1 REPORT ON THE PAINT INDUSTRY PROJECT TITLE: “STUDY OF SUPPLY CHAIN MANAGEMENT IN THE PAINT INDUSTRY” – AN ANALYTICAL VIEW OF THE SALES AND MARKETING SIDE ORGANIZATIONS IDENTIFIED FOR THE STUDY: BERGER PAINTS INDIA LTD ASIAN PAINTS INDIA LTD BUSINESS SECTOR IDENTIFIED FOR THE STUDY: PAINT INDUSTRY PROJECT GUIDE: PROF. ANIRUDH SHARMA A Report By: Manmeet Singh/ IIPM / PGP / SS 2003 – 05 Alumni Reference Code – SS03517 IIPM/ PGP-SS-2003-05/ SS03517 Indian Institute of Planning and Management
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REPORT ON THE PAINT INDUSTRY
PROJECT TITLE:
“STUDY OF SUPPLY CHAIN MANAGEMENT IN THE PAINT
INDUSTRY”
– AN ANALYTICAL VIEW OF THE SALES AND MARKETING
SIDE
ORGANIZATIONS IDENTIFIED FOR THE STUDY:
BERGER PAINTS INDIA LTD
ASIAN PAINTS INDIA LTD
BUSINESS SECTOR IDENTIFIED FOR THE STUDY:
PAINT INDUSTRY
PROJECT GUIDE: PROF. ANIRUDH SHARMAA Report By: Manmeet Singh/ IIPM / PGP / SS 2003 – 05
Alumni Reference Code – SS03517
Indian Institute of Planning and Management
IIPM/ PGP-SS-2003-05/ SS03517 Indian Institute of Planning and Management
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Date of Submission: August 31, 2005 Manmeet Singh
IIPM/ PGP-SS-2003-05/ SS03517 Indian Institute of Planning and Management
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ACKNOWLEDGEMENT
It is my proud privilege to acknowledge with a deep sense of gratitude, the invaluable
help, kind patronage and able guidance, given to me by my learned and revered project
guide, Prof. Anirudh Sharma Vice President - Corporate Relations, Indian Institute of
Planning & Management. Their prudent counsel, meticulous supervision, ardent
personal interest, sustained encouragement and affection have been of immeasurable
help all along. In fact working under his supervision is a matter of pride.
I owe a debt of honour of Prof. Sumanta Sharma, The Indian Institute of
Planning and Management, for the exceptional cooperation and multifarious openhanded
help.
I am also thankful to Prof. A. Sandeep, Dean - Center for Advanced Consulting
& Research, Indian Institute of Planning & Management, for the support he provided at
the time it was most important to me. He provided me with the project of Micheal Potter's
5 forces analysis project, which made me gain a lot of knowledge and start the project
with a right platform.
My heartfelt gratitude are due to the officials and staff of various companies
specially to Mr. Arun Batra (RSM Berger Paints), Mr. Rajesh Sahay ( DSM Berger
Paints India Ltd), Mr. Joydeep Paul(RSM Asian Paints India Ltd) and Mr. Nimesh
Gupta (ASM ICI Paints) who all helped me with the information I needed to finish the
project successfully in time.
(Manmeet Singh Sachdeva)
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EXECUTIVE SUMMARY
Supply Chain Management is an area that is used as a differentiating
factor for a lot of companies. Every company in the world have either
improved the Supply Chain Management or are looking forward to give
proper concentration to it. This project will take a look at the supply
chain management of the Paint Industry. In view of the same the
companies which are been covered are primarily the biggest 2
companies in Delhi. As being No.1 in Delhi, Berger Paints India Ltd and
the follower Asian Paints India Ltd. The study has only been focused
towards the working of these companies in the global region of Delhi.
The research has mainly covered some company officials; in the
company officials even I have tried to cover at least 3 levels of officials,
thus for the same effort I have covered 24 sales officers of 3
companies (Berger Paints, Asian Paints and ICI paints also for a better
idea of the industry), then onwards there are ASM’s of all the three
companies and RSM’s of only the two focal companies. After covering
the company persons, the next step was to cover, as many dealers as I
can, but due to the time constrain the no of dealers, which were been
covered, were restricted to only 38.
With the discussions to the company persons and the dealers I was
able to gain knowledge that the paint trade in Delhi is primarily
working on 2 things. One is rebates and the other is credit period. On
the basis of both the things the market runs.
In the thesis I have first explained about the basic concept of supply
chain management. After the same I have explained about the Indian
Paint Industry. Paint trade in India is organised only to the level of 60%
and rest is all un-organised. The unorganized sector in the Paint
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Industry is very scattered, Delhi in all have almost 550 Local vendors.
Thus the competition and usefulness of SCM goes deeper.
After understanding the need then the thesis moves to various areas of
the SCM and see how are all these things managed in Paint Industry as
a whole and wherever possible about the two companies differently.
The second chapter covers the areas of Logistics; logistics, which is the
backbone of any SCM, is covered with various areas. It has areas like
invenmtory management, order processing, network planning and
many more. In this chapter all the functions are explained individually
and also been accompanied with the paint trade for that particular
segment only.
Moving further to the areas where the heart of any company exists, the
financial aspects, this chapter explains about the relevance of finance
to SCM and SCM to finance. How well the combination of the two is
working together for the Paint Industry.
The further chapter moves towards the forecasting methods and the
importance of forecasting. It shows that how difficult is it to forecast in
the paint industry.
This is followed by the relationship chapter, this chapter talks about
the customer satisfaction and the inter firm relations. This chapter
explains both the things differently and explains how Asian is trying to
take an additional advantage by giving special kind of services and
trying to gain customers goodwill.
Role of sales and marketing in the working of SCM is the next chapter.
This chapter tells us about the importance of human touch in the
technical process. This chapter shows that is there is not a proper
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human involvement then the whole process might go for a toss. Thus
to have a perfect person at perfect place is as importance as to have
the right market share.
In the next chapter there is discussion about the machine which has
changed the working of the Paint industry. This machine has made the
SCM in the Paint Industry some effective.
Further moving to the final chapter we will talk about the future of the
paint industry and what all changes are going to hit the paint market
and what all effect will be there from the changes.
IIPM/ PGP-SS-2003-05/ SS03517 Indian Institute of Planning and Management
Luxol Hi Gloss Butterfly Enamel Luxol Luster Finish Luxol Satin finish Luxol Rich Mat Enamel Butterfly Furniture Enamel Antisol Roof Enamel Wood Primer BP Cement Primer And Many More……….
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Let us move further and multiply the number of colours, which every product has to provide in the market.
Move further and multiply all these (products X Colours) to the No of Pack sizes every product has to
supply in the market.
This was just a small segment of the works of the paint industry. Another major area of work might be the
tinting machine’s that are available in the market. After having this illustration you one might be able to
imagine the kind of complexity that is there in the paint companies.
A GLIMPS ON THE INPUT SIDE OF THE PAINT INDUSTRY (Raw Materials)
The industry is raw-material intensive. Of the 300 odd raw materials, nearly half of them are imported
petroleum products. Other major raw materials titanium dioxide, phthalic anhydride and peutarithrithol
constitute 50 per cent of the total cost. Besides, this, there are other raw materials such as castor, linseed
and soybean oils, turpentine and pigments. Majority of the inputs in paint industry are sourced through big
industrial houses and the raw materials used are standardized across the industry with limited substitute
available and very limited scope for players to switch suppliers. Materials like titanium dioxide, phthalic
anhydride, peutarithrithol and petroleum products are imported and they constitute nearly 30 per cent of
their raw material requirements and the raw materials cost sums up to a whopping 70 per cent thus changes
in import policies can affect the industry. For imported petroleum products, any deficit in global oil
reserves affects the bottom-line of the players. Raw materials such as castor, linseed and soybean oils,
turpentine and pigments are procured from the local players which are easily available in the market and
thus decreasing the bargaining power of the suppliers
With having these many complications in the production of the product and making it available in the
market the story doesn’t ends here. Further are the expectations of the product in the market which a
company has to fulfill in the market. To be successful in the market paint should provide number of things.
Let us now take exteriors and study that what all is needed out of an exterior paint.
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Qualities of an exterior Paints
Durability
Finish
Anti-fungal properties
Dirt pick-up resistance
Ease of Application, no curing required
Wide range of shades
Cost
These are a few of areas which one has to provide as a bear minimum in the market to stay there and be in
the consideration box of the target audience.
