Discussion of the Optimization and Weaknesses of a Supply Chain

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Introduction

Today companies operate in a highly competitive environment and are increasingly using their logistics and supply chain to compete and gain market shares. Those who know how to set up, manage and quickly re-configure the value chain and will outpace competitors in capturing the market. According to experts the recession has technically ended but many of the same challenges still exist for many organizations. Constant cost-cutting cause's instability on the supply chain, hence we have to find other ways to meet the business goals. These factors will continue to be a top priority in 2010. The global economy remains weak in 2010, the natural implication is that astute supply chain managers feel the pressure to become optimize and take full advantage of opportunities that best meet business opportunities.

Regarding supply chain optimization, they need to improve their Supply chain management (supply chain management) practices. "2010 promises to be a year of recovery and renewal - but only for those companies technologically and operationally ready to capitalize on the many fruits of economic improvement. The winning supply chains will be those that are able to recognize and respond to potential risk, and also be flexible and efficient enough to seize opportunities when they present themselves (Woodward 2009)".

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Logistics in India is very expensive than in any other part of the world due to weak infrastructure and hence there is tremendous supply chainope for improvement. "India's supply chains are built on slow transit networks fed by poor roads, ineffective ports and little distribution infrastructure. In India, there is no such thing as next-day delivery, no transport company to manage nationwide deliveries, and limited distribution channels marketing foreign products to local areas. Logistics infrastructure is severely lagging the country's growth and costs are extremely high, as a result. Logistics costs are around 13 percent of GDP, compared with 8 percent in the U.S" (Vikram K 2009). Foreign entities that have created a retail presence and are currently selling products in India are hit with transportation costs that total 40 percent of all product costs. Some of the supply chain challenges foreign companies can expect as they enter the Indian market are insufficient channels, Limited physical infrastructure, ports with limited infrastructure, archaic warehousing standards, disorganized land transport operations, limited use of technology etc. It has become the need of the hour to ensure that existing supply chain management practices must be recast to adopt and harness the best of global best business practices.

The prevailing supply chain requires improvements. New investors do not have complete confidence due to various hurdles in the current supply chain. There is a need to research on the past, present and future outlines of supply chain in India and find ways of improving them.

Globalization has brought the world markets closer to one another. Dependency on overseas markets for raw material and on time supply of finished goods to the international markets in a timely manner and at competitive rates has evoked the need for a proper planning to make optimal use of the various modes of transport via land, air and water along with warehousing to ensure that the entire process of the chain is put to the best use at an effective cost and within required time frames. The economic progress made by various under developed nations and their ever increasing consumer base has put forth an array of thoughts on weather supply chain management is put to its optimal use to the benefit of producers , consumers and all the other elements that form part of the chain. Supply chain however, still faces various challenges, hurdles at every point. However, it cannot be ruled out that effective planning and use of the supply chain could bring about huge changes to any industry. I would like to put forth my views on how a well designed supply chain system could ensure wider exposure to international markets keeping costs low and ensuring timely movement. Supply chain management today being the core area of every business is a very integral part of a company's growth. I would like to focus on how developing countries can effectively use supply chain management systems to ensure efficient flow of commodities thru the chain in a cost effective and timely manner. I also would like to bring forth a mechanism in which supply chain management as an important part of any business if put to the best use. India as a nation has seen rapid industrial and economic growth. With the need to expand in international markets it is necessary that an efficient supply chain management mechanism is put in place.

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This research could benefit supply chain management executives and managers to take advantage of the opportunities as they arise and companies can gain sufficient market share

To provide information about supply chain challenges by providing useful information and my research findings.

Literature review on Supply chain

To remain competitive and be able to respond quickly to changes in consumer demand, multi national enterprises have, in the last decade, increasingly adopted flexible production methods that involve large numbers of suppliers and service producers (Levy, 1997). Unquestionably the biggest issue that such organizations face has the exponentially increasing complexity with which the MNE's need to scramble resources to meet up with market demand and yet manage the delivery of product from source to market in the most optimal way.

