Final project report

“Importance of managing the supply

chain in a time of global recession”

Assignment submitted to the

In fulfillment of the requirement for the award of the degree of

Aviation Foundation Programme – Air Cargo

Submitted by

RIJAZ MUHAMMED
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 ACKNOWLEDGEMENTS

I’m indebted to the ALMIGHTY GOD for the blessings He has showered on me and for being

with me throughout my studies.

I thank Emirates Aviation College and the trainers for giving full support in fulfilling the Air

cargo course.

I extend my sincere gratitude towards my parents, who have always encourages me. Their

support has always motivated me.

Finally I would like to convey my heartiest thanks to all my well wishers for their blessing and

co-operation throughout my study. They boosted me up every day to work with a new and high

spirit.

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S. No. TITLE Page No.

1 Summary 3

2 Introduction 3

3 The world ahead: more competition, globalization 4

4 Recession impact on supply chain 5

5 Measures to deal with global recession 6

6 Supply chain practice to withstand economic recession. 8

7 CASE STUDY 1: Wal-Mart - Monitoring supply chain risk 10

8 CASE STUDY: 2 11

Procter & Gamble (P&G)—End-to-End Supply Chain Management

9 CASE STUDY: 3 13

BMW—A Blueprint for Supplier Partnership

10 Conclusion 14

11 References 15

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 SUMMARY

Supply chains have become substantially more global and complex over the last decade.

In the light of the ongoing globalization and evolution of today’s business world supply chain

has gained significant visibility and is regarded as a critical link to improved corporate

performance. The recent economic recession had a severe impact on global economy and

complex function of supply chain became a global challenge in organization worldwide. This

report brings some interesting point regarding the supply chain activities and challenges during

the global recession and the method of managing supply chain in a time of global recession. A

case of Wal-Mart, P&G and BMW has been attached which focuses on the best supply chain

practices executed by organization which helped them to withstand the economic down turn.

INTRODUCTION

Supply chain management is a management system that coordinates and integrates all of

the activities performed by supply chain members into a seamless process, from the source to the

point of consumption. It is the Coordination and collaboration with channel partners, which can

be suppliers, intermediaries, third-party service providers, and customers. In essence, Supply

Chain Management integrates supply and demand management within and across companies.

Sourcing contracts, production decisions, inventory decisions, transportation strategy, bench

marking and best practices and mile stone payments are some of the major activities that to be

focused in a time of global recession . A leaner, more rational supply chain, not only has a role

to play in the recession, but also it can also help a company prepare for the upturn.

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 The world ahead: more competition, globalization.

Increasing globalization has increased the access of organizations, at least the large ones, to

information, capital, skilled manpower, locations and other resources. Competitive environment

in almost all industries the world over has intensified. Consumers are increasingly becoming

more aware than before. Consequently, customer responsiveness is becoming a more important

basis of competition than just low cost and high efficiency. In order to be customer responsive,

organizations have to be more flexible to offer a wide variety of products and services, introduce

new products and services faster and deliver them swiftly, in right quantity, offer high- quality

post-sale services, while keeping the operational costs low.

It is already a motto for many industries that any organization that wishes to enter and sustain

leadership in the competitive markets must possess these qualities. More and more markets are

steadily acquiring such characteristics and to sustain in competitive environment, they must work

on various methods/measures to shield their businesses from uncertainty. Some of the more

popular measures are suggested as follows:

 Customers and markets, often make varying demands on businesses. Business can

efficiently manage such spikes in demand by implementing multiple supply chain

models.

 ‘End-to-End’ alignment within a business must be improved to ensure accurate forecasts

by suppliers as well as distributors.

 A process-oriented (rather than function or geographically-oriented) supply chain is the

most efficient model.

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  Companies must strive at discovery and elimination of hidden risks in the extended

supply chain, especially at times of economic downturns.