Let us now come to the reality and analyse that what the Indian domestic market is doing in the decorative
segment. As we have already seen that the market leader in the paint industry is Asian Paints with a good
amount of margin. Asian has that advantage because they have a very keen eye on the decorative market
and they have been the most aggressive company in the paint companies from last many years, due to this
aggressive effort of many years Asian holds rank 1 in the decorative segment, following to the leader is
Berger Paints, which is been closely followed by ICI and then last is the industrial segments leader Nerolac.
The efforts which is there in the markets in the current times by all the companies are as follows
•Aggressive efforts of GNP for resurgence.
In the past couple of years Nerolac has started making an aggressive effort in the retail market.
With the effort of marketing and putting amitabh bachan in their Advertisements they have been able to get
some good effort from the market but still a lot more to go to come into the prompt notice of the target
audience
.
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•Focus brand marketing of ICI.
ICI being a player who does not believe in providing the affordable products in the market is able
to make a prompt mark in the market attacking only in the high end products.
•Comeback battle of Shalimar.
Shalimar Paints which was loosing its presence from the market is now trying to make a
comeback and is trying to be the 5th player in the market.
•Gradual evaporation of J&N.
Jenson and Nicholson, once being the initial companies to install the tinting machines is now
loosing their presence from the market and is now almost out of the market.
•Price game tinkering of Asian.
Asian even being the market leaders are now not able to command their needed price and are
feeling threat from other players in the market, due to the same they are now coming more aggressive in the
market with the price game. With having the same the aggressiveness in the market is still these with the
name of Asian paints in the market.
•Positive outcome of brand building exercise in Berger Paints
With the efforts from the marketing Berger Paints is now able to Improved visibility & brand
salience due to which they are able to improved the price realizations even after providing the consumer
affiliation & applicator base.
VAT implementation and Crude oil price fluctuation.
Due to the VAT implementation and Crude oil price fluctuation the Paint Industry is moving towards
- Intense brand wars.
- Clash of loyalty programs.
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- Clash of application facilitation.
- Hostile dealer associations
- Product showcase outlets.
- Large format retail outlet customers: a new trend.
- Losing human resources to consumer related industries.
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CHAPTER 2
LOGISTICS MANAGEMENT
In this chapter we will analyze that how the most
important area of the supply chain management
works. The area which was been given the second
name of Supply chain management. With the theories
of logistics we would co-relate it with the paint trade
and we would find out the way paint is taking care of
this particular segment.
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Logistics, which used to the be the synonym of Supply Chain Management till couple of years back and is
still understood the same way by a lot of people. It is the area which covers the core of any business.
Logistics activities have a major impact on the capabilities and profitability of the company. Logistics
management is increasingly being seen as a source of competitive strength. Its effective use provides
potential for cost reduction and the opportunity for increasing market share.
Logistics management is the process of strategically managing the procurement, movement and storage of
materials, parts and finished inventory (and the related information flows) through the organization and its
marketing channels in such as way that current and future profitability are maximized through the cost-
effective fulfillment of orders.
Source: Christopher, M. (1998). Logistics and Supply Chain Management: Strategies for reducing cost and improving service, (2nd
Ed.). New York: Prentice Hall.
Logistics Management is that part of Supply Chain Management that plans, implements, and
controls the efficient, effective forward and reverse flow and storage of goods, services and
related information between the point of origin and the point of consumption in order to meet
customers' requirements.
Logistics Management activities typically include inbound and outbound transportation
management, fleet management, warehousing, materials handling, order fulfillment, logistics
network design, inventory management, supply/demand planning, and management of third party
logistics services providers. To varying degrees, the logistics function also includes sourcing and
procurement, production planning and scheduling, packaging and assembly, and customer
service. It is involved in all levels of planning and execution – strategic, operational and tactical.
Logistics Management is an integrating function, which coordinates and optimizes all logistics
activities, as well as integrates logistics activities with other functions including marketing, sales
manufacturing, finance and information technology.
(Source: Council of Supply Chain Management Professionals www.cscmp.org)
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'Logistics' is the process of designing, managing and improving such supply-chains, which might include
purchasing, manufacturing, storage and, of course, transport. The Modern business logistics sets out to
deliver exactly what the customer wants - at the right time, in the right place and at the right price. Very
often transport is a major component of the 'supply-chain' which delivers to the customer the goods and
services needed.
Order Processing
Inventory Management
Transportation
Location management
Network planning
Warehousing
E-commerce
Channel Bonding
All the above areas comes together and makes the output which is known as the logistics management.
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ORDER PROCESSING
As a very old saying is that demand derives the supply of a product, thus it will not be wrong to say that
demand derives the logistics system, if there is no demand there is no reason of a logistics system to exist.
Time duration that is been used by a company to complete the order processing is very important for any
company. This time duration is one of the factors to find out the reaction time for any happenings in the
market.
Order processing includes order preparation, order transmittal, order entry, order filling and order status
reporting
Order preparation involves the customer or sales person filling out the order form, voice communication
by telephone to a sales clerk or selection from a computer menu. In some companies it is been done by
using bar codes on the products and only giving it the quantity.
Order transmission is transferring the order from its point of origin to the place where the order entry can
be handled. This can be done either manually or electronically
Order entry includes
Checking the accuracy of the order information such as item description and
number, quantity and price
Checking the availability of the requested items
Checking the customer’s credit status
Transcribing the order information as needed
Billing preparation
Order filling represents the area where the order is allocated and then been dispatched after making a
challan for the order. This area also covers the confirmation of the delivery of the order to the customer.
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Order status reporting ensures good customer service by keeping the customer informed of any delay in
order processing or delivery.
Let us now see that how are these functions are been taken care in the paint industry.
Order preparation is done by the sales person or is taken by the order clerk on the phone.
Order form has various columns as
Customer name
Customer code
Territory code
Stock business line code (SBL Code)
Every customer in the company has a unique code for his name. As for example a code is written as
03/005254/05
This means
07 / 005254 / 0 5
Territory Code Customer Code SBL Code Customer type
Further in the order form there are columns with the heads as
Serial No
Item Code and Name
Product Name or Code
Various columns of product size
The row has to be filled as per the columns heading, the quantity of the product has to be filled in the
product size column.
Further this again makes a full code, which tells the whole story
2145482000
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This means
214 548 2000
Product code Shade Code Size Code
In the process of Order transmission the order is been accompanies with a cheque of the ordering party
Blank cheque’s are been given by the dealers to the companies, these cheque’s are signed by the party and
crossed on the name of the concerned paint company. The only blank area in the cheque is the area where
the amount is been written
After the attachment of the cheque’s the order is been transmitted to the order entry desk, where the order is
been entered into the computer. In the process of entering the order the customers credit limit (In Value
and in days) and the availability of the products is been checked. After which the invoice is been printed
and the amount is been filled in the blank cheque of the dealer.
In Order filling the order invoice with the challan is passed to the Godown and the physical transfer of
goods is been taken care of. In this process one copy of the challan and invoice is been returned back after
signing the acceptance of the products.
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INVENTORY MANAGEMENT
Inventory provides a means to take care of all the uncertainties in product supply and demand. It is meant
for the purpose of making the product available at the very time when the customer needs it. To give a
prompt supply it is needed. It can be explained as it is done to shorten the time between the order and the
delivery.
With having this accuracy of the supply to the customers and to be very prompt to all the demands of any
customer a company can create a very nice goodwill in the market and can create a healthy relation with the
customers. Inventory is a very important portion of providing the right product at the right time and the
right place. Thus it is very important to have high inventory level.
At the same time where inventory so important to the company it can even present threat to corporate
profitability to the consumer. The capital that is invested in keeping the inventory can be invested at any
other place and the profits can be made to the company
Manufacturing entities have inventories for raw products, products in the production process, and finished
products. In addition there are often warehouses or distribution centers between the different levels of the
supply chain. Inventories are costly. Binding capital in inventories prevents the company from investing
this capital in projects of higher return. The holing cost inventories are therefore often set as high as 30 -
40% of the inventory value! In addition it is desirable to avoid so-called dead inventory, i.e. inventory that
is left when a product is no longer on the market.
