Supply Chain Management Centre

Indian Institute of Management Bangalore

not have supply chain issues that impact our brands perception in the market.

Vol. 2 No. 2 December 2010

Editors Note
We are happy to be releasing this years second issue of SCMC Digest, the Newsletter of the Supply Chain Management Centre at the Indian Institute of Management Bangalore. In this issue, we bring you articles by two international executives on topics of increasing interest in this region. Also in this issue is more information on our next major event, the Biennial Supply Chain Management Conference due to be held on 7-8 January 2011. You might have noticed that in our last issue, we have included news about research carried out outside IIMB that we thought would be of interest to our readers. We would like to bring you more such information about developments in research in Supply Chain Management in future issues. As always, readers reactions and feedback is vital to improve. Please send your views and suggestions on SCMC Digest and we would try our best to incorporate them in future issues. Happy Reading! Editors

PERSPECTIVE
Supply Chain Social Responsibility Requirements for Suppliers

Supply Chain Management

For decades, IBM has been committed to working with responsible suppliers. The company runs one of the largest, most complex supply chains in the world, spanning 28,000 suppliers in 90 countries. Engaging this many suppliers in social and environmental responsibility requires considerable resources. But IBM has embedded social and environmental checkpoints into every aspect of our procurement process and has for many years.
Industry Sector & Revenue Services 58% Software Hardware Global Financing Enterprise Investments/Other People 399,409 Employees Worldwide 22% 17% 2% 1%
$42.3 B Global Supply BTO Managed Spend $9.5B Global Supply Spend (34% of Revenue) $32.8B $95.8 B IBM Revenue

by Mike Meaden IBM Global Procurement, Vice President, Services and General Procurement

Introduction
From its inception almost a century ago, IBM has been based on a set of fundamental values. IBMs values shape and define our company and permeate all of our relationships--between our companys people and our shareholders, our clients, the communities where our people live and work, and among our network of suppliers. Corporate Social Responsibility in IBM Governance and Financial Accountability Corporate Community Relations Environmental Affairs and Product Safety Global Human Resources Supply Chain Management Governmental Programmes IBMs commitment to social responsibility is part of our heritage and is reflected in the recently published Corporate Responsibility Report.

IBM Global Supply Spend Profile

2009 Services & General Procurement Spend by Category
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IBM Supply Chain Social Responsibility (SCSR) is part of IBMs Corporate Citizenship activity. It is a requirement for all IBM suppliers who are viewed as an extension of IBMs brand and is supported by the Chief Procurement Officer and Procurement managers/staff. In the words of John Paterson, Chief Procurement Officer, SCSR is not optional; it is a requirement for IBM suppliers. IBM has the second most valuable brand name in the world and we can

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This article is based on Commitment to Corporate Responsibility - Requirements for Suppliers, a presentation made by Michael Meaden, VP Services & General Procurement, IBM at the 2010 North American Conference - Unlocking Your Operations Potential on June 21-23, 2010 at Dearborn, MI, USA.

Corporate Sponsors

Disclaimer: The views expressed in this Digest represent the authors personal views and they do not represent the official views of their organizations, the SCM Centre or the Indian Institute of Management Bangalore.
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Vol. 2 No. 2 December 2010

Supply Chain Social Responsibility Program

Within our supply chain relationships, we know that our companys sizable purchasing power is a unique resource that we must manage responsibly, and we do. Yet more than managing our spend, we have a responsibility to hold ourselves - and our suppliers - to high standards of behavior. This means complying with all applicable laws and regulations. But it goes beyond that. More importantly, however, it means striving for continuous improvement. It entails a strong commitment to work with suppliers to encourage sound practices and develop sound global markets. IBMs Supply Chain Social Responsibility Program formalizes a number of past initiatives into a comprehensive plan that has been implemented across our global network of suppliers. IBMs commitment includes doing business with responsible suppliers. Our goal is to work with our suppliers to foster full compliance as they, in turn, apply these to their extended sources of supply engaged in the production of goods and services for IBM. We consider these principles and adherence to them in our selection process and seek ongoing compliance by actively monitoring performance. Strong social responsibility in the supply chain is very important to IBM. As an organization, we are eager to make gains in the area of supply chain social responsibility, with the help of our suppliers.

New Supply Chain Management System Requirements:

IBMs suppliers are now expected to establish
and maintain a management system under which they manage their intersections with the environment and other aspects of corporate responsibility. IBMs suppliers now must:
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Define,deploy and sustain a management system that address escorporate responsibility, including supplier conduct and environmetal protection Measure performance and establish voluntary, quantifiable environmental goals Publicly disclose results associated with these voluntary environmental goals and otherenviromental aspects of their management sytems Cascade requirements to the suppliers suplers who perform work that is material to the products, parts and/ or services beingsuplied to IBM.

IBM requires its audited suppliers to create and submit for review a Supplier Improvement Plan (SIP). The SIP is intended to address audit noncompliance to the respective provisions of the code of conduct with priority given to major noncompliance. The SIP receipt is driven through the procurement organization and is reviewed by IBMs Supply Chain Social Responsibility (SCSR) team. In this manner, the SCSR team is able to work with the supplier and offer guidance regarding the proposed improvements and their likely impact toward code compliance. The supplier is then re-audited to measure improvements and compliance

Global Supply Social and Environmental Management System

In 2009 we consolidated our existing social and environmental requirements involving supply chain management into a single comprehensive Global Supply Social and Environmental Management System (GS S&EMS). The new system better enables consistent execution of the requirements and programs by Global Supply employees worldwide. This integrated management system enables us to more efficiently and effectively manage and continue to enhance our programs and performance in these areas to promote IBMs ongoing leadership as a premier provider of goods and services that meet high standards. The implementation of this new system includes training and awareness programs, internal and external communications efforts, new procedures to maintain operation control, and ongoing monitoring of performance against goals. The GS S&EMS also requires suppliers to have their own social and environmental management system and for them to cascade these requirements throughout their supply chain.