Recession impact on supply chain

What normally happens in a recession is that markets collapse, sales fall, profits go down

and eventually an effect comes down from the top management to supply chain managers just to

reduce costs. However at the same time as that order is arriving, unit costs tend to be going up

naturally as there are fixed costs in the supply chain for warehousing, for fixed vehicle routes

that must run every night whether the vehicles are full or half full. There are of course, actions

that can be taken to reduce costs. At the extreme, Supply Chain Managers can offer “nil service

for nil cost”. For example, they can close warehousing, but even if they can recover costs from

that, which is somewhat doubtful, because they probably cannot release payments, which may

become redundancy payments. Instead, if they can close warehouses and cut some costs, it will

just cut service and will be less responsiveness to customers, which is not desirable.

Similar is the case with inventory, if they cut inventory, then that will reduce stock

availability to customers. And also, if they ship by sea freight rather than air freight then that will

reduce responsiveness to customers. In such situations, supply chain managers find themselves in

a very difficult position, having to cut costs in a time, when costs are naturally rising because of

lower throughputs.

This adds up to the following net results Top line impact, Bottom line impact and

COGS impact which is detailed below;

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  Top line impact: Low top line growth, as consumers cut their spending due to

recessionary pressures, job losses, uncertain financial conditions and tight consumer

credit. All of these may result into “low to no top line growth”, and in some cases, it may

very well shrink.

 Bottom line impact: Low profitability, fuelled by increased competition, too little

demand, too little disposable income, together adds up to pressure on cutting prices

further to retain the sales, and affects the bottom line.

 COGS impact: Higher cost of operations, driven by the tight credit and higher cost of

money along with the volatility of demand and the desire to maintain good inventory

levels to service customers will lead to higher Cost of Goods Sold (COGS).

It has been observed that the impact of the recession on global organization’s supply chains has

been massive and hard-hitting. Although many top-line priorities remain the same, a new priority

—improving cash flow and working capital—is fast emerging.

Measures to deal with the global recession

Supply chain managers should shift focus from strategic to more tactical or short-term

improvement project. As mentioned above, Cost Effectiveness and Chain Efficiency are the two

major concerns, when a recession strikes. A good supply chain strategy can deliver on both these

fronts. In fact, supply chains are all about costs and efficiency. Anything one does better in

supply chain management is bound to affect either of the two i.e costs and efficiency, e.g

inventory planning process. If enhancements to this process, results in lower inventory, inventory

turnover goes up affecting the Asset Turnover, positively. Assuming that the process

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improvements result in better fulfillment, but do not affect inventory levels, the cost of

operations for fulfillment and cost of lost sales goes down through better inventory deployment.

Hence, even if inventory levels are not affected, overhead costs goes down, which benefits the

supply chain. For instance, let us take the example of transportation optimization, reducing the

miles will have a direct impact on cost of transportation and hence COGS. If one can develop

forecasting improvements with higher accuracy, the cost of lost sales can be saved through better

planning and deployment of inventories.

In fact, any supply chain process improvement, whether it is in planning or execution, network

design or supply planning, demand planning or warehousing; all lead to either direct cost savings

affecting the COGS, or more efficient use of assets affecting the Asset Turnover. Hence to sum

up, the following measures need to be adopted to efficiently tackle the impact of current

recession on supply chain:

1. Anticipate change in demand and respond accordingly

2. Invest in strengths and divest from ‘cash drainers’

3. Focus on cash flow

4. Switch to more flexible capacity

5. Engage employees to adapt to current situation

6. Exploit supply conditions

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 Supply chain practices to withstand economic recession

Recession usually has its effect on almost every element in the economy. Recessions bring out

the worst in companies. Risks in supply chain, which are triggered by recession, are poor

purchasing processes, improper material planning, supplier failure, and change in government

policies, low customer response and the like. Hence, it is seen that the entire supply chain is

affected, reducing the overall profitability. It becomes essential to implement certain practices

which would reduce or eliminate the effect of recession on supply chain in future.

Certain practices or ways which ensure sustainability in future volatilities in economy are as

follows: Transit, Technology, Outsourcing, Green Supply Chain, Reduction of Inventory,

Strategic reduction of total landed cost.

