BHARATHIDASAN UNIVERSITY TIRUCHIRAPPALLI - 620 024. CENTRE FOR DISTANCE EDUCATION ’ (For Private Circulation only) a (Copy Rights Reserved) M.B.A SUPPLY CHAIN MANAGMENT (Full Package) THIRD SEMESTER‘Code Number = BHARATHIDASAN UNIVERSITY TIRUCHIRAPPALLI = 620 024 CENTRE FOR DISTANCE EDUCATION M SUPPLY CHAIN MANAGEMENT B Full Package A Copy right reserved For Private Circulation OnlySupply Chain Management Objectives. problems associated with supply chai To explain basic theory aud techniques of supply chain to examine the issues and ina changing business environment. Goals and principles of Supply Chain Management Bullwhip effect and its impact on. supplychain performance Flow Management and its importance = Management of material flow in the supply chain - Management of information flow = Management of cash flow and Value flows Customer service strategy’ - Bench making’ best practices Customer refationship management Out-bound logisties resources planning and management Quick response systems in manufacturing Management of in-bound logistics E-supply chain cases ‘Supply chain cost analysis ‘Supply chain performance measures Issues in Global supply chain Supply: Chain Management - Strategy Planning & Operations - by Sunil Chopra.1. Paradigus Shift and Birth of Velocity Organization Odjectives = 1. To getan overall view of three ages of civilization and characteristics of three ages. 2. To understand the radical changes taken! place in 21 st century velocity organization, 3. To geta clear picture of paradigm shi ike nass customisation, vial integration. et, 4. To understand the importantance of effectiveness and efficiency to thrive. LL Three ages of Modern Man : World witnessed following three ages as a part of civilization, 1. Agricultural or agrarian age 2. Industrial age 3. Information age Table 1.1 Three ages of modern man © Creative Management Consultoncy 12 sultural age - Time frame : Agriculture was the first wave in the process of civilization growth and continted to be the ‘source of livelihood for most of the human race thrdughout the world until around five hundred years ago. {ie.,) upto mid 17" century. 12.4, Rules of Game of Agricultural Age : nagriculturatage, person possessed more numbers of acreage of fand was able to have control over less number of acreage landholder. In short, characteristic of business prevailed during this period was stronger acquired weaker. Simple phenomesia of this agricultural era was big fish exts away the Net business game of agricultural age was revolved around “Survival of the fittest”. As apaitof ‘age money ruled the worl.1.2.2 Wealth creation process of agricultural age: Land, labour and money were the predominant resources in the process of wealth creation during agricultural era. Small land holdingsneans owner of sinall portion of wealth, marginal land holding means owners of marginal portion of wealth, big land holding meags owner of big slice of wealth, finally megaland hholding means owner of biggest slice of wealth. n tum, characteristic of business’of agricultural age was predor ily, stronger acquired weaker. 1.2.3 Characteristics of agricultural age : 4 | Age Agrarian @ Origin of civilization to oil kcal middie of 18th contury 3 Characins of | sronger oequved wooker business ze 4 | Rules oftne game | Survival one test of business 5 | Predominant | use power owe + ten rs 6 Factors of 2. Material 3! reduction 3, Money 7. Business game in | Big fish eat away Bushes gamelan | Onn ee Table 1.2 Characierisles of Agricutural Age © Gj Creative Management Consultancy 124 Agricultural age M&A game- Survival of fittest + Small Land Lord geabed by marginal / medium landholding person 4 Marginal / medium farmers land use to be grabed by big! large farmers 4 Big/ large farmers lendholding use to be grabed by mega farmersMoney Ruled the World Figure 11 M&A game of agricultural age - Survival ofthe ftest © Creative Management Consultancy 13 Industrial age - Time Frame : + The industrial age was the second wave. Industrial Revolution in Manchestor during mid 18" cen- tury gave birth forthis second wave of industrial age. The industrial revolution, the mechanical revolution and the amazing changes in the methods of transport were all due to science. The numerous factories had changed the methods of production, railwAys and streamships had suddenly narrowed the world. Birth of electisity, telephones, diesel engine based ships and aeroplanes dramatically changed tie world. In turn, Geography has become part UrHiswry. 13.1 Rules of Game of Industrial Age : In Industrial age, person owning big or tall chimney used to have the control over sinall or dwarf chimney-owning person. In short, characteristic of business prevailed during this period was larger companies swallowed smaller companies. In this process, Market leader used to take over either market nicher or market follower or sometime market challenger too. This is mainly to emerge as aconsolidated market leader with a control of tion share of market. Here again the phenomenon was big fish used to colt away the small fish. Intum, nt business game of industrial ace has been revolved around “Survival of fittest”. 13.2 Wealth Creation Process of industrial age: Men, Material, Machine, Money and Method were the main resources in the process of wealth creation during industria era, Small chimney person or small scale company use to have coatrol over the tiny scale company and inturn takeover the same. Similarly, medium scale company use to have control ‘over small scale company large company, scale company use to have coctrot over medium scale companies. Predominantly money ruled the world, during industrial age.1.3.3 Characteristics of Industrial age fens Industrial e Mido ot 18m cxnturyto =| idle of 208 century 3. | characteristics of Larger swallowed smaller business | Rutes ore game | Sunivatof the fittest of business | Predominat | saactune powet [2 | power 7 wen 6. | Factors of 2 Matetol @) prodvction 3 Machine 4 Money 5 Methods 7, | Business game in | Big sh eat away utshel sal fsh 8 Table 1.3 Cheracteristics of Industrial Age © GF Creative Management Consultancy age M&A game - Survival of fittest : 1.34 Indust 4% Tiny scale industry grabed by small scale industry ‘Small scale industry, grabed by medium scale industry: Medium scale industry grabed by large seale industry 1.4 Information age: Each age or wave inthe past had a very significant impact onthe evolution of man's civilization, wved and the way they conducted business. Each now age had a higher impact than rent information and knowledge age is no exception. the way the ancestors have li the previous one and the cut formation and knowledge age that started nebulously during the 1950s and ly structured around computerization, e526. The third wave, th 1960s gathered momentum during 1970's. This third wave is largel etomation, space technology, biotechnology, tlecommurication and ether technology bad bs Due to rapid pace of technology change, information age mas a signieam impact fe style as well as thinking patter of human being.an ba ties) EE) Gi) Ga) Chimney symbolically represent industry Smoks inte chimney and quartuin of emake represent ‘afflont level of the industry and eignificnt stake in the sce Money Ruled the World Figure 1.2 Sursival of fitest- Merger end