As we see it is in every company's interest to keep inventory levels at a minimum. Much effort has been put
into this, for example an entire manufacturing paradigm has come out of it. A main objective of the Just in
Time (JIT) paradigm is to virtually abolish inventories. The efforts made have been more or less successful.
There are a number of mismatches which are countered when we plan for the inventory
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MISMATCH BETWEEN
INVENTORY LEVEL
STORAGE COST
TRANSPORTATION COST
PRODUCTION COST
RAW MATERIAL COST
Let us now see that how is the inventory is been managed in the paint industry
There is no hard and fast formula in the paint industry. It is always based on the budget which is
been prepared. On the basis of the budget the Target Stock Level (TSL) is been fixed on the
basis of which the product is been kept in the go down.
Inventory of the factory is always based on the forecast of the depots that is been compiled and
the production plan is been made. Many products as per the other costs has to be made in one
bulk order and is to be managed high in the inventory.
At the depot level a basic cap is been made as the TSL and further stock is been kept as per the
schemes, which are been run by the companies. When the company is going to run schemes on
product (A), then they would make it sure that the product is available at the depot’s level.
As far as the dealers level is concerned, they don’t have to keep much stock in their inventory as
it is very easily accessible to them from the closest depot. The inventory has to be high only when
the season is coming and at that time getting products from the depot at urgency will not be very
easy thus at that time dealers are been asked to keep a high amount of inventory.
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TRANSPORTATION
Transport remains a major component of most supply-chains. Certainly limitations of, or
restrictions to, transport caused by congestion, taxation or legislation will drastically affect the
design and operation of supply-chains. Logistics services and other transport companies need to
understand logistics and supply-chain management in order to tailor their services to meet their
customers' needs.
Transportation is the only area that works at all levels of the supply chain. It is taken as critical
that if a company has good transportation planning and they can work it out optimally then the
supply chain of the cooperate has a high probability of being good.
We can understand the transportation as
With all the functions this is a common phenomena
This for a paint company will be in a different format.
The transportation cost is one critical factor for any paint company. The transportation cost is
always very high for then. With the view to the same cost every company in the paint industry has
IIPM/ PGP-SS-2003-05/ SS03517 Indian Institute of Planning and Management
Raw material supplier
Production Plant
Parent Depot
Retail DepotDealerEnd Customer
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various factories at distinct location of India. By doing this they can even provide quick service to
any depot in the country.
Berger Paints works on a format that the factory directly sends the product to the sales depot,
which will sell the products to the dealers, and it is sold in the market by them.
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The structure of Berger can be seen with a diagram:
This is how Berger paints manages to transport the material from factory to the depot. In this
diagram majority of the requirement of the depot is been fed by factory 1 and factory 2. this is
because the transportation from the factory to the depot is cheapest in comparison to other
factories. Thus the cost efficient factory is providing the material to the depot. Still there are some
products that are not in a very regular demand, thus these products are not been manufactured in
all the factories and is been transported from the factory that is manufacturing it. This is done to
keep the production cost down.
Asian on the other hand is working the pattern of having Regional distribution center(RDC) and
further having carrying and forwarding agents (C&F).
IIPM/ PGP-SS-2003-05/ SS03517 Indian Institute of Planning and Management
Factory 1
Factory 5
Factory 4
Factory 2
Factory 3
Factory 7
Factory 6
Depot
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Their structure will be
Instead of having a depot owned godown they are having a C&F agent at all the places. Their
system is to transfer the products from the factory to the regional distribution center, which is
more easily accesable to all the depots. By doing this they don’t have to carry high inventory at
the C&F level and through this they able to supply the right product to the right depot when ever
the need comes up.
The further supplies of the products from the depot’s/C&F to the dealers is done by the
transporter’s which is been outsourced by all the companies in the paint trade.
IIPM/ PGP-SS-2003-05/ SS03517 Indian Institute of Planning and Management
Factory 1
Factory 2
Factory 3
C&F Agent
RDC
C&F AgentC&F Agent
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LOCATION MANAGEMENT AND NETWORK PLANNING
For any company to be good in logistics management it is very important to have a proper
location of their depot and to have proper location of the dealers they are associated with.
To be located close to the market as a depot and to have dealers in the proper market is the
dream of any company. Every company is trying hard on working with dealers, who have highest
footfall in their shops. Thus this is one of the most critical areas for any company. If a company is
working with these kinds of dealers then they can promote their sales in a better manner.
Both the companies have placed their depots very close to the markets; in a city like Delhi both
the companies have 5 depots in all the areas of Delhi.
With the same view both the companies have very critically worked on the dealers also, both the
companies are running hard to collaborate with the best dealers in the market. The best dealers
are those who have the retail market, the dealers who are placed in the location where the retail
sale is high.
As on date Asian is leading in the two, Asian is known for having most of the retailers working
with them and Berger is known for having most of the distributors in their hands.
The major advantage that Asian is getting out of it is that the product gets consumed quickly and
they again have space in the market to sell. The turnover rate of Asian is better than Berger in the
market. As Berger paints products goes from the distributors to the dealers and then to the final
customer. Thus the logistics of Asian Paints is better in the manner that one of the most important
area
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CHAPTER 3
FINANCIAL AREAS
Supply chain activities have a major impact on the
capabilities and profitability of the supply chain and
its member firms. Let us understand the how is the
supply chain connected to the financial part and it is
done otherwise.
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Significant opportunities exist for the competent supply chain manager to reduce expenses, generate better
returns on invested capital and improve cash flows.
Introduction
Customer value and satisfaction are important ingredients in the business formula for success. No one
business function alone can create superior value for customers. All departments must work together in this
important task. Each company department can be thought of as a link in the company’s value chain. This is,
each development carries out value-creating activities to design, produce, market, deliver, and support the
firm’s products. Marketing Mangers pay attention to understanding customer needs, understanding the
company’s ability to satisfy them, and creating revenues to sustain future growth and profitability.
Logistics managers historically have focused their time and attention on three core functions of business
operations: inventory policy and practice, facility location and design, and transportation of materials and
products. Financial managers strive to obtain borrowed funds at the lowest cost, to select projects that offer
the best returns, and to balance the financial risks taken with investor expectations of returns, and to keep
the business liquid. The firm’s success depends not only on how well each department performs its work
but also on how well the activities of various departments are coordinated.
To the successful supply chain organization is shifting from a single firm cost focus on inventories,
facilities, and transportation to a multi-enterprise focus on cycle time compression, system wide cost
reduction, and improved value for end customers. Having satisfactory or even excellent products and
services no longer guarantees a competitive advantage in today’s market place. Successful companies find
that they must also establish supply chain partnerships to reduce costs and complement their product
portfolios with value-adding relationships.
Financial Issues of Supply Chain Consultants
The Management of every business wrestles with a common problem: How do we allocate the resources
required to effectively and efficiently meet the expectations of our various constituencies? Those needs and
expectations very by constituent. Owners and investors desire reasonable rates of return given the level of
risk they assume compared with alternative opportunities. Employees need and expect to be adequately
compensated and rewarded for their contributions to the success of the firm. Customers require multiple
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values from the products and services they purchase. Resellers of the firm’s products expect help in
marketing and managing their activities. Resellers of the firm’s also expect credit of more and more days
and more and more amount so that they will be able to earn more. Suppliers expect timely payment for
goods and services provided. They community expects socially responsible behavior, whatever the costs to
the firm.
Major reductions in inventory relative to GDP have occurred since 1981, when the prime interest rate was
at an all time high. When we look at the changes in total transportation and inventory costs graphically, it
appears that productivity improvements have bottomed out.
Are further cost reductions possible? A concern could be raised that the economic value of logistics to the
macro supply chain is not increasing. How does the individual firm plan for and evaluate the reductions in
its logistics costs? How does the individual firm meet the economic claims of its various constituencies,
reduce its logistics costs and achieve acceptable profitability and returns on investments?
Three Paths to Economic Success: The Micro View
There are basically three paths that an enterprise can take to manage its profitability and rate of return:
margin management, asset management and financial management.
Margin management is concerned with the revenue streams generated from sales, less the cost of goods and
services provided by suppliers, and less the firm’s selling and other operating expenses. The result is net
profit.
Asset management is concerned with the investments made to produce the revenues of the company. These
include cash, accounts receivable, inventory, and other current and fixed assets (fixed assets include
facilities, equipment, and hardware) that are used in the business to generate its income. The productivity of
these assets is an important managerial concern. As an important measure of enterprise productivity, the
asset turnover measure is computed by dividing the value of sales generated for the period by end of period
total assets.
