Supply Chain Management
A Project On
“Mc Donalds”
SUBMITTED TO: Dr.Jayant Sonwalkar
SUBMITTED BY: MUGDHA BIYANI PANKAJ SINGH
ACKNOWLEDGEMENT
This
Supply Chain Management project on McDonalds is the outcome of sincere
and positive contribution contribution of various various individu individuals. als. We can not justifiab justifiably ly translate translate there help, help, cooperation and guidance extended to us in completing this project work in words. However we shall be failing in our duty if we don’t express our thanks to a few people in particular.
We would like to thank Mr. Akhilesh Mishra(floor manager) at McDonalds for his cooperation and it has been high privilege to work under the able supervision of our respected teacher,
Dr. Jayant Sonwalkar
Mugdha Biyani Pankaj Singh Parihar
Table of Contents
1. Introduction to McDonalds . 1.1 History. 1.2 Corporate overview. 1.3 Why the Project? 1.4 Types of Restaurants . 2. Methodology used.
3. Business model. 4.
Advertising.
5.
Global operations and locations.
6. McDonalds in India. 7.
Understanding Supply Chain Management.
8. Inve Invent ntor ory y Manag Manageme ement nt.. 9. How How Purch Purchas asin ing g cycl cyclee work works? s? 10. Understanding Supply Chain at McDonalds. 11. Suppliers and Distributors of McDonalds. 12. findings of study conducted.
McDonald's
Is the leading global foodservice retailer with more than 30,000 local restaurants serving 52 million people in more than 100 countries each day. More than 70% of McDonald's restaurants worldwide are owned and operated by independent local men and women.
Is one of the world's most well-known and valuable brands and holds a leading share in the globally branded quick service restaurant segment of the informal eating-out market in virtually every country in which we do business. Serves the world some of its favorite foods - World Famous French Fries, Big Mac, Quarter Pounder, Chicken McNuggets and Egg McMuffin. Our rich history began with our founder, Ray Kroc. The strong foundation that he built continues
today with McDonald's vision and the commitment of our talented executives to keep the shine on McDonald's arches for years to come. To read more about McDonald's history, vision and executives, click on their links in the left menu.
History
1955 1957 1959 1961 1963 1964 1965 1967 1968 1972 1973 1974 1983
1984 1989 1990 1993 1994
1996
Ray Kroc opens his first restaurant in Des Plaines, Illinois and the McDonald's Corporation is created. Quality, Service, Cleanliness and Value (QSC& V) becomes the company motto. The 100th McDonald's opens in Chicago. Hamburger University opens in Elk Grove, near Chicago. One billion hamburgers sold. Ronald McDonald makes his debut. Filet-O-Fish sandwich is introduced. McDonald's Corporation goes public. The first restaurants outside of the USA open in Canada and Puerto Rico. The Big Mac is introduced. The 1,000th restaurant opens in Des Plaines, Illinois. A new McDonald's restaurant opens every day. The Quarter Pounder is introduced. Egg McMuffin is introduced. The first Ronald McDonald House opens in Philadelphia. The Happy Meal is launched. Chicken McNuggets is introduced. New Hamburger University campus opens in Oak Brook, Illinois. Set in 80 wooded acres. Training is provided for every level of McDonald's management worldwide. 50 billionth hamburger sold. Ronald McDonald Children's Charities is founded in Ray Kroc’s mem ory to raise funds in support of child welfare. McDonald's is listed on the Frankfurt, Munich, Paris and Tokyo stock exchanges. McDonald's opens in Pushkin Square and Gorky Street, Moscow. The first McDonald's at sea opens aboard the Silja Europa, the world's largest ferry sailing between Stockholm and Helsinki. Restaurants open in Bahrain, Bulgaria, Egypt, Kuwait, Latvia, Oman, New Caledonia, Trinidad and United Arab Emirates, bringing the total to over 15,000 in 79 countries on 6 continents. McDonald's opens in India – the 95th country.