One of IBMs key objectives is to help suppliers build their own capacity to effectively manage their responsibilities in a way that is long-term, sustainable and integral to their routine business operations. IBM believes that by raising suppliers awareness of their own accountability, they will improve their individual performance and results. The supplier will benefit, as will the entire supply chain and the world.

IBMs Supplier Conduct Principles

Core to our Supply Chain Social Responsibility program is the establishment of a set of Supplier Conduct Principles which outline the requirements for doing business with IBM. We intend to work with our suppliers to help them achieve full compliance to these principles. These principles establish for our suppliers the minimum standards we expect from them as a condition of doing business with IBM. We expect our suppliers to apply these principles not only in their own companies but to their extended sources of supply engaged in the production of goods and services for IBM will have the right to take action with suppliers that fail to comply with these principles, including terminating our relationship with them.
IBMs Suppliers Conduct Principales (SCP)
IBMs suppliers are required to comply with all 13 elements of its SCP

Supplier Audits
Suppliers Adherence of Supplier Conduct Principles is assessed by Audits. A Third Party audit firm has been contracted for the assessments, for objectivity and consistency. If problems areas are identified, Supplier Improvement Plans are required and tracked; Re-audit is conducted in 6 9 months. These statistics illustrate the value and commitment of pursuing this work with our suppliers. These efforts, which require substantial commitments of time and resources from both customer and supplier, ultimately benefit the many employees engaged in the extended supply chain.
Supplier Audit Results - Global Cumulative (2004-2009)
(base = 600 + suppliers) Health & Safety Working Hours Wages & Benits Respect & Dignity Communications Record Keeping Nondiscrim Environmental Child Labor Forced Labor freedom Assoc Ethical Dealings 0 20

Industry Collaboration
No company is an island. Business leadership in todays interconnected global marketplace means, as a practical matter, finding a way to influence all supply chains-not just your own-to adopt a common set of standards for socially responsible behavior. Thats why IBM, Hewlett Packard, Dell, and a number of large electronics manufacturing service providers have released an Electronic Industry Supplier Code of Conduct. This paves the way for a standards-based approach to monitoring suppliers compliance across several areas of social responsibility, including labor, health, safety, and environmental impact. This initiative is about working with suppliers to foster a common understanding of what socially responsible business practices are, and then aligning the interests of all constituencies around industry standards to encourage soundpractices of social responsibility in the

A number of issues are seen in most Grouth Markets, and management systems are generelly not well devolepd
40
Signicant

1. 2. 3. 4. 5. 6. 7.

Forced involuntary labor Child labor Wages and benits Working hours Nodiscrimination Respect and dignity Freedom of association

8. Health and safety 9. Protection of the environment 10. Laws, including regulations and other legal requirments 11. Ethnical dealings 12. Communications 13. Monitoring/record keeping

60
Minor

80

100

% Non Compliant to IBM code

Supplier Improvement Plans

Upon completion of a social responsibility audit,

SCSR is not optional, it is a requirement for IBM suppliers . . . We can not have supply chain issues that impact our brands perception in the market John paterson, Chief Procument Ofcer

global marketplace. IBM accepts this code as an alternate to IBMs existing Supplier Conduct Principles.

FOCUS
Pre-requisites for a coherent supply chain strategy

2. Forming the BAES MAS Supply Chain Strategy Team

BAES MAS has invested in the strategic development of its supply chain capability throughout the last decade, and as a consequence secured significant new business and positioned itself to secure further business in partnership both with UK and International customers. In 2008, BAES MAS took the decision to further develop this capability and formed a Supply Chain Strategy team, responsible for further aligning the supply chain strategies operating across the various BAES MAS lines of business. Recognising the diversity of BAES MASs business portfolio, and the varied scope of supply chains supporting the aircraft platforms, it was time to set-out a robust and coherent set of supply strategies that would be a key enabler for future business success. To ensure that the supply chand strategtes were seen to be relevant to the future of the business it was necessary that the supply chain strategy team: 1. Clearly articulated Change, the Pressure to

Supply Chain Minerals

Identifying and mitigating the use of so-called conflict minerals throughout the electronic supply chain is an ongoing work effort. As ores move through the supply chain, smelting and blending masks the identification of the original source of the materials thus creating a significant challenge to the ability of end users to understand (with full clarity) where the materials originate.

