Supplier Rationalization

Recently I came across the concept of supplier Rationalization. A very important concept for the professionals working on the sourcing side; therefore I decided to write this blog entry for the beginners to get introduced to this vital concept.

Rationalizing the supply base basically means utilizing the right number of suppliers and high performing suppliers. This requires one to categorize spend and identify current and potential suppliers in each category. Options for supply base in each category:

·         Reduce:  When we already have enough number of qualified suppliers and we are sure that no other supplier can provide cost, quality or other advantages. Then we can consolidate spend with a subset of currently used suppliers.

·         Increase:  If a supplier is providing services/products in many categories; the question to be asked is if the supplier is providing best service/product in each category. If that is not the case than one may want to have more suppliers to gain more value.

·         Maintain it: In case we are happy with the current supply base; Retain and monitor it.

·         Keep the size, change the mix: Many times we have adequate number of suppliers but inadequate level of service/product offerings. In such a scenario we may want to replace poor performing suppliers with good ones.

·      Increase than reduce: Imagine a situation where you are given an objective of reducing the number of suppliers. In such a scenario you will not want to be dependent on less number of poor performing suppliers. Therefore one good approach could to be first increase the supplier base, identify the best suppliers and then reduce the total number of suppliers to attain the objectives. This two step approach enhances the chances of working with small number but high performing suppliers.

Strategic Sourcing Vs Operational Sourcing

Sourcing activities can be broadly be identified as operational sourcing and strategic sourcing

Operational sourcing is more operational in nature i.e. the demand comes from the requesters and the request is linked directly to the operations of the organization.. Various terms are used to describe this kind of sourcing, some of them being -- Operational, Responsive, or Tactical sourcing. Most of the companies have this type of sourcing. Operational sourcing is highly critical for manufacturing organizations that rely heavily on the "Direct" or "MRO" materials.

Strategic sourcing is more strategic in nature. The starting point for strategic sourcing process typically could be -- Spend Analysis, or Strategic Initiative from the top management. For this kind of sourcing, various terms such as -- Strategic, Collaborative or Proactive sourcing – are used. The majority of large scale companies have this kind of sourcing process. This kind of sourcing is more critical and widely used in

• Service oriented industries (e.g. Financial Services, Pharma, Retail, Public Sector, etc.) where there exist a huge savings opportunities in "Indirect" and "Services" spend

• Fast changing industries e.g. Life Sciences, media, where managing collaboration/partnership with strategic suppliers is becoming more and more critical with fast changing technologies.

The operational sourcing can be handled well by both SRM and SAP Sourcing. The main differentiator of E-Sourcing solution is that it can handle not only the operational sourcing but also the strategic sourcing.

In operational sourcing scenarios, the demand always gets started by the requesters (e.g shopping carts, purchase requisitions. The procurement / sourcing / purchasing team tries to fulfill these requests from operations. The purchasing team might utilize strategically defined contracts or agreements with various suppliers to source these requirements.

In Strategic Sourcing scenarios, the demand does not come from requesters or operations. The strategic team performs the analysis of spend and sets the goal for sourcing activities eg. reduce IT spend by 10%, reduce travel spend by 20%. Then, a strategy or a plan is devised to achieve this savings goal, supplier development goal, or contract renewal goal. Team responsible for strategic sourcing creates contracts , agreements with various vendors to increase savings. They generally utilize RFI , RFP , RFQ, Auctions etc for this activity.

Indian Retail sector: Next big wave?

Indian retail sector is undergoing a sea change. According to the study conducted by ICRIER, total retail business in India will grow at 13% from 322 billion $ in 2006-2007 to 590 billion $ in 2011-2012 and further to 1 trillion $ by 2016-2017.

Recent phenomenal changes in single brand retail FDI policy and significant discussion emanating towards allowing 100% FDI in multi brand retailing will be having a game changing impact on the modern retail sector in India. AT Kearny has ranked India at 5^th position in its Global Retail Development Index (GRDI). GRDI is unique because it does not just identify markets that are bigger or richer but markets with bursting with hot opportunities.

As per the Economist Intelligence unit though retail percentage contribution to India’s GDP is around 40% but organized retail penetration in India is only 6%. However the recent FDI policy changes are bringing along a sea change in the retail landscape.

As per the government regulation at least 50% of investment needs to be made for the backend infrastructure. IKEA (single brand) brand to invest 1.5 billion euros to open up 25 stores in India. It has decided to roll out 600 million Euros to set up 10 stores in India. With the Indian government planning to open up the sector for multi brand retail stores we can expect huge investment in India from the global players like Wal-mart and Carrefour.

Under the obligation to invest at least 50% investment in the backend infrastructure, one can foresee huge investments by these multinational giants in setting up of supply chains and related systems. Germany based Metro group has partnered with SAP, Intel, Microsoft and IBM to implement RFID technology which will gradually replace bar coding. Such technologies would percolate down to Metro stores in India. There appears to be no reason why similar partnerships and investments could not be expected by other international retailers in Indian market

Therefore to summarize I observe that retail sector is going to be the next booming bet for Indian economy. If the regulations permit we will notice multiple multinational retail brands making great investments in their supply chains and related IT systems. The question left to be answered is how ready are we to exploit this opportunity?