One would be mistaken to think that this is the situation that is endemic to only developed markets. As a matter of fact this complexity and complications thereof can be found in any market that seeks to leverage the advantage of moving products from the source of supply to the market of demand. Hence we would not be making a mistaken assumption that such issues are not only in the domain of the MNEs rather it cuts across organizations at every level.

Before we delve into further detail on the supply chain management, let us first identify a primary understanding of supply chain management.

"Supply chain management is a set of approaches utilized to efficiently integrate suppliers, manufacturers, warehouses, and stores, so that merchandise is produced and distributed at the right quantities, to the right locations, and at the right time, in order to minimize system-wide costs while satisfying service level requirement" (Mak and Ramaprasad 2003). It is interesting to note that the Mak and Ramaprasad(2003) assumes the primary concept of movement of goods from origin to market place exists and the essence of supply chain management is the shared intelligence or knowledge and information that enables efficient decision making. However Korosec(2003) argues that supply chain management is the high ground of 4 principle attributes as listed below:

Information technology that enhances operating capabilities in purchasing

Decentralized decision making that gives rise to innovative solutions that meet changing customer requirements

Collaborative model of partnership between internal (the company) and external agents ( service supply agents, Third Party Logistics (TPL) providers, etc)

Integrated project management model that allows individuals to better understand and be accountable for each procurement process.

The truth of the matter remains that "As customers have become more insistent on higher levels of quality and performance, there has been a realization that traditional procurement systems focus too heavily on costs alone to adequately meet these new needs" (Talluri, 2002). However Kleijnen and Smits (2003) argue that a supply chain management that does not use performance metrics like a supply chain integrated balance score card system relevant to the business needs cannot adequately measure performance or quality.

A key parameter that we should take into consideration is the information flow along the various touch points and the distortion that it can cause in demand supply if the information does not travel efficiently. Lee, Padmanaban & Whang (1997) call this the bullwhip effect or the whiplash effect. They define the Bullwhip effect as "the phenomenon where orders to the supplier tend to have larger variance than sales to the buyer (i.e., demand distortion), and the distortion propagates upstream in an amplified form (i.e., variance amplification)." They further outline in the same paper instances faced by Procter and Gamble HP and mention that it is often said that the DRAM market faces a much higher volatility than the computer market. (See Lee et al. 1997 for more evidence of the bullwhip effect.)

From the above we can see that supply chain management is not just the movement of goods from point A to B but rather is the efficient management movement of goods across the various touch points right up to the customer within the performance metrics that enables an optimal operation for the companies. This may include companies who collaborate and coordinate together in avoidance of competition and the associated oversight thereof.

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In fact many companies are moving from a country based model to a trans global manufacturing model, typically this entails that the large chunk of product are procured from a particular region, say Asia. This kind of situation throws up greater issues in effective supply chain management. Now that companies need to coordinate with suppliers based in China or Malaysia or India companies would have having to rely on multimodal transport options that include road, sea and air. The cost efficiency of ocean freight would need to be traded off against the urgency of shipment that only airfreight could deliver. With issues in improper flow of information orders gets delayed which then has to be expedited across the through the manufacturing channels. Quite often there are no savings in the process, which means that the burden of delivering goods on time to the location then falls upon the efficiency with which the supply chain system can scramble and route resources so that companies that are already fighting for market shares don't loose further. The focus then is optimize the operations building by eliminating the cushion zones at various touch points and ensuring maximum efficiency.

India is a typical; example, the logistics infrastructure is weak, and companies try to push through processes through an infrastructure that is not very mature. Combined this with a range of regulations and trade agreements framework, many of which get changed regularly and thus companies end up with huge supply chain costs.

When considering an efficient supply chain management that involves the global marketplace and the ways that it is changing. Every company should estimate the major impact that globalization entails.