Paper-and Wood-based Packaging

Over the timeframe of 2004 to 2009, working in conjunction with our suppliers, we grew usage of sustainably sourced materials from 40 percent to over 95 percent of our global demand. This initiative grew from external engagement with environmental NGOs that brought our attention to issues surrounding nonsustainable logging of old-growth and virgin forests, and ideas to address increased use of sustainably sourced wood-based commodities.

by

Phil Humphreys 1. Introduction

Director Supply Chain Strategy, BAE Systems, Military Air Solutions

Definition of supply chain: An integrated system of functions, people, processes, information and resources that adds value to the two-way flow of goods and information between source and user. When operating in a highly-competitive and rapidly-changing international environment, the importance of effectively operating multiple supply chains should to be taken as a given, and has long been recognised as a pre-requisite for achieving business success. BAE Systems Military Air Solutions (BAES MAS) operates in just such an environment and is currently deploying coherent supply chain strategies to both optimise its existing supply chains and also to underpin its business aspirations for the next 10-15 years. BAES MAS employs approximately 15,500 people across 23 separate locations, operating a through-life portfolio across sixteen aircraft platforms (including Typhoon, F35 Lightning, Tornado, Hawk, Harrier, Nimrod MRA4, and Taranis), with a turnover of ~4bn. In summary: BAES MAS has supplied most of the UKs fixed wing fleet l Has a track record of partnering with the UK customer to support in-service aircraft l Has a long-established relationship with many international customers l Are a prime systems integrator l Has proven capabilities in prime contracting, rapid engineering, systems integration, manufacturing, maintenance, repair & upgrade, and military training. Against this backcloth, the potential for conflicting supply chain strategies is very real and increasingly demands an integrated and coherent approach to minimise any conflict. The following is a short case study of how this challenge is being addressed by BAES MAS.
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Supply Chain Diversity

IBM has long been considered an industry leader in supply chain diversity. With a global supply chain diversity program that has been in place since 1968, IBM has consistently encouraged and embraced businesses owned by diverse groups, both inside and outside the United States. Because diverse suppliers are typically smaller and more nimble, they add significant value. They also provide a diverse mix in our supplier base, which promotes economic and cultural stability in local communities. In 2009, we transacted $2.1 billion in First Tier spending with diverse businesses worldwide. But IBM doesnt just contribute to the advancement of diverse businesses by contracting with them; IBM also participates in international organizations focused on supplier diversity. In addition, the company has initiated a Mentor Program to facilitate the development of diverse suppliers. Mr. Mike Meaden joined IBM in 1984 as a production planner. He held various management positions within Production Procurement, and in 2000 he was appointed Director of Production Procurement Sourcing. In 2003, he joined Services and General Procurement (S&GP), and has held 6 dfifferent executive positions wihtim S&GP over the last seven years, including a tow year assignment in Hong kong as the Director of Asia Pacific Sourcing. Mike currently lives in New York with his wife Mary Anne, and his three children, Michael (11), Patrick (7) and Anna (5).

2. Developed a Clear Shared Vision, 3. Ensured that the business had the Capacity to Change, and actually got on with transforming the supply chain activities by 4. Initiating some Actionable first Steps. Successful management of the four elements was, and still is, critical to delivering successful supply chain transformation. Remove any one of the elements and you can be assured of low priorities, minimal action, frustration, false starts, and relative failure. Taking each of the four elements in turn, and by utilising what has subsequently become known within BAES MAS as the Supply Chain Wheel (see Fig.1), we are successfully optimising existing performance levels, defining our longterm supply chain strategies, and developing capabilities to meet the future demands on the business. For the purposes of this article it has been appropriate that I exclude any reference to specific BAES MAS business objectives/ targets, although the four-step approach should be suitable for utilising in the majority of business environments.

3. Step 1-Pressure to Change

For a supply chain strategy to be relevant it has to be aligned to the strategic direction set out by the company. The company mission, vision and strategic objectives have to form the foundation for the strategic and tactical approach for supply chain. In the case of BAES MAS, we have a defined mission statement, a focused vision, a mature set of Strategic Objectives (covering period 5 years+), together with Portfolio
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Vol. 2 No. 2 December 2010

Actions (12 months+). By ensuring that Supply Chain activities are explicit within several of the BAES MAS Strategic Objectives Actions has enabled the associated supply chain challenges to be clearly articulated. Supply Chain challenges might include any of the following examples: other end of the spectrum (see Fig. 2, below).
Primary Customer
Supply Bace Customer Interface

Customer Partnerships
Concept Assessment Demostration Manufacture In-Service

Enabling BAE Systems Functions (Finance, HR,IT, Leagle, Comms, Stradgy)

0 1A 1B 2A 2B 2C
Procurement

3A

3B

7
Maintenance

Manufacturing / Operations / Logistics

Engineering

Life Cycle Management

BAE Systems Programme / Supply Chain Inuence

Tier-n Suppliers (SMEs)

E2E

Raw Materials

END-TO-END SUPPLY CHAIN

End-Users

Logistics Network: To optimise the logistics network to support the internationalisation of the business. Supply chain had been scoped, and supply chain vision & imperatives understood by the BAES MAS business. The foundations were in place to take the strategy forward.
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Figure 2 - Supply Chain Scope within BAE Systems MAS

5. Step 3 - Capacity to Change

As I outlined in the introductory paragraph, BAES MAS operates a broad product portfolio, delivered through three separate lines of business. To ensure that the required level of change was realised, it was necessary to provide BAES MAS with the capacity to make the change. Designated senior business and functional stakeholders became component parts of the BAES MAS Supply Chain Steering Board, responsible for directing, managing and sustaining the supply chain strategies in support of the BAES MAS vision and strategy. Accountabilities included:
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In support of this factory to fox-hole approach, we have completed a full scoping of the required supply chain capabilities. As can be seen, this goes way beyond the more traditional definition of supply chain, and for BAES MAS includes end-to-end capabilities such as:
l l l l l l l l l l