Aquisition (M&A) game of industrlatage © & Crome Management Consultancy LAL Rules of game of information era : “The wnote rules oF the game of business have undergone radical change in this information era, fast defeats slower, regardless of size. \n shot, seail fish can also vat away the big fish provided smal fi is aggressive, Net business game of information age is revolving around ‘Survival of the fastest’ In information era, fastest does not mean mere physical fastness of an erganization, but it means’ ‘mental fastness of an organization or creativity fastness of an organisation or innovation fastness of an organisation. During agricultural and industrial age money has ruled the business world. Whereas, in infor- mation era, knowledge is ruling the world 142 Wealth creation process of information age: Ininformation age, idea rules the world. To be more precise, innovative idea rules he world. Every individual available in this earth possess something unique thinking pattem compared to the other. In short, every individual is unique proprietary right holder or intellectual right holder. First mover, who could cconverthis /her idea into viable business propoSition and boldly venture in the business is going to have an unique advantage. Such a first mover will have a better chance in creating world-class company and in turn that company will rule the world. For example, Amazon.com, Dell, CISCO, Yahoo have first mover advan- tage, The whole business game of today is revolving around creative idea, intelligent business model, end maintaining one up in the market place, through continous innovation of business model. ‘Supply chain management plays a vital role as a part of continuous innovation of business model, and offer better value for vitimate customer.1.43. Characteristics of information age: Business gamein ftshell ssmet fish Table 14 Characteristics of inforiuation age © @& Creative Management Consuttancy 1.44 Information age M & A Game Survival of Fastest : 4 Small size knowladge based company grabed by Tiny size aggressive knowledge based company 4 Mediu size knowledge based company grabed by Tiny size aggressive knowledge ‘based company 4 Large size knowledge based company grabed by Tiny size aggressive knowledge based company. LAS Welcome to innovation fastest era: Endof “survival of fittest” era of agriculture and industries, welcome to “survival offastest “era of information or knowledge of 2st century. During yesterdecades with money one can make money, whereas in information era, with worthwhile business idea or business model only one can make money. Money is no more ‘a constrain to achieve ‘success, in the matket place. Thanks to venture capital, plenty of cheap venture funds are freely available ia the market place, for worth while business idea with right business model. Unique supply chain desigat is mandatory to survive in this context,Idea Rule the World Figure 1.3. Survival of Fastest Merger and Aquislion (M&A) game of - Information age © @ Creative Management Consultoney 146 Technology - Main Strategy not part of strategy : Upto 1980"s most ofthe Firms of the world treated technology as an uncontrollable variable, in tum they firmly believed that technology is beyond the control of the organization. Consequently, firms used technology as a part of external environment scanning involved in strategy formulation process. During 1990's Technology itself has emerged as a main strategy for most of the firm. In turn + if technology is not managed properly inan organization then nothing else can be managed. Here technology not necessarily mean by development of new technology but hamessing the emerging teehnology to offer better value addition to existing customer as well as new Gutomer. is context, harnessing the power of intemet fo offer better value addition to customer using Cut throat competitive environment. Under unique virtual supply chain is mandatory to survive This sitsation has been righty observed by Bill Gates as, “competition today isnot among products but among business models, irrelevancy is a bigger risk than inefficiency.” As a part of survival as well as to emerge as world class company. companies forcedto re-invent themself radically, by using out of the box thinking, 18 Summary of Three ages of modern mant Table 1.5 summarizes the main characteristics of 3 ages of civilization in a vivid fashion, From the {information era characteristies,one ould uniersiand the paradigm shit, particularly the physical resources given a way for information resourses, Power shift has taken place, the muscle power and machine power ven a way for mind / brain power in information age. 716 ae ae EE ee ee 2 Gea OWciced | Ba toneu as = e. a nn SRE Ta wremge | sentoinn Metals aS, | octes a es =.) cos a | ee le ‘ =. aT fo 2 |G uae @ ns Sol mets | ie Table 1.5 Taree ages of Modern Mau and Main Characteristics of Bustness © Creative Management Consultancy The Old and New soul of the Enterpri Profit fist priority 'S.No| 20th century old soul of the enterprise 2Ist century new soul of the enterprise ‘Customer satisfaction first priority ‘Assets are things Thinkers are separated from doers Assets are people ‘Doers and thinkers are the same ‘Separated marketing with suppliers and cust srm's efglle ‘Lean production Tntegrated marketing with partnership-based| relationships with suppliers and customers 6 | Organizations controlled by hierarchies, fanetional departments sopgrated, Performance measurement fer Finacially dominated ee __t ‘Organizations based on teamwork, numerous crossteams Performance measurement for improvement, beeader measures 8. [Seale economies important ‘Time economies important. Table 1.6 Old soul Vs. New soul of the enterprise Source : Hall, soul ofthe Enterprise (1993). p.281ss of Velocity Organization : Characteristics of 21% Century velocity organization undergone sea change compared to 20" Century organizations. Table [.7 summarizes the characteristics in a crystal clear fashion, Chaves | So conary Oana] Sit entry Onna) ‘Orpmiztion | The foram he we or Network Focus Katernal External (Customer ‘Syte ‘Steverweed Piette | Sowce of Srp] Statitiy Cong 5] Sirweare ‘Setfutfsieney Twter dependencies = [soon Teeasigael ame | Sieinienin 7] Operations | Veriea negation [Vital Iteration 7 Preto New Pradocton Tw Cononiraton 3] Raw Tome ia 101] Fnac Sony Tra ta os cc EL Tors 1B | Say Tor aaew Baap ee a 14, | Workers Employees Employees & Free Agens sd enon Growth 16 | Mowraen [To compa Teen A a Resse ‘Alfedabe Bow Qual Table 1.7 Characteristics of 20th ceutury organization vs-2Ist century orgautzation Source : Business Week, August 28 2000 Main Characteristics of 21st Century organizations aretype of organization structure “Nenwark™ organization structure, not pyramid steucture, Management focus is external or customer oriented not internal, Source of strength is "Change" not stability. Operations or supply chain management practice is virtual integration, not vertical integration, Product strength és mass customization not mass production, Inventory practice is hours not months, Product improvements are revoluionery dnt nature and vot incremental one. 1.8. Mass production Vs Mass customization: 1.8.1 20th Century - Mass Production Era: ‘The era of mass production reigned for a large part of the 20th century, corporations produced in butk to eater to booming markets, whether it was automobile, personal care products of electronic goods. Those were the days when prodvction was king and could dictate to the eustomer, as well as 9to departments in the company. The general attitude of the company, was that "...we kttow what the customer needs". Such successful companies operating on mass production principles paid scant attention to feedback from the market. 