The business began in 1940, with a restaurant r estaurant opened by siblings Dick and Mac McDonald in San Bernardino, California. Their introduction of the "Speedee Service System" in 1948 established the principles of the modern fast-food restaurant. The present corporation dates its founding to the opening of a franchised restaurant by Ray Kroc, in Des Plaines, Plaines, Illinois on April 15, 15, 1955, 1955, the ninth McDonald's restaurant overall. Kroc later purchased the McDonald brothers' equity in the company and led its worldwide expansion. With the successful expansion of McDonald's into many international markets, the company has become a symbol of globalization of globalization and the spread of the American way of life. life. Its prominence has also made it a frequent topic of public debates about obesity, corporate ethics and consumer responsibility.
Corporate overview
Facts and figures
A McDonald's restaurant in Times Square. Square. McDonald's restaurants are found in 120 countries and territories around the world and serve nearly 54 million customers each day. The company also operates other restaurant brands, restaurant brands, such as Piles Café, and has a minority stake in Pret a Manger. The company owned a majority stake in Chipotle Mexican Grill until completing its divestment in October 2006. Until December 2003, it also owned Donatos Pizza. On August 27, 2007, McDonald's sold Boston Market to Sun Capital Partners. Partners.[3] It also has a subsidiary, Redbox, which started in 2003 as 18-foot (5.5 m) wide automated convenience stores, stores , but as of 2005, 2005, has focused on DVD rental machines.
WHY THE PROJECT
•
To strengthen our knowledge
•
To develop practical approach
•
To understand real supply chain practices
•
To know the cold chain system
Methodology Used
•
Through Questioners
•
Personal interviews
Types of restaurants
A McDonald's restaurant in Kristiansand, Norway. Kristiansand, Norway.
Inside a Dublin McCafé. McCafé. Most standalone McDonald's restaurants offer both counter service and drive-through service, with indoor and sometimes outdoor seating. Drive-Thru, Auto-Mac, Pay and Drive, or McDrive as it is known in many countries, often has separate stations for placing, paying for, and picking up orders, though the latter two steps are frequently combined; it was first introduced in Arizona in 1975, following the lead of other fast-food chains. In some countries "McDrive" locations near highways offer no counter service or seating. In contrast, locations in high-density city neighborhoods often omit drive-through service. There are also a few locations, located mostly in downtown districts, that offer Walk-Thru service in place of Drive-Thru. Specially themed restaurants also exist, such as the "Solid Gold McDonald's," a 1950s rock-androll themed restaurant. In Victoria, Victoria, British Columbia, there is also a McDonald's with a 24 carat (100%) gold chandelier and chandelier and similar light fixtures.
The site of the first McDonald's to be franchised by Ray Kroc is now a museum in Des Plaines, Illinois. Illinois. The building is a replica of the original, which was the ninth McDonald's restaurant opened. To accommodate the current trend for high quality coffee and the popularity of coffee shops in general, McDonald's introduced McCafés. The McCafé concept is a café-style café-style accompaniment to McDonald's restaurants. McCafé is a concept of McDonald's Australia, Australia, starting with Melbourne in 1993. Today, most McDonald's in Australia have McCafés located within the existing McDonald's restaurant. In Tasmania there are McCafés in every store, with the rest of the states quickly following suite. After upgrading to the new McCafe look and feel, some Australian stores have noticed up to a 60% increase in sales. As of the end of 2003 there were over 600 McCafés worldwide. Some locations are connected to BP gas stations/ stations/convenience stores, [4] while others called McDonald's Express have limited seating and/or menu or may be located in a shopping mall. Other McDonald's are located in Wal-Mart stores. McStop is a location targeted at truckers and a nd travelers which may have services found at truck stops. [5]
Playgrounds
Some McDonald's in suburban areas and certain cities feature large indoor or outdoor playgrounds, playgrounds, called "McDonald's PlayPlace" (if indoors) or "Playland" (outdoors)[citation needed ]. The first PlayPlace with the familiar crawl-tube design with ball pits and slides was introduced in 1987 in the USA, with many more being constructed soon after. Some PlayPlace playgrounds have been renovated into "R Gym" areas. "R Gyms" are in-restaurant play area that features interactive game zones designed for children aged 4 to 12. Equipped with stationary bicycles attached to video games, dance pads, basketball hoops, monkey bars, an obstacle course, and other games which emphasize physical activity. activity .[6] The "R Gym" features the Toddler Zone, an active play environment with age appropriate games that develop physical coordination and social skills; the Active Zone, designed for children aged four-to-eight that promotes physical fitness through fun play; the Sports Zone which features a series of sport oriented activities to promote aerobic exercise for children aged 9-to-12; the Parent Zone which features seating and provides a monitoring area for their children; and the Dining Area which allows families to eat.