Implications of transferring supply chains to other parts of the world Re-shaping industrial models to support internalisation of the business Ensuring that the future relationships are in place with strategic partners / suppliers Identifying who you consider to be the Industry Shaping partners Understanding how you will be able to operate multiple international supply chains Ensuring that supply chain capability (people, process & infrastructure) are developed to meet the challenges.

l l l l l

Arising Rate Management Solution Development Supply Chain Design Inventory Optimisation Physical Logistics Capacity Management Asset Visibility & Tracking Supplier Management & Development Value Engineering Repair Validation Customer Returns Supply Chain Integration Export/Import Assurance & Governance

We are progressively under-pinning the supply chain capabilities with an integrated capability model that incorporates consistent supply chain processes and capability development programmes, all of which will be key enablers to achieving the BAES MAS strategic objectives. Having defined the scope of supply chain, together with the component capabilities, we simplified the message for the broader BAES MAS business by issuing a small number of strategic imperatives (i.e. imperatives to be owned and facilitated by the broader BAES MAS business operation), in support of our supply chain strategy, as follows: Long-Term Planning: To align longterm supply chain planning, make vs buy strategy and operations planning l Segment Customers: To recognise customers different needs and to adapt supply chains to deliver these requirements l Supply Chain Solutions: To ensure that supply chain solutions are lean, robust and sustainable l Effective Supplier management: To manage sources of supply strategically. l Technology Infrastructure: To develop a technology infrastructure that provides a clearview of the flow of products, services and information across the end-to-end supply chains.
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Acting as the focal point for BAES MAS supply chain strategic outputs. Sponsoring and supporting the generation and sustainment of the BAES MAS supply chain strategies and objectives Optimising the alignment and capability model and deployed cost coherence of supply chain strategies generated by the three lines of business Helping the three lines of business to exploit synergies and to identify risk within their supply chain strategies Promoting and facilitating supply chain innovation and best practice transfer across the lines of business.

We now had the wherewithal to take the supply chain strategy forward. Effectively, we had the capacity to change.

When the pressure to change together with the associated supply chain challenges had been fully quantified and agreed, we had a solid foundation for progressing our supply chain strategy.

6. Step 4 - Actionable Steps

Taking the BAES MAS vision and strategy as the landscape, we produced a detailed and focused set of supply chain strategies and objectives. In summary, the approach taken was both top down and bottom up. Strategic supply chain objectives were aligned to specific elements of the BAES MAS strategy, and we are progressively embedding what we refer to as under-pinning supply chain activities (these are the more generic supply chain projects/initiatives such as: Logistics, Supplier Management & Development, Supply Chain Capability, Supply Chain Governance, and Performance Measurement). With a formal business review process, designated owners for all the strategic supply chain objectives and the under-pinning initiatives, we now have an integrated framework of strategic and tactical supply chain activities across the BAES MAS business.

4. Step 2 - Clear Shared Vision

As part of developing a clear shared vision for supply chain within BAES MAS, we found that a critical step was to define the scope of supply chain. I know that it sounds obvious; but ignore this activity at your peril! Some consider supply chain to be the same as Procurement, and primarily about managing the external supplier base. While others view supply chain as Logistics or storage and distribution. The reality is that supply chain is much more, and should be viewed as an end-to-end process that cross-cuts our internal functional boundaries, at the same time incorporating our customers (and end users) at one end of the spectrum, all the way through our internal business structure and into the various tiers of our supplier base at the
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7. Conclusions
It has been a two-year journey for the BAES Supply Chain Strategy team. From the initial scoping of tactical supply chain activities, to embedding a fully-integrated framework of supply chain strategies and objectives, the process has not been without its challenges. That said, we now have a business environment that primarily talks the same supply chain language, and more importantly where supply chain has become a key enabler for the BAES MAS strategy and vision. Current performance is measured against the following success criteria: l Managing a single process for the maintenance and development of the supply chain skill base l Ensuring consistent supply chain solutions that exploit cross-business synergies l Ensuring that supply chain capabilities are developed based on the supply chain effectively across the BAES MAS business l Accelerating the enhancement of the end to-end supply chain performance l Providing a framework for the effective management of supply chain resources and processes l Providing a training infrastructure for supply chain specialists l Minimising the risk of duplicate investment The process outlined in this article has proved to be invaluable to BAES MAS, and if adopted can be utilised and modified to suit localised requirements across a wide range of business environments. In summary, the process checklist reads as follows:
PROCESS CHECKLIST STEP 1 - DEFINE THE PRESSURE TO CHANGE Align to company business strategy and vision Clearly define your supply chain challenges based on company business strategy STEP 2 - DEVELOP A CLEAR SHARED VISION FOR SUPPLY CHAIN What is the scope of supply chain within your business? Define your supply chain vision(s) Define the strategic imperatives required to underpin the supply chain strategy STEP 3 - ENSURE THAT YOU HAVE THE CAPACITY TO CHANGE Embed senior supply chain forum to promote the supply chain activities and change programme STEP 4 - IDENTIFY YOUR ACTIONABLE FIRST STEPS Produce a Supply Chain Framework, incorporating both strategic and tactical under pinning supply chain projects Define overall supply chain strategy Embed supply chain reporting framework