 Transit:

Negotiate containers and rates for closed – loop freight strategies. Manage the trips of containers

or trucks with a partner in such a way that its routing requirements are reverse of the other

partner. Build relationships globally, innovation is the key factor to sustain. Also looking out for

alternate modes of transit can be beneficial in terms of cost. Any 3PL or 4PL can be helpful in

crafting out such cost efficient models.

 Technology:

During downturn, it is the tendency of most organizations, not to incur expenditure on latest

machinery. But the reality is that latest technology eventually saves money. While investing in

technology, one must go for small incremental investments, appropriate to the situation. Efficient

technology, always gives a competitive edge in the market.

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  Outsourcing:

Companies want to cut their cost and also serve the customers simultaneously. Hence

outsourcing invariably is the most preferred alternative. Every company should have a clear

picture in mind about its core competencies and where can it leverage those capabilities through

partnership with 3rd party. The outsourced supply chain can provide real protection during a

recession, but not without risks.

 Green Supply Chain:

Comprehensive emission-tracking system would be beneficial in tracking where all the energy,

delivery and other inefficiencies in supply chain are so that they can easily be reduced. Hence it

helps in reporting them as cost reductions and emission reductions.

 Reduction of Inventory:

Being more realistic with actual planning will result in less holding in inventory as less inventory

would ensure low storage space, low warehouse cost and low capital blockage.

 Strategic reduction of total landed cost:

The total landed cost includes raw materials, processing and assembly logistics, inventory

carrying cost, duties, taxes and quality issues. Once the total cost are known one can figure out

which elements incurs high cost and could be managed efficiently or handled strategically.

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 CASE STUDY: 1

Wal-Mart - Monitoring supply chain risk

The world's largest retailer Wal-Mart introduced Supply Risk Monitoring (SRM) service as a

requirement to Wal-Mart's supplier community. This after Wal-Mart made an agreement with

Strategic Forecasting, Inc. (Stratfor) to assess and rank security risk for countries in its global

supply chain.

Stratfor is a leading private intelligence company and its services will enable Wal-Mart to

identify risks with supply chain infrastructure in countries (ranked as high, medium or low)

within its supply chain using a unique analytical methodology. The countries will be assessed on

risks associated with terrorism, insurrection, crime, the political and regulatory environment,

natural disasters, including various other factors related to supply chain infrastructure. This will

help Wal-Mart to produce a quantifiable measure of the actual risk to a nation's supply chain and

thereby determine appropriate supply chain security counter-measures. It can thus quickly warn

of emerging threats and prevent disruption of deliveries of goods to major markets around the

world.

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 CASE STUDY: 2

Procter & Gamble (P&G) End-to-End Supply Chain Management

P&G’s Feminine Care division reached 2009 revenues of more than $1 billion and sustained an

after-tax margin of 10%. For many years, the division saw revenue growth that ranged above

20%. All this changed in the summer of 2008, when company management became increasingly

concerned about the market risk foretold by massive sales drops and aggressive de-stocking at

retailers and distributors. “We didn’t panic,” says Budapest Plant Manager Stefan Brünner, who

oversees the factory that manufactures the products sold in Europe, the Middle East, and Africa.

“Rather, we decided we needed to understand the range of scenarios we were looking at, and

then develop a strategy to accommodate what we felt was most likely to happen.” After

evaluating numerous scenarios, P&G management concluded that a slow recovery was most

likely. “Obviously we weren’t happy about the drop in business,” notes Brünner, “but we saw

this as an opportunity to focus on improving some supply chain fundamentals and emerge from

the recession in a stronger position.” Assuring its workforce that no permanent employees would

be laid off, the company launched an aggressive recovery program. The objective—and the

ultimate key to success—was the deployment of a fully optimized end-to-end process from

supplier to customer across multiple organizational boundaries. While senior management

initiated this transformational change, it was carried out by the entire supply chain organization,

which had been honed over many years. A truly cross-functional approach helped integrate key

stakeholders across the supply chain: supply network management, brand planning, site

planning, warehouse and distribution management, customer service logistics, operations

management, product launch management, and work system management. A customer/market