Redesign
A UK McDonald's before the redesign, August 2006
The same McDonald's after the redesign, August 2007 In 2006, McDonald's introduced its "Forever Young" brand by redesigning all of their [7][8] 8] restaurants, the first major redesign since the 1970s .[7][ The new design will include the traditional McDonald's yellow and red colors, but the red will be muted to terra cotta, the yellow will turn golden for a more "sunny" look, and olive and sage green will be added. To warm up their look, the restaurants r estaurants will have less plastic and more brick and wood, with modern hanging lights to produce a softer glow. Contemporary art or framed photographs will hang on the walls. The exterior will have golden awnings and a "swish brow" instead of the traditional doubleslanted mansard roof . The new restaurants will feature areas: •
The "linger" zone will offer armchairs, sofas, and Wi-Fi connections.
•
The "grab and go" zone will feature tall counters with bar stools for customers who eat alone; Plasma TVs will offer them news and weather reports.
•
The "flexible" zone will be targeted toward families and will have booths featuring fabric cushions with colorful patterns and flexible seating.
Different music will be targeted to each zone.
Business model
The McDonald's Corporation's business Corporation's business model is slightly different from that of most other fastfood chains. In addition to ordinary franchise fees, supplies, and percentage of sales, McDonald's also collects rent, partially linked to sales. As a condition of the franchise agreement, the Corporation owns the properties on which most McDonald's franchises are located. The UK business model is different, in that fewer than 30% of restaurants are franchised, with the majority under the ownership of the company. McDonald's trains its franchisees and others at Hamburger University in Oak Brook, Illinois. According to Fast Food Nation by Eric Schlosser (2001), Schlosser (2001), nearly one in eight workers in the U.S. have at some time been employed by McDonald's. (According to a news piece on Fox News this figure is one in ten). The book also states that McDonald's is the largest private operator of playgrounds in the U.S., as well as the single largest purchaser of beef, pork beef, pork , potatoes, and apples. apples. The selection of meats McDonald's uses varies with the culture of the host country.
Products
McDonald's predominantly sells hamburgers, hamburgers, various types of chicken of chicken sandwiches and products, french fries, fries, soft drinks, breakfast drinks, breakfast items, and desserts. desserts. In most markets, McDonald's offers salads and vegetarian items, wraps and other localized fare. This local deviation from the standard menu is a characteristic for which the chain is particularly known, and one which is employed either to abide by regional food taboos (such as the religious prohibition prohibition of beef consumption in India) India) or to make available foods with which the regional market is more familiar (such as the sale of McRice in Indonesia). Indonesia).
Advertising
Ronald McDonald
McDonald's has for decades maintained an extensive advertising campaign. In addition to the usual media (television, radio, and newspaper), the company makes significant use of billboards and signage, sponsors sporting events from ranging from Little League to the Olympic Games, Games, and makes coolers of orange of orange drink with drink with their logo available for local events of all kinds. Nonetheless, television has always played a central role in the company's advertising strategy. To date, McDonald's has used 23 different slogans in United States advertising, as well as a few other slogans for select countries and regions. At times, it has run into trouble with its campaigns.