CRM or CMR?

We all are quite familiar with the concept of CRM: Customer Relationship Management.

Needless to mention how important it is for the organizations to manage the all the touch points with the customers. As the competitive scenario intensifies organizations are pooling more and more resources in order to hear the voice of the customers streamline it with the voice of the processes and provide more value to the customers.

One of the recent trends in the supply chain is of Customer Managed Relationships.

The question that should be coming to your mind will be how it is different from Customer Relationship Management! Well, in case of CMR the customers are responsible for managing their relationships with the organization. Seems interesting right, appears to be one of those flaunted “Blue Ocean Strategy.”

The fact is that it is! With the rising awareness of the “green concern” , “eliminate waste” few organizations have managed not only to reduce the cost of the offerings thus enhancing the perceived value of the products but with “green supply chain” have earned the reputation with which customers wants to associated with. Thus instead of pooling most of the resources in managing customers the organization is much more focused on creating associations which calls for customers managing relationships by themselves.

Resolve Dissolve or Solve – Dilemma

Think about it! What is the best approach to sort out an issue? Should you attempt to solve it, resolve or dissolve it?

I wonder if you have ever thought of all these three option; however my love for process and supply chain management did force to think. So I just thought of sharing my thoughts with you people.

Resolve approach seems to be of reactive kind; you resolve an issue or a problem when you encounter it. Of course doesn’t seem like a good approach when time is resource are limited and results are paramount.

Solve approach seems more active; however the focus here is also on sorting out an issue and delivering results.

Dissolve approach on the other hand though appears to be a reactive approach but imbibed in it is the essence of project management. Here we do not only look to sort out an issue but at the same time moves a step ahead and look forward to the root cause and eliminate (dissolve) it.

My opinion is that embodying “dissolve” approach in your every day activity may initially consume a lot of time but the fruits it will bring to you might cover up much more in the long run.

A case study on Raymonds Supply Chain

The various brands under the Raymonds umbrella are: Park Avenue, Colorplus, Parx, Notting Hill, Manzoni etc. The company is one of the largest integrated manufacturers of worsted fabric in the world and commands a 60% market share in India. Raymonds in India has huge plans of expansion in the retail segment. With this in mind huge investments have been made at its existing plant at Vapi and investments have also been made to set up new manufacturing units at Bangalore and Kolhapur. This goes to show the increasing focus, the company has on distributing its manufacturing units across different regions in the country so as to be able to respond faster to the customer demands.

According to Mr. Gautham Singania, the Chairman and Managing Director of the group, “The difficult part we face is getting the right supply mechanism for materials and the manpower to improve the efficiencies in delivery of the product.” A unique feature of the Raymonds supply chain is the launch of Extranet - a B2B e commerce channel. The thought behind this introduction is to connect the company’s marketing and sales teams with its external business partners like dealers, agents, franchisees in the textile business division. Through this they believe they can speed up and improve the distribution channels across the country. This will give them more flexibility and enable the stockists to place their orders directly on the net. The Raymond Apparel Ltd. a complete subsidiary of Raymond Ltd. has also implemented a supply chain management package based on the Oracle platform. With this, they hope to smoothen out both ends of the supply chain.

Unlike some other garment companies in the industry, Raymonds Ltd. has configured its supply chain based on a pull system. The customers can pull what they want from the manufacturing base of Raymond through dealer based distribution networks. Raymonds has a supply chain that is a vertically integrated composite network of different operations that produces only as per the demand. The problem this could have is increased lead times and fails to address the challenge of quick response to customer demands. Increasing product variety makes the problem even worse. 

A case study on Arvind Mills Ltd Supply Chain

A very distinct feature of Arvind Mills Ltd is the fact that its brands work across multiple channels, price points and customer segments. These are brands that are distinctive and relevant across diverse customer segments. Some of the brands under Arvind Mills are: Wrangler, Excalibur, Flying Machine, Newport, Ruf & Tuf, Arrow, Izod etc and its customers include Levis, Lee, Tommy Hilfiger etc.

The supply network finally reaches the customer touch points through over 275 stand alone brand stores across the country and more than 975 counters selling multi brand retail outlets an key accounts across India. Arvind Mills Ltd is one of the largest denim manufacturers in the world and has configured its supply chain based on “push” system. Under normal operating conditions, Arvind manufactures denim “sorts” based on monthly forecast to stock at various warehouses. As Arvind Mills “pushes” its products (sorts) to ware-houses, actual selling takes place on an ongoing basis with the “sold sorts” are being replaced subsequently. The “Push” system operates under the “make-to-stock” environment.

While the system has worked efficiently at Arvind for years it becomes difficult for a company to follow the same where a high demand fluctuation exists. A Push-based supply chain accumulates excessive inventory (“cycle stock” and “work-in-process”) by the time it responds to the changing demand. In addition, since long-term forecast plays an important role, it is difficult to match supply with variable demand. “Push” supply chain also entails larger production batches, incompatible for catering demand of short quantity.

Another interesting feature of the supply chain is the intense reach Arvind Mills is targeting. With increasing disposable income available in the rural areas as well, the company is trying to

make shirts at affordable rates available at grocery stores and petrol pumps. It has also started selling shirt bits instead of multi meter long rolls which once dominated the retail shelves.