Financial management is concerned with the source of funds used to conduct the business (i.e., debt, equity,
or retained earnings) and the capital structure relationship of debt to equity employed. Because the cost of
capital and associated risks vary by source of funding, financial management is focused on achieving
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balance between debt and equity to provide an acceptable amount of financial risk and leverage to achieve
targeted returns on equity.
Using this model, financial simulations are easy to construct that reveal the impact of possible supply chain
decisions on the firm’s financial performance. Supply chain executives often have responsibility for a
significant portion of the costs of goods sold and operating expenses, and therefore, have a major impact on
margin management. Decisions and expenditures associated with procurement, inbound transportation,
production planning, and materials management are directly related to the net profits of the firm. Supply
chain executives have responsibility for a sizable array of assets – inventories, facilities, handling
equipment, transportation equipment, and computer and communications systems, used in the operation of
the business. Their decisions on asset acquisition, utilization, replacement, and disposal affect the rate of
asset turnover.
The ability of the supply chain executive to perform financial analysis affecting supply chain decisions is
critical in competing for funds and adding value to the firm and the supply chain. The supply chain
executive must be able to implement the often-competing strategies of cost minimization, value added
maximization and control/adaptability enhancement. This requires the use of financial tools.
Financial Focus of the Supply Chain Executive
It was not long ago that operations performance was measured in strictly negative terms, such as costs over
budget, damaged goods and shortages, late or missed shipments, and stock-outs. Increasingly, firms have
begun to appreciate how improved supply chain performance produces increases in sales, productivity and
profit. No longer is supply chain management focused only on internal operational activities and measures.
Economic measures, both internal and external, are increasingly used to justify, judge and reward the
supply chain organization. There are three areas of financial focus in which the supply chain executive
must demonstrate competency; expense control, capital budgeting, and cash flow generation.
Expense control
Expenses control goes beyond merely managing expenses to the constraints of the budget. Expenses control
requires a deliberate ad continuous search for more efficient ways of getting value-added work performed
while eliminating non-value added activities. Some companies naively install computers and other
technologies to automate and speed up outdated business practices. The power of computers and
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technology should be used to “reengineer” the work, to abandon inferior yet institutionalized ways of
working, and to create better practices and processes that better align with customer needs.
Capital Budgeting
Supply chain executives must understand capital budgeting techniques, including their advantages and
disadvantages, to contribute effectively to investment decision-making. They must speak the language of
finance. They must know which acceptable methods of investments evaluation will best sell their
proposals. Several capital budgeting techniques can be used simultaneously on a single investment
proposal. Decision makers must consider the amount and timing of cash inflows, as well as the cost of
capital or some internal hurdle rate of return. Some firms use the simple payback method of evaluation or
the benefit-cost ratio.
Cash Flow Generation
Cash flows of the firm can be improved as a result of many business practices. Historically, accounting
departments attempted to improve working by aggressively collecting accounts receivable from customers
white simultaneously delaying payments to suppliers. Such behavior. Such behavior rarely produces and
net benefit across the supply chain.
Care must be taken in how that inventory reduction is accomplished. Just in time (JIT) manufacturing
techniques have become a “best practice” of manufactures in most industries, but savings in inventory
investments associated with JIT practices can be more imagined than real. To offset the faster cash outflow,
shippers receive discounts from carriers in exchange for last payment. Lead time reductions affect cash
flows. Many firms systematically work on controlling and reducing lead times and have achieved
impressive results. An economic evaluation of lead time reduction should examine of impact on future cash
flows across all business functions or at the organizational level, no just the product level.
A Gold Mine of Opportunity Left Un mined
Inefficiencies in the supply chain can waste as much as 25% of operating costs. Companies considered to
be best practice organizations in moving product to market enjoy a 45% supply chain cost advantage over
their median competitors. Their order –cycle time is half that of their competition, their inventory days of
supply are 50% less, and they meet their promised delivery dates 17% more often that the competition.1
1 Source: International Supply Chain Management Association
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Key Performance Areas that are used for the financials of the Supply Chain
Management
The “supply chain cost” measures used are
1. Total cost,
2. Cost per unit,
3. Cost as a percentage of sales,
4. Inbound freight,
5. Outbound freight,
6. Administrative,
7. Warehouse order cost,
8. Direct labor,
9. Comparison of actual versus budget,
10. Cost trend analysis,
11. Direct product profitability,
12. Customer of customer segment profitability
13. Inventory carrying,
14. Cost of returned goods,
15. Cost of damage,
16. Cost of service failures, and
17. Cost of backorders.
Margins to remain intact despite increasing input costs
Between 2007-08 and 2010-12, the demand for paints is expected to grow at a steady rate of
around 7 per cent in volume terms and 10 per cent in value terms. While the high growth in the
auto sector is expected to drive the demand for industrial paints, higher demand from fresh
housing constructions and steady growth in housing repaint demand is likely to boost the volumes
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of decorative in the short term. Another major rise in the paint industry can be expected with the
rise in infrastructure in India because of the common wealth games and other further games that
are in plan to be hosted by India.
The paint industry is raw material intensive and about 50 per cent of the inputs used are
petroleum-based. The industry imports around 30 per cent of its total raw material requirements,
primarily titanium dioxide. While the unexpected spurt in crude oil prices led to an increase in the
cost of production of paints, the pressure on margins was eased by the flexibility to pass on input
cost increases. The productivity-related benefits, an increased focus on premium products and the
flexibility to pass on any further sharp change in input prices will continue to ensure stability in
operating margins.
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When we come to the financial controls on the sales level then it is one of the job that nobody wants to do
as it has a lot of restrictions and those restrictions are sometimes hurdles for the sale. Due to the hurdles one
has to keep a very keen eye on these things so that these things are taken care of before even coming in
between sales.
Let us first move to Berger Paints, which have to take care of all the areas at a depot level. Let us first see
that what all restrictions are there to which a depot manager has to take care of.
• Credit Limit to a dealer
• Credit limit are of two kinds one is the credit limit in term of money or can be said
as in Rs. And another can be the case as credit limit in days. Both are very different
but have a very close relevance. On one side credit limit in Rs. is the amount of
product given to a dealer without paying the amount for the same. On other hand
the limit in days is that the dealer can pay the amount in x number of days. There is
a limit for every dealer in the companies as per the working pattern of the
company. This is been decided on the size of the work that a dealer is doing with
the company and the relation that the company has with the dealer. At both the
sides there is a amount of capital involved in it. Let us understand this with a
example. Let us assume that at a particular depot there are 200 Dealers working
with the company and every dealer is on an average working for around 2 Lacks
with the company. Thus if the company is giving even one day as credit limit to all
the dealers then the company has to go for an additional investment for around 4
Cr. So this explains the importance of having the credit limit in hand and in control.
• Damage Stock
• Damaged stocks has always been a big problem for the paint industry as the
products are such that the damages are very common in transit thus one has to take
care that it is been reduced to the minimum level
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• Non-moving Stock
• These are those stocks that have not moved from a long time and are lying at the
depot only. As these stocks are consuming a lot of money in them in the face of
inventory cost, capital, a part of profit which will be there after sales and many
other minor areas.
• Material Returns
• Material returns are even more dangerous than material not sold as this material is
also carrying the cost of transportation from the depot to the customer and return.
This material is also needed to be controlled because these returns generally are
harming the relations with the customers also.
• Cheque Returns
• A stock is consider sold only at that time when the payment of that stock is
received. As with the view to this line a cheque return is considered to be product
not sold but still is lying at somebody else’s place or even is sold further in the
market.
• Invoice cancellation
• This is one area which is reducing the credibility in the market as either the
customer doesn’t want the product now are it is because of some fault of the
company. In both the cases the company is loosing relation as well as the sale,
which always harms.
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• Delay in depositing cheques
• A delay in depositing cheques will result to a delay in clearance. It can be treated
as an additional capital is been delayed to get cleared and is further not available
for investments.
• Transportation cost
• The transportation cost from the depot to the dealers end is a very crucial part as
the order of a dealer varies from 1 Lt’s to 10,000 Lt’s, thus when the order is less
then the transportation also has to be paid as per the expenses he is bound to get.
Thus we need to take care of the transportation expenses in a proper manner.