Global operations
Countries with McDonald's stores
McDonald's has become emblematic of globalization, sometimes referred as the "McDonaldization" McDonaldization" of society. The Economist magazine uses the "Big "Big Mac Index": Index": the comparison of a Big Mac's Mac's cost in various world currencies can be used to informally judge these currencies' purchasing power parity. The EFTA countries are leading the Big Mac Index with the top 3 most expensive Big Mac's. Mac's. Iceland has the most expensive Big Mac, followed by Norway and Switzerland. Switzerland.
The brand is known informally as "Mickey D's" (in the US and Canada), "Macky D's" (in the UK), "Mäkkäri" (in Finland), "McDo" (in France, Quebec, the Philippines, and the Kansai region of Japan), "Maccer's" (in Ireland), "Macarrannis" (in Mexico), "Maccas" (in New Zealand and Australia), "McD's" (in New Zealand), "Donken" (in Sweden), "de Mac" (in the Netherlands), or "Mac" (in Brazil). Thomas Friedman once said that no country with a McDonald's had gone to war with another . another .[14] However, the "Golden "Golden Arches Theory of Conflict Prevention" Prevention " is not strictly true. Careful historians point to the 1989 United States invasion of Panama, NATO's Panama, NATO's bombing of Serbia in 1999, 1999, and the 2006 Lebanon War as War as exceptions. Some observers have suggested that the company should be given credit for increasing the standard of service in markets that it enters. A group of anthropologists in a study entitled e ntitled Golden Arches East (Stanford University Press, 1998, edited by James L. Watson) looked at the impact McDonald's had on East Asia, Asia, and Hong Kong in particular. When it opened in Hong Kong in 1975, McDonald's was the first restaurant to consistently offer clean restrooms, driving customers to demand the same of other restaurants and institutions. In East Asia in particular, McDonald's have become a symbol for the desire to embrace Western cultural norms. McDonald's have recently taken to partnering up with Sinopec, Sinopec, China's second largest oil company, in the People's Republic of China, as it begins to take advantage of China's growing use of personal vehicles by opening numerous drive-thru restaurants.[15]
Global locations
• • • • • • • • • • • • • • • • • •
• • • • • •
Argentina Aruba Australia Austria Azerbaijan Bahamas Bahrain Bangladesh Barbados Belgium Bermuda Botswana Brazil Bulgaria Canada Cayman Islands Chile People's Republic of China Hong Kong o Macau o Colombia Costa Rica Croatia Cyprus Czech Republic Denmark
•
• • • • • • • • • • • • • • • • • • • • • • • •
Latvia Lebanon Lithuania Malaysia Malta Mauritius Mexico Moldova Morocco Netherland
• • • • • • • • • •
s •
• • • • • • • • • • • • • •
• •
Dominican Republic Ecuador Egypt El Salvador Estonia Fiji Finland France Georgia Germany Greece Grenada Guatemala Guyana Honduras Hungary Iceland Italy India Indonesia Ireland Israel Jamaica Japan Jordan Kuwait
Dominica •
New Zealand Nicaragua Oman Pakistan Panama Peru Paraguay Philippines Poland Portugal Qatar Romania Russia Saint Lucia Saudi Arabia Serbia
• • • • • • • • • • • • • • • • • •
• • •
•
Singapore Slovakia Slovenia South Africa South Korea Spain Sri Lanka Sweden Switzerland Syria Taiwan Thailand Trinidad and Tobago Turkey Ukraine United Arab Emirates United Kingdom United States Guam o Puerto Rico o United States o Virgin Islands Uruguay Venezuela Yemen
MCDONALDS IN INDIA
McDonald's opened its doors in India in October 1996. Ever since then, our family restaurants in Mumbai, Delhi, Pune, Ahmedabad, Vadodara, Ludhiana, Jaipur, Noida Faridabad, Doraha, Manesar and Gurgaon have proceeded to demonstrate, much to the delight of all our customers, what the McDonald's experience is all about. Our first restaurant opened on 15th April 1955 in Des Plaines, Illinois, U.S.A. Almost 50 years down the line, we are the world's largest food service system with more than 30,000 restaurants in 100 countries, serving more than 46 million customers every day. Click here for more information on the history of McDonald’s.