1.8.2 Selling concept not marketing concept : Ii an era when computer companies were all producing mainframe computers, Microsoft came uup with the strategy of building desktop personal computers. On the other hand, Wang labs, « highly successful mainframes company did viot sense the customer disposition towards PCs - their assumption was “we know what they need", Thus very quickly they lost out to the competition as customers en masse switched to desktop PCs. The 20% century mindset of "we know what they need" war 30 strong that many companies despite operating in markets with different needs and requirements, ndwethetess stuck to the slrateuy of selling the same product worldwide. Most of the companies followed inward focus model, which has been summarised ‘in figure't.4 as old paradigm. According to chambers dictionary, paradign’ is nothing but a conceptual framework withii which scientific theories ace constructed Old Paradigm fo contact Contact No ‘contact Figure 14 Old Pardigns Source : Innovation strategy for corpora renoissance, page 77, Excel Books, 183 Product focus of European MNC : = Fora tong time a leading European MNC persisted in selling costly electrical products in India with fequures more useful in temperate climates with not much otiity in tropical climates. ‘The mindset was, "they don't kiow what a great product we sre offering ther is bound to be costly, customers should understand this". Such companies nianaged to do well, until the competitor emerged and provided better value for money to the customer. 1.8.6 2st Century Intelligent Customer: ‘The 21" century Corporation will encounter an entirely different breed of customeis The 21" 1018.4 Japanese MNC’s customer focus : The latter part of the 20% Century witnessed the breath taking competition in the electronics goads segments -from cameras, music systems, VCRs te VCPs, phoiocopiers, computers. The Japanese scored over the inventors through the power of miniaturization of pioneering products, For example. Canon stole the market from Xerox Corporation (the inventor of the Photocopy machine) by develop: maller and cheaper machines: 185 2ist Century - Era Of Mass Customization: The strategies of 20 Century mass production combined with the attitude of "we know what they need" will not provide the competitive edge in the 21* century. In fact, the 21st century markets are saturated in mest of areas or would be saturated: very shortly. In such a situation, 10 compete ved. Every company is suppose to have total effectively a quantum shift in mind.set is req focus to survive in the market Figure 1.5 New Paradign Source : Innoration - strategy for corporate renalssance, page 78, Excel Books. century customer will have far greater knowledge regarding options and choices available worldwide The ease Of access to information trom multi various sources via the web, will facilitate greater customer awareness, leading to the exercise of options vo choose. Call centers and CRM systems will make customers used to instant service. 18.7 Customer Expectation and "WAP" Enabled Mobile Telephony: With the emergence of broadband and the capacity of suppliers to continuously monitor the performance of products sold as we!l as improve’, oF repair it as soon asneeded, new levels of customer expectations will emerge. WAP enabled mobile telephony will elso bring in néw levels of customer expectations of service on the move: "1‘As Ferguson and Pike of Andersen consilting put it, "a sweeping change is under way - the world uf seanrtess. continuous ecanomie ond social interaction”, This is to be dawwn of u commerce tivough which one ean stay connected fo one's 4n Slot in eyberspace through multiple deviews beyond tional comput the limitations of ti and telephony. ss and hard wires of 1.9 Journey of Inward Focus to Customer Focused Organiza 1.9.1 Inward Focus: Upto 1960°s, globally demand for a product was more aid supply position was lessand in tum MNC’s and other companies top management team have adopted inward focus approsch by efizetively managing variqus functions of an organization. External Environment Intemal Environment 7S Figure 16 Extcerel and internal environment scenario upte YOON © G Creative Management Consultancy 1.9.2 Inward focused Approach : Stage - 1 Upto 1960's all the four main functions, of organization like marketing, production, finance and HRM have got equal importance 25% focus, Predominantly management style followed was inward fo- cus Murketing | roduction ~~ Major assumption about market place was “pust repeats” Fignre'7 Inward Foons (Stage ~ I 1.93 Inward focused Approach ; Stage - 2 Subsequenty, marketing has got lion share of around 40% focus and rest of functions like production, finance & HRD have got equal share of 20% focus of attention from the management. This is due tothe fact ‘marketingis the back bone of the organization. Here again management ‘Major assumption about market place was “past trend will con Figure 1.8 Inward Focus (Stage -2) tinue in future”. 219.4 Functional focussed organization AAAS [Gas] Figure 1.9 Functional Organization Structure Source: The Essence of BPR, bysloe Peppard. Pailip/ Rowland production peason Fully focussed in produ Macketing person focussed fully in marketing dom: tion domain sameway every body lived in water right compartment, consequently none of them bothered about customer, rather focussed about respective department policy and procedure. In turn the pace of innovation level in functional level organization was very slow both in product as well as market 5 Customer focus: From 1970 onwards globally market ‘scenario witnessed radical change pattem of short supply to over supply (i.c..) demand for various category of product is less and supply is more, in most of the sectors. In line with this changed scenario, MNC’s and other companies main focus has shifted towards customer focus, rather than inward focus, Extemal Environment Internal Environment y} Cavome? Focus Ny) a} got 1 . at mo La Tine Figure 110 External aud internal environment scenario on wards feam 1970 © § Creative Management Consultancy: 1.6 Customer focused Approach : Stage -1 °} Marketing Main shift has taken place from inward focus to customer focus. Iirtum,all the four major functions like HRD, marketing, cpers- tions and finance fine-tuned towards customer. Héreagain, all four major functions of an organization got equal importance. Main nsabout the market place was “new drend and disconti- ‘The value system is “Think Strategically”. assum muityare predictable Figure ll Custorter. Focus (Stage - 1) 131.9.7 Customer focused Approach : Stage - 2 Dynamically changing market place, warrants marketing function to keep their eyes and ears open, 10 get the feel of fast changitig customerneeds and wants not of yesterday or oday but tomorrow. In turn, marketing has got prime importance. Consequently mar- eters were forced to keep close touch with customer. M sumption about market place was “planing eyete inadequate fo deal with rapid glianges”. The value system is “Create the fu- tire example for this is Finland tased Nokia, a global feader in celphione Five 112 Customer Focus (tue 2 1818 Process focussed organization: ‘Customer Figure 1.13 Process Focused organization structure Source: The Essence uf BPR, by Joe Peppard. Philip/ Rowland, Customer has become the central fulcrum of the organization, In turn, all the department re- el in line with customer requisement. 