These are some of the most important areas that have to be given a proper priority so that company doesn’t
loose some money, which can be used for further growth of the company. If these areas are handled in a
proper manned then the company can grow at a very faster rate in comparison to otherwise.
Now when the discussion moves to the market leader, Asian Paints, then we can see that they don’t have to
take care of all the issues they only have to deal with few of them as all other processes are been outsourced
by Asian paints to a local vendor or to a centralized one. A few of the areas where even Asian has to worry
about are
• Credit Limit to a dealer
• Material Returns
• Cheque Returns
• Invoice cancellation
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Thus from this discussion one thing which is understood is that with the market leader Asian Paints is
making more expenses for the processes but still feels that the payment is justified so that various areas can
be controlled in a better manner.
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CHAPTER 4
FORECASTING
In this Chapter we will see the relevance of
forecasting in a supply chain management
and how it is been used in various areas.
How can we get the maximum out of the
forecasting and how does it actually happen
in the paint industry
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Demand planning and sales forecasting is a critical consideration for manufacturers, distributors, retailers,
and other supply chain members. It is a central activity for many mid- to senior-level executives, mainly for
those who manage the companies supply chain activities. Sales forecasting is more important for those
who are especially responsible for developing and monitoring sales to forecasts, schedules, and budgets.
Forecasting can be defined as
“Predicting current and future market trends using existing data and facts. Analysts rely on
technical and fundamental statistics to predict the directions of the economy, stock market and
individual securities.”
Or
“Can be defined as a quantitative estimate (or set of estimates) about the likelihood of future events based
on past, current, and future information. This past and current information is specifically embodied in the
structure of the econometric model used to generate the forecasts. The future information contains any
predictions or knowledge of the trends in the behavior of the explanatory variables.”
Sales forecasting is a difficult area of management. Most managers believe they are good at forecasting.
However, forecasts made usually turn out to be wrong! Even after having such results the managers are
forced to look well ahead in order to plan their investments, launch new products, decide when to close or
withdraw products and so on. The sales forecasting process is critical for most businesses.
Supply chain initiative such as quick response, effective customer response, collaborative planning
forecasting and replenishment and vendor managed inventory all of these rely on the forecasting to help
plan and manage operations more effectively.
Sales forecasting for a product is the total volume that would be bought by a defined customer group, in a
defined geographical area, in a defined time period, in a given marketing environment. If it is done
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effectively across the supply chain then it can bring a lot of benefits. Specifically, it can help in cutting
inventories, speed up product flows and increase revenues & profits.
As a starting point for estimating market demand, a company needs to know the actual industry sales taking
place in the market. This involves identifying its competitors and estimating their sales also.
Most of the times when we start doing sales forecasting then there are a few questions come into our minds.
How can customers be integrated with other supply chain members to realize supply chain
efficiencies?
What role does the sharing of business plans and schedules play in demand planning and sales
forecasting?
How do Vendor or Supplier Managed Inventories relate to demand planning and sales forecasting?
How do channel members share the cost of inaccurate forecasts in terms of buybacks, reverse
logistics of returns, ineffective promotional campaigns, and the costs of improved DP&SF?
What metrics should be used to monitor improvement of the forecasting process?
These questions must be answered in the mind of the person who is responsible for the sales so that he will
be able to achieve the same and create confidence in others for the same. If not done so then the forecast
might not be achieved.
Forecasting never ends at the point of doing, it is a continuous process, as one should review the forecast
done. This helps in two ways. First one is that one can put periodical checks and can review ones own
performance and modify the working style according to the mismatch (If mismatch is there). The second
benefit is that one can see the forecasting abilities of his own and further can keep the mismatches in mind,
so that he will be able to do a better forecasting of the market.
To improve forecasting performance, companies have increasingly relied on advances in Computer and
Information Systems Technologies. Point of sale (POS) data collection systems, electronic data interchange
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(EDI), and more recently, internet-based applications all provide access to near-real-time sales and
forecasting information for each supply chain member.
It will review the evolution of forecasting research from and early emphasis on technique development, to
more recent considerations for behaviors and channel factors that affect forecast creation and application.
Contributing to this understanding of forecasting, I merge existing concepts in forecasting management and
application to establish a model of supply chain sales forecasting management.
The forecasting of a company can be divided into 4 steps; rather in can be divided into 2 dimensions that
will be explained in a better manner.
The vertical axis, described as “moving from models to management”, acknowledges the human
component of forecasting. It recognizes that forecasting entails more than mathematical formulae,
operating procedures, and systems. Rather, forecasting involves people, their perceptions and motivations,
and their behaviors as they participate in the development and application of forecasts.
IIPM/ PGP-SS-2003-05/ SS03517 Indian Institute of Planning and Management
Organisational Supply Chain
Mod
els
Man
agem
ent
IIForecast Implementation and
Management
IEvaluating Model Performance
IVForecasting Management Performance
in the Supply Chain
IIIModel Performance- Implications for
the supply chain
55
The horizontal axis illustrates that forecasting practices more and more frequently consider demand process
and incorporate forecasting techniques that extend beyond corporate boundaries to companies throughout
the supply chain. Let us now understand each quadrant and the contributions that are helping to improve
sales forecasting performance in supply chains.
Quadrant 1: Evaluating Model Performance
Early efforts to improve forecasting performance sought to identify techniques that produce the most
accurate forecasts when considering the varied patterns of product and service demand. Much of this
research focused on time series and regression techniques and evaluated those techniques based on
traditional measures of forecast accuracy such as percent error (PE) and mean absolute percent error
(MAPE).
Findings from these and similar studies of forecasting performance suggest that more complex or
statistically sophisticated techniques do not necessarily lead to more accurate forecasts. Forecasting
performance can be affected by a variety of factors including the level of detail and types of demand data
used (item by location, all items aggregated to one number, dollars vs. units, etc.) and the length of the
forecast interval and horizon (yearly, quarterly, monthly) among other factors. Therefore, rather than
focusing on any one technique for sales forecasting, those responsible for forecasting are encouraged to
apply a range of techniques individually, and in combination, whenever possible. Furthermore, combining
forecasts should extend beyond time series and regression to include judgmental techniques.
As computer processing speeds have improved and increased the ability to consider more complex
techniques, broader measures of forecasting performance have emerged. Rather than measuring the
accuracy posed by alternative techniques, these measures have addressed issues related to forecast
application in industry.
Because they have been repeated over time, these surveys offer some interesting insights about the
evolution of forecasting practices in such concerns as changes in techniques, technologies that support
forecasting, areas of application, and role of forecasting in business.
In addition to supporting the application of more sophisticated forecasting techniques, computers have
provided a means to evaluate techniques within the context of particular business applications (Bowersox,
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Closs, Mentzer, & Sims, 1979; Gardner, 1990). Computer-based simulations have been used to investigate
relationships between forecasting performance and the performance of functions that use forecasts for
decision making.
Quadrant II: Forecasting Implementation and Management
It is apparent from the previous discussions that techniques selections can affect forecasts performance and
that the application of more accurate forecasts can lead to more effective operations in other areas of a
company (i.e., inventory management). Forecasting is not, however, solely a quantitative exercise.
Qualitative methods also provide a means to forecast future demand for products and services. To benefit
from either quantitative or qualitative forecasting techniques, individuals, systems, the forecasting
environment, and other related factors must be considered.
Forecasting implementation draws from many of the same factors that affect the implementation
of other types of decision support and operations management systems. Key among them is the need to
adopt a user’s prespective in process and system design (Schultz, 1984). The many individuals who
participate in forecasting incorporate different decision styles, educational backgrounds very and
differences exist in perceptions about forecasting practices ad now well they understand those practices.
To improve the likelihood of success with forecasting process and system implementation, Schultz
(1984) recommended the following five steps to guide forecast implementation:
1. Define the current process and system supporting forecasting.
2. Measure factors that contribute to implementation success (such as those outlined above),
3. Develop an implementation plan,
4. Build an implementation team, and
5. Establish mechanisms for feedback and control during the implementation process.
Implementing new forecasting systems and practices can improve forecasting performance; however, such
success is not a guarantee of continued forecasting effectiveness or improvement. Over the longer term,
forecasting performance relies on management attitude and a company’s approach to continuous
improvement in forecasting management.
