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.
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.
|
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.