1.10 Customized Chain - Old Value Chain: 1.10.1 Business environment : ‘The market witnessed a scarcity situation, after world war Il, market witness high demand pattern dnd short supply, companies were able to operate comfortably with inward focus approach.lnward focused organizatioris of 1960s followed old value chain model to reach their products to the customer due to short supply in the market place. 1.10.2 Organization innovation level and business model : Under old chain model companies with one innovation itis possible to manage the market fora period of'six yeats or even sixty years. In turn companies were so happy and co" fortable with one innovation and with one product and its features, then go in for mass seale production. As a part of mass'scale marketing simply mass scale distribution taken pale Que to this sort of inward focus of organization, ultimate customers to whom organization scrve were able to get only low value addition product. Figure 1.14 summarizes the above phenomena in nutshell, In short, companies Followed mere selling concept 4Figure 1.14 Old Value Chain, © @ Crearwe Management Consultancy 1.10.3Traditional Physical Business Process: ‘The traditional physical business process is used by the company as a part of old valiechain, which is shown in Figure 1.15. Under “Selling” process, company usedto follow simply “Make the Product "ard "Sell the product”. in tun offer low value addition to customer. ‘CMake the Product bo pl SVS at “Figure 1.15 Truitional Physicat Business Processes Source : Marketing Management, Philip Kotler, Miltenium Edition, Page «85 Here pricing of the produet used to be earriedout after production process was over, In turn, Com- panies followed “product out” concept and cost plus pricing strategy, 1.11 Customized Cliain - The New Value Chain : L111 Business environment : ‘ From 1970, onwards the global market scenario completely changed to excess supply in ‘most of the category. In India, such a scenario has come into effect from July 1991 onwards due to end of license raj and other liberalization measures. 1.11.2. Organization innovation: level and Business model : Under this changing market scenario, customer has emerged as winner, innoveition and value addition becomes the buzzword to survive in the rapidly changing market place. This is due 15to the fact selling has giveit a way for marketing. In turn whole rules of the geme of business dramatically altered. According to Kotler “marketing is nothing but understanding needs and want of the eus- tomer and satisfy the needs and wants of the customer, This definition was perfecty alright upto 1970. Afier 1970, none of the orgariization can follow this definition, Why’? Here the quetion whether the organization has to concern about yesterday need or today need or tomorrow need of the customer? ago World class organization are conogmed dbout tomorrow need of customer not yesterday and today. Here again the question is tomorrow means is it one day or one week or one month or ‘one year or five years or ten years. Definety 21st century velocity organization has to concem about minimum 5 years, average 10 years needs and wants of the customer. In turn, organization itas to offer ahiead of time product, right today, at yesterday's price, If companies were able to achieve this feast and constantly add value to their customer, then ley will be part of the dynamically changing business, otherwise they will be part of history. [n short, survival mante’ for companies largely depends on offering tomorrow's product right today in yesterday's price ‘The whole product development cycle under new value chain starts with customer feedback and the whole thrust is towards value addition. Here again focus is on continuous value addition and in the market place, Figure 1.16 summarieses the altered rules of the game. in turn su oon. coders i ‘over poses Figure 1.16 Custontized chain - the new value chase Source: Business Today, Jan 7 ~24, 1997, Page 34 | The Vatue ereation and delivery sequence: As 2 part of new valve chain, value creation aad delivery sequences got prime focus. Main stages ‘of value creation chain are chouse the value, provide the value, and communicate the value, Under value creation concept. pricing for a produet has to becarried out prior manufacturing the product or even before developing the new product. In short, continuous value addition to customer kas ‘become the mantra for survival of an organisation. Figure 1,17 gives a clear picture of the value ereation ‘model. In short, “praduct out” has given a way for “market in”. tn line with market affortadable price, matketers were forced (0 plan for a value added product. 16a 7 Same fms |_| nro ‘Choose the Value | cr fel lls ee] tere te tg OY el Sa fe Se Provide the valve > ia a Ls) mma = ann Figure 1.17 Value Creation & Delivery sequence : Source: Marketing Management, Philip Kotler Millenium Editon, Puge - 85 1.12 Customer delight: ‘As a part of achieving customer detight, an organization has to offer aheard of time product. right today in yesterday's prite As » part of underctanding the need and wants of wustenet of tomorrow, an organization has to understand the drivers of the needs of the customer and keep a tack of how the drivers of the needs are keep on changing in line with the changing trend, An ‘organization has to offer right product, In right form, at price, in right quality and in right quantity. To achieve this, unique and perfect model of both "SCM" & *CRM’ is must for every organization, 1 Inwardly focused : Product or Technology Led Strategy : “This could be a ‘So, where are ‘great product’ the customers?” Figure 1.18 Cusioner Delight (Model: 1) Source: Transform Your Supply Chain, by Jon Hughes, Mark Ralf, Bill Michelifalue detivery and customer Responsive strategy: Provide the value “What are ‘customers are ooking for’ *Are price and functionally igh? Figure 1.19 Customer Delight (Mosel <2) Source: Transform Your Supply Choin, by Jon Hughes, Mark Rolf. Bil Michels 1.12.3 Shareholder Focused : Value Appropriation Strategy + “Are price and functionally righ’ promote i?" ooking for" Figure 1.20 Customer Delight (Model 3) Source: Transform Your Sepply Chain, by Jon Hughes, Mark Rolf, Bil Michels Itis inappropriate to evaluate business strategies only via ‘customer delight’. Then natirally is a shareholder and customer trade-off, 13 218t Century Costomer - View products as an expression of self : The 21° Century customer will strive to establish a unique and differentiated, identify and view products as an expression of self. Such aspirations have ro doubt existed perennially in the customer the past - for example the car a5 an extension of one's personality, In