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As a tool for prescription, the characteristics identified along each forecasting management dimension are
represented in some form at all stages of sophistication. By comparing forecasting practices to the model,
companies can establish their current state of forecasting practices and define a road map leading to
improved forecasting management performance.
As a tool for prescription, the characteristics identified along each forecasting management dimension are
represented in some form at all stages of sophistication. By comparing forecasting practices to the model,
companies can establish their current state of forecasting practices and define a road map leading to
improved forecasting management performance.
Quadrant III: Model Performance- Implementation for the Supply Chain
Forecasting technology and inventory policies can systematically influence the degree of demand
variability in the supply chain than exponential smoothing techniques. Furthermore, when all companies in
a supply chain use the same demand data, the same forecasting technique (i.e.) forecasting is centralized),
the same inventory polices, the supply chain experiences reduced demand and inventory fluctuation (the
bullwhip effect). On the other hand when forecasting is not centralised, or when forecasting techniques
require estimation of smoothing parameters to address factors such as trend and seasonality, a more
substantial bullwhip effect can be experienced in supply chain inventory.
Quadrant IV: Forecasting Management Performance in the Supply Chain
Forecast development and application in supply chains is affected by two dimensions of management. The
first is intra-organizational and is concerned with forecasting effectiveness within companies. This
dimension draws from insights revealed in the discussion of quadrant II. The second is inter organizational
and is affected by the extent each company in the supply chain has adopted a supply chain
orientation(SCO) and activities affiliated with such orientation.
The inter-organizational dimension extends the concept of forecasting management performance across the
supply chain. FMP is defined as the forecast users’ perception of forecast accuracy and credibility, as well
as their application of the forecast without modification (Smith, 1999). In the FMP model (Figure 7.2)
forecast users include individuals and operations within an organization who must satisfy product and
service demand, and who use forecasts to plan and execute tasks to accomplish this goal. In the supply
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chain forecasting management performance (SCFMP) model (Figure 7.4), forecasts’ users extend to
include other companies in the supply chain that rely on forecast to plan and execute tasks to satisfy
product and service demand.
In supply chain environment in which companies share forecast information, the effectiveness of the
forecasts used by an upstream company for planning and management can be influenced by measurement
error (accuracy), a commonly recognized approach to measuring forecast performance. It ma also be
affected by the extent that forecasts received from a downstream supply chain partner are used to plan and
manage operations. In other words, if a forecast shared between companies in a supply chain were devoid
of measurement error, performance could still be affected by the extent that each company uses the
forecast, ignores the forecast, or modifies the forecasts prior to its use.
Let us now analyse some of the channel relationships
This is the most traditional channel relationship. This is how it used to be managed. In this channel
management, there was no exchange of information from both the sides. The wholesaler will come to know
about the plans of the retailer at the time when he will get the order and the manufacturer will come to
know about the wholesaler at the time of order only.
In this caste Manufacturer has to forecast about the wholesaler’s forecast and similar is the story for
wholesaler to retailer. Only the retailer is able to concentrate on forecast of customer who should be the
target of all the three.
Further market has moved towards sharing some information and the next stage appeared as
IIPM/ PGP-SS-2003-05/ SS03517 Indian Institute of Planning and Management
ManufacturerForecasting Management
WholesalerForecasting Management
RetailerForecasting Management
ORDERORDER
59
In this case the forecasting is been shared with the supplier at all the levels. This has improved the working
of the whole chain. In this case the problem is that the manufacturer can plan things as per the forecasting
of the wholesaler and the retailer as he has got the information needed to plan the production. The problem
arises in that case when retailer has to change his plans or make his plans and is in need of the forecast of
his suppliers, thus it needs to have a sharing of the information from both the sides. Another reason for
sharing of information from both the sides is that the person at a higher level can put much better inputs
and can predict for a market much better that a small player of that market. Thus a retailer to be successful
and make the company successful in a particular market needs to have a better insight about the market and
the company.
Let us now see that what kind of relation is needed for a optimal combination
IIPM/ PGP-SS-2003-05/ SS03517 Indian Institute of Planning and Management
Sharing of Forecasting&Plans
Sharing of Forecasting&Plans
ManufacturerForecasting Management
WholesalerForecasting Management
RetailerForecasting Management
ORDERORDER
Sharing of Forecasting&Plans
Sharing of Forecasting&Plans
ManufacturerForecasting Management
WholesalerForecasting Management
RetailerForecasting Management
ORDERORDER
60
In this case every supply chain partner can plans things as per the information that is available to him. A
retailer can plan things better in this case as he can know about the status of the orders he has given and
also is knowledgeable about the activities happening in the market. At number of times he might be able to
give some valuable information to the company that he might have thought to be irrelevant.
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Let us now move to the Paint industry and understand how is the forecasting in the particular trade.
As it was been discussed in the first chapter that there are many products, which are been covered by a
company in the paint, trade thus it is very important to have a accurate amount of forecast. If at any level
the forecast goes wrong then he might loose either sales or he has to bear an additional cost for having the
stuff available at the time it is needed. To make all the products available at all the time for the customers is
a very costly affair as to do so one has to carry huge amount of inventory, which will charge carrying cost,
capital, which is been blocked in the inventory, and also the products are getting older in the Godown.
To forecast the market very accurately for so many products is not only difficult but is merely impossible.
The forecasting has to be as close as it can be so that the manager who is forecasting can offer the right
product at the right time in the right market without having any additional cost. Some plans have also to be
made for the uncertainties so that a manager should not loose any kind of sales if the market does not
moves as per the forecast.
In the forecasting patterns both the companies move in a different pattern. Let us see that how both the
companies plan their future in the market and how well they are able to perform.
The paint market is so uncertain that to forecast is very difficult for any company but still all the companies
in the market are looking to have better growth than the other. Berger Paints who was able to keep the
growth level in the positive side since 1980 is having more of human touch in the forecasting process. The
plans of forecasting is been decided both top to bottom ways and also bottom to top ways. This can be
explained as a growth for the company is been decided by the top management of the company and is been
further divided as per the growth potential of the Zones( Berger Has 5 Zones in India), the Zones then
further divide the plans in the Regional Level (Every Zone has 2 regions), further regions divide their plans
into depot wise which is finally been given to the territory level. In this process the division is been done as
per the growth potential of the place. In a depot to have an average of 10% Growth he might give one
territory a target of 5% and the other a target of 15% as the growth potential of the first is low and the
second is high. This happens other wise also as the plans for up to down is for the plans of overall growth
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but when it comes to product wise growth then the plans are made at a depot level which is decided at a
territory level. These plans are been compiled and moved up to the regional level, then zonal level and then
finally goes to the corporate level.
The planning in Berger is done twice a year, once it is done for the first 3 months of the year which is
January, February and march. The other planning is done for the rest of 9 months. The planning is then
been divided in month wise and then unto the territory wise level. This exercise is called phasing. In this
phasing exercise one has to forecast for all the SKU’s (Stock keeping units) that can be divided in product
name, colour and pack size.
The planning is also done at a dealer wise level and is been communicated to the dealer at the beginning of
every month. There are many schemes run for various fast running products, these schemes are generally a
cash discount through credit notes or given in the system of some gift. For every dealer to achieve the
discounts or gift they have to qualify the criteria, which is generally based on the forecast made for the
particular dealer. if a dealer is not able to qualify for the scheme, then he will not be able to enjoy the
benefits of the scheme and thus at times he is not able to make himself competent in the market.
The system of schemes will better be understood by an example
Suppose a particular dealer has purchased Luxol Snow White (A Berger Brand) 200Liters in the month of
may in the previous year, then he might be given a target of 12% growth on the last year lifting and he is
been told that if he achieves the target then he will be issues a Credit note of Rs. 2 Per Liter of the total
purchases of the same product in this month. If the dealer is able to achieve the target given by the
company then he will be able to get products cheaper than the rate which is given to the dealer who are not
able to qualify in the market. If in case he is not able to do so then he will be getting products 2Rs costlier
than the dealers who are able to achieve the scheme. If these dealers decide to sell the products in the
market only after making profit of Rs.1 then this dealer who is not able to qualify will not be able to sell the
products in the market.
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With these schemes running in the market there is a advantage to the dealer as to that he can purchase the
products in the cheaper cost and also to the company so that they can achieve the targets they made for a
particular dealer. With having the targets achieved for the dealers they are trying to achieve the target of the
territory which is go up to the depot, region, zone and finally to the company as a whole.
