Cover Story: The New Supply Chain 2000; Pg 2

For a classic example of converting a supply-chain into a competitive advantage, turn to Wipro's PC-manufacturing operations in Pondicherry. With the PC business becoming commoditised under the onslaught of price-cuts and grey market players, Wipro has picked fast turnaround time-36 hours-between order and delivery as its value-proposition in the marketplace. Naturally, managing its supply-chain, from which the company draws all the parts of the PC, is crucial.

LOGISTICS & SUPPLY CHAIN

Leave your logistics specialist out of your supply-chain management, and you're sawing a key link off your competitive advantage. How else can you get the best out of the crucial Merge-In-Transit (MIT) function, whereby your logistics operator picks up small batches of different components from different suppliers-which you've ordered on a Just-In-Time basis-and delivers them to you without your having to foot the high bill of running a transportation system to handle such small consignments? The reason that he can do it is simple: he performs the same function for other companies too, and has attained an economical scale in his operations, which you cannot possibly achieve by yourself.

That's why, for instance, Mitsubishi Chemicals has handed over the logistics of supply-chain management of inputs for its new 3.50 lakh tonnes per annum purified terephthalic acid plant coming up at Haldia (West Bengal) to the Chennai-based Sembawang Shriram. The logistics specialist will manage the transport of naphtha from global suppliers up to Indian ports, and then transport it to the plant using the most economical internal routes. Likewise, McDonald's has its in-bound logistics managed by AFL, whose responsibility it is to ensure that supplies like farm-fresh lettuce are delivered in refrigerated containers to the distributors' premises, and thereafter to the restaurants. Obviously, without the best logistics support, your supply-chain will fall apart.

Nor are logistics specialists stopping there when it comes to adding value to your supply-chain management. Some of them are even taking care of the operational parts of the process, such as the actual purchasing, packing, re-labelling, and billing. Why, IBM's logistics operators not only do all this, but they also perform part of the company's sub-assembly needs before delivering semi-finished products to the shopfloor. With the dividing line between supply-chain management and logistics management becoming blurred, it's clear that your logistics supplier can sharpen the competitive edge that your supply-chain provides.

This is particularly challenging because the specs for each of these components change constantly thanks to technology development, making it virtually impossible for Wipro to maintain large inventories. Explains P.K. Gopalakrishnan, 37, General Manager (Operations), Wipro: ''PC parts are subject to constant technological changes. But since we build to order, we cannot afford to delay delivery.'' His company follows its former joint venture partner Acer's globally-used fast-food model, which involves keeping low-value items in stock while sourcing high-value parts on a Just-In-Time basis. So, it configured its supply-chain by requesting hard-disk manufacturers Quantum and Seagate to set up distributors in Pondicherry for prompt deliveries. Even electricals (TVS Electronics) and floppy-drive manufacturers (Larsen & Toubro) have been requested to be at beck and call to supply products on demand.

The lesson? Be prepared to reconfigure your supply- chain continuously, depending on a combination of factors internal and external to your company. The state at which your company is in its life-cycle-start-up, growth, consolidation, or maturity-will influence the nature of your supply-chain considerably. Why? Simple: in the early days, the focus will be on creating the chain, with more emphasis on assured availability of inputs-which will, typically, take you to established players. In the growth phase, cost will not be as much of an issue as the ability of your vendors to ramp up their supplies when the need arises-which will need a different kind of supplier from those in the first phase. And when you're consolidating, you will be able to invest in creating suppliers and lift their technological and process capabilities, and work more closely with them in meeting customer needs. Bajaj Auto, for instance, goes to the extent of identifying the right layout, robotics, and other machinery for its vendors. And, when yours is a mature company, cost will be the driving-force in setting up and managing your supply-chain. Says Satish Jha, 42, the CEO of the supply chain technology consultants James Martin & Co.: ''Corporate battles are being won by cents rather than dollars.''

Indeed, strategic supply-chain management can airlift troubled companies operating in mature markets into the realm of competitiveness. Take the case of refrigeration-equipment manufacturer Blue Star, which was suffering from an average on-time delivery record of just 33 per cent at its chiller-manufacturing plant at Thane (Maharashtra). The plant was struggling to break even due to high inventories. Blue Star asked PricewaterhouseCoopers (PwC) to restructure its supply-chain completely. An initial audit revealed that just 10 per cent of its 449 vendors accounted for 60 per cent of business. But Blue Star still had to devote 90 per cent of its supply-chain management resources to dealing with the remaining 400-and-odd vendors. Partly as a result of this, 85 per cent of the time was wasted on non-value-adding activities, like issuing as many as 3,100 purchase orders. Says Mit S. Sethi, 49, Vice-President (Manufacturing), Blue Star: ''We were on the brink, literally.''

PwC realised that the company, given the state of its business, needed a leaner supply-chain. And that its managerial resources had to be focused on those vendors who supply critical components-which also demanded downsizing the supplier-base. So, it reduced the number of vendors to 142, using a home-grown model named Mutual Vulnerability. This model was used to designate each vendor as either strategic or routine, depending on whether the mutual dependence between it and Blue Star was high or low. Thus, it was able to concentrate on the former, yielding better results from them and improving the performance of its supply-chain.