Locally Owned
McDonald’s in India is a 50-50 joint venture partnership between McDonald’s Corporation [USA] and two Indian businessmen. Amit Jatia’s company Hardcastle Restaurants Pvt. Ltd. owns and operates McDonald's restaurants in Western India. While Connaught Plaza Restaurants Pvt. Ltd headed by Vikram Bakshi owns and operates the Northern operations. Amit Jatia and Vikram Bakshi are like-minded visionaries who share McDonald's complete commitment to Quality, Service, Cleanliness and Value (QSC&V). Having signed their jointventure agreements with McDonald's in April 1995, they trained extensively, along with their Indian management team, in McDonald's restaurants in Indonesia and the U.S.A. before opening the first McDonald’s restaurant in India.
Respect for local culture
McDonald's India has developed a special menu with vegetarian selections to suit Indian tastes and preferences. McDonald's does not offer any beef or pork items in India. Only the freshest chicken, fish and vegetable products find their way into our Indian restaurants. In addition, we've re-formulated some of our products using spices favoured by Indians. Among these are McVeggie™ burger, McAloo Tikki™ burger, Veg. Pizza McPuff™ and Chicken McGrill™ burger. We've also created eggless sandwich sauces for our vegetarian customers.
Even our soft serves and McShakes™ are egg-less, offering a larger variety to our vegetarian consumers.
International Standards
McDonald's India's local suppliers provide us with the highest quality, freshest ingredients. Complete adherence to the Indian Government regulations on food, health and hygiene is ensured, while maintaining our own recognized international standards. Fast, friendly service the hallmark of McDonald's restaurants the world over is the mantra we abide by. Stringent cleaning standards ensure that all tables, chairs, highchairs and trays are sanitised several times each hour. Such meticulous attention to cleanliness extends beyond the lobby and kitchen to even the pavement and immediate areas outside the restaurant.
Our Philosophy
"We take the burger business more seriously than anyone else." When McDonald's founder, Ray Kroc made that memorable statement, he was letting the world in on the philosophy and secret behind McDonald's phenomenal success. Our vision to be India’s "best" quick service restaurant experience is supported by a set of principles and core values [McDonald’s Way] The principles that guide us … •
Quality, Service, Cleanliness & Value - It is an unflinching McDonald's ideology that our customers must always get quality products, served quickly and with a smile, in a clean and pleasant environment; and all at a fair price
•
We are committed to exceeding our customers' expectations in every restaurant every time.
•
We have a passion and a responsibility for enhancing and protecting the McDonald's brand.
•
We believe in a collaborative management approach, employing a mutually respectful business philosophy,
•
We will seize every opportunity to innovate and lead the industry on behalf of our customers.
