Supply Chain Management is gradually making inroads into corporate India, but it will be quite a while before industries here are ready to go whole hog and embrace SCM completely.
No wonder then that such success stories have had a positive effect on India Inc. with almost 90 percent of Indian corporates now believing efficiency in SCM as vital for their business. And expectedly, the Indian market for SCM solutions had touched Rs 107 crore in 2001. According to IDC India, this market is expected to grow by 26 percent to reach Rs 597 crore by 2004. The importance of supply chain management in India can be gauged from the fact that logistics cost is in the range of 10-12 percent of our GDP. As per the recent CMIE database, over Rs 1,00,000 crore of total capital is tied up in inventories in the industrial sector. This is close to 22 percent of aggregate industry sales. This may be attributed to many reasons, like increasing complexity and uncertainty of supply networks, globalisation of businesses, proliferation of product variety, and shortening of product lifecycles. “These are forcing businesses to realise that it is no longer possible to prosper in isolation. As a result, Indian organisations are required to look beyond their four walls for collaboration and co-ordination with supply chain partners,” feels Pradeep Sen, director for process industries at SAP India.
The year 2001 might have been generally gloomy for a wide spectrum of India Inc. But like that old saying “every cloud has a silver lining”, these tough times have led many companies to adopt innovative business methods, and the results in several instances have been nothing less than spectacular. The auto giant Mahindra & Mahindra has been able to reduce its inventory by 20-50 days in this year, FMCG major Hindustan Lever has reduced its inventory from about 45 days to less than 5 days, while in LG’s case the reduction has been around 30 days. All these successes have one common denominator: the adoption of supply chain management (SCM) solutions and judicious optimisation of the entire supply and distribution chain as a result. The benefits have not only been in terms of inventory reduction: Mahindra made savings of about 30 percent, HLL has realised savings to the tune of 35 percent while LG saved about Rs 4.7 crore.
It is imperative for Indian organisations to highlight the effects and the benefits of the five key dimensions namely - information integration, workflow assimilation, technology assimilation, synchronisation, and trust to make supply chain integration a reality in today’s business environment. However, the Indian figures pale in comparison to the worldwide scene. The worldwide SCM market was at $41 billion in 2000, $62 billion in 2001 and with an estimated CAGR of 33 percent is expected to reach $90 billion, $117 billion, $140 billion and $170 billion in 2002, 2003, 2004 and 2005 respectively.
With the growing realisation of the benefits of supply chain optimisation, what is heartening to note is that there seems to be no dearth of SCM solutions in India. In fact, at a conservative estimate, more than 68 percent of Indian software houses have expertise in SCM solutions. The leading vendors include the major ERP guys like SAP, Oracle, Baan, PeopleSoft and JD Edwards, who also offer independent SCM modules. Then there are vendors like i2 Technologies who are a leading name worldwide in SCM solutions. In addition, Indian vendors like KLG Systel and Deloitte Touche Tohmatsu also offer customised solutions for their clients. The main solutions in the SCM space include strategic planning, collaborative demand planning, collaborative supply planning and supply chain execution.
The recent competitive pressures have made several Indian organisations realise that individual companies by themselves cannot face up to the competition. A well designed product and a good technology for manufacture may not ultimately deliver value to the customer because of a bad set of suppliers or an inefficient distribution network. Explains Mukesh Arora, executive director, KLG Systel, “For instance, a manufacturer of auto electrical components competes with a competitor on the basis of what he does in his factory as well as on the basis of his relationship with suppliers and customers, and on the strength of his distribution system. In this case, the supplier, the customer, the logistics partner and the manufacturer together constitute the supply chain. The key requirement of SCM is the ability to network with several other business entities having complementary skill sets.”
Every organisation has three types of flows, the material flow, the information flow and the fund flow. While the material flows from the back end (supplier) of the supply chain to the front end (customer), money flows in the reverse direction. The information flows in both directions. SCM involves developing a set of management practices that will ensure that these three flows are smooth. Faster material flow will greatly improve responsiveness to customer requirements and will in turn ensure faster money flow back into the supply chain. However, the information flow is the crucial determinant of the other two flows in a supply chain. Collaborative planning and information sharing practices will streamline the information flow in the supply chain. A good supply chain management will provide superior value to the ultimate customer.
The challengesWhat are the challenges facing increasing adoption of SCM solutions in India? The main one is the lack of awareness of the business potential of SCM solutions in India. Says C S Venkatesh, senior consultant for sales at i2 Technologies, “The problem is in most people treating SCM as ‘one more module’ to be implemented after ERP. This focuses attention more on the technology / IT part of the project rather than the significant rethink in business policies that need to accompany a supply chain improvement project.” Next, there is a lack of consulting experience in the field in India. There are comparatively fewer people who have sufficient experience to guide organisations through successful supply chain improvement projects. As a result, the business process integration of SCM solutions has suffered. “Typically, customers have implemented ERP systems, which offer very basic
SCM functionality, and they have carried out a BPR at that stage. In order to get comprehensive benefits out of an SCM implementation, customers normally have to revisit key processes and modify them. This needs significant consulting input and can turn out to be a challenge if not managed well,” adds Venkatesh.
