.4
97-98 1261.01 10163.99 12.4
99-00 1388.93 11485.00 12.1
01-02
1508 12679 11.89
03-04
1658 14305 11.59

*Source: Raghuram and Shah 2004

 Logistics Costs for the US
Logistics Costs for the US Economy
Economy
Nominal Values
Organized Sector US: 1990 US: 2001 US: 2002

Transportation 50% 60% 63%

Inventory 20%
Warehousing
24% 40% 37%
Packaging
Losses 6%
Total Cost 11.4% 9.5% 8.7%
Logistics Cost 659 957 910
($ billion)

GDP ($ billion) 5,800 10,080 10,470

Source: CASS Information Systems, 2002

Performance of the Indian
Manufacturing Industry*

Data Source: PROWESS, CMIE

Sector-wise Industry Performance of
Indian Firms*

Data Source: PROWESS, CMIE

Status of Logistics Management in
India

Neglected area in organizations

Taxation structure drives the logistics
related decision, not cost or service
considerations
Poor state of infrastructure
Complex regulations affecting logistics
decisions
 Supply Chain Challenges for the
Indian FMCG Sector
Managing Availability in the Complex
Distribution Set up
Working with Smaller Pack Sizes
Entry of National Players in the
Traditional Fresh Products Sector
Dealing with a Complex Taxation
Structure
Dealing with Counterfeit Goods
Opportunistic Games Played by the
Distribution Channel
Infrastructure
The Marico Supply Chain
 Summary

What is supply chain management?

The supply chain encompasses all activities
associated with the transformation of goods
from the raw material stage to the final stage,.
Supply chain management involves planning,
design and control of flow of material,
information and finance along the supply chain
Why is the supply chain important?
On account of globalization and increased
competition, firms have to manage a larger
number of product lines with shorter product life
cycles under the situation of changed power in
supply chain performance would help Indian
 Summary-II

Supply Chain Evolution

Technological and managerial innovations,
along with the development of logistics
specialists, have helped progressive firms to
improve supply chain performance under trying
times
Supply Chain Challenges in India
Indian firms need to learn from progressive
firms in developed economies, which have
managed to improve supply chain performance
considerably,
But at the same time emerging economies like
India and China have their own unique supply