It was early evening and one of the 25 McDonald's outlets in India was bustling with activity with hungry souls trooping in all all the time. No matter what one ordered - a hot Maharaja M ac or an apple pie - the very best was served every time. But did anyone ever wonder as to how this US giant managed the show so perfectly? The answer seemed to lie in a brilliantly articulated food chain, which extended from these outlets right up to farms all across India. US-based fast food giant, McDonald's success in India had been built on four pillars: limited menu, fresh food, fast service and affordable price. Intense competition and demands for a wider menu, drive-through and sit-down meals - encouraged the fast food giant to customize product variety without hampering the efficacy of its supply chain. Around the world (including India), approximately 85% of McDonald's restaurants were owned and operated by independent franchisees. Yet, McDonald's was able to run the show seamlessly by outsourcing nine different ingredients used in making a burger from over 35 suppliers spread all over India through a massive value chain. Between 1992 and 1996, when McDonald's opened its first outlet in India, it worked frenetically to put the perfect supply chain in place. It trained the local farmers to produce lettuces or potatoes to specifications and worked with a vendor to get the perfect cold chain 1 in place. And explained to the suppliers precisely why only one particular size of peas was acceptable (if they were too large, they would pop out of the patty and get burnt). These efforts paid off in the form of joint ventures between McDonald's India (a 100% whollyowned subsidiary of McDonald's
What is supply chain management
of planning,, implementing, and controlling the Supply chain management (SCM) is the process of planning operations of the supply chain as efficiently as possible. Supply Chain Management spans all movement and storage of raw of raw materials, work-in-process inventory, and finished goods from point-of-origin to point-of-consumption. point-of-consumption. The definition one American professional association put forward is that Supply Chain Management encompasses the planning and management of all activities involved in sourcing, procurement, conversion, and logistics management activities. Importantly, it also includes
coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, Supply Chain Management integrates supply and demand management within and across companies. More recently, the loosely coupled, self-organizing network of businesses that cooperates to provide product and service offerings has been called the extended enterprise.[1]
Some experts distinguish Supply Chain Management and logistics, while others consider the terms to be interchangeable. Supply Chain Management is also a category of software product. Supply chain event management (abbreviated as SCEM) is a consideration of all possible occurring events and factors that can cause a disruption in a supply chain. With SCEM possible scenarios can be created and solutions can be planned.
Supply Chain Management Problems
Supply chain management must address the following problems: •
•
•
•
•
Distribution Network Distribution Network Configuration: Number, location and network missions of suppliers, production facilities, distribution centers, warehouses, cross-docks and customers. Distribution Strategy: Strategy: Including questions of operating control (centralized, decentralized or shared); delivery scheme (e.g., direct shipment, pool point shipping, Cross docking, DSD (direct store delivery), closed loop shipping); mode of transportation (e.g., motor carrier, including truckload, LTL, parcel LTL, parcel;; railroad; railroad; intermodal, including TOFC and COFC; ocean freight; airfreight); replenishment strategy (e.g., pull, push or hybrid); and transportation control (e.g., owner-operated, private owner-operated, private carrier , common carrier, contract carrier, or 3PL or 3PL.. Information: Integration of and processes through the supply chain to share valuable information, including demand signals, forecasts, inventory and transportation etc. Inventory Management: Quantity and location of inventory including raw materials, work-in-process and finished goods. Cash-Flow: Arranging the payment terms and the methodologies for exchanging funds across entities within the supply chain. c hain.
Supply chain execution is managing and coordinating the movement of materials, information and funds across the supply chain. The flow is bi-directional.
Activities/functions
Supply chain management is a cross-functional approach to managing the movement of raw materials into an organization, certain aspects of the internal processing of materials into finished goods, and then the movement of finished goods out of the organization toward the endconsumer. As organizations strive to focus on core competencies and becoming more flexible, they have reduced their ownership of raw materials sources and distribution channels. These functions are increasingly being outsourced to other entities that can perform the activities better or more cost effectively. The effect e ffect is to increase the number of organizations involved in satisfying customer demand, while reducing management control of daily logistics operations. Less control and more supply chain partners led to the creation of supply chain management concepts. The purpose of supply chain management is to improve trust and collaboration among supply chain partners, thus improving inventory visibility and improving inventory velocity. Several models have been proposed for understanding the activities required to manage material movements across organizational and functional boundaries. SCOR is a supply chain management model promoted by the Supply Chain Management Council. Another model is the SCM Model proposed by the Global Supply Chain Forum (GSCF). Supply chain activities can be grouped into strategic, tactical, and operational levels of activities.
Strategic •
•
•
• • •
Strategic network optimization, including the number, location, and size of warehouses, distribution centers and facilities. Strategic partnership with suppliers, distributors, and customers, creating communication channels for critical information and operational improvements such as cross docking, docking, direct shipping, and third-party logistics. Product design coordination, so that new and existing products can be optimally integrated into the supply chain, load management Information Technology infrastructure, to support supply chain operations. Where-to-make and what-to-make-or-buy decisions Aligning overall organizational strategy with supply strategy.
Tactical • •
• