AQUA

MANAGEMENT
CONSULTING SUPPLY CHAIN COST REDUCTION IN INDIA
GROUP

Supply Chain Cost Reduction

Opportunities for Indian
Companies | Special Report
 Aqua MCG Special Report ` SUPPLY CHAIN COST REDUCTION IN INDIA

SUPPLY CHAIN COST REDUCTION IN

INDIA
Supply Chain Cost Reduction Opportunities for Indian Companies

SUPPLY CHAIN COST REDUCTION IN INDIA

THE MARKET AND SUPPLY CHAIN NEED
Failed companies. Rescued banks. Panicked markets. Our current economic suffering is being hailed as one of the
worst of all times. With a sharp decline in spending & wealth, now more than ever, have organisations realised the
need for strategic thought and structured planning. This is where cost reduction has assumed its insurmountable
position.

Cost saving initiatives need to be shaped and implemented by all departments in the organization; the entire
process of planning, monitoring and measuring needs the support of all. Everyone from the top to the bottom
must be actively involved, and work towards the new goals set. Expense reports are obviously the most logical
place to start. These should be over a relatively long period of time in order to remove any seasonal variations. It
is also important to stay focused on the key areas that account for the major 80% of costs.

Many organizations believe in myths like an “informal program for cost reduction is fine”; or even that reducing
costs have a negative impact on quality. Nothing could be further from the truth. The most efficient cost reduction
programs are those that very formal / specific and have clear objectives & accountabilities attached to it.

Companies that have been successful in cost reduction realised that it’s not enough to just reduce expenses to
remain competitive; rather it takes innovative measures to emerge as leaders. This is why the role of knowledge
advisory groups is so important. They help provide a much needed innovative & structured program, designed
through practice-proven tools and strategies from specialists.

For example, it is easy to see why so many companies choose to downsize their workforce so that employee
costs, which often account for more than 40% of a company’s operating budget, can drastically reduce overall
expenses. But how many have actually considered outsourcing non-core functions, like outsourcing the entire
supply chain. Many auto & chemical companies around the world have outsourced their logistics, and are saving
considerable amounts of money.

Even in the domestic Indian market (sans the effect of globalization) there is a tremendous need for companies to
improve their supply chain processes due to:

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Well informed, powerful customers The level of customer satisfaction is often driven by the supply chain.
Customer expectations today stand at very high levels where responsive, demand-driven ones meet the desired
service levels. For this supply chains need to be well integrated & at the same time help maintain low costs and
high margins.

Shorter product lifecycles Product lifecycles are getting shorter and shorter mainly led by technological advances.
Take for example the tremendous impact that the invention of a tiny microchip had on so many products across
industries.

This means that companies need to continuously introduce new products to stay in business. Unless one has a well
co-ordinated and collaborative supply chain, the entire new product introduction will be a failure- right from the
development costs to the time-taken-to-market.

Reaching the rural customer More than 70% of India’s population lives in its villages. This “bottom of the
pyramid” represents a huge untapped market potential. Companies are striving on new ways to reach out to this
huge market. This requires huge investment in infrastructure development, Information Technology and the local
people. It requires a robust supply chain to reach out to these markets and achieve the desired ROI.

Business leaders are going on record to say that although Asia has been a growth story for so long, many
businesses have not paid enough attention to pricing & costs. “This is the time to do it” they say.

LEVERS TO IMPROVE ECONOMIC PERFORMANCE

This section provides a brief look at some levers that help boost economic performance. We will be examining
some of these points, especially those related to supply chain, further on in this report.

Although it is imperative to maintain lean costs to boost economic performance in the current market scenario,
what is oft forgotten is the need to maintain lean cash. By this we mean:

Cash tied to inventory by improving service levels through delivery and turns

Improve working capital flows this will help unlock the potential of this one-time cash

Rationalize the operational CAPEX this can help in reduction and postponement of CAPEX expenditures

Under the maintenance of lean costs we need to look into the following key areas:

Departmental costs optimize the all division costs; be it HR, Legal, Finance, Public Relations and so on

IT find new ways of automating processes and reducing manual human interventions

Supply chain companies might want to outsource non-core activities and stop reverse logistic processes like
returns, damages etc

Service levels reduce extra service costs like warranty

Product development improve productivity & efficiency with focus on lowest costs

Manufacturing adopt lean measures

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Reduce indirect procurement such as travel & healthcare

Organization streamlining reduce management layers and improve span of controls.

FACTS ABOUT INDIA & ITS SUPPLY CHAIN

India's diverse economy ranges from traditional village farming, modern agriculture, handicrafts, to a wide range of
modern industries, and a multitude of services. Services, however, form the major source of economic growth,
accounting for more than half of India's output with less than one third of its labour force.

About 60% of the work force is still in agriculture, leading the government to focus on improving the lives of the
rural poor by developing basic infrastructure, and boosting the economic performance. The government has also
reduced controls on foreign trade and investment; for example it has raised the limits of foreign direct investment
(FDI) in key sectors, such as telecommunications.