Simultaneously, PwC also introduced a 2-bin system of Kanban on the shopfloor for automatic replenishment of C-class items, such as rubber part, nuts, and bolts, without piling up cash-guzzling inventories. This was backed by the installation of special software, which has crashed Blue Star's planning time for new jobs from 3 days to 2 hours. The software requisitions supplies from vendors in the right quantity and at the right time. The plant's Order-to-Delivery cycle-time has dropped from 103 days to 34 days. As a result, it can produce an average of 30 chillers per month, up from 17. Its Work-In-Progress has dropped from an average of 22 chillers to 6 chillers while on-time deliveries stand at 94 per cent. While the tangible savings amount to Rs 1.5 crore a year, better supply-chain management is yielding Rs 22 crore in additional revenues. Says Sanjay Tugnait, 32, Principal, PwC: ''From inability to meet orders, Blue Star has reached a stage where marketing is under increased pressure to sell what the plant can produce.'' That's supply-chain management at its most powerful.

Just like every other industry, yours too is hurtling towards a situation where the most successful company will be the one that meets the specific needs of different customer segments. And if you're being compelled to abandon the one-size-fits-all specifications for your products in favour of customisation, your supply-chain will have a crucial role to play. For, unless it provides you with the variety you need-without compromising on cost, quality, or delivery-you will lose out to competitors who can extract such flexibility from their supply-chains. Says Harsh Pati Singhania, 38, Deputy Managing Director, JK Corp.: ''The ability to manoeuvre pricing-levels is limited because it is the market that decides what it will buy and at what price. The real option is to reduce costs and become a preferred supplier. At the same time, continue reviewing each element of cost build-up.''

In these circumstances, it is vital to do away with the practice of using multiple vendors for the same product, and replace it with serial monogamy. JK Corp, for instance, has entered into exclusive partnership with suppliers of alum (a cleansing-agent used in paper-processing) and straw board pipes within a 10-km radius from its plant at Jaykaypur in Orissa. This resulted in a reduction in costs by 10 per cent, and has cut JK Corp's inventory-holding from an average of 15 days to just 1 day.

On the face of it, this might contradict the idea of always shopping for the best bargain. Actually, what the lean supply-chain strategists propose is that, at any given point, you should only use 1 supplier for any given product. Why? Answers Ranjan Ghosal 48, Country Manager, Atlantic Duncans International: ''There must be a (least) cost and (minimum) time relationship with the supplier at all times. Including the options to buy from outside or manufacture it.'' That's the tenet driving supply-chain management at the Pune-based Kirloskar Oil Engines Ltd (KOEL), which manufactures 1.50 lakh engines a year, ranging in capacity from 5 HP to 300 HP, and from 2,400 HP to 8,000 HP. But 50 per cent of its sales come from the mid-category 20-300 HP engines. In 1997-98, KOEL had over 630 suppliers of components for its mid-size engines, with upto 4 suppliers for the same product in many cases. In 1997-98, KOEL took the sword to the sheer numbers, reducing the vendor-base to 231-with a target of lowering the figure to below 200 by March, 2000. In fact, the company now has only 1 vendor each for 120 out of its 400 components. Likewise, Godrej-GE reduced its vendor base from 750 in 1991-92 to 256 in 1998, by identifying single sources of supply for most components. Your supply chain can't be kept lean without entering into long-term relationships.

If permanent relationships give way to a series of deals, does that spell the end of partnering between a company and its suppliers? Not necessarily. All that will happen is that neither you nor your vendors will be able to take one another for granted as long-term partners. Instead, both will operate in a dynamic market environment, where competition will determine just who sells to whom. The crucial issue will be determining the parameter for choosing between competing vendors for a component or raw material. That, in turn, will flow from your business needs. For a company selling products that need frequent remodelling and upgrades, it might be speed of delivery to ensure that new products can be brought to market quickly.

Thus, as its strategy shifts to competing on price with rival car-makers, Maruti Udyog has fixed cost as the cementing factor of its relationships with its vendors. The company has set up a system of auctioning among current and potential suppliers. Of course, it couldn't have moved to this stage without investing assiduously in raising the quality-base of its entire supply-chain. Says Jagdish Khattar, 56, CEO, Maruti Udyog: ''Our experience shows that mutual dependence brings the best results. At the same time, we wanted to eliminate complacency.''

Taking free-market sourcing to its logical conclusion, fast food giant McDonald's is building its own supply-chain relationships-its suppliers are, obviously, crucial to its operations since they provide all the inputs that go into the food it sells-on the principle of mutual need. There are no binding contracts with any vendor. Says Vikram Bakshi, 50, Managing Director, Connaught Plaza Restaurants, McDonald's exclusive franchisee in North India: ''It is a policy laid down in McDonald's global manuals. We focus on a mutually-interdependent long-term business relationship. If we can assure our vendor that we are as dependent on him as he is on us, the trust must carry the relationship through.'' The Mumbai-headquartered lettuce-manufacturer Trikaya Agriculture is McDonald's only lettuce supplier. But the company has no binding contracts with either of them. In other words, you must allow market-forces-and not binding agreements-to determine just who the constituents of your supply-chain will be.