STUDENT PROJECTS
Optimally Locating Distribution Centers
by Atif Hussain, Student of Post-Graduate Programme 2007-09 One of the important drivers of distribution strategies of Indian firms is the complex taxation structure consisting of central sales tax (CST), the state taxes, set-offs and concessions leading to differential tax burden on inter-state sales. To minimize the impact of differential sales tax, Indian firms with a national presence have located their distribution centers (DCs) in each state. This adversely affects logistics efficiency. The gradual phase out of Central Sales Tax and introduction of uniform tax structures call for restructuring of the Supply Chain Processes within the industry. There have been many approaches to determining optimal location of DCs, using a deterministic demand structure. Heuristics methods are employed for solving the problems. Research typically ignores multiple levels of DCs. Revenue loss due to Secondary leg of transport not properly formulated. Scalability is affected due to the complexity of the problem. This project studies outbound logistics, wherein shipping is done by road from a Central Warehouse through Distribution Centers (DC) to Retail Outlets. The Central Warehouse is assumed to be located at Mumbai, which is both a central and important location in India, as well as the main sourcing point for most imports. To the existing main components of logistics costs in India - inventory, transportation and warehousing costs, a fourth component of cost -Loss of Revenue due to delay in servicing has been introduced. The model was then run on three classes of typical products with different Value Densities viz. Groceries like sugar, wheat, rice, and pulses with 15 Rs/kg; Packaged FMCG goods at 150 Rs/kg; Consumer electronics like CTVs valued at 1500 Rs/kg. For each product type, 6 demand patterns were considered in the respective ranges: Groceries - 0.1 kg/person/ yr to 5 kg/person/yr; Packaged Goods 0.01 kg/person/yr to 0.5 kg/person/yr and Consumer Electronics 0.001 kg/person/yr to 0.05 kg/ person/yr. The mean demand was assumed to be proportional to population distribution. Most commonly occurring hub locations were found based on the road network in India. For the distance metric, distances between each pair of cities was used. For each DC, the relevant costs considered in this model are the fixed cost of installing and operating the DC; both and combination Facility Costs were reckoned at a fixed Rs 100,000 /yr, and of fixed and variable costs at Rs 100,000 /yr + 0.5% of value handled respectively. Average

cost of carrying inventory as safety stock at the DC and the in-transit inventory were taken @15% pa and average cost of transporting material from Central Warehouse to the DC was taken @ Rs 1.5 /km/ton. It is assumed that a demand point can be served by one DC only. However, a DC can serve more than one demand point. Other assumptions included Transport Speed = 450 km/day; Demand Uncertainty = 20% of mean; Service level to be maintained = 98%. In the present study, a 2-step algorithm using Dijkstras algorithm to find shortest paths from source to all DC nodes, where each DC node is supplied from not more than one parent DC which gives it the shortest overall route, obtaining a tree structure for the distribution network. A variant of dynamic programming was applied to the tree structure, to compute the optimal location of DCs along each sourcing path. The model was tested on a books distribution in India and yielded expected results. Shown below are the results for each product type and demand pattern and the optimum number of DCs (excluding the central warehouse at Mumbai): As the facility cost increases, the solution gave lesser no. of facilities. In a sample of solutions for 36 sample cases, 16 cities figured in DC locations in at least 50% of the cases. These cities which regularly figure in the solutions cover all regions of the country, confirming their stature as a gateway to their nearby regions, and giving further confidence in the results. These locations can be developed as transport hubs. Given the rising product variety in recent times, the algorithm needs to be extended for distribution of multiple SKUs. Daily shipments were assumed and cycle stock ignored; this assumption can be relaxed. The results can be computed for central warehouse locations other than Mumbai. A more challenging task would be to solve this problem using multiple warehouses.
Product Type (Value Density) Demand (kg/head) 0.001 0.002 0.005 0.01 0.02 0.05 0.1 0.2 0.5 1 2 5 Groceries (15 Rs/kg) A 10 13 20 23 29 37 B 10 17 27 38 53 76 FMCG (150 Rs/kg) A 1 3 6 12 15 20 B 4 8 12 21 27 38 Electronics (1500 Rs/kg) A 0 1 4 7 10 16 B 2 7 11 16 25 33 -

Phil Humphreys is the Director of Supply Chain Strategy for BAE Systems, Military Air Solutions. He has worked within the Aerospace industry for 32 years, and currently leads a supply chain strategy team based at Warton, Lancashire, England

A fixed Facility Cost + variable Handling Costs

B fixed Facility Cost only

Vol. 2 No. 2 December 2010

INSIGHT
Managing Counterfeiting in Supply Chains
by S. Naveen, Doctoral Student of IIM Bangalore Counterfeiting is a widespread phenomenon in many industries like pharmaceutical, automobile, aerospace, electronic components and software products. Counterfeiting is no longer confined to luxury products and has become a health and safety issue in addition to economic problem. The use of counterfeit medicines that are deliberately and fraudulently mislabeled with respect to their identity/ source can result in treatment failure or even death. There are increasing cases of selling of counterfeit medicines in authorized supply chains. In 2007 counterfeit medicine Lipitor (for lowering cholesterol) and Zyprexa (for treating bipolar disorder and schizophrenia) were seized from legal supply chain in United Kingdom. The Center for Medicines in the Public Interest predicts that if action is not taken to curb the illegal trade counterfeit drug sales could reach US$75 billion globally in 2010. According to a special report in Business Week counterfeit electronic components like bogus chips, routers, and computers are infiltrating authorized channels. These cost the electronics industry up to $100 billion annually. In aerospace sector the number of counterfeit incidents has increased by more than 140 per cent in 2008 according to the US Department of Commerce Bureau of Industry & Security. The increasing volume of counterfeit parts entering the aerospace supply chain poses significant performance, reliability and safety risks. Similarly recent ACMA report estimates the proliferation of counterfeit parts has caused the Indian auto component industry a whopping loss of $1 billion till date. The countermeasures to curb counterfeiting could involve legal, political or business techniques. What should be the strategy of manufacturer to deal with authorized retailer who indulges in selling counterfeit goods along with original products? In our study we use game theoretic models to comprehend the issue of counterfeiting in supply chain and identify the ideal strategy for manufacturer to mitigate counterfeiting. The manufacture and retailer strategy in a supply chain would depend on relative cost of counterfeiting when compared to genuine product. In the first model we try to understand the retailer counterfeiting behavior for various counterfeiting cost structures. The retailer has two cost components namely production/ purchasing cost of counterfeit product and non-detection cost for evading detection of illegal goods from law enforcement agencies. We estimate the optimal wholesale price that maximizes manufacturer profit for various
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counterfeit cost structure of retailer. In most cases, the manufacturer does not have the complete information regarding level of retailer counterfeiting. The accuracy of information regarding retailer counterfeiting could play an important role in manufacturer pricing decision and type of contract he chooses. We built stochastic models in different contract settings to understand best strategy of manufacturer for various levels of uncertainty regarding counterfeiting. Our results also show that manufacturer will benefit if he opts for a two part tariff (franchise) mechanism compared to simple wholesale price contract. Manufacturers can use various methods to monitor counterfeiting, the solution could comprise of technology and robust process management. There is wide range of solutions varying from micro tags with unique ids, to complex RFID solutions and nanotechnology based non-clonable technology to deter the retailer from counterfeiting. e.g. Sun Microsystems and SupplyScape offers a comprehensive RFID package which enables companies in the pharmaceutical supply chain to combat counterfeiting and diversion.RFID coupled with EPC and electronic pedigree enables to know if particular product is genuine and will make the copying of medications either extremely difficult or unprofitable. Different countermeasures would require different level of investment by the manufacturer and it could lead to varying level of monitoring effectiveness. In our research we model the supply chain setting where manufacture has to decide the ideal monitoring level to mitigate counterfeiting. Using analytical optimization methods we identify the optimal level of monitoring the manufacturer should invest to mitigate counterfeiting. Overall, our research provides insights into the manufacturer- retailer decisions in supply chains with counterfeiting. The model can assist the manufacturer decide the wholesale price to be offered to retailer under various counterfeiting cost scenarios. Further, we studied the role of information regarding counterfeiting by retailer on manufacturer strategy. We evaluate the effectiveness of alternative mechanisms like two-part (franchise) to wholesale pricing contract. We also identify the optimal level of investment by manufacturer in anti-counterfeiting mechanisms to mitigate counterfeiting in the supply chain.

governmental pressures. Government policies across the world are rapidly changing course and the implications of such change for companies can be far fetched. Given these prospects, the authors explore various policy changes that several Governments have initiated fairly recently. The authors study two policies namely the National Clean Energy Fund Policy in India and the Corporate Average Fuel Economy (CAFE) regulations in the United States which levy a certain amount of tax which a manufacturer has to pay in lieu of falling short of government set environmental standards multiplied by the total production of the manufacturer for each financial year. This means increased costs of greening for the manufacturer in addition to the costs incurred on failure to meet governmental regulations. We find that along with increased price competition in market, manufacturers also face increased greening competition. Under these phenomena while most players in the market individually try to develop green technologies\products, several companies form joint ventures in order to develop cleaner technologies; few invest in third party research organisations to develop environmental friendly technologies while others share best practices and knowledge of their processes with their competitors and suppliers in order to build a better knowledge base for green technologies and products. Thus, several questions arise. What is the impact of Government regulations and greening costs on a firms decision on the level of greening to be achieved? Further, how do they impact the price of the green product? What happens when there is price and greening competition between two large manufacturers? What is the impact on the level of greening and price of the green products in such a case? Are the results any different when the two players cooperate in the market to develop a cleaner technology/ product but compete on prices? Which strategy can best suit a firm under prevailing regulations and costs? In order to answer the above questions we build game theoretic models. Using single period, deterministic models with non-linear cost functions and linear penalty functions, we analyse the case of a single firm and extend this model to a duopoly under price and greening competition analysis. We develop a three-stage game to model the strategic decision making of each player in the market. We also study the case of cooperation between the players. Cooperation is modeled as a joint decision making on the level of greening. Under co-operation the players still compete on prices. It is observed that under green product development, players often enter into contracts to share the costs of development. Hence, we study several contracts and conditions under which players would participate in those contracts vis--vis non-contractual product development. The case of cost sharing contract, fixed-fee contract, revenue-sharing and wholesale price contracts are discussed.

Competition and Cooperation in Product Greening under Government Legislation

by Debabrata Ghosh, Doctoral Student of IIM Bangalore During the past two decades `sustainability has emerged as the new paradigm of conducting business driven by increased societal and

It is found that greening costs have a negative impact on the greening levels of the product as with increased costs firms tend to reduce their greening levels. We also specify bounds on costs below which firms achieve the greening levels as mandated through Government regulations. We perform numerical analysis and specify conditions under which firms would participate in contracts or cooperate or develop the products independetly. The present research work contributes to the ongoing discussion on impact of Governmental legislations on companies. Further, analysis throws interesting insights on strategies of companies under pricing and greening competition. Additionally, analysis of contracts contributes to the growing literature on contracts specific to green supply chains.

Shah of IIMB will be guiding the study of Pharma Value Chain. We began with a three-fold objective: (1) to study the drug discovery and development process and suggest recommendations to improve the process; (2) to study the manufacturing, supply chain, risk management and outsourcing potential in the biotech and pharma industries, between the two countries and suggest recommendations to capitalize on the opportunity; (3) to study successful models of industry-academia collaborations and best practices in the protection of jointly invented IP and suggest recommendations for productive collaborations. Our focus over the first year has been on the drug discovery and development process. The pharmaceutical industry worldwide is under growing pressure from a range of issues, a perfect storm of trends, including major losses of revenue owing to patent expirations, increasingly cost-constrained healthcare systems, more demanding regulatory requirements, pricing pressures, legal entanglements and declining R&D productivity. Quoting Jean-Pierre Garnier, ex-CEO of GlaxoSmithKline, while all of these trends are problems for the industry, decline in R&D productivity is at the heart of it. Given this backdrop, we set out to carry out an analysis of the R&D process from a portfolio optimization and process management perspective, to explore what specific strategies could have the most substantial impact in improving R&D productivity. As part of our approach, we carried out extensive secondary research based on comprehensive, recent, industry-wide data to identify the relative contributions of each of the steps in the drug discovery and development process to overall R&D productivity. We have also begun some primary research in the form of focused group workshops and one-on-one interviews with R&D professionals. We intend to produce two case studies one on the drug discovery and development process and the other on supply chain management in the pharma industry in the first year (by Nov 2010). We conducted the first focused group workshop on Opportunities and Challenges in Drug Discovery and Development in India for senior R&D executives, on the 5th Feb 2010 at IIMB, where we secured the participation of 12 senior R&D executives including the R&D Director of AstraZenecas R&D Centre in Bangalore, the Managing Director and Head of Operations & Project Management of the Bristol-Myers Squibb Biocon R&D Center in Bangalore, the Vice President Scientific Affairs of UCB India, the Chief Scientific Officer of Actis Biologics and the R&D Director of Apotex Research. During this one day workshop, we gathered practitioner inputs on challenges in the drug discovery and development process

and perspectives on Indias current role in the global value chain and where India could aspire to be in this value chain going forward. The second workshop was held on the 2nd June, during the Shanghai Expo 2010 and explored key trends and developments in managing Pharma supply chains at the regional, national and international level in order to identify unique features of supply chains operating in different contexts and the extent of uncertainties which may exist and the strategies used by different companies to overcome or alleviate these uncertainties. During this workshop, we gathered practitioner inputs on supply chain issues from developed economy and emerging economy perspectives. A third workshop was held at IIT Kanpur on the 13th August 2010 focused on identifying some key operational challenges in the early stage research process from a supply chain perspective and formalized the structure of collaboration between the science and management groups in the Indo-UK Science Bridge project. The workshop discussed the declining R&D productivity in the biopharma industries and a case study related to management of drug discovery process at a big pharma company along with the complexities and trade-offs in the process. Possible techniques to measure uncertainty across various stages of drug discovery process and the application of some generic operations management tools (bottleneck management, lead time reduction strategies, capacity management) in the context of drug discovery process were discussed Over the past 6 months, we have also initiated one-on-one discussions with several industry partners including AstraZeneca (Bangalore - India and Shanghai - China), Ranbaxy, Glenmark Pharmaceuticals, UCB India, GSK and Actis Biologics

FRONTIER
BioPharm 20 UK-India Science Bridge Project
by Christabel Singh, Research Associate, Science Bridge Project, IIM Bangalore BioPharm 2020 (a UK-India Science Bridge Programme) is a collaborative R&D and technology transfer partnership jointly funded by The Research Councils UK (RCUK) and the Indian Department of Science and Technology (DST). The University of Nottingham (UoN), the Indian Institute of Technology Kanpur (IITK) and the Indian Institute of Management Bangalore (IIMB) are building on existing extensive collaborations with the goals of producing (a) clinical and commercial benefits from patent protected research, (b) world class human resource with a focus on interfacing with Industry, and (c) to assess the supply chain and outsourcing potential for long term business engagement and policy formulation between the two countries. Management teams from the Indian Institute of Management Bangalore (IIMB), the Indian Institute of Technology - Kanpur (IITK) and the University of Nottingham (UON) have come together under the umbrella of BioPharm 2020 - UK India Science Bridge, with the purpose of studying the value chain across the biopharmaceutical industry beginning with the process of new product development and going into the latter parts including procurement, manufacturing, supply chain, distribution and logistics with the overarching purposes of increasing research and commercial collaboration between India and the UK in the biopharma industry, maximizing the acceleration of innovation in biopharma between India and the UK and aiding policy-level decisions in the biopharma industries in the UK and India. Prof. Kulwant Pawar of University of Nottingham, Prof. Peeyush Mehta of IITK and Prof. Janat