As discussed earlier not only do companies operate in many more countries today than earlier , but the regulations in countries are becoming more complex and constantly changing. An efficient supply chain management system would need to be able to absorb that information and tweak business processes to optimize for these changes. For example fuel costs in India may be cheaper than china, however trade tariffs in India would be higher as compared to China. Hence the efficient supply chain management system would be able to adjust its model to understand which is a better trade off. The direct result is that companies operates differently today in the global environment - even in countries where it has had a long term presence for many years.

Typically MNE's tended to procure locally to avoid import tariffs, now that global rates have fallen, cross border trade has increased which has had impacts on the average cost of the product as well as the overall profitability of the company. Hence it would be fair to argue that an efficient supply chain management system would have to have the systems in place that can capture information across the macro economic levels and translate it into actionable alerts and triggers that further improve efficiency, hence in a very real sense the world of supply chain management is an organic process that constantly assimilates information across the touch points and provides the intelligence to managers to tweak operations.

As mentioned earlier, the biggest challenge to an efficient supply chain operation is the limited infrastructure. Which in turn reduces the capability of a company to move products across markets, quite often partnering with 3PL providers who understand the marketplace and know how to move product makes a lot of sense, in some supply chain scenarios it makes sense to build multiple distribution centers that focus on a hub & spoke model.

A supply chain management system should then have to identify and factor in the infrastructure-related challenges that companies typically face in markets. It can be a truculent trade union to poor road networks to in efficient toll systems that hamper free traffic movement. However none of these factors can mitigate the challenges thrown up changes in consumer preferences and the impact it has on buying behavior, for example winter clothes ordered and brought into market 3 months in anticipation of winter months end up being dead stock due to changes in fashion preference.

With consumers expecting different things in different markets, the need of the hour for companies to come up with efficient supply chain management systems that enable it to rapidly deploy multiple product options in different markets. For example a shoe that sells in the U.S. would not be a hot seller in Japan and sizes would vary across markets as well. The supply chain challenge that the company would have to satisfy is to be able to manufacture optimum quantities of different sizes and different fashions as expected by consumers in both the Japanese and US markets and reach the same to the markets in the most optimal manner. This kind of product SKU proliferation brings in demands for more speed, responsiveness, and the capability to adapt supply chain Models meeting the needs of diverse consumers in different markets. The key word in the supply chain management trade is flexibility, the company needs to make the argument if this flexibility can be created by partnerships with suppliers and carriers or my creating infrastructure and captive manufacturing capabilities.

While there will always be a conflict between flexibility and costs, the sales channels also constantly push for lower lead times and rapider rate of inventory turns as this is the only way the sales channel can ensure better profitability. Considering the longer lead times , the working capital blocked and the constraints in supply chain systems, many companies today may find that they can afford to pay a higher cost per unit in a local market as the higher cost is leveled out in the efficiency and intricacies of implementing and efficient supply chain management system across infrastructure limited bureaucracy ridden nations.

While challenges remain with transportation costs given that freight costs are going to rise, and that's not only because just because of fuel increases (which nobody can control) but due to higher TCO and the need for door-to-door solutions for all deliveries. This entails that global suppliers and carriers can now take ownership from beginning to end, including regulatory clearances. Port infrastructure and railroads supporting continue to be stressed and strained, perhaps to the breaking point. Companies today will need to start planning for the infrastructure that we'll need ten-to-twenty years from today.

The concern that companies face is that how to get more speed and agility into the supply chain. In short the key word is flexibility .

For many companies, the home market like the US is not necessarily the biggest market with the bulk of revenue coming in from overseas markets. Many companies that are head quartered in US make products in India for sale in India as well which in turn returns to the issue of having regional supply bases for a global distribution network. Hence one may see that traditional reasons for shifting production out of countries like cost savings in cost per unit or lower transportation costs may no longer hold good when considering an overall picture unless an efficient supply chain management system is put in place.