In the case of forecasting Asian Paints has a upper hand as they have a better technology in their hands.
Asian paints have implemented ERP in their working from i2. They are able to get the market data very
accurately and so do they can plan things in a better manner but at the same time as been discussed that the
forecasting now a days is more of a human factor than the technical factor. To forecast a market in a better
manner one has to have good knowledge of the market and also to have a insight about what the competitor
is doing, one who has the better idea of all this is able to do things in a better manner and is able to get
better results. In the present days Asian has a bigger problem in having fight with ICI as their rivals as they
both are having a strong presence in the same segment, they both are more aggressive in the emulsion
market as they both feels that emulsions are the future of the paint industry. Thus it is very difficult to
forecast in a better manner. Asian most of the time works on the targets of the dealers, they have targets or
all the dealers, these targets are based upon the performance on the last year sales. As also in Berger, Asian
also gives additional benefits on achievements of these targets. One thing that is different in Asian is that
they have a very keen eye on what the market is going towards, as they don’t prefer having surprises. Asian
always keeps a check on the product lifting of every dealer, through which they can come to know about
the dealer in a better manner as to is the dealer selling as in the retail market or he is selling the stuff to
other dealers also. This can be seen as if one dealer who is lifting 300 liters of Paint in a week and another
is lifting 20 liters. Suddenly if 300 liters person stops buying and the person having 20 liters shoot his order
then they come to know that the stock is been transferred by the second dealer to the first dealer. They at
Asian Paints does not stops at the point by thinking that the lifting is still the same but they work on the
reasons of having such kind of activity, they prefer to check the reasons and try to get the things back to
their own control. Asian Paints prefer that their products in the market should not be wholesaled but should
only be retailed. This helps them to keep the control in their hands only so that one dealer will not be able
to harm them to a high volume.
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CHAPTER 5
CUSTOMER SATISFACTION
(The Key to Supply Chain Value Creation – A Customer Focus)
&
INTERFIRM RELATIONSHIP
(The Key to deliver the promised components – A health partnership)
Delivering just what your customers need, when they
need it, isn’t easy. But some leading companies are
combining strategy, business processes, and
technology to create what’s known as demand-driven
supply chains—a highly efficient mode of operating
that scores a perfect 10 for businesses and customers
alike.
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An increasing number of businesses are turning their attention to supply chain management to create
competitive advantage and improve the bottom line. Many managers still view supply chain management
as a mechanism to improve profits through cost containment. However, it is important to recognize that
effective SCM focuses primarily on meeting customer needs, rather than on cutting costs. Improved
relationships with customers and more efficient product delivery processes can result in a clear distinction
between firms and lead to sales growth. Alternatively, if cost cutting goes too far, the company may
unknowingly eliminate services or product features that may be valued by customers.
The notion of leveraging supply chain service is particularly significant in situations where there exists
intense competition on price, product features and promotional initiatives. In commodity-type markets
where the standard is high-level service at the lowest cost, firms must reduce wasteful practices across the
entire supply chain to create significant value. For example, in businesses like consumer packaged goods
and automobile parts, firms have little choice but to compete on service to gain differentiation. Adopting a
customer-driven perspective enables firms to view SCM as a tool for creating market value, rather than
simply controlling costs.
Management of the supply chain can help firms distinguish themselves from competitors. Rather than
limiting promotion efforts to the products they offer, the processes that accompany the products can be
viewed as an additional means of adding value for customers. For example, many manufacturing firms
have produced brochures that detail how their customizable distribution capabilities benefit customers.
It is rare that cost cutting alone can enable a company to improve long-term profitability and competitive
position in a growing economy. Thus financial professionals must look beyond cost containment and focus
on customer satisfaction as a major component of the strategic direction of the company. Embracing a
customer-driven focus in the SCM process offers many tangible opportunities for financial professionals to
actively participate in strategic planning and business decision-making, and to be perceived as valued
members of the management team.
To help their firms develop customer-driven SCM, financial professionals should:
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Appreciate the true differences between customer-driven and asset-driven SCM
Identify and support initiatives that capitalize on customer value-creation opportunities in the
supply chain.
Let us now see that what is the difference between a Customer-Driven Supply chain management and a
Asset-Driven Supply Chain Management
While many companies openly claim to be customer-driven, in reality, they tend to be more asset-driven.
Managerial effort, performance evaluation and rewards are based primarily upon internally-oriented
efficiency and productivity metrics rather than on the satisfaction of customer needs. In terms of SCM,
customers value — and are often willing to pay a premium for — high-quality service, flexibility,
reliability, customization and responsiveness. Unless firms adopt a focus broader than asset-driven cost
control, the attributes critical to customer satisfaction may be overlooked.
In contrast to the internal focus of asset-driven companies, customer-driven companies maintain a more
balanced focus by allocating time equally to tracking internal processes and external issues like customer
needs and competitor actions. Senior managers may spend as much as one day a week meeting directly
with customers. Formal customer service and satisfaction data is collected and regularly evaluated. Joint
problem-solving meetings are routinely held with customers. A key determinant in performance evaluation
and reward allocation is customer satisfaction.
Extensive familiarity with customers operations is important because SCM is essentially a trade-off
between cost and service. In order to realize the potential benefits in terms of increased sales and profits,
management needs to understand the customer and recognise the value that customers assign to the various
dimensions of service. It is essential that managers work across functional boundaries. SCM should not be
considered the domain of any single functional group.
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Now let us see that how a Supply Chain can add value
Supply chain management adds customer value in three generic ways: effectiveness, efficiency and
differentiation. It is important for finance professionals to recognize the product differentiation opportunity.
As an increasing number of businesses use SCM to create competitive advantage, it is important to
recognize the importance of customer-driven SCM. If financial professionals are expected to help their
firms develop customer-driven SCM programs, they must first appreciate the differences between
customer-driven and asset-driven perspectives as applied to SCM. This important distinction will enhance
the credibility of financial managers when operating in cross-functional teams and prepare them to best
identify and support initiatives that capitalize on customer value-creation opportunities in the supply chain.
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Lets now again go to the paint industry and analyse it.
In the paint industry the involvement is very less to but the product as it is not the product that is in direct
contact to the end customer, the product is used by a applicator who is generally a painter. It is in hand of a
painter to give a product a desired output, if a painter is will to work on the product from his heart then he
can give the product a better output than the company claims to have as he knows that what is the right
move and what is not appropriate to be done. Thus in this case it is very important to keep a painter
knowledgeable on how to use the product in a proper manner and also to keep him happy with the products.
Thus in the paint industry the painter is equally important that to a customer.
Thus if we have to give importance a per a company to the painter, dealer and the end customer then it
might happen that the customer will loose and will not be able to get as much importance as the painter and
the dealer is given. The reason is simple that the painter is the applicator and he is the sole person who is
responsible for success or failure of a product. The next importance is that of a dealer as there are three
reasons for it. One is that the dealer is keeping the product at his shop thus he is a aim for a company, the
second reason is that every dealer have a few painter attached to him and he is in direct contact with them
and is also responsible for a better or a poor picture in the painters mind. Last but not the least is that at
times when a customer is willing to buy the product by himself then he is moving to a dealer and asking for
a particular product, but due to lack in confidence, which is due to lack in knowledge it is very easy to
convert the customer from one brand to another. So due to all the three reasons the dealer even scores very
high points for the company.
As when we compare the companies like Berger and Asian which are two market leaders then we look at a
very opposite story as they both are very opposite in their working. At one side is Berger Paints who is
mainly concentrating on the dealers network and likes to give heavy discounts or supports to the dealer
network they have as they feels that if the dealer is happy with them then he will stock only the products
they are providing. The further result will be that the dealer will be working on the painters he have and
convince him to apply that product. This will finally help them making their product reach maximum
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number of houses. As the result they are able to take lead in a number of markets, one of them is Delhi,
which is the biggest market in India as far as the paint industry in India is concerned. The company even
after having services like Home Décor, which is a service provider for all the solutions for a home in the
paint concern, the perception in the mind of consumer is that the product is more of value for money
product. Now keeping this picture in mind the company is trying to change the perception in the mind of
consumers with a initiative to change the branding and the services which they are providing. The company
is now changing the brand name from the previous name generally used as Berger Paints “Colours of Joy”
they are now moving to some thing like Lewis Berger “Paint your imagination”. Thus with having all the
initiative and also are starting the products like illusions which is a paint that looks like a wallpaper they
might be able to change the perception in the mind of a customer. By this work they are also hoping that
they will improve the market share of Berger paints in the next few years.