The Indian logistics industry is also poised for a significant leap forward in the coming years because of the view
that India would become the leading global hub for manufacture of automobiles, auto ancillaries, pharmaceuticals
,high technology electronics, processed foods, textiles etc. as well as the services sector like IT, tourism, health
services, finance, education, BPO's etc .

In the early 2000s, when companies undertook supply chain management studies of a large magnitude, the top
objective of leading supply chains was to increase profitability – while, at the same time, reducing costs and
improving quality. Now, companies are moving away from a direct focus on cost reduction to put increasing focus
on customers, by putting
responsiveness and customer
servicing within its set of three
top objectives.

As you can see here, the top

three objectives (from a
choice of eight), as rated by respondents in each of the 2006 Value Chain studies conducted in the United States,
Europe, Japan, ANZ and India, compared to worldwide 2003 results shows how responsiveness has emerged as
the single largest focus. 1

HOW ARE INDIAN COMPANIES PERFORMING ON KEY SUPPLY CHAIN

METRICS?
Now, a key question to ask here is: how are Indian companies performing on key supply chain planning metrics?

The on-time delivery performance of Indian companies has improved over the years and compares favourably to
global counterparts. However, this is primarily due Indian companies using less stringent metrics for this
measurement; leading companies are redefining key supply chain metrics and setting up programs to monitor and
improve their performance.

1
Source: IBM Institute for Business Value 2003 and 2006 Value Chain Studies

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For about one-third of these

respondents, the standard
lead time from order to
shipment is within a week.
The cash to cash cycle of
about half the respondent
companies in India is less than
a month; however, 30% of
respondents have a cash to
cash cycle of greater than 2
months.

To take this one step higher,

the break-up of typical supply
chain costs in India is as
indicated in the figure below.
This clearly indicated how
over 55% of costs come from
transportation whether
outbound or inbound. Other
major costs include inventory carrying costs and warehousing costs.2

O the r costs (insurance , 
Break‐up Of Supply Chain Costs in India
inte rnational fre ight &  Re turn inve ntory cost Re turn proce ssing cost
c le arance s) 4% 4%
6%
Cost of damage s
5% In‐bound transportation 
Cost of transist  losse s Cost
5% 2 8%

Inve ntory carrying cost
13%

O ut‐bound transportation 
W are housing Cost Cost
7% 28%

Now let’s take a look at the Automobile industry in India, which is the tenth largest in the world. In today’s
competitive landscape and economic down-turn, automobile companies worldwide are shifting their attention
towards understanding & implementing an integrated supply chain. In such a context it is important to understand
the current supply chain metrics being followed by the Auto and Auto Ancillary Industries in India.

2
Source: IBM Institute for Business Value 2003 and 2006 Value Chain Studies

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A recent IIMM (Indian Institute of Materials Management) survey of the supply chain management practices in India
revealed the major supply chain practices and metrics being followed. This survey was carried out among 27 Auto
and 51 Auto Ancillary companies.

In this context, Automobile companies can be broadly grouped into the following categories:

1. Cars & utility vehicles,

2. Tractors
3. Trucks
4. Two wheelers

Auto ancillary companies on the other hand, can be grouped into the following:

1. Engine parts
2. Transmission
3. Electrical
4. Ancillaries others

As in any industry, the four broad supply chain metrics considered were:

1. Cycle-time metrics
2. Cost metrics
3. Service quality metrics
4. Asset metrics

For the first metric i.e. the Cycle-time (measured by the no. of days elapsed from the moment a customer places
an order to the moment of receipt of payment) for around 37% of the companies is between 10 - 18 days. For
some of the companies (4 percent), it is above 45 days.
In service quality metrics (% of On-Time Deliveries, Supplies made as per the quantity ordered and Supply on
desired quality) around 64% of companies have an on time delivery of 95- 100% & around 12% of the companies
contacted have an on time delivery of less than 80%.
Asset metrics include aw Materials Inventory Holding (No. of Days), Work in Progress Inventory Holding (No. of
Days), Finished Product Inventory Holding (No. of Days) and Inventory Turnover (Times). Results show that
around 26% of the companies have a raw material inventory holding of less than 9 days and about 8% of companies
have this holding above 28 days.

As the theme of this report suggests, we will primarily be focusing on the cost metrics and dwell on this in detail.
The main components of costs in this industry’s supply chain are highlighted below:

In-bound transportation cost This is the cost of transporting raw materials / products etc from
suppliers. It is typically denoted as a % of the total manufacturing costs. Here, for 44% of the
companies it was found to be 1-2%. The break-up is shown in the pie-chart (Fig. 1). Fig 1

Out-bound transportation cost This is the cost involved in transporting the finished products / services to the
distributors / customers, and denoted as a % of total sales. As
indicated in the chart (Fig. 2), for majority of the companies the
outbound supply chain cost is close to 2-3%.

Warehousing cost These costs are incurred at the warehouse and

Fig 2
include elements such as storing, receiving, picking, and shipment Fig 3
etc of the finished goods; this is again denoted as a % of total sales. About half the companies

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have warehousing costs less than 1% (Fig. 3)

Inventory carrying cost This is the cost involved in holding the inventory and
represented as a % of total sales. For about 50% of the companies this cost stands at 1-
2% (Fig. 4).
Fig 4
Total supply chain cost In the automobile & auto ancillary companies the
total supply chain cost for majority of the companies i.e. 48% it is about 8-
12% (Fig. 5).
Fig 5

SUPPLY CHAIN PROCESSES IN INDIA

Among the many supply chain processes, the three ranked the highest by respondents were: Customer service,
Demand management & Inventory management.

In inventory management, the inventories looked at are raw materials, WIP, finished goods, goods in transit,
accounts receivable, accounts payable, inventories at CFAs/DCs, distributors & retailers.

In India, the primary inventory replenishment process is the push system versus the pull system. It is often quoted
in the industry that up to 85% of companies adopt the push system.

In a push-based supply chain, products are pushed through the channel, from the production side up to the
retailer. The manufacturer sets production at a level based on historical buy patterns. However, it takes longer for
a push-based supply chain to respond to changes in demand, which may result in overstocking or bottlenecks &
delays (the bullwhip effect), unacceptable service levels & product obsolescence. On the other hand, in a pull-based
supply chain, procurement, production and distribution are demand driven so that they are coordinated with
actual customer orders, rather than forecasted demand.

ƒ Push-Based Model:

ƒ Pull-Based Model:

The major divisions of logistics costs in India are: cost of materials, labour, production operations, inbound /
outbound transportation, warehousing, primary/secondary movements and distributor’s margin. Delivering on
these costs is itself a challenge and added to that companies must deliver on profitability & responsiveness.

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Delivering on all three i.e. cost, profitability and responsiveness can therefore be the real test. In the surveys of
many nations it was found that the reduction in cost has been replaced by the focus on quality in the top three
objectives. And to meet these multiple objectives, supply chain leaders have realized that supply chain effectiveness
requires more than efficiency and low cost. Supply chains are also an important driver of revenue growth and
profitability, as well as the primary source of responsiveness. Many companies therefore are evolving toward the
on-demand i.e. customer-driven supply chain.

The shared vision is to have an integrated end-to-end, customer-driven supply chain – integrated across the
business and with key customers, partners, suppliers and service providers. All top-performing supply chain
companies are actively adopting leading management practices, such as:

ƒ Synchronizing supply and demand through more efficient planning & forecasting
ƒ Developing mutually beneficial outcomes to strengthen supply chain relationships. This also
means sharing information & risks with partners to reduce overall exposure
ƒ Coordinating business functions horizontally across the supply chain
ƒ Managing supply chain cycles – for example, for planning or for order-to-delivery
ƒ Developing variable cost structures as alternatives to fixed costs
ƒ Using real-time information to create responsive, customer-driven processes

In India too, organizations are responding to the challenges of cost control & customer responsiveness in five key
supply chain areas:

ƒ Synchronizing supply, managing demand by making planning customer driven

ƒ The perfect product launch and lifecycle management
ƒ Effective customer order management through real-time information
ƒ The procurement opportunity by realizing the benefits of holistic sourcing
ƒ Efficient logistics services by driving efficiencies in logistics operations

Another major development is the e-enablement of supply chains through various IT applications across the supply
chain: computer aided process planning, manufacturing execution system, engineering data management, demand
management, process control & optimization, supply chain management, warehouse management, scheduling &
loading, CAD/drafting, sales, distribution, ERPs etc

THE NEED TO REDUCE COST IN THE INDIAN SUPPLY CHAIN

The aim of any manufacturing/services firm is to produce goods to meet the end-customer requirements. One of
the key differentiators which influences a customer’s buying behaviour is the price of the product. This is especially
true for a mass market like India, where volumes are more important. Another reason for this is the increasing
maturity of many industries and the mass commoditization of products. In such a case, the product price and on-
time delivery becomes a very critical factor. With the cut-throat competition and increasing input prices, cost
reduction is a must to help maintain/increase margins. The competition is so intense that a small price rise of a
product might cause huge reduction in demand for that product. Secondly, there is always a push from the
shareholders to maximize their return on investments. As operations cost for a major part of the cost that goes
into the product, supply chain cost is the single most important area for cost reduction. However supply chain
cost reduction needs to be followed with the customer in focus i.e. there should be no compromise on either the
quality of the product or technology or customer service. Also cost reduction has to be a continuous

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improvement program rather than a one-time attempt keeping in mind the ever demanding customers who wants
a better quality product at a lower price. Thus supply chain cost reduction is one of the most critical tasks facing
the Indian companies.

When the competition is no longer among individual companies but among entire supply chains, every area of end-
to-end cost reduction needs to be looked into. Financial supply chain optimization has helped many leading
companies make their entire supply chain competitive, with the introduction & implementation of many advanced
SCF (Supply Chain Finance) practices & technology (automated transaction processing).

Finance, supply chain and procurement groups need to ensure their companies are actively adopting SCF (Supply
Chain Finance) or risk missing the next wave of cost improvement. This is especially applicable in the current
context of the global melt-down.

COST MANAGEMENT BEST PRACTICES

Cost management leaders confess certain best practices that are critical for it to be a success:

Cost management initiatives need to be decided by several

functions A well defined S& OP process can greatly help framing
these initiatives. As with S&OP it is critical to include various
functions in the decision making process; these include-
ƒ Finance
ƒ Sales
ƒ Supply Chain
ƒ Production
ƒ Human Resource
ƒ Information Technology

Should be specific & limited to shorter time-frames In these

kind of focused small packages lays the long-term strategic
advantage.

Clear accountability Cost management exercises needs clear

accountability where it is necessary to map costs to specific departments / individual heads.

Performance Feedback Loops Measurable KPIs (Key Performance Indicators) should be set up to ensure the
initiatives are being successfully implemented & adopted.

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A STRUCTURED APPROACH TO COST MANAGEMENT

Supply Chain Cost Management Framework

Define Goals & Objectives A structured approach to cost management would obviously first involve defining its
goals & objectives. The supply chain cost management & reduction exercises should be well aligned with the
overall business
strategy. With overall
business strategy we
mean key business Goals &
plans, customer Objectives
expectations,
opportunities &
threats, supply chain
road-map, marketing plans and last but not least, a clear understanding of the relationships shared between various
functions and departments. Those that are not tied to these long-term strategic goals are often misguided and
create havoc due to the myopic focus on short-term productivity gains.

Team goals should be set with the involvement of all departments & functions, so as to infuse the interest &
concern of all. Again, a pure department-focused cost reduction exercise will only motivate a single department
and not multi-departments that actually forms a team.

Just as in any strategic exercise, cost management drives also require a core team entrusted with adequate
responsibility & authority to drive manage and monitor all cost management initiatives. They should also keep in
mind that goals should be realistic, focused, measurable and quantifiable. It should be breakable into clear units of

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work which can then be assigned to each team. On the other hand, unrealistic or vaguely defined goals can dampen
motivation and guarantee the failure of cost management

Identify Supply chain costs Now that the Goals & Objectives have been identified, it is now important to classify
all the supply chain costs and its flow. From the primary costs that have been stated in the previous step, the
secondary costs and sub costs will emerge. Now the team can drill down on all the activities to be taken up in
order manage all these costs step by step. At each stage one can review this process and the core team, to
continually improve both. If needed, more relevant / value-add individuals and teams can be added

Define the key cost drivers Identification of the cost drivers and the interaction between these identified drivers
is very critical in gaining a clear understanding of the cost behaviour. Traditionally cost behaviour was analysed
solely based on the volume of output. However, such a cost driver analysis does not give a proper picture when a
long term analysis is done. In a typical strategic cost driver analysis, cost drivers are classified into two categories
(Shank & Govindrajan):

ƒ Structural: these drivers relate with the strategic choices made by the company
o Economies of Scale
o Scope: the extent of vertical integration in the firm
o Learning and experience curve effects
o Technology requirements
o Complexity/broadness of the product line
ƒ Execution: these drivers are related to the organizational skills i.e. they depend on the way management
uses the resources available to meet the customer needs
o Capacity utilization
o Workforce Involvement and commitment to continuous change
o Efficiency of plant layout, production processes and other internal operations
o Efficiency of linkages with suppliers and customers
o Time-to-market of new products
o Commitment of workforce towards quality

Thus a firm needs to identify the key cost drivers in order to make strategic decisions aimed at supply chain cost
reduction.

Identify opportunities for cost elimination/reduction Cost reduction is a direct function of controlling the cost
drivers related to each activity in the value chain. Hence the team needs to clearly identify the areas for cost
elimination/reduction by quantifying each of them and perform a cost-benefit analysis for each cost reduction
opportunity. Then classify the opportunities based on two criteria: investment required and time taken to
implement. It is advisable to first target the quick hits and then address the other identified areas

Develop Road-Map, Implement & Monitor The road-map that follows aims at breaking each activity or
exercise into clear tasks and units of work. Therefore, this should possess clear action statements and action
owners similar to a RASCI matrix. RASCI stands for:

o Responsible: the clear owner of the exercise

o Accountable: the authority who approves and signs-off initiatives; R is accountable to him/her
o Support: person who supports & assists

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o Consult: person who provides the information & expertise necessary for the success of the
initiative
o Inform: person who should be notified and informed of the results

After developing a similar matrix, the schedules i.e. start and end-dates with time-lines for critical activities should
be listed out. KPIs (Key Performance Indicators) should also be set to measure the effectiveness of the
implementation.

This entire road map should be easily implementable and the results / details should be fed back. This in turn will
be checked against the KPIs to review the process & its success; it will at the same time help in continual
improvement.

KPIs and KPI-reporting can be done through Dashboards and Metrics that allow top management to get an instant
window into how effective the various cost management initiatives have been, and the current implications of it.
They also provide instant feedback on what is working, and what is not; tracking progress and monitoring
schedules. In case the need arises, this forms the foundation for modelling various other scenarios / initiatives to
alternatively take.

COST MANAGEMENT INITIATIVES

The importance of Sales & Operations Planning

An S&OP process helps in balancing supply and demand with the help of a single operating plan spanning across all
functions to achieve profitable growth. It also helps align the company’s strategic business goals with the daily
operations plan in the most cost-effective manner. Effective planning results in better forecast accuracy and better
visibility. Effective planning of the supply chain helps in maintaining balanced inventory levels, increase inventory

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turns and a better utilization of the resources. All these three factors together help achieve supply chain cost
reduction.

The demand forecasts developed by the Sales personnel are generally inflated to buffer the effect of late deliveries
from the manufacturing plant. The manufacturing personnel in turn give an inflated projection to the sourcing and
procurement team. The finance team gives another set of forecasts to the manufacturer purely targeted at meeting
goals of the finance group, without any idea of either the capacity constraints or the inventory levels. The result is
a number of forecast figures most of which are inaccurate and unreliable. On the other hand a poor planning
process results in higher costs due to expedited shipments, frequent stock-outs, higher inventory levels, higher
transportation costs due to large number of small shipments and lower customer service levels. The chart below
shows a typical 5 step S&OP process.

Most companies today have some sort of an S&OP process in place. However, in most cases the existing process
in place is far from an ideal state. Even in companies where there is a rudimentary traditional S&OP process where
a forecast number is agreed by marketing, sales, finance and production planning teams; forecasts tend to be poor.

A company thus needs to first do a diagnostic to determine at what stage of maturity it is at present, and then aim
for the next higher stage. Given below is a 4 stage S&OP process maturity model (From the “Journal of Business
Forecasting”, 2005 Spring Edition, MIT).

S&OP Maturity Model

Stage 1, Marginal Process: The

companies in this stage do not
have any formal meetings for the
S&OP planning process. Even if
there are meeting scheduled, then
are frequently cancelled or are
given very less importance. This
results in different plans being
created by different functions
across the organisation with no or
little collaboration. Each of these
functions act as individual “silos”
with their individual goals, which
more often than not are conflicting to the goals of other departments resulting in locally optimal decision makings
and higher supply chain costs. Even the supply plan is not aligned with the demand plan.

The use of software technology is at a minimum, mostly limited to the use of spreadsheets as each of the functions
develops their individual plans and there is no integration whatsoever.

For companies in Stage 1 to move to Stage 2, they need to have a more formal meeting process, with each of the
functions actively involved in working towards a common plan.

Stage 2, Rudimentary Process: Companies in this stage have formal meetings for S&OP, however the
participation is minimal and there is very little integration in the planning process. There is a lack of a consensus
based plan due to minimum interaction between the functions, or a lack of preparedness for the S&OP meetings.

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The demand side functions develop multiple demand plans through the use of Demand Planner applications which
are then transmitted to the supply side. The supply side in turn reconciles these plans and develops a supply plan
aligned to it. This supply plan is generally not shared with the demand side.

For companies in Stage 2 to move towards Stage 3, it is very important to have support from the management
team. The management team needs be first convinced of the need for a well designed S&OP process, which is then
transmitted to the all the functions by the management so that the S&OP meetings are given due accordance. The
intent should be towards arriving at a single consensus plan by the concurrence of the supply and demand plans.

Stage 3, Classic Process: Companies in Stage 3 have an established formal S&OP process and have their supply
and demand plans aligned. The S&OP meetings are held at regular intervals as decided and find full participation
and support from all the functions. The planning process is totally integrated resulting in a single consensus plan.

Companies in Stage 3 can move to Stage 4 by having more frequent S&OP meetings and a constant emphasis on
the building sustained relationships with as many suppliers and customers as possible.

Stage 4, Ideal Process: This Ideal stage should be used as a benchmark by companies for achieving further
improvement. In this ideal state scenario, S&OP meetings are generally event-based and are done only when there
is a need to make amendments to the plans. The supply and demand is continuously monitored in real time, which
in effect makes the decision making very fast and proactive. The moment an imbalance is detected between the
supply and the demand, a meeting is immediately held involving all S&OP attendees on a global basis usually
through the use of advanced technology. Thus the plan can be quickly modified and put into action.

Furthermore, there is extensive collaboration with the suppliers and the customers, which gives ready access to
information to align the plan with those of the external agents i.e. the suppliers and the customers.

As emphasised earlier, to make the best use of this maturity model, a company first needs to do a “as-is” analysis
of its S&OP process and then make a sustained effort to move to the next stage. It should then identify the gaps,
perform a cost benefit analysis, identify the quick hits and target these first.

Other Cost reduction areas

This section gives an insight into other areas in the supply chain where there exists tremendous scope of cost
reduction specifically in the Indian market context.

Inventory Management More than Rs 1, 00,000 crores is tied up in industry inventories in India. One of the main
reasons for the huge pile-up of inventories is the separation of the inventory strategy from the S&OP planning. The
lack of a holistic overall approach results in locally optimal inventory decision and in turn higher inventory holding
costs with frequent stock-outs. To add to the industry woes, 84% of inventory replenishment processes in the
Indian manufacturing sector are push based (according to a report published by FICCI in 2004).

Thus, there is a clear need of integration between the inventory optimization process and the S&OP. This will help
solve not only the inventory holding costs but the over-arching strategic problems that link into other issues. Also,
moving from a push based system to a pull based system helps drastically reduce inventory across the supply chain.
Efficient production planning and an integrated, responsive supply chain network are all critical to reducing
inventories. Inventory segmentation for decisions into service levels, is another popular approach to reduce
inventory and retain customer-centric focus on the key products.

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In addition to this, the 2007 benchmark report on Working Capital Optimization (WCO) surveyed 400
corporations from across the world and found that for more than 65% of them, WCO was a high-priority at any
given point of time. The need to focus on WCO is primarily driven by financial stakeholders who continually urge
companies to improve their financial metrics. However financial & inventory strategies are not enough to mitigate
this; technology platforms to cushion the impact of inventory, by enabling better access to funding, and helps
stream-line & automate various processes.

According to a report published by FICCI, a supply chain improvement program can help reduce Finished Goods
Inventory by 32.1%, raw materials by 25.1% and Work in Progress by 38.7%.

Implementation of SCM in Mahindra & Mahindra led to an inventory reduction of a whopping 50% (this also
increased the replenishment lead time from 52 days to 19 days).

Typical Indian companies are manufacturing centric. Directly or indirectly, supply chain decisions are made or
heavily influenced by either production or sales departments. It is typical to find manufacturing second guessing
forecasts because of production personnel with large number of years of experience and instinctive understanding
of historical forecasts. But introduction of new products and SKUs and changing market conditions result in stock
outs and high inventory because of forecast unreliability.

Ironically, inventory scenario can be a mix of both stock outs and high inventory levels; stock outs of required
material and high inventory levels of unwanted or not in demand items. This is typically because of poor forecast
reliability; people tend to over forecast so not to miss sales demand. This increases obsolescence cost and
warehousing costs.

Technology Beyond ERP and robust enterprise systems, managers have done their supply chain planning using
tools ranging from Excel based to huge software products. From capacity planning, forecasting to inventory
management, transportation planning these tools tend to make supply chain managers life easier.

In an environment of high growth, multiple product introductions, shifting economic conditions, drop in exports
and rising costs, companies have felt the need for Decision Support Systems to aid in inventory management
(safety stock levels, stocking locations etc.), transportation planning, warehouse management and many other
areas.

In addition, a well designed and robust S&OP process requires a good technology support to achieve the desired
results. For companies using spreadsheets, even though a low cost option, for developing demand and supply plans
as part of the S&OP process, it becomes very difficult to integrate these to arrive at a consensus plan. Reconciling
all these plans might become a very frustrating and time-consuming task, which brings in the additional danger of
data being outdated. This can have costly and far reaching implications for the supply chain in the form of stock-
out, improper mix at the shelves and inventory pile-up across the supply chain. Thus companies need to have an
advanced (depending on requirement) and effective technology to support their S&OP process. This helps in co-
ordinating between all the functions across the value chain (both internal and external) and quickly adapting to any
changes in the supply demand imbalance.

Logistics and Distribution In India the logistics cost is very high compared to other developed countries
comprising of around 14% of the GDP. Transportation alone accounts for 35% of this. There is a huge scope for
Indian companies to reduce cost in this domain by route optimization, contract optimization and increased vehicle
utilization. Apart from this reduced turnaround time of trucks and number of expedited shipments are a couple of
more areas that can be targeted.

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Sr. No  Elements of Logistics Costs  Contribution % 

1  Transportation  35%
2  Inventories  25%
3  Losses  14%
4  Packaging  11%
5  Handling & Warehousing  9%
6  Customer’s shopping  6%
 

Collaboration across different companies for freight consolidation, use of efficient equipment and proper packaging
are some of the other areas where there is a potential of logistics cost reduction.

The use of IT can be a key enabler for achieving cost reduction in this domain. The use of IT coupled with
advanced tracking technologies like RFID/GPS increases visibility of the movement of goods across the supply
chain, thus helping in better decision making and proactive decisions rather than reactionary. This also reduces the
number of expedited shipments. It also helps in the time of unwanted interruptions like road blockades, emergency
situations etc since now they can be rerouted onto a different path due to the increased visibility of the whole
transportation process.

There is a tremendous need for development of transportation infrastructure in India in road, rail and ports. As
much as 97% of cars in India are moved by road due to the lack of availability of proper rail infrastructure. Also the
cost of transportation within the country is tremendously high. In the port sector, all the major ports in India are
running much above their capacity which causes congestion at the ports thus increasing the turnaround time of
ships at Indian ports. Government investments to make the transportation infrastructure more efficient can also go
a long way in reducing costs.

Sourcing & Procurement and Supplier partnership On an average, Indian companies typically have more
number of suppliers compared to global best practices. For example, in the automotive industry, typically an auto
company sources materials from 250 suppliers compared to the best practice of 100 suppliers (According to a CII
2002 report). This increases the complexity of the whole sourcing and procurement process. Supplier
consolidation not only simplifies the purchasing but also
Status 00-01 01-02 02-03 03-04 04-05
leads to better utilization of resources. A number of
Indian automotive companies are reducing the number of Vendor Base 1017 950 738 612 400
suppliers to achieve this.
ISO / QS Certified 245 281 364 382 400
Typical procurement cost management strategies include
negotiating price by leveraging volume, price and cost Self certified vendors 210 240 260 290 350
analysis (industry cost profiles, process cost models, total
JIT% of PO value 62 72 74 77 82
cost of ownership models).
LCL% of PO value 5 5 6 7 9
Supplier partnership is also needed to enable processes
such as cross docking. Cross docking can be an effective MRP% of PO value 26 23 20 16 19
way to keep costs low. But implementation issues abound.
A huge percentage of suppliers still use email as their Vendor Base Rationalisation
primary means of order related communication, with telephone and fax coming as
other means of communication. Cross docking requires Advance Shipment Notifications (ASNs) and barcoded
shipping labels.

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ESourcing/eProcurement is another important step that can lead to substantial cost savings. Many Indian companies
are now using the power of internet to source materials internationally. This gives the companies 2 advantages: 1)
get best quality raw materials 2) at the best prices. Also the use of technology increases transparency in the whole
process.

Aggregation of purchasing across all business units can result in substantial cost savings. Typically in India, most of
the business units may be sourcing same raw materials from the same company, but the orders are placed
separately. On the other hand, if the companies aggregate their purchasing across all business units, it gives them
greater purchasing power in the form of bulk discounts.

The figure shows how Ashok Leyland through its project “Oscar Inbound” went about rationalising its vendor base
and reducing inventories by JIT and LCL. This project also included other initiatives like global sourcing and
eSourcing. Inventory levels were reduced from 23 days to 18 days. eSourcing helped it achieve savings to the tune
of 11.5% of total material cost.3

Outsourcing Outsourcing the non-core activities in the supply chain is an important avenue for cost reduction,
especially in the pharmaceutical and electronics industries. As shown in the chart below 27% of outsourcing is
done to achieve cost reduction.

The diagram below shows the extent of

outsourcing of supply chain activities in India.

The host of benefits supply chain outsourcing will

bring are extremely relevant to current times,
where costs are of primary concern. SC
outsourcing will drastically reduce overall supply
chain costs which form a major chunk of revenue
costs.

3
AutoSCM India 2006

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 Aqua MCG Special Report ` SUPPLY CHAIN COST REDUCTION IN INDIA

FUTURE VISION OF SUPPLY CHAIN IN INDIA

Where is supply chain management headed?

The diagram below illustrates how supply chain is evolving into a more integrated end-to-end, customer-driven
supply chain – which is well integrated across the business and all its stakeholders and service providers.

The On-demand supply chain would focus on elements such as:

ƒ Excellent synchronisation between supply & demand through efficient planning & forecasting
ƒ Integrating & co-ordinating business functions horizontally across the supply chain
ƒ Developing outcomes that have been mutually decided & beneficial, to strengthen relationships
ƒ Managing the supply chain cycles for planning to order-to-delivery
ƒ Developing flexible cost structures that focus on variable cost structures rather than fixed costs
ƒ Collaboration and sharing of information & risks with partners to reduce overall exposure
ƒ Efficiently using real-time data to create customer-centric supply chains that are totally demand
driven and customer-driven

We will look at some of the key points in detail.

Synchronising supply & demand Understanding demand patterns and efficient planning of supply is the constant
endeavour of all supply chain planners. Responsive supply chains are typically characterised by an early
understanding of demand signals through minimum distortion of the POS (point of sales) data in near real time.

But why?

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Ability and flexibility are key strengths that come through from responsive supply chains. This kind of synchronised
supply chain planning leads to competitive advantage that helps provide superior customer service; it also reduces
waste and losses due to the suboptimal planning and inventory deployment.

In a growing economy like India, the constant fluctuations in demand and bottle-necks due to infrastructure, pose
additional challenges to supply chain planning; but this must still be the area of continued focus as this can enable
organizations to respond to constant changes in the market place.

New Product Introduction Innovation is the key to future success. It is also critical for a company to maintain
profitable growth especially in view of the increasingly competitive Indian marketplace.

But why?

All successful companies are distinguished by their ability to efficiently bring innovation to the market- quickly and
ahead of the competition. Effective product launch is obviously a key element in the innovation process. This
however requires process integration and alignment of objectives across the internal and external elements of the
value chain.

Leveraging the capabilities of value chain partners, like suppliers and channel members, in a collaborative approach
can help bring products / services to the market faster, smarter and cheaper. This means integrating with suppliers
& supply chain providers during the entire process of design, development, production and service. After
identifying and evaluating these capabilities / resources it is also important to nurture them. Innovation is
undoubtedly the biggest competitive advantage and differentiator in the future, but your supply chain needs to
support it!

Efficient Customer Order Fulfillment Customer orders start with the order entry process and involve efficient
maintenance of customer database, opportunity evaluation for cross- sell, up-sell, back-order processing and post
order fulfilment transactions. Customer Order Management being an important customer touch-point means a
direct impact on customer satisfaction levels. The company’s ability to receive customer orders through multiple
channels, and subsequently understand and respond to customer needs forms part of customer order
management.

But why?

Many companies have adopted new technologies that churn data and extract meaningful insights to further
enhance fulfilment capabilities. Companies are leveraging technology to enable supply chain visibility to efficiently
accept orders & adhere to promised delivery dates. This helps in facilitating processes down the line like planning
& scheduling.

Therefore, technology has played an important role in integrating the company’s order management process with
the customer’s planning and procurement processes. Overall, this means an evolved on-demand supply chain.

Logistics services

Today’s market demands:

o More stocking locations
o Frequent ordering
o Smaller order sizes

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 Aqua MCG Special Report ` SUPPLY CHAIN COST REDUCTION IN INDIA

o More sophisticated modes of transportation

o Multi-channel distribution
o Configure-to-order capabilities, among others

Customers are becoming more knowledgeable & demanding. They have higher service-level expectations which
mean higher degrees of responsiveness and customisation from the company. Customers today expect on-time
deliveries and value-add services like real-time order tracking information. Innovations in technologies & logistics
solutions have also been able to create new customer distribution channels and even existing channels are under
pressure to change, to retain the market position a company holds.

But why?

Accurate & efficient logistics management and servicing means Customer satisfaction & retention coupled with
continued sales growth. This type of decentralised supply chain models and tighter trading partner collaborations,
especially in view of rising transportation costs and other complexities in the system, means new and improved
visibility.

Management tools can also help combat any inefficiency that arises in warehouse management, manpower,
transportation, space utilisation, inventory management and shipments. To summarise, it has ever more critical for
companies to implement scalable yet cost-effective strategies in logistics.

This rings ever more true in the back drop of the current economic conditions, which fiercely call for an increase
in profitability, improvement in quality & reduction in costs. A mammoth challenge, but possible to execute.

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Clients come to us when they need help to reduce cost, improve quality standards, introduce new products or
increase market share, gear up operations to meet business objectives, utilize capacity etc. through a lean and
efficient supply chain and we at Aqua MCG, with our hands-on expertise and thought leadership in several sectors,
understand the need and serve it with due diligence and integrity.

For more information, please contact:

Mumbai: Ram Mantravadi ram.mantravadi@aquamcg.com

Shiv Kumar shiv.kumar@aquamcg.com

Bengaluru: Gopal gopal.anandan@aquamcg.com

Manish K Singh manishkumar.singh@aquamcg.com

New Delhi: Sanjeev Ganesh Sanjeev.ganesh@aquamcg.com

Technology: Anshuman Mukherjee anshuman.mukherjee@aquamcg.com

Or contact us through our website: www.aquamcg.com

About Aqua Management Consulting Group

Aqua Management Consulting Group (Aqua MCG) is a premier advisory and execution group committed to
delivering superior operations & supply chains and maximizing business value for our clients. We help transform
and manage supply chains for better business performance. We do this by providing -

ƒ High value consulting advice and complete execution support

ƒ Business and functional leadership, on a BOT model
ƒ Supply chain outsourcing solutions and services
ƒ Steady-state operations monitoring & continuous performance improvement

Our team comprises professionals with strong consulting experience, good domain knowledge and execution
leadership. We use structured methodologies, analytical rigor and defined metrics to deliver value for every
project we undertake.

Our vision is to be globally recognized as highly valued partners for achieving supply chain leadership.

Visit us at: www.aquamcg.com

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