the 21” century however, payehe tly the impulses for identity expression through differentiated product usage would be-signit heightened, given the scope and opportunity for expression, 1.13.2 "Cstomer is king" to “customer is god": ‘The phenomena of enhanced awareness, plethora of information and higher educational levels, made the customer teuly king. Thus, in the 21” century, no company can afford to say “the customer is king” as a mere platitude - this will have ¢o be practiced in is fullest sense 2st century will further see the decentuation of the Gandhian concept of eustomer as God (Customer is Goel - we exist for the customer. he does mot exist for us). Thus the 21st century customer will not onty believe he is God, he will also expect 19 be treated 18one. Companies that realize this wisdom and respond appropriately will take the lead. ‘Thus, the 2st century Corporation will have to build its growth strategy sround unique customer specifications ‘and as per customer, configuration Lid Vertical integration Vs Virtual integration: 1.14.1 20% century self sufficient organization: Organizations of the 20% Century pperated in a mode of self-sufficiency, Companies organized themselves to aké care of every requirement without depending on outside agencies. Many Companies whether in coal, steel or other manufacturing sectors like automobile invested in infiastracture to build power plants, rail routes, roads, ports, ete, Engineering companies even had their own tool rooms from where they sourced their requirements,_n large automobile and engineering companies, divisions were established which manufnetured components and spares. 1.14.2 Vertical integrations - self sufficient model : Companies built business models where they got into upstream as well as downstream businesses inan effortto become more self-sutticient. Companies thus became vertically integrated and however, still make profits because of the less competitive and,more stable boundaries environment 1.14.3 Virtual Integration - interdependenice model : AS competition increased during fag end of 20th century, companies began to feel the het place, In (ou. any OF the hidden inefficiencies and unproductive habits hhout wave in the globat ©F practices of the firm got exposed. tw the 21st Centuri, no longer can companies afford 10 be inefficient end cosity. To survivethey will haveta become cost competitive and fit. To grow: companies will have tocontinuously innovate in product, process ds wellas procedure. Such market realty forced many firms to focus in core area and to vacite areas’ of non-core ‘competence. Now mantra for world'class companies are outsoures all that firm can get done cheaply and effectively and keep mm covld-carryout chesply anid effectively. By way of exclusively focus core process which the ‘on areas of their core competence, companies can stay more’ compet changing market place. This one yp situation in market place warrents firms to move to the virtual integration model of organization, so that company can delight the customer ively in the dynamically ties 1.14.4 Outsourcing - Front Office and Back Office Ai Companies like GE, ABB, BA, have been steadily moving'in this direction, ou-sourcing beth front end and back end company activities (o low cost, high skill destina <¢ Inidia and treland. This shift to a virtual integration miodel will no doubt hinge on the development of dependable Partners who will be committed to the conipany goal, Companies will have to build strategic alliances and partnerships and develop the ability (0 nurture these inter-organizational relationships for mutual benefit, 191.15.3 Value Addition Chain: “The Supply chain assumes a flow of value t0 the customer and pricing pressure tothe supplier. Reality is 2 lot more complex. Tele: ofa superior value proposition inva valve vo the customer ‘Dens fr cero fow pricing Curtooe supplier integration 205 a responsive supply chaia = Value aquisition Valucidded Value delivery rom suppliers inproduetion to eustomers Figure 1.21 Value addition game Source: Transform Your Supply Chain. by Jon Hughes, Mark Relf, Bil Michels. L1G Effectiveness vs Efficiency matrix Effectiveness is doing the right things. Whereas, efficiency is all about doing things right. Effectiveness and efficiency: way of classification of an organization, lead to various options like thrive, survive, die quickly and die slowly, as specified in the Figure 1.22 High Lno east Stowly | Die Quickly tow Tigh Efficiency Figure 1.22 Effetivess Ve. Efficiency matrix - Macro view ‘Source Innovate, by Paul schrmann, Dorma prestwood Alvin ‘on, lol vaston. page 86, MCcow hill Ine. 201.16.14Die Slowly” type organizatio In "Die Slowly’ type organization, efficiency as well as effectiveness of an organization is low Such organizations doesn’t understand market requirement, at the same time organization possess poor internat system, This type of organizations use-to die slowly. 1.16.2~Die Quickly” type organization ; {In ‘Die Quickly’ type organization efficiency of organization is quite high. At the same time such effectiveness is low. Such organizations use to possess good intemal aystems but out of focus with reference to market. This type of organizations, use to die quickly. 1.16.3 Survive? type organization : . In ‘Survive’ type organization effectiveness of an organization is quite high but efficiency is low. Such organizations use to have full focus of market, at the same time possess poor internal systems at the same time anticipates and grab market. This type of organizations use to survive, due to their market focus. 1.16,4*Thrive’ type organization In ‘Thieve" type organization effectiveness of an organization is quite high as well as efficiency ‘of an organization is quite high. Such orgaaizations use to have excellent internal organizations use to thrive, due to their constant touch with market place. As a part of achieving excellent internal system every organization is suppose to have effective as quanayemrent in place, well a efficient supply chai High "aT Cost focus on market | Anticipates market ‘opportunities eam | Coat Good intemal systems | Excellent internal " systems Doesn't understand | Focus on market : market | | Gesme> | Gaenie> Poorintemal system | Poor intemal systems Low! igh Low Effectiveness se Figure 1.23 Effectiveness and efficiency Matrix - Micro view Sonrce: Innovate, b Poul Schumann, Dona Presswood. Alvin Tong. oh Vanston, Page 86 hte Graw Hil, ne. 21 Menem o ena117 Innovate to Thrive : Necessity is the’ mother of invention and also the mother of innovation, The necessity is to satisfy the changing customer priorities. The change is driving the corporate to innovate, innovate and innovate, not in a discrete fashion but on a continuous fashion. 1.17.1Peter Drucker view of innovation : According to Peter Drucker, 20th century business has only two basic funetcons, marketing and innovation. They both produce results. All the rest are costs. Whereas in 21st century, businesshas only funetion-innovation, because innovation in marketing is also essential. In turn eveything is ‘one bas business narrows down to one basis function. “Innovation”. 