One of the key challenges faced is the business process transformation required to exploit the best practices and tools of SCM. Some business processes will go away, like the informal ones including faxes and hot lists. Some new processes like closed-loop supply base responses will appear, whereas some existing processes would need modification. Typically, companies work with many suppliers and are not happy with them, but after SCM implementation, the endeavour would be to work with fewer suppliers and inculcate mutual respect.
The next and even more difficult challenge is the management of change. This involves getting people who have been engaged in the same process for many years to change to best practices. Explains Mani Bharadwaj, director, Deloitte Touche Tohmatsu, “A successful change management program determines the effectiveness of the SCM solution. SCM requires a higher level of trust and openness among trading partners, based on a new attitude towards suppliers and customers.”
Going by Agarwal’s logic, it seems that despite the numbers, the Indian market is not ready for a complete SCM solution. But it is definitely ready for what he calls the Phase One of SCM, or more correctly Supplier Relationship Manage-ment (SRM). “SCM will be SRM + Phase Two. SRM will provide more effective communication between buyer and supplier,” says Agarwal. And most companies, he feels, have gone in only for SRM, not SCM. “The total number of companies in India which have gone in for complete SCM is not more than 10. Most of these are large companies and even they went in for it because of the hype that surrounded it.”Vivek Agarwal, COO, CommerceOne, feels the challenges SCM faces in India will ensure that it does not totally take off as yet. It is difficult to implement the entire SCM solution at one go because that would involve putting a complex network in place with every single entity connected to the whole process. “It is not about increasing efficiency between you as a buyer and me as a supplier but also between us and the supplier and the supplier’s supplier. When so many people are involved the system becomes complex. Even those who are involved need to change their mindset to accept the potential,” says Agarwal. This has not happened even in mature markets like the US. It will be another two years before the market there is ready for such a system. And since we in India are not far behind when it comes to implementation of IT technology, in our country it will take roughly the same period to evolve to that level.
Prognosis for India
What are the sectors that have been the biggest beneficiaries of SCM implementation in India? Industries that would see tremendous benefits include the manufacturing sector, automotive sector, FMCG, retail, oil and gas. Says SAP India’s Sen, “The popular opinion has been that the manufacturing sector is the one that is benefiting the most from SCM. While not opposing its importance in that sector, some of the other industry sectors we see it picking up in a big way are FMCGs and the organised retail industry.” Moreover, with changes imminent in the tax structures, there are large opportunities in key supply chain areas such as logistics, network design and optimisation. There are also immediate opportunities in the auto sector, particularly on integration with vendors of components and assemblies.But does this mean SCM has no future in India? “Not really,” feels Bharadwaj. “Even in the US, though the first supply chain planning (SCP) collaboration technologies were introduced some time ago, but it was not until the year 2000 that collaborative SCP pilots became a reality. It is my view that these technology solutions will be widely and comprehensively adopted around the second half of 2003. I expect the SCM demand to grow initially at around 15 percent for the next couple of years. However the growth in the next five years or so will be exponential - just like it happened with ERP. Having said that, the early adopters of SCM will benefit by e-marketplace and business-to-business (B2B) service offerings.”
SCM flavours
One good sign for SCM solutions has been the fact that in the past ten years, the proportion of purchases to the total cost of goods manufactured in Indian organisations has significantly increased. Currently, on an average this proportion is more than 65 percent. This indicates the increasing willingness of many organisations to resort to outsourcing instead of manufacturing in-house. This is a huge opportunity for SMEs. Good SCM practices will make SMEs more attractive to such initiatives of the buying organisations. SMEs have traditionally suffered from their inability to reach a wider set of customers. Increasing the reach typically involves additional expenditure due to more manpower and better skill requirements. Geographical limitations and high costs of communication prevented many organisations from tapping a wider market. Due to the ubiquitous nature of the Internet, SMEs are able to reach a wider audience without significant increase in cost. Sceptics may scoff at such logic, especially after the dot com disaster. But as Venkatesh points out, “The experience of the dot coms has shown that e-business can deliver value only when all participants in the value chain stand to benefit. The surviving e-marketplaces are those that have SCM as the cornerstone of their e-business offering. So, implementing e-business solutions without SCM would be like trying to drive a car without an engine.”
Even SCM solutions come in different flavours. KLG Systel, for instance, offers a Supply Chain Optimisation (SCO) solution. There is a fundamental difference between SCM and SCO. In SCM the consultants capture all the processes and build it into the ERP system. Everything is hardcoded into the system. Each and every transaction conducted is based in rules. It does not analyse the different options that are available. Explains Arora, “Suppose a company has a rule which says that all cheques above Rs 50 lakh have to be signed by the CEO, then the SCM solution would not accept any other signature. There may be a situation where the CEO may not be available and the cheque has to be signed urgently otherwise it could result in a loss. SCM does not give any scope for breaking away from the set rules. Whereas our solution ensures that options are incorporated in the event of such a situation. SCO will look at all these options and come up with a solution that will ensure optimisation of the resources available. SCM does not do resource optimisation the way our solution does.”
This article first appeared in Express Computer.
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