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perspective drove all of the supply chain improvements. The development of rapid product

changeover capability in conjunction with the ability to start up new products without requiring a

learning curve has greatly improved manufacturing responsiveness. Close collaboration with key

suppliers to perform a complete value-stream analysis and optimization has helped reduce lead

times for critical materials. In addition, a new supplier portal has shared planning and delivery

information, linking supplier delivery transactions to the ERP system. The portal includes

electronic quality releases and a self-billing function. These changes brought impressive results:

greater manufacturing responsiveness, more than a 20% increase in manufacturing productivity,

an 18% reduction of regional inventory while keeping customer service levels high, a decline in

material lead times by as much as 50%, faster launches of new products, and a drop in the total

delivered cost of more than 12%. Thanks to its extremely flexible and responsive operating

model, P&G’s supply chain has become adept at coping with demand fluctuations and managing

complexity in today’s fast-changing market environment.

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 CASE STUDY: 3

BMW—A Blueprint for Supplier Partnership

BMW Motorrad, a global manufacturer of motorcycles selling approximately 100,000 units

annually, has developed a comprehensive approach to managing its supplier portfolio. Consisting

of eight modules, this portfolio encompasses the entire life cycle of partnership collaboration and

risk management. BMW designed its supplier selection strategy to optimize the supplier

portfolio, beginning with the identification of potential candidates. The company conducts

performance, and technology audits on a regular basis to assess the innovation potential and

strategic fit of a partner. It also thoroughly evaluates technical capabilities, performance, and

risks for supply interruptions of selected suppliers. Road maps guide sustainable performance

improvement, and a centrally managed database aggregates information for consistent supplier

information management. If critical performance problems come to light and no feasible solution

is found, a phase-out module organizes the substitution of the faulty supplier with a new

candidate. This selection strategy substantially mitigates the risk of supplier default. BMW’s

supplier risk management approach is part of a comprehensive supplier management strategy,

which—from an IT perspective—is fully integrated and managed through predetermined key

performance indicators. All key suppliers are evaluated for performance and default risks on a

regular basis and corrective action is taken. Recent measures reached from strengthening the

operations of failing suppliers to a structured phase out and ramp up of alternative suppliers.

Thanks to the transparency of its suppliers’ performance, and implemented corrective actions,

BMW Motorrad ensured an uninterrupted supply of its production plant to date and, at the same

time, significantly improved the quality of delivered components by suppliers.

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 CONCLUSION

The entire supply chain has to be made profitable be it downturn or upturn of the economy. It

could be best done by making each element in the supply chain profitable and efficient. This

means reducing inventory, and increasing collaboration with, and even financially supporting,

their key suppliers. Inventory reduction is the main focus for increasing cash flow. While some

companies are looking at their outsourcing policies, others are sharply increasing focus on supply

chain flexibility. Supply chain flexibility is defined as the ability to maintain cost-effective

delivery capabilities in times of unscheduled and large demand fluctuations. Hence, it is still

considered the most critical success factor for supply chains worldwide.

In order to recover from the economic crisis, the supply chain executive need to adopt the global

supply chain capabilities. Real time supply chain planning, increasing supply chain flexibility,

better cost management, end-to-end supply chain risk management and a truly integrated and

empowered supply chain organization must be the supply chain leaders agenda to recover from

the economic recession.

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 REFERENCES

 http://www.ltdmgmt.com/pdfs/opportunity-challenge.pdf

 http://www.prtm.com/uploadedFiles/Strategic_Viewpoint/Articles/Article_

Content/PRTM_Supply_Chain_Trends__2010-2012.pdf

 http://www.scdigest.com

 http://www.supplychainstandard.com

 Patrick Francis. (ed.) (2010) The five challenges of today’s global supply

chains. Link Magazine, Vol 08, No 08, pp.40-41

 Jayaraman, A.P. (2010) Supply chain management. PGDM Supply chain

management, SICOMS, 21st May 2010 [Lecture notes taken by Rijaz M.]

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