Samveg 2009, IMI Delhi

Challenges for Logistics and Supply Chain Management in Slowdown

Team Details

1. Srikant Rajan
Contact: srikant.rajan@ifmr.ac.in, +91-9962552824
2. Vivek Prabhu
Contact: vivek.prabhu@ifmr.ac.in, +91-9380254288

Synopsis:

The paper begins with recommended alternative for SCM optimization, in recessionary
times followed by investigation of its applicability in the Indian context. The latter part of
the paper analyzes other SCM efficiency enhancement alternatives and evaluates their
effectiveness vis-à-vis recommended alternative.

MLA formatting has been adopted.

 Challenges for Logistics and Supply Chain Management in Slowdown

Green Supply Chain Management (GSCM) is an approach that incorporates

environmental thinking into the supply chain. GSCM takes into account the entire
product life cycle and propagates green thinking post final product delivery, as potential
efficiency and cost reduction measures.

Emphasis on recyclable material leads to significant cost reductions, for instance General
Motors reduced disposal costs by $12 million by establishing a reusable container
program with their suppliers1. A similar approach in the Indian consumer goods industry
could be utilization of recyclable paint cans, procured from the end customers. A
discount offered for every paint can returned, would entail a superior value proposition to
the customer. Additionally such measures would not incur an increase in net life-cycle
costs; the decrease in material usage compensates the investment required in maintaining
the reverse logistics chain2.

Adapting sustainable measures in the supply chain would mean adherence to regulations
and an improvement in the brand reputation. Cost reduction and creation of a distinctive
value proposition to the user not withstanding, GSCM measures clearly differentiate
products from competitor products, which in turn may aid in creation of a suitable
targeted marketing strategy.

GSCM is of significance in recessionary times, which are characterized by decreased and

highly volatile consumption patterns. In such a scenario focus on improving margins to
counter the decreasing volumes becomes the driving force. Cost cutting is the viable
choice as price increases would be suicidal in such an environment. Cost reduction
alternatives in the entire chain of operations from production to final consumption
include the inventory reduction, distribution network and production optimization.

1
Energy savings and the Environment, November 2008,IBM Retail Solutions
2
Climate Change and Supply Chain management , July 2008, The Mc Kinsey Quarterly
Inventory planning is the preferred alternative in SCM optimization. However this is
dependent on dynamic information of consumer demand which despite IT enabling of the
chain is challenging. This is on account of volatility of demand. Forecasting is largely
dependent on historical demand patterns which go for a toss in recessionary times. The
forecasting challenge is particularly acute as in many upstream industrial settings, as
supply partners along the chain anticipate decreased demand, the chain kind of decouples
from downstream consumption which is the backbone of most forecasting models.

Definitely reduction in inventory and consequent reduction in production would aid in

cost reductions by reducing the variable costs incurred. However, challenges in
forecasting notwithstanding, this approach would entail underutilization of existing
capacity thereby reducing the contribution per unit on recovery of fixed costs incurred.

The other alternative is of reducing the number of links in the typical producer,
wholesaler, ware house, retailer chain. This would also entail increasing the chain
responsiveness by decreasing distortions in information snowball along the length of a
company’s supply chain (Bull whip Effect).

However, reducing the links by cutting down the number of retailers would also reduce
coverage and thus negatively impact the market share particularly in the FMCG sector.
Wholesaler decrease may be viable in say goods such as paints but direct transportation
to the retailer would involve a sizeable investment in resources such as manpower that
would offset the advantage of decreasing the bull whip effect.