Risks of Supply Chain

Cooper et al(2000) lists out some of the challenges that an improper supply chain can entail as below:

Failure to provide products and services of the highest quality in the eyes of the internal customers

Misuse of proprietary sensitive information belonging to employers or suppliers

Misuse of sensitive information belonging to suppliers or others

Conflicts of interest that involve working for a competitor, customer, or supplier without prior management approval

Succumbing to back door selling practices

Willful inaccuracy of records or reports

Monopolistic and restrictive trade practices

Failure to conduct global purchasing in accordance with the laws, customs and practices of other countries, consistent with the laws of the land

Utilizing improper hazardous materials or procedures to reduce cost

Department closings and layoffs

Failure to identify the customer's needs and recommend products and services that meet those needs

Cross Border Environments

Operating in any cross border environment entails risks of language, cultural understanding and the differences in time zones. It is not uncommon to find many companies that have round the clock operations to keep track of shipments and supply chain issues that occur between time zones. Alternatively the supply chain manager that does not do so also runs the risk of not being aware of a problem or not being to report about the problem before it is too late.

Regulatory Environment

Supply chain operations that harness the capabilities of cross border operations often run the risk of changes in the legislation or creating work around processes to be compliant with local market requirements. Such environment changes may spill over into the financial domain where tax implications are not comprehensively covered.

Risk Concentration through constant cost reduction efforts

Many companies under severe share holder pressure keep concentrating risks in an effort to be more cost conscious and manage operations with as little slack as possible. This can be classified chiefly as :

• Risk of suppliers going obsolete

• The vast swings in costs of due to complex interdependence of labor, currency or energy and commodity

• In the current economic scenario, the recovery of economy is unpredictable, one moment is going up and the next moment it is crashing.

Working Capital Shortages

With banks tightening credit and customers rolling back spends, brings higher level of scrutiny on operations to as companies look to lower operating costs and reduce inventory . At the end of the day the moot objective is how can companies reduce the carrying cost. This is further amplified when buyers exert pressure to extend payment terms and on the other hand the supply side will drive for faster or shorter terms in a bid to boost liquidity.

Reconfigure Manufacturing Options

Nett importers like large companies that manufacture overseas for the sole purpose of importing into the home country will continue to reconfigure their supply chains, by moving plant operations and sourcing vendors closer to home and away from Asia in general and India in particular

China clamps down on oversight

With recent scandals including the toy and tainted milk products , the government rhetoric in China is clear as officials have vowed to clamp down on product safety failures by launching national investigations and ordering local officials to report all possible product safety issues. With a tightening of the regulatory environment in China, new control list are being introduced that makes for stronger regulatory oversight of firms

Influencing on business strategy?

Since supply chain is often the tip of the whip, the pre dominant trend it to reacting to demand at the point of sale. This often results in exaggerated response to the situation at hand, on one side companies end up overstocking to meet anticipated pent up demand whereas on the other side companies end up not having enough stock to meet the requirements and extended lead times. Either of these scenarios are detrimental to the over all health of the company, Hence the need for supply chain to be an integral part of the business strategy is crucial. We all readily acknowledge that the global market is competitive and a sharp supply chain system will provide the edge companies require.

Adapting in a Competitive Market

Constant change in market conditions result in the need for supply chain systems that are adaptive and change to market dynamics on the fly or as close as possible. This may entail taking an external view to market conditions and challenge established though processes. A key instance is that of a supply chain manager constantly battling internal issues is not likely to understand the or be receptive external market triggers.

Simple Supply Chain or Complex Supply chain

When dealing with product postponement and eliminating the bull whip effect or the myriads of catastrophic issues that supply chain managers face, the overriding focus is to be as simple as is realistically possible. While this may make life easier, it also prevents the true value of an efficient supply chain to the organization. Hence there is an overriding need to be able to create and strike a balance between keeping simple operations and complex operations that drive better value to the company