The global fertilizer business continued to recover in 2011 showing positive trend. It is estimated that fertilizer demand increased by 6.2% in 2011 to 173 Million Metric Tons. This growth was triggered by firm agricultural commodity markets. Nitrogen fertilizer demand, which fully recovered in 2009-10 from economic downturn, is seen up by 2.6% to 104.5 Million Metric Tons. Phosphate fertilizer demand is estimated to have increased by a significant 8.8% to 40.7 Million Metric Tons. Global nutrient capacity grew at a slower rate than production, confirming the tightness of supply seen throughout 2011, because of delays in new capacity commissioning and stronger than expected demand. Overall, the pricing trend for Ammonia, Urea and DAP remained positive rising to around $700 per ton, $500 per ton and $625 per ton respectively. World cotton prices softened during the year. Wheat prices also witnessed a downward trend in 2011 due to significant expansion in production in Kazakhstan, Brazil and Russia. 1
2011 saw unprecedented increase in prices of fertilizers as continued curtailment and prolonged shut down due to gas outage on the National gas network based fertilizer plants and limited curtailment on the Mari field plants, reduced production significantly. The country was therefore once again forced to import Urea despite indigenous capacity to meet demand and indeed export. To fulfill needs of domestic agricultural market and deal with fertilizer shortages government imported 1.2 Million tons of Urea. This major import cost the economy a huge out flow of precious foreign exchange and a hefty amount in subsidy. The rise in prices was further compounded by the imposition of General Sales Tax on all fertilizers. 2
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On the back of price increases during the year and floods in lower Sindh, Urea demand registered a further slowdown over the previous year. It is estimated that the Urea market declined by 3% over 2010 to approximately 5.9 million tons. The phosphate market showed major shrinkage as sales dropped by a significant 15% for the year over the same period last year. Global prices of DAP, which had commenced appreciating in 2010 and had increased by 40% by the end of 2010, further spiraled by another 34% at the end of 2011. The agriculture commodities on the other hand registered reduction in their rates. Wheat prices saw a dip in mid-year due to Russia's wheat price hitting rock bottom in international market but the Government of Pakistan raised its support price too late in the year to improve farmer response. Cotton prices saw a decrease of 30% from 2010 to 2011. Maize prices also decreased particularly in the third and fourth quarter. Sugarcane prices remained higher whereas rice prices decreased over the course of year making it one of the preferred export items after Thailand's losing out on its rice due to 2011 floods. 3
Profile of key players
The sector is dominated by four major firms, namely Fauji Fertilizer Company (FFC), Engro Chemical Pakistan Ltd (ECPL), Fauji Fertilizer Bin Qasim (FFBL) and Dawood Hercules Chemical Ltd. (DHCL). A brief overview and profile of these firms is presented below4
Fauji Fertilizer Company (FFC)
FFC was incorporated in 1978 as a private limited company. It was a joint venture between Fauji Foundation and Haldor Topsoe A/S of Denmark. The company commenced operations in 1982 with an annual urea capacity of 570,000 tons per year. As a result of a de-bottlenecking programme (DBN), plant capacity was increased to 695,000 tons per year. 5
Production capacity was further enhanced in 1993 when the company established its second plant with a capacity of 635,000 tons per year. In 2002, FFC acquired the Pak Saudi Fertilizer Limited (PSFL) urea plant located in District Ghotki from NFC under the government's privatization programme. It had a capacity of 574,000 tons. This pushed the overall company capacity to 1.9 million tons, thus making it the largest urea producer in the country. Further DBN activities have enhanced the company's urea capacity to 2.048 million tons1. Apart from manufacturing, the company also has an extensive marketing network comprising 3,258 dealers spread across the country. Presently, a 44% stake in the company is held by Fauji Foundation (FF). 6
Engro Fertilizer Limited (EFL)