1.17.2Innovate or perish : Mantra for 20th century organization was perform or perish, whereas mantra for 21st century is vety clear innovate or perish. Twentieth century belong to gradual improvement in terms of productivity, whereas twenty first century belongs to breakthrough level improvement. As a part of achieving this radical improvement, continous innovation in terms of product process and procedure is must 1.17.3Innovation for competitive advantage : Innovation is the basis ofall competitive advantage. Innovation is mostly market driven, As the corpvatee innovate hecause of shifting customer priorities. Innovation unleashes creative energy hidden in an individual as well as dormant potential it an organization. Every innovation has a life eyele. The exploitation of an idea stats in a modest fashion. reaches a perk and thereafter, obsolescence seis in and the imovation fades into eblivion. 1.17.4Tom Peters view of innovation : ‘Tom peters says that in Furture, ail corporations will be in the business of “Satisfying their ceustomérs”, Not in near future already innovation plays a vital role in 21st entury velocity organization. Innovation will be the seed around which corporates will grow, Innovations: will be the centre of gravity. The future corporate will thus be Grivéil:by innovation. 1.18 Innovation Vs Impact model: Mere innovation alone will not guarantee success in global market place and in turn company cannot reach a stage of world class company, Timing of the innovation and delivery of the innovative product or business model in a beautiful fashion 9 the market place, there’ comes the innovative and impact in the market place. sn with respect to two, key variables. The first creativity and strategic differentiation, snvironment that these actions have, Figure 1.24 explains the typical pattems of suriuhle isconcemed with extraordinaiy actions relating to inmgvation, ‘he seconel variable relates to the extra-ordinaty effort on the ¢ 2High ; Wasted Purposeful Energy Action a a i - a f Lost ‘Thoughtless i Opportunity, _ Action ° a Low! Low ih Figure 1.24 Innovation Vs, laypact model Using Innovation Vs Impact model, various organization positions can be snalused four s classifications lost opportunity wasted energy, thougitless action and purposeful action, What isrequired n reality is, purposeful action. 118.1 Corporate example of "Lost opportunity” IBM is aclassic exainple for low innovation and low impact (i.):lost opportunity’. Mindset oF IBM towards mainframe forced them to see beyond it, in tur they lost the opportunity in PC? revolution, ‘To companies compad (now part of HP) HP, DELL. Today DELL emerged as a global leader in ‘PC* market. s 1.18.2 Corporate example. of "Wasted energy" : "Xerox’ is a classic example for high innovation and low impact (i.e..) wasted ener 1.18.3 Corporate example of "Thoughtless action" : Many companies were innovators inthe past. but have been unable to produce new innovations we their growth, Classic example is Polaroid, which fallin this category. tocon 1.184 Corporate example of "Purposeful action” : Amazon.com is a classi¢ example for high innovation and high impact. * zB1.19 Changing Business Game : = = e Foot Ball Figure 1.25 Changing Business Game for éonporute renaissance AIMA-NCYM-TYS -luces- page 35- Excel Books Source : Inmovotion - Strate L.19.1 Stage -L : Foot Ball = ‘The game of business was like foot ball during 19603 and 19708, There were shunt bursts oftintense activity called plays. {fone executed the ball well, one gain ground and seore the goal. But there was not much of actions except: for a few pockets. ‘The rest ofthe time, the business was standing sround and waiting which created @ manageable pace. In turn, slow and stealy wins the race. 1.19.2 Stage -2 : Basket Ball : = The 1980's & 1990's saw a different ball game - Basket ball. Scale and market share were important bu they provided less protetion. One has to be very fast and not big, One has 10 play thie same very Fast, otherwise the other side will score om repeatedly. The mantra that time was speed ... speed ... speed. In turn, fast and steady wins the race, 1.19.3 Stage -3 : Chess : ‘When the companies were trying to jeam basket ball skills, the game has now changed to chess in 2000+. Some of the companies have innovated their business designs moving away from speed based to non speed based skills Mass production and market share will not fetch suocess in the market place, value proposition what a company provide is very much important more than that how they are that value propostition matter lot. Now one has to play-the, game of chess. maintaing 24Zach move haa to be innovated depending on your opponents move. A company cannot stand 1d watch the show. Here a company has (0 conceive of and execute a series of moves to achieve one up in the market place, ireturn to emerge as a winner, in the global marke: place. ious chinese procured gays “known thyself, know thy euemy. you can win thousand batt ix is 100% truc today every firm should know their own strengilt and focus in that cose competence area, at the same time have check over competitor move.» + tegration Practice (Rook Supply Chain) i Amazon. Com’s uni Can you name biggest book store in the world? Ksit Branss 4 Nobel of “US", No! Cross word of India !!- Big No !! , Then who is number one ? Autazon.com. world. Winners don't do different things, they dla things in adifterent way. This is 100% true as for as Amazon. Com is concern. | the number one book seller in the whole ‘Amazon.com come into existence only during March 1997, But within eight years eom- pany hasemerged asa world leader in book selling. That feast hasbeen achieved by Amazon.com without having a physical book store, any ~ where in the world. Amazon.com. without having any physical book store but virtual book store and ware housing facilites for storage of books, achieved this incredible feast. That is the wniqueness of Amezon.com. 1.0 FROM YOUR MOUSE TO YOUR HOUSE AMAZON.COM WAY ‘Amazon.com isoncof the leading online shopping com- pany, of the whole world, with an area of shop - 3 miflion square feet, Le., 1.5 time the floor space of the Empire state building. in the following paragraphs the steps that are taking, place behind the scenes when an individual is placing order and how the system of virtual integration works from click- ing the mouse, how the products are reaching door step has been enumerated in a detailed fashion. 41 Step t: Online ordering of Taree items: slike a When a customer orders for three book, a game and a digital cameres, a compuler in one ofthe ‘Amazon's seven US distribution centers,1. Seattle (93,000 sq.ft ware house), 2. Grand forks, N.D. (130,000 s 3, New castle Det (2,02,000 sq.ft), 4. FrenteyNew (3. s4.f0), 5. Coffeyville Kaus (7,50,000 sq.) 6, Cicubelts Ville (7,70,000 5q.ft) 7. Me Danough GG (8,00,000 sq.) register the order. For example, the order gered in the Seattle ‘Amazon's distribution center. The order is transmitted to the closest facility having the product ‘ 26Book Supply Chain latlie warehouse, rows of red lights show which prod auets are ordered by the customer: Workers move from builh to build, retrieving’ an item from the shelf above and pressing « button then resets the fight. Computers determine which war k- ers go where Each item then goes into a large green erate that con tains many customers’ orders. When full, the crates tide a series of conveyor belts that winds more than 10 miler through the plant at a constant speed of 2.9 feet per seco. The bar code on each item is scanned 15 times, by machines and by many of the 600 full- Amazon stock options. 