On the other hand is Asian Paints who is the market leader for India as a whole. They are more of customer
centric and they prefer to work more on the promotions for the products. With the heavy spending on
promotions they want that on the name of paints every customer should remember only one name “Asian
Paints”. They have even kept their advertisements in the T.V. keeping that thing in mind and always kept
the tagline the same “Har rang kuch kehta hai”. In fact they are the only company that is promoting the
Brand Asian as a whole, other companies like Berger and ICI are always willing to promote one of the
product that is been provided by their bucket. With having so much interest in the customer centric they
even go for demonstrations whenever a customer is not satisfied or is confused to choose the products. This
has helped them to have a perception of premium companies in the mind of the customers.
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INTERFIRM RELATIONSHIP
Internet age challenges have been accompanied by a handsome promise, that being, the promise of being
able to collaborate and cooperate with strategic partners to deliver better products to customers in a faster
and more efficient fashion.
As a manufacturer, wouldn't you welcome a system where there are no warehouses, inventories or paper
invoices, just plug-ins that monitor your supplier network automatically, in real-time, everywhere,
simultaneously?
Synchronised execution of manufacturing and supply across a dynamically re-configurable supply chain
network, to profitably meet demand, is an ideal scenario.
The mantra is moving from just measuring performance, on internal cost and efficiency, to external
processes targeting customer-satisfaction at the shelf. Having a well-harmonised network maintaining high
operating margin — not just profits or growth rate — is the goal of any organisation.
Manufacturers must learn to collaborate internally and externally. This builds the culture of information
sharing empowering everyone across the board. Collaboration makes it easier for companies to adjust to
changing scenarios.
Collaboration facilitates real-time focus on inventory levels, capacity outlooks and new technology drivers,
which, in turn, helps in better management of demand. Setting up a collaborative network will help build
effective supply chain components.
Collaboration in Supply Chain Management
Partnership, which can be another name for collaboration, is a label used for a variety of innovative
approaches to managing relationships between organizations in construction.
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These arrangements have one thing in common - an intention to move beyond the limitations of traditional
project relationships. In these, there is little or no integration of the processes used by the different
members of the project 'team'; all too often one party seeks to improve business performance by
manipulating cash flows and enhancing profit margins at the expense of someone else.
Partnering is not another new form of contract nor a new way of relating between people. It is a different
way of structuring business relationships, which has profound implications for both contracts and the ways
people work together.
Most ideas of Partnering draw their inspiration from manufacturing - vehicles, food, aerospace and
electronics - where long-term supply relationships have developed between product assemblers and key
first-tier component suppliers. Rather than constantly put out tenders and choose different suppliers on the
basis of lowest price, assemblers enter into long-term, but relatively informal, agreements with a few
suppliers. Commercial pressure is maintained by benchmarking supplier performance on a number of
fronts, with agreed targets for improvement. Suppliers work together with the assembler to deliver
continuous improvement in products and processes over time. As a result, all parties deliver lower costs
and improved quality without squeezing each other's profit margins. Steady profits then provide the basis
for investment in improved products and processes, and a virtuous circle of continuous improvement is
established.
This goes for the manufacturing side now let us look at the marketing side and look at how partnership
affects marketing strategies
Marketing strategists are increasingly realizing that making better decisions faster is crucially important in
the Internet age. No longer a luxury, the ability to make effective decisions quickly is practically a
prerequisite for mere survival. Fortunately, these uniquely Internet age challenges have been accompanied
by a handsome promise; that being, the promise of being able to collaborate and cooperate with strategic
partners to deliver better products to customers in a faster and more efficient fashion.
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Partnership can also help in making each other profitable as both can work together to make the system of
the other better and more effective in a cheaper cost. By partnership another benefit can also be that the
expansion the business of both the supply chain partners. This can be better understood with a example.
Let us see that the companies have partnership between each other and have collaborated to work, then the
with having the faith in each other the dealer who is buying the products from the company and forwarding
the products in the market can forward some of his major accounts to which he is supplying a major
amount of products from the company. by doing so he does not have to worry for the supplies as the
company will do it directly and he will get his commission as he has given the deal to the company. the
benefit on the company side can be that the company is in contact with the customer directly.
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Inter firm relations in the paint trade.
One common thing about the trade is that every company in this trade is very dealer centric. This is because
of the reason that he has a very important part to play in the sales. He is not only the facilitator of the
product but also plays a part as a influencer in the final sale. Keeping these things in mind every company
is having a club. The company has given targets as in slabs or has given any other criteria through which a
dealer can enter into the club. The members of the club are once in a year are taken on a foreign tour, which
is fully paid by the company. In addition to that they get stationary and gifts in which it is mentioned as
their being a member of the Club (Whichever they belongs to). In addition to the yearly club there are
various schemes that are been run for the dealers as some may be of a tour to some place in India, some
might be for a free gift as in the shape of a T.V. of a home theater. The dealer gets a lot of privilege from
the companies for being loyal to the company.
As already been discussed that both the companies have a very different way of working in the market.
Berger is more of working in the wholesale kind of structure and is willing to spend more on giving to the
dealer. They are always more aggressive to give better discounts to the dealers and getting higher market
share thus the relation that is been shared by dealers from Berger paints is most of the times in negotiation
to the company and getting the maximum that they can get. It is been seen that the dealers are most of the
times discussing the rates at which they will be getting a product (In the paint trade it is called the landing
rate of a dealer). This can be better seen with that most of times when a products discount in Berger is
changed, then the major concentration of the, manager taking the decision is kept on the rates at which the
products of Asian is been sold to the dealers and at what price Asian products are been retailed in the
market. It is seen that generally the products of Berger will be sold at a good discounts than the
comparative products of Asian paints.
Asian paint is trying to keep a most hold in their hand by having the pull from the market instead of giving
push to the dealer. They spend so much on the marketing that the dealer has a compulsion to keep a
moderate amount of products of Asian Paints to serve the market properly. If the dealer won’t do so then he
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might loose a few of customers, as they are strict to take Asian paints for the painting of their house. This
can be better understood with the example that a product Apex (Asian Paints), an exterior product, is
having the name of the category. It is having such good name in the market that if a person needs exterior
paint of any other company then he will say that “please give me Apex of Berger”. It was that the customer
was in need of Weathercoat of Berger Paints, which is a competition brand of Berger to Apex of Asian
Paints. With having such good name ion the market it doesn’t means that they don’t keep any care of the
dealers but is in such a manner that they try to rely on the dealer as less s they can. This helps them to built
a brand image of their product in the market and also are getting minimum threat of the buyer shifting from
your brand to any other brand. This can be seen that they are reducing the bargaining power of the buyers
and are taking care of one force of Michael Porter’s 5 Forces Model.
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CHAPTER 6
ROLE OF SALES AND MARKETING IN
SCM
The two roles which focus totally towards market.
One designs about how to sell and what should be
done and the other actually sells the product in the
market. Let is see what the experience of marketing
and sales talks about it.
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The role of sales in Supply Chain Management
Given that the role of the contemporary salesperson is changing dramatically, and that in many situations,
the old models of selling are simply outdated, ineffective, and counterproductive to supply chain
management goals and objectives
While most sales organizations focus on pre purchase activities, supply chain partners focus on managing
relationships and conducting post purchase activities to enhance supply chain performance. The sales force
is well positioned to implement, facilitate, and coordinate many supply chain management activities. In
short, the supply chain sales force should be involved with any supply chain activity that goes beyond
organizational boundaries. More specifically, the sales force should be an integral part of implementing
cooperative behaviors (i.e., joint planning, evaluating, and forecasting), mutually sharing information, and
nurturing supply chain relationships.
To be effective at their new role, the supply chain sales force must gain new expertise in logistics and
supply chain management. Salesperson logistics expertise is defined as a customer’s perception of a
salesperson’s knowledge, experience, or skills relevant to logistics issues. Salesperson logistics expertises
concern the seller’s and supply chain partners’ logistics operations, systems, and processes at both tactical
and strategic levels. Thus, salesperson logistics expertise includes internal (company) logistics expertise,