Vol. 2 No. 2 December 2010

NEWS AT SCM CENTRE

Supply Chain Management Conference Opportunities and Challenges in Services Supply Chain on January 07 - 08, 2011 at IIM Bangalore The Biennial Supply Chain Management Conference of the Indian Institute of Management Bangalore will be held on January 7-8, 2011 at IIM Bangalore. It is jointly organized by EADS-SMI Chair for Sourcing and Supply Management, Indian Institute of Management Bangalore and Supply Chain Management Centre. The theme of the conference is Opportunities and Challenges in Services Supply Chain. The Conference targets academic researchers and professional practitioners whose main interests are the issues of Supply Chain Management, especially those with a focus on Services Supply Chain Management. Service Economy has become an important driving force in the modern day economy. Indias large service industry accounts for 62.6% of the countrys GDP and about 34% of employment. In the 1990s the service sector grew rapidly due to accelerated growth in the communication, financial services, business services (IT) and community services (education and health). Business services (information technology, information technology enabled services, business process outsourcing) are among the fastest growing sectors catering to outsourcing by global firms and contribute to about a third of the total output of services. In 2009, seven Indian firms were among the top 15 technology outsourcing companies in the world. There is wealth of managerial practices and expertise in these sectors which need to be shared, critically analysed and codified for the benefit of the Service Economy. It is believed that service businesses can benefit by applying principles of supply chain management to their processes. However, services supply chains has not attracted researchers attention. Due to its complex nature, the service sector needs a lot more attention, investments and efforts on innovative theories, methods and solutions to fulfill its great promises. The International Conference on Supply Chain Management is intended to provide a forum for management professionals and academics to share their knowledge and to enable a large pool of management practitioners and educators to gain a deeper understanding of the current industry practices and challenges in Supply Chain Management with focus on Services Supply Chains, update themselves and benefit from key research findings in contemporary areas in the field of Management. Key Features of the Conference Include:
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Plenary sessions featuring CEOs of top companies on theme related to services upply chain management Panel discussion on Opportunities and Challenges in Services Supply Chain ~50 authors representing both academia and industry and international participation to present their work in the field of Supply Chain Management An exclusive session for Industry papers covering best practices, new technologies, practitioners opinions and perspectives on policy issues Uniform Participation Fee for delegates from SAARC Countries

of these assumptions by looking at experience from the US and Europe. The article concludes by observing: What worries one is the wishful thinking on the part of public in general and industry and policymakers in particular who assume that FDI in organised retail in India is the one stop solution to all problems. Yes, we have problems for which we do not have ready-made solutions. Yes, we need to improve productivity in agriculture and reduce wastage in supply chains. it would be naive for us to assume that global organised retail chains would do the tough task of solving these complex set of problems in agriculture production and distribution. We need to look at FDI in retail as just another approach and not look at it as panacea for all our problems in agriculture. A 5-day Executive Development Programme on Strategic Sourcing & Supply Chain Management conducted by Profs. Devanath Tirupati and Jishnu Hazra was held at IIMB from Aug 30, to Sep 3, 2010. The Programme had 25 participants from various industries. Mr. Sanjay Handu, Director International Purchasing, Tyco Electronics shared his insights in an invited experience sharing session. Prof. Roger Moser conducted two ScenarioDevelopment Workshops on 5th and 6th August 2010, for the Automotive Industry and for the Aerospace & Defense Industry respectively at IIMB. Each Workshop had about 15-20 invited participants, senior managers from the respective sectors to discuss the results of the Delphi Studies conducted earlier and to jointly develop scenarios for the political, economic, social and technological (PEST) environments of this industry sector and to integrate the PEST scenarios into a common framework and for creating the Big Picture & Next Steps. Prof. Moser plans to use the study and workshop results for academic publications. Faculty and families of EADS-SMI Chair and Supply Chain Management Centre met on Friday 30 April 2010 evening to greet and bid farewell to the family of Prof. Roger Moser - Ms. Nadja Moser and their two children Joel & Jerome on the eve of their departure to Switzerland after nearly 3 years in Bangalore.

The distinguished senior faculty members of the Indian Institute of Management and other leading Management Institutes and Universities as well as Business Leaders of Corporate India, from international companies are associated with the organization of the Conference.

Participation Fee
Delegate Category Authors Academic Delegates Corporate Delegates Students SAARC Rs 4,000 Rs 6,000 Rs 8,000 Rs 500 International US$ 100 US$ 150 US$ 200 US$ 25

For registration details, please visit http:\\www. iimb.earnet.in\node\1889 . The Conference Committee is headed by Prof. Devanath Tirupati, Chairperson of the Conference. The contact e-mails are: scm_conference_chair@iimb.ernet.in; scmconference2011@iimb.ernet.in . We request all leading Corporates to take active interest in the Conference and support it by Sponsorships. More details on Sponsorship Packages are given in our websites http://www. scmc-iimb.org and http://eads-smichair-iimb. org. Economic Times, 23 Aug, 2010, carried an erudite article Mythical Benefits of Retail FDI by Prof. J Shah and Mr. M G Subramanian. The article highlighted the assumptions or myths prevailing in the entire debate on FDI in retail needed to be questioned. The recent business press articles strongly supported FDI in retail often leaving readers with this perception that once FDI is allowed in multibrand retail, the leading retailers of the world - Wal-Marts and Tescos would enter India and revolutionise the agricultural practices and supply chains for food products; our farmers would receive higher share of the retail price and consumers would enjoy food products at lower prices. The authors examine the validity

Keynote Addresses by Dr. Raguram Krishnapuram of IBM Research Labs & Mr. T.R. Parasuraman of Toyota Kirloskar Auto Parts.