1¢ workers, all of whom All of the crates arrive at 'a central point wheve bar-codes are matched with order numbersto determine who gots what. The three items ordered end up in s 3 feet wide chute- one of several thousand and ate placed into a cardboard box with a new bar code that identi- fies the order ZTBook Supply 1.5 Stage S: Gift Wrapping: Amazon traits an elite group of gift wrapper to “make it look like Mom’s”, Each worker processes 30 packages an hour. Those whe fail ace reassigned to otheg jobs. For its bus est season, Amazon's warehouses are stocked with 4.4 million yards of ribbon and 7.8 million square feet of wrapping paper — which if laid fat would cover more than Disneyland. * 16 ‘The McDonough’s Amazon plant was designed to ship as many as 200,000 piecesa day. About 60% of the ordersare shipped via the US Postal Service, nearkyreverything else goes through United Parcel Service. Both have large: facilities within the reach of the warehouse. Products that are unusual or heavy (150 Ibs or more) requires special delivery. Within 1 to 7 days later, yetanothér of Amazon's 13 million customer has been reached. As discussed earlier, only af- ter the success of the Amazon.com in the market place by virual integration, Brick and mortor companies seriously viewed e-Business opportunities. Some gone for click and mortor. Whereas others gone in for brick and mortor as well as click and mortor. L$. Traditional Book market striseture “The traditional market structure is dominated by local bookshops and other retail out- lets, Telephone sales have had a relatively minor impact as the customer needs to know exactly what item is requited without further browsing. Mail order has carved out a number of niches, in which alimited catalogue sent by pest has been sufficient to meet the browsing needs of, say, science fiction enthusiasts or k en gardeners 28Book Supply Chain Teaulidonal Strsctare ee Figure 1.0 hidependence of lication —the book market Source: e-Marketing, Meleolen Me Donald, Hasgh Wilson 1.8.1 E-Business Game Change E-business ¢9” be the reason a businfess succeeds or the reason it is defeated. Evolution of business over hundres years and a revolution under way, due (0 E-Business is shown iu the figure 2.0 . aot hone cal paca] we [SS Il sae 19708 19805 1990s Figure : 20: £-Business Gume Chaugers Late 1800’s, Sears catalog started post mail order. Then during 1960's Avon lady started auto: based door to door sales. Also during 1964's Wal-mart started Discount super store. Ducing 1970" Land’s end started Telephone mail order, also QVC started television mail order; During 1980's CUC Marted direct mail, During 1990"s Dell started customer self’ service, commerce one started MRO pro curement, Amazon.com started Web-based retailing. subsequently Autobytel started Web-based marketing. (8.2 Emerging Book market structure : Independence of location allows individualization to be achieved economically. Niche products can serve their target markets even if spread globally. Being able to reach customers wherever they are concept widened consumer choice and extend consumer power. The impact that independence of location cawhave on market structure is clearly illustrated by the increasing importance of the Intemetin sales of books, pre-recorded music and videosas shown in figure 3.0Book Supply Chain [eis se si orders erat syecisists_ | “Wappaar _ Flenre 30 Emersing mathet stectre Source: e-Marketing, Malcolm Me Donald, Hugh Wilson ‘8 Amazon.com is uniqué way-of reaching consumers: Internet booksellers such as Amazon are provinigra much more successful challenge to } the local bookshop, Large catalogues can be provided online without the prohibitive expense of printing and mailing, while browsing can be enhanced by computer search facilities“ The added value is accompanied by lower costs, low unitcost transactions with a computer replace the high cost of shop assistants, and capital does not aced to be tied up in moving books into expensive retail space. Naturally the retailers are fighting back with their own websites, and some publishers are bypassing both with their own websites, but the principle is clear that, at least for many purchases, a direct purchase provides greater valuc and conyenicace 4p the customer at lower cost. and hence with lower prices. A challenge to printed books can also be anticipated from electronic publishing, whereby the product is distributed electronically, not just ordered electronically. ‘Similarly, the direct distribution of music over the intemet, paid for by track at very low prices. is severely worrying the major tecord labels which have so far remained committed to the physical CD, 2 is10 -Aineon.comile Bosticniwm caponent Sinha martating Amazon exploits the Web's interactive nature by offering facilities such as: 4 Searching for books on particular topics © Tracking the status of an order placed earlier * Making recommendations of books based on a list of the user’s favourites © Providing reviews of a book placed by other customers ‘The Web site builds knowledge of the customer, enabling it for example to notify the customer by e-mail if'a new book appeass on a topic of particular interest. The comparison of Amazon and Bames & Noble approaches are depicted in Figure 4.0 “Book Supply Chain Top 1000 nes Paar fol Wiener nn 000 tes mn” ‘wibenen Barnes & Noble ee tes = Newnes ‘aes Fo Pes Tamer] wens Figure 4.0 Independence oftocaion — Amazon Vs Barnes & Noble Source: Marketing, Malcolm Kic Denald. Hugh Wilson LL Amazon Vs Barnes & Noble: Barnes & Noble. the largest US retailer launched its own Web site in March 1997. To respond, ‘Amazon was forced to buy vis expensively on the Net. Deals wittrthe search engine/directories ‘Yahoo and Excite were designed to ensure that when seeking books, users would find their way to Amazon. Barnes & Noble, meanwhile, made a deal with America Online (AOL), a service provider with 8.5 million subscribers, ensuring privileged access to much of their potential market. They also invested in advertising the site in papers such as New York Times, Bamés & Noble played me-too on its Web site, copying initiatives by Amazon as.quickly as possible to neutralize its advantage. What differences remain between them? L.ULL USP of Anjazor ‘Amazon relies on the physical proximity of its offices to the largest wholesaler of books, Ingram Book Company, which stocks 490,000 titles and provides 59 per cent of Amazon sales. The 1000 top sellers are the only stock that Amazon cartis itself. LULZ USP of Barnes & Nobel = Barnes & Noble, by contrast, has its own distribution network, designed for supplyit shops, with huge stocks, often enabling it to get books out faster thaw Amazon, 1.113 Inventory strategy of Amazon.com = Amazon is also vulnerable to competition from other Web-based retailers wh6 draw on the same wholesalers, such as Bookstacks and Bookserve. Amazon continues to n attempt to main- tain its differentiation. It extended its “top 20” listing of best-selling, books to include every book listed on the Web site, providing an endless source of depressing news for authors of niche items who might discover their masterpiece at number 4503 in the best-seller list, novateBook Supply Chain LIL Ai 701 networking strategy : * Iman atiempt to compete with niche sellers such as Pandora’s books, which sells out-of print sci fi (again with Ingram’s assistance), Amazon set up an associates piogramme, whereby any other site ~ say, a business school’s ~ can point its Web site visitors to Amuzon.cora to buy books by its faculty in exchange for 8% of the resulting revenic. LIL Amazon’s diveisification strategy : sifying into sales of CDs and Videos, and recently launched an auction service witere tis now users can auction virtually anything, 142 Using E-Business (0 Sell Books - Amazon.com way The book industry was one of the first ¢o feel the impact of e-business with the launching of Amazon.com in July 1995. Since 1995, Amazon has added music, toys, electronics and software, and home improvement equipmeat toits list of product offerings. Unlike, the PC industry and Dell, however, Amazon has been losing money in spite of dramatic growth in sales. During 1999. Amazon had total losses of nearly $ 600 million from revenues of about § 1.6 billion. Amazon purchases some of its books directly from the publisher and buys the remaining titles from distributors, as shown in Figure 5. A traditional bookstore chain, in contrast, purchases all books directly Feom publishers. ase +t nw =. Reta ss > Chinese > |™ iretouse> Pivtsnes> Figure $.0 Supply chains for Amazon.com and a traditional Book suppplier Source : Supply Chain Management, Sunil Chopra & Peter Meinl 1.13. Revenue Impact of E-Business on the Book Industry: 1.13.1 Additional intermediary in book supply chain = ‘There are several reasons why e-business has hurt revenuesin the book industry. As shown in Figure 5 the Amazon supply chain is longer that that of a books store chain as Borders of Barnes and noble because ofthe presence of an additional intermediary ~the distributors. Unlike the PC industry, 32Book Supply Chain tates direct sales by manufacturers. e-business Its resulted in longer supply re e-business facil wii chains in the book industry. Given disteibutor margins, thi The distributor margins can also be viewed as an increase in cost because of e-business in the book industry. 1.132 Consumer pull through deep discount = A factor hurting revenues for Amazon has been the jteady downward pressure on book prices on the Infernet.. Amazon was the leader in offering deeper discounts on best-sellers and other books sold on-line, Traditional bookstoresdiscounted best sellers by about 30 percent, until Antazon started to offer discotints of 50 percent. The deepor discounts have contradicted the argument that people buy books on-line because of the convenience. If convenience drives on-line book sales, e-businesses selling books should charge for the convenience rather that offering deeper discounts, Price cuts have hurt the PC industry, too, but it has been more rampant for Internet booksellers than for Internet PC manufacturers. L133. Review instead of leaf through books : ‘As is the case with Dell, customer wanting a book quickly camot shopat Amazon, Therefore, Amazon can only attract customers that are willing (o wait a few days to get the book. Amazon also cannot attract customers who value the bility to leaf through books. The company tries to counter this problem by providing reviews and other information on books to allow customers to et a fell for he Book on-tine, L134 Million plus listing - advantage to Amazon : ners and increase Amazon ha exploited several opportunities onthe internet to attract cust revenues. Aniazon uses the Interuet to attract eustdiners by offering millions of books, Customers can search for hard-to-find books or those of special interest. A large physical bookstore, in contrast, can carry fewer that 1,00,000 titles. Rad 113.5 Customer detightin Amazon way: ‘Amazon also uses te Internet rorecomntend books to customers based on their purehsse histo Exmails are sent out to customers informing thein of wew ttle that maich theirinterésts, Amazea aloo Provides reviews and comments from other customers on the titles available. New titles are quickly introduced and made available on-line whereas in a brick-and-mortar bookstore chain, all retail stores have to be stocked. 3.6 24x 7x 365 days shoping experiences ‘Amazon uses the Internet to allow customers to order a book any time of the day from the comfort oftheir own homes. IReustomers to order a book any time ofthe day can place the order oifies 33Book Supply Chain ‘within a few minutes, and the books are delivered to their door. There is no need to leave the house and spend time that going toa physical bookstore would take. This fact allows Amazon to attract customers who value this convenience and are willing to wait for detivery. 1.14 Cost Amazon also uses ¢-business to lower its inventory and some of its facility costs. However, processing costs at facilities and transportation costs increase as a result of selling books on-line, ‘mpact of E-Business on the Book Industry: 1.14.1 Inventory Costs: “Aniazon is able to decrease inventories by geographically, aggregating the inventories in 3 few locations. A bookstore chain, in contrast, has higher inventories because titles are carried at every store, ‘The reduction of inventories on aggregation ismost significant for low-volume books wi demand uncertainty. The benefit is less significant for bestsellers that sell in large volumes with demands that are more predictable. ‘Amazon carries high-volume titles in inventory, and it purchases very low volume fitles From the distributors in response (o a customer order. This allows the Amazon supply chain to further reduce inventories of very dow yolume titles, because distributors are able to agsregate across ‘other booksellers in addition to Amazon. E-Business anows Amazon to lower facility costs because it does not need the retail infrastructure that a bookstore chain like Borders or Barnes and Noble must have. Iietially, Amazon did not have a warehouseand purchased all books from distributors. When demand volumes were low, the distributor was a better location to carry inventories because it could ageregate demand across other booksellers besides Amazon. However, as demand has grown, Anuazon lias opered its own warehouses, where it stocks high-volume books. Amazon now purchases the high-volume books directly from publishers ‘and only goes to distributors for the lower volume books. Thus, facility costs at Amazon are growing, However, they are still much lower than the facility costs for a bookstore chain because Amazon has no retail sites. 1.14.3 Oniler Processing costs: Amazon, however, incurs higher order processing costs than a bookstorechain, Ata bookstore, the customer selects the books and only cashiers are needed to reveive payment. At Amazon, no cashiers ‘are needed. but every order is picked off the warehouse shelves and packed for delivery. For books that are received from distributors, additional handling at Amazon adds to the ccst of processing the order, For some on-line bookstores, distributors directly ship the customer order to save on handling costs. However, this adds to the distributor margin, further squeezing the margin for the on-line bookseller. 34