Engro is the second largest player, while also being the first ever company to establish a urea plant in the country. The company was initially established as Esso Pakistan Fertilizer Company Ltd. in 1965 with 75% shares held by Esso. With an initial investment of $ 43 million, the plant was established having a capacity of 173,000 tons. With Esso becoming Exxon, the company was renamed as Exxon Chemical Pakistan Ltd. In 1991, Exxon decided to divest its fertilizer business on a global basis, which resulted in an employee-led buyout of Exxon's 75% stake in the company. Since then, the company has evolved into a dynamic and well-diversified conglomerate. The holding company ECPL now has a urea capacity of 975,000 tons and an NPK capacity of 160,000 tons. The company is close to achieving the highest domestic urea capacity by way of its expansion of 1.3 million tons, costing over $1 billion, which is expected to start commercial production by mid- 2010. The company also has a share of 21% within the marketing segment. Currently, a 41% stake of the company is held by the Dawood group. 7
Fauji Fertilizer Bin Qasim Ltd (FFBL)
Always on Time
Marked to Standard
FFBL is the only DAP producer in the country and also manufactures superior quality granular urea. The manufacturing complex was built at a cost of $ 68 million. Formed as a venture between FFC, FF and Jordan Phosphate Mines Co. (JPMC) in 1993, the company ran into a series of crises in its early years due to technical, financial and managerial reasons. As a result, its DAP plant was mothballed in 2001 due to accumulated losses of Rs 6.5 billion. In 2003, JPMC sold its stake and the company was renamed FFBL, having resumed production after a lapse of two years. The company currently has annual urea and DAP capacities of 551,000 tons and 445,000 tons respectively. The company's off-take is handled by FFC and, as such, FFC had a 44% share in DAP marketing during 2007/08. Presently, a 51% stake is held by FFC and 17% is held by FF2. 8
Dawood Hercules Chemical Ltd (DHCL)
The company was incorporated in 1968 as a joint venture between the Dawood Group and Hercules Inc. USA. The plant had an initial capacity of 345,000 tons which was enhanced to 445,500 tons as a result of revamp activities during 1981-1991. DHCL markets its products through Dawood Corporation Ltd (DCL), though its activities are confined to Punjab and NWFP. During 2008, DCL maintained a share of 8.2% in the overall fertilizer marketing activities in the country. The company is primarily held by the Dawood Group while it also holds 38% stake in ECPL. "Competition assessment study of the fertilizer sector in Pakistan", Competition Commission of Pakistan Islamabad. 9
Engro Fertilizer Overview
Engro Fertilizers Limited is a wholly owned subsidiary of Engro Corporation and a renowned name in Pakistan's fertilizer industry. Engro holds a vast, nationwide production and marketing infrastructure and produces leading fertilizer brands optimized for local cultivation needs and demand. Engro is also a leading importer and seller of Phosphate products, which are marketed extensively across Pakistan as phospatic fertilizers.
Engro Fertilizers Limited was incorporated in June 2009, following a decision to demerge fertilizer concern from its parent company Engro Chemical Pakistan Limited. The continual expansions and diversifications in its enterprises necessitated a broad restructuring in Engro Chemical operations and management. To facilitate better oversight, Engro Chemical Pakistan was converted into a holding company named Engro Corporation, and its fertilizer business was subsequently demerged to a newly formed Engro subsidiary -Engro Fertilizers Limited.
Engro's fertilizer manufacturing facility at Daharki has been experiencing ongoing expansion. This, coupled with distinct dynamics of highly nuanced fertilizer industry warranted an independent and dedicated business entity and approach. The demerger of fertilizer concern was approved by High Court of Sind on December 9th, 2009, making it effective as of January 1st 2010. 10
Engro Fertilizers is poised to become the leading urea manufacturer in the country following major upgrading of its manufacturing capabilities. ENVEN 1.3-a tremendous expansion in Engro's urea manufacturing facility went into production in November 2010 and looks set to end Pakistan's near-term urea imports, leading to benefits of an expanded local urea base and savings in national exchequer.
Engro is a dynamic company driven by a vision to improve productivity and lifestyle for thousands of farmers across Pakistan. Engro Fertilizers Limited has earned itself a distinguished name by continually striving to uphold its tradition and trust of its loyal consumer base. 10
History of Engro
In 1957, Pak Stanvac -an Esso/Mobil joint venture -stumbled upon vast deposits rich in natural gas in Mari while pursuing viable oil exploration in Sind. With Pak Stanvac focused exclusively on oil exploration, the discovery shifted the impetus to Esso which decided to invest on the massive industrial potential of Mari gas field. Esso proposed establishment of a giant urea plant in Daharki, about ten miles from the Mari gas fields, which would use natural gas produced as its primary raw material to turn out urea fertilizer.
Talks with the Government of Pakistan bore fruit in 1964, and an agreement was signed allowing Esso to set up a urea plant with an annual capacity of 173,000 tons. Esso brought in state-of-the-art design; commercially tried facilities; and a highly distinguished pool of technical expertise to ensure a smooth start up. Total investment made was US$ 46M -the single largest foreign investment in Pakistan to date then. The plant started production on 4 December 1968 -a few months late and with less than 10 % over run on the original budget.10
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Farmer education programs increased consumption of fertilizers Pakistan, paving way for Company's branded urea called "Engro" -an acronym for "Energy for Growth".
In 1978, Esso became Exxon as part of an international name change. The Company was therefore renamed Exxon Chemical Pakistan Limited.
In 1991, Exxon decided to divest its fertilizer business on a global basis. The employees of Exxon Chemical Pakistan Limited -in partnership with leading international and local financial institutions -bought out Exxon's 75% equity.
By 2009, Engro was fast growing and had already diversified its business portfolio is as many as seven different industries. The continual expansions and diversifications in Company's enterprises necessitated a broad restructuring in Engro Chemical operations and management.
The demerger acquired the approval of High Court of Sind on December 9, 2009 after obtaining the requisite approvals from creditors and shareholders of the Company. The demerger became effective from January 1, 2010.
Future prospects for Engro Fertilizers look bright as the Company recently undertook its biggest urea expansion project to date. Its newly constructed Prill Tower stands tall at 125 meters -dubbed the tallest structure in Pakistan. The total cost of this expansion is approximately US$ 1.05 Billion, with the expanded facility looking set to make Engro the biggest urea manufacturer in Pakistan, besides substantially cutting the cost of urea imports to national exchequer. 10
Engro Fertilizers Limited has traditionally been led by the most visionary business leaders in Pakistan's fertilizer industry. During its span of over 40 years, Engro has been bringing together the best of business leaders in its boardrooms, uniting them into a dedicated team of company leadership in pursuit of excellence and growth.
The governance structure at Engro continually responds to industry's best practices demands and dynamics, ensuring sustainability and balance in Company's obligations and operations. Core to its responsibilities is careful evaluation of all aspects of its commitments -social, environmental and economic, and ascertaining complete impact of business decisions on Company's triple bottom line - People, Planet and Profits.
The Board of Directors ensures compliance with the 'Code of Corporate Governance' -as issued by the Securities and Exchange Commission of Pakistan. The Code primarily helps Engro in establishing a system in which the Company is directed and controlled by the directors in accordance with the best governance practices to safeguard the interests of the stakeholders. 10
Safety, Health & Environment
For Engro, safety and health of personnel, neighbors, customers and visitors is the foremost concern in all their operations and processes.They realize and care about their responsibilities towards environment, health and safety within their own confines and beyond -extending safe practices throughout procurement, distribution and waste disposal.
Ethics and Integrity
At Engro, integrity takes precedence over results. They uphold honest and ethical behavior in all their activities within the Company and in its relations with customers and stakeholders. Engro stand to commit themselves to conduct business and provide service with unyielding integrity, valuing their repute as a conscientious and scrupulous corporate entity as their biggest of all assets.
Engro value leaders and cultivate strongly the ability to lead at all levels within the organization. Engro is the professional home to business leaders with high integrity, energy and enthusiasm who demonstrate exceptional managerial, professional and people skills. Engor's are the people who inspire others set high goals and strive hard to achieve them.
Quality & Continuous Improvement
Engro believes that quality and a relentless commitment to continuous improvement are essential to their ongoing success. To this end, they define quality as understanding customers' expectations, agreeing on performance and value, and providing products and services that meet or exceed expectations every time. Their motto is, "Quality in all we do."10
Enthusiastic Pursuit of Profit
Engro push their selves to goals that are ambitious, worth aiming and satisfying. Their success hinges on an enthusiastic attitude towards discharging their responsibilities to their shareholders and enhancing their long-term profitability and growth.
External & Community Involvement
Engro believes that society must have industrial organizations that it can trust. Trust and confidence are earned by performance, by open and direct communication, and by active involvement in the communities in which we live and conduct our business. Engro appreciates the importance of cooperation and trust with the communities that they work with, and strives to get them to the road of modernization and improvement.
Candid & Open Communications
They believe that excitement, satisfaction and recognition are essential elements of a creative and high-performing work environment.
Enjoyment & Fun
Engro value communications that are courteous, candid and open -those that enable each of them to do their jobs more effectively and that contribute to the quality of their judgments and decision making.10
Success requires us to continually bank on breakthrough ideas, improving on their efficiency, work methods and products. They encourage challenges to the status quo and seek organizational environments in which ideas are generated, nurtured and developed.
Individual Growth & Development
They strongly believe in the dignity and value of their people. They treat each other with respect and strive to create an organizational environment in which individuals are encouraged and empowered to contribute, grow and develop themselves, and help their peers and communities to develop and grow.
Teamwork & Partnership
High-performing teams containing the right mix can achieve what individuals alone cannot. Their strength is their purposeful use of the diversity of style; approach and skills to build teams that go beyond the capabilities of its individual members.
Diversity & International Focus
Engro value differences in gender, race, nationality, culture, personality and style, as diverse solutions, approaches and structures are more likely to meet the needs of customers and achieve their business goals. Engro is fast realizing its ambitions to have worldwide footprints to provide truly global solutions and opportunities to its stakeholders and customers, and is poised in its culture and attitude to take on the global stage.
Engro is the first company to have setup urea production facility in Pakistan, a landmark event in agricultural sector of the country.
For a healthy growth the plant requires three major nutrients namely Nitrogen, Phosphorus and Potassium. Di-Ammonium Phosphate (DAP), which contains 46% Phosphorus, is the most widely used source.
Engro Zorawar is a specialist product which provides the plant with Phosphorus content.
NP formulations that contain Nitrogen and Phosphorus in almost equal quantity have been especially important to Pakistani farmers, given the peculiar deficiency of both components in most of the Pakistani soils.
Plants require three major nutrients (i.e. Nitrogen, Phosphorus and Potassium) for quality higher yield. Zarkhez, introduced in 2002, is the only branded fertilizer in Pakistan which contains all three nutrients.
Zinc is a micronutrient, it is a nutrient which the crop requires in small dosages and it compliments functions of major nutrients Over the years zinc deficiency has been well.10
Since inception, Engro has recognized that a positive relationship with key stakeholders guarantees long-term success for any enterprise.
Engro has long believed in its commitments to society and national fabric.
Corporate Responsibility Efforts
Community And Society
Engro is sensitive to the needs of its stakeholders especially those of their host communities, and most of their social investments directly address these needs. Engro Foundation plays a leading role in making meaningful investments towards addressing the social and economic needs of these communities. 10
Engro Foundation serves as a single platform for community engagement activities and social investments of Engro affiliates. By pooling their financial and managerial resources under the Foundation, Engro seeks to create large scale social impact.
Health, Safety And Environment
Engro is committed to conduct their business in a manner that protects the health and safety of their employees and the communities in which they operate. HSE performance and programs at Engro are annually reviewed at the board level.10
They also recognize the importance of protecting the environment while conducting their business and believe that caring for the environment is not only an ethical and legal obligation but also a mechanism for success. Engro abides by all local environmental laws and regulations including National Environmental Quality Standards (NEQS). It continually strive to align their HSE management systems and processes to international best practices including Occupational Safety and Health Administration (OSHA) and Dupont Workplace Safety Standards.
Their HSE systems and processes are regularly assessed and audited internally as well as independently by third parties.
The following aspects are hallmarks of HSE systems at Engro:
Health & Safety
At Engro, health and safety of their personnel forms their fundamental priority. They share an unshakable commitment to providing a safe environment to work in to all their workers and staff. Engro's dedicated panel of professionals at company level ensures health and safety using proven expertise, tools and training methods.
Core objectives of environmental management policy at Engro include complying with regulatory requirements and reducing their environmental burden and footprint. 10
HSE Performance -Facts, Awards And Certifications
A key measure of their progress has been Total Recordable Injury Rate (TRIR). It also aims at aligning HSE management systems to and processes to international best practices including Occupational Safety and Health Administration (OSHA) and Dupont Workplace Safety Standards. Engro has achieved 31 safety performance awards from National Safety Council, USA, 02 Exxon Basic Chemicals President Awards, and Golden Jubilee award for the best practices in Occupational Safety, Health & Environment.
Urea manufacturing site at Daharki has the following certifications:
OHSAS and 18001:1999 and SA 8000:2001.
In addition to these certifications, preliminary work has been completed for ISO 17025 certification. This certification will ensure the internal Laboratory functions' alignment with world-class standards. Engro Zarkhez plant has also achieved Environmental Management System ISO-14001:2004 certification, reiterating our commitment towards well-controlled and strong environmental and safety safeguards.10
Ratio calculations have been done on the data till 2011 for all the three companies.
Return on Assets
Return on Equity
Return on Capital
*Data taken from Annual Reports 2010-2011 :"Engro" , "FFC", "Fatima" 11
The Chart dipicts that ROA ROE and ROC of FFC is the highest amongst the three competitors.
Levered Free Cash Flow Margin
*Data taken from Annual Reports 2010-2011 :"Engro" , "FFC", "Fatima" 11
Fatima's Gross Margin is the highest, second is FFC and third comes Engro.
Leveraged free Cash Flow margin is negative for Engro due to high leverage postion of the company of its Enven Plant Loans. Earnings before interest and taxes is highest for Fatima and lowest for Engro.
Selling, General and Administrative expenses are highest for Engro and lowest for Fatima.
Total Assets Turnover
Accounts Receivables Turnover
Fixed Assets Turnover
*Data taken from Annual Reports 2010-2011 :"Engro" , "FFC", "Fatima" 11
Asset Turnover is highest for FFC, it has the highest number of plants and the equipment and machinery used are new and they have less plant shut downs as comparied to other companies. Gas supply is regular for FFC hence its assets are fully utilized. Fixed Assets are also high for FFC. Inventory Turnover is higher for Engro and FFC due to high Urea demand.
*Data taken from Annual Reports 2010-2011 :"Engro" , "FFC", "Fatima" 11
Current Ratio of FFC is the highest, which is a good sign for the company. The lowest current ratio is of Engro, which should be improved.
For Quick Ratio FFC still has the highest Quick Ratio irrespective of taking out the inventory.
Total Liabilities/Total Assets
*Data taken from Annual Reports 2010-2011 :"Engro" , "FFC", "Fatima" 11
Total Debt to Equity Ratio is highest for Engro as it has taken loan for its expansion (ENVEN 1.3) $1.3Billion, this makes the company highly leveraged. Which is a big problem for the company in 2012 due to no gas supply for its new Plant and loan payments have to be paid with plant utilization being zero.
Growth Over Prior Year
Growth Over Prior Year
Tangible Book Value
Diluted EPS Before Extra
Cash From Ops.
Levered Free Cash Flow
*Data taken from Annual Reports 2010-2011 :"Engro" , "FFC", "Fatima" 11
The above chart shows Growth over Prior. Engro Shows a higher total revenue growth a higher gross profit a higher EBITDA growth over its previous year.
This Data is till 2011 when its new plant comissioned and their production increased for some time, that is depicted in the charts above as growth over prior years.
"Due to the complex information flow in these systems; which consists of cumulative data about costs parameters, production activities, inventory systems and levels, logistic activities and many other related processes, we may unwaveringly express that the performance of a successful SCN directly related to the constant, accurate and appropriate demand information flow as this vital flow of information inarguably influences all decision making processes in all stages of SCNs.
SCNs are multi stage complex dynamical systems consist of various involved organizations performing different processes and activities in each and consequent stages which are connected through upstream and downstream linkages to produce value in the form of products and services (Christopher, 1994). Demand forecasting and decision making processes are among the key activities which directly affect the performance of this complex systems. As demand pattern varies due to the field of activity and architecture of system, appropriate forecasting and order decision model determination is a complicated work in SCNs." 12
Engro Corp is trying to determine if a central supply chain department would be efficient or will the existing model suffice with tweaking. At the moment there is a supply chain department for each subsidiary. The value offerings by each department vary with their functional scenarios. But the overall concept is to make the procurement and logistics effective and efficient for the corporation as a whole. At the moment each department has a bunch of suppliers and vendors which are the same or could be the same if they had a uniform list to relate to, but their prices and time of delivery vary from department to department of the same corporation. So if the price negotiations can be done with larger orders and quicker delivery times then it will bring about efficiency for the subsidiaries of the corporation.
"What's better a centralized or decentralized supply chain?
In speaking with several users, reporters, analysts and vendors one of the common themes debated was a centralized or decentralized global supply chain and which is better. My knee jerk reaction was immediately to say a centralized supply chain since its been so successful at IBM and a critical factor in our turnaround. But we are a solutions company, meaning we offer clients a package of hardware, software and services that are all pulled together to solve a problem. So it makes sense for us to streamline our supply chain across all of our divisions and brands. But if I am a company like General Electric for example (just an example, I didn't speak with them), which owns a TV station (NBC) and medical imaging technology, it may not make as much sense since its clients are typically not buying a 30 second commercial and a MRI machine. Maybe indirect procurement could be centralized, since travel and office supplies can be leveraged across the brands, but NBC doesn't have any manufacturing that the medical division relies on, so why pull them into a common supply chain.
After having this conversation several times it just boiled down to the fact that it's not a one size fits all answer, which also fit well into what i2's CEO Michael McGrath was saying about i2's specific industry capabilities and solutions that are tailored to the needs of a company." 13
The above article is a statement by a senior supply chain executive and will help me with my research with Engro Corp. He has given me a different view concerning conglomerates with respect to diversified business and their functionalities.
Centralization and Decentralization
Centralization is said to be a process where the concentration of decision making is in a few hands. All the important decision and actions at the lower level, all subjects and actions at the lower level are subject to the approval of top management. According to Allen, "Centralization" is the systematic and consistent reservation of authority at central points in the organization. The implication of centralization can be :-
Reservation of decision making power at top level.
Reservation of operating authority with the middle level managers.
Reservation of operation at lower level at the directions of the top level.
Under centralization, the important and key decisions are taken by the top management and the other levels are into implementations as per the directions of top level. For example, in a business concern, the father & son being the owners decide about the important matters and all the rest of functions like product, finance, marketing, personnel, are carried out by the department heads and they have to act as per instruction and orders of the two people. Therefore in this case, decision making power remain in the hands of father & son.
On the other hand, Decentralization is a systematic delegation of authority at all levels of management and in all of the organization. In a decentralization concern, authority in retained by the top management for taking major decisions and framing policies concerning the whole concern. Rest of the authority may be delegated to the middle level and lower level of management.
The degree of centralization and decentralization will depend upon the amount of authority delegated to the lowest level. According to Allen, "Decentralization refers to the systematic effort to delegate to the lowest level of authority except that which can be controlled and exercised at central points.
Decentralization is not the same as delegation. In fact, decentralization is all extension of delegation. Decentralization pattern is wider is scope and the authorities are diffused to the lowest most level of management. Delegation of authority is a complete process and takes place from one person to another. While decentralization is complete only when fullest possible delegation has taken place.
Article explains centralization and decentralization of decision making within the organization, this explains the benefits of both sides, this further adds information to my research and will help me come up with a direction within both options.14
THE SUPPLY CHAIN
By Maha Muzumdar and Narayan Balachandran
As change comes fast and furious, supply chain professionals can take advantage in ways undreamed of just a few years ago.
ROLES, RESPONSIBILITIES AND IMPLICATIONS FOR MANAGEMENT
A steady increase in the complexity of supply chains and a corresponding rise in the virtualization of the manufacturing process have spawned several noticeable trends in organizational dynamics. Over the decades, management of the supply chain has moved through three distinct phases, from decentralized (functional/departmental), to centralized (corporate planning and purchasing), and finally to a combination of both.
The pendulum is currently swinging toward central-ized planning combined with decentralized execution. Technology now allows for the rapid propagation of business information from all functional and geographical areas of the extended enterprise, which enables decision- makers to plan and execute with the intent of maximizing enterprise-wide profitability.
Organizational structures and functional areas within organizations have transformed significantly over the past four to five decades.
Phase 1 represents the transformation from the post World War II era through the late 1980s. Each functional area or department planned and operated in an isolated environment. Attempts at enter- prise-wide supply chain planning were often ineffective. Supply chain execution decisions were again taken from a largely functional perspective.
Phase 2 represents the incremental changes that occurred from the late 1980s through the late 1990s. The adoption and diffusion of advanced planning and scheduling (APS) systems and enterprise resources planning (ERP) systems, in concert with business process re-engineering (BPR) were key factors behind the transformation.
Supply chain planning and execution became more integrated and driven by cross- functional teams. Today with the advent of the Internet and Web-enabled technologies, the supply chain is morphing again.
Phase 3 describes the current transformation from a linear supply chain to a network, where suppliers and customers collaborate to extract and share knowledge and value. In addition, increased visibility and access to real-time information will make a greater proportion of supply chain execution decisions pre-emptive rather than reactive.
Phase 1-Departmentalized or functional supply chain management
ORGANIZATIONAL STRUCTURES FROM THE fifties to the late eighties can be characterized as a series of functional and geographical silos. Executive management's attempts at centralized supply chain planning in such an environment were ineffective due to the lack of standardization of business informa- tion, poor data integrity and analysis support, disparate tech- nology systems, and incentives that did not promote sharing of information.
Supply chain execution decisions were made by a core set of managers within each silo with minimal thought about reper- cussions in other areas. Decisions were reactive and based solely on criteria that were applicable to the particular functional area.
Supply Chain Execution
Silo-based execution- often in a reactive mode ; Decisions often made by
functional managers and key associates
Integrated cross-functional decisions, still primarily in a reactive mode
Decisions taken at the most appropriate level in the organization
Greater proportion of collaborative, pre-emptive decisions
Phase 2-Transformation to integrated supply chain management
IN THE LATE EIGHTIES and early nineties, with the advent of BPR, corporate leaders started seeing the benefits of aligning their organizations, along with the associated business objectives and performance incentives for executives, to underlying business processes. Advances in technology and lower cost of computing increased the penetration of enterprise-wide trans- action systems such as ERP systems. Standardized business information and a coherent set of metrics from different businesses, functional and geographical areas were now readily available to senior managers. With the introduction of APS systems, supply chain optimization became a feasible option. This led to an increase in the effectiveness of increasingly centralized supply chain planning processes. The planning process was more integrated and driven by cross-functional teams with an objective to look at the enterprise as a whole.
Leading corporations across all industries started realizing that to reap the full benefits, demand forecasting, supply chain planning, and production scheduling ought to be treated as an integrated business process. Sales and operations planning programs, where cross-functional teams periodically meet to determine the best course of action, became popular.
Supply chain execution decisions also became more cross
functional and integrated. Purchasing and manufacturing could now jointly decide on a raw material procurement decision that minimized the total cost-to-make of a product, not just the lowest purchase price. Similarly customer service and distribution and logistics could jointly decide on a fulfillment decision that minimized the total cost to serve a particular customer.
Phase 3-Transformation to value networks
TODAY, THE INTERNET IS unleashing a powerful phenomenon-collaboration-that is affecting the supply chain. Integrated and centralized supply chain planning will become even more effective as the majority of inputs to the planning process will flow bottom-up through the enterprise, and an increasing portion of it will originate from the end customer. Pertinent information will be adjusted and reviewed by relevant players based on new developments. Demand fore- casts will be routinely updated by sales representatives based on the latest customer information and eventually by the end customers themselves. Sharing of information around product seasonality, promotional events and new product launches between buyers and sellers will further enhance the trend, and increase the associated benefits of higher customer service levels and lower supply chain costs.
The other significant development will be that supply chain execution decisions will become increasingly decentralized. As supply chains migrate from a push model (build-to-stock) to a pull model (build-to-demand), they require four key elements for operational success: real-time visibility (across the entire supply chain), flexibility (of supply and sourcing options), responsiveness (to changes in customer demand and product lead-times) and rapid new product introductions (based on market trends and new designs).
The next generation of supply chain systems will include supply chain process management or event management capabilities. These capabilities will enable close to real time, event- based escalation of relevant pieces of information through the organization to appropriate individuals, who will then execute decisions to minimize organizational impact and/or leverage opportunities created by this event.
Increased VISIBILITY and access to real-time information will make a greater proportion of SUPPLY chain EXECUTION decisions pre-emptive rather than reactive.
In today's environment, where effective supply chain collaboration is increasingly seen as a competitive advantage, viewing the business process as something that extends beyond the enterprise, and understanding the impact of decisions on key customers and suppliers will become a critical success factor. The ability to effectively collaborate with several other stakeholders outside your organization will become increasingly important. Successful players will operate comfortably in virtual and perhaps even transient cross-functional teams, providing domain expertise to some and leadership skills to others. The ability to rapidly process information, filtering out the noise while gleaning the relevant pieces is the key to understanding that disconnected pieces of information are indeed part of a larger event. This knowledge can then be used to proactively plan several potential decision scenarios and to execute one or more of them in a pre-emptive mode.
Clearly, not all organizations in different industries are at Phase 3. Certain industries, such as the high tech sector are leading the pack. However, this juggernaut is coming and this transformation will occur across industries over the next several years. People who manage the supply chain for a company will need to have a few key characteristics. First, they must build a personal knowledge base that is integrated, diverse, and goes beyond one's immediate functional area and across the enterprise. They must focus on obtaining both the depth and the breadth of knowledge.
Another key factor is learning to work within integrated team settings, both physical and virtual. These settings will be fast- paced and oftentimes seem chaotic, however keeping a holistic and synergistic viewpoint will keep participants on such teams focused. Inherent in this approach is thinking of customers, suppliers and other organizations as partners and collaborators. You will all succeed together or you will not succeed at all.
Finally, workers with supply chain management responsibilities must strive to stay on top of new technology and develop an intimate knowledge of not only how it can affect their unit and their companies, but also how it can affect their partners. Technology is fueling Phase 3, and leading companies are beginning to adopt systems and policies that are increasing the efficiency in their supply chains.15
This article explains the evolution of supply chain, and how supply chain as a work function was developed. The author has divided the evolution into 3 phases and explains each phase briefly. This will help me with figuring out where and in which phase the organization is standing and where it can develop or has a room to develop into.