Even before your supply-chain can pour the inputs that you need into your company, you must set up a reverse-flow of information back into the supply-chain. This information must originate with the customer, and your tracking of the needs that your product seeks to meet. Each such need, communicated to your company through the upstream parts of the value-chain, must be translated into the product specs that your suppliers must adhere to. This constant information-flow is crucial because you will be competing in markets where customer needs will be different across individuals and over different time-periods. So, your entire value-chain must, actually, march to the beat set by the customer. Says Ram S. Ramasundar, 48, CEO, Electrolux India: ''The objective must be to create a dual interface that moves-at both ends of the spectrum-as close to J-I-T as possible.'' Electrolux, for instance, is putting in place an integrated system with an auto-pull refill order to match Electrolux's global standards of 98 per cent order-fill rate. That's why setting up the information linkages between the end-user and your vendors is imperative.

The price of not doing this can be high. As a study conducted by A.T. Kearney shows, the lack of integration within the supply-chain, arising from inaccurate forecasting of customer needs can bloat inventories by as much as 27 times. Says Sharat Bansal, 46, Executive Director, PwC: ''The forecast fidelity ranges between 30-60 per cent due to poor information flow.'' Unless the information is captured properly at the customer-end, and then faithfully poured back into the supply-chain, the distortions keep multiplying. In their eye-opening 1997 article in The Sloan Management Review (Spring, 1997), The Bullwhip Effect In Supply Chains, Hau L. Lee, V. Padmanabhan, and Seungjin Whang demonstrate how poor co-ordination amplifies variability as one moves up the chain from the customer to the manufacturer. To counter this, unimaginative supply-chain managers stocked high inventories.

The real solution: your supply-chain must be sensitised to the exact demand-pattern at the consumer end at any given point. Argues B.S. Sahay, 37, Professor (Operations Management), Management Development Institute, Gurgaon: ''The cost of maintaining inventories at the pre- and post-distribution ends dictates the area the company focuses on.'' So, smart supply-chain managers aimed at enhancing transparency and minimising guesswork. Says Sid Khanna, 44, Managing Partner, Andersen Consulting: ''To optimise on business operations, it is essential to keep the supply-chain transparent.'' That the information must flow in real time, using e-mail and the Net, is obvious. Companies like Electrolux, Bajaj Auto, Philips, and Maruti Udyog are systematically setting up on-line links with every one of their suppliers precisely for this purpose.

The key to ensuring accurate information-flow within the supply-chain is to minimise the dissemination points of data. This way, unnecessary information will be filtered out. That's why companies like KOEL as well as Otis Elevators, for instance, have configured their supply-chain into tiers. Only Tier-I vendors supply the company's needs directly, using Tier-II vendors as their supply-chain. And, where necessary, Tier-II vendors use Tier-III suppliers to provide them with the inputs. This way, the information flows only from the company to the Tier-I suppliers, who pass it on to their vendors, and so on. Says Vijay Verma, 48, Vice-President, KOEL: ''We wanted to deal with as few vendors as possible. It streamlines our own data-processing significantly.''

In businesses with seasonal shifts in demand, keeping the supply-chain operating on a just-as-much-and-when-needed basis can make all the difference between profits and losses. During the cane-crushing season, for instance, sugar-maker Balrampur Chini Mills uses a cane accounting and calendaring software. Based on the demand for the 6 varieties of sugar that it produces, it lays out its manufacturing schedules. It, then, computes how much can be procured from neighbouring areas, and how much needs to be transported from elsewhere. The company, then, issues tickets with dates and time-frames to the farmers. Says S.S. Grewal, 44, the Chairman of the Delhi-based A.K.S. Software, the developers of the software: ''This software has ensured a steady flow of raw materials in just the required quantities.''

Clearly, what's flowing here is information first, and material only afterwards. But beware. Sure, your supply-chain can yield unmatched competitive advantage-but it can prove just as elusive as your customer. After all, companies that compete with you in the same product category may-indeed, will-also try to steal your suppliers. So, your strategy for managing your supply-chain will also require you to become the best-possible customer for your vendors.

That means meeting their aspirations too. For instance, the players on your supply-chain may want to explore global markets, or expand operations to a scale where they need more than your custom. On your ability to enable them to grow their business without damaging the equilibrium of your supply-chain will depend whether you are able to sustain the competitive advantage that flows from that chain. Agrees Sanjiv Bajaj, 31, Deputy General Manager, Bajaj Auto: ''Helping vendor viability and growth is as much our responsibility as it is to develop their capabilities as component manufacturers.'' Remember, only by captivating your supply-chain will you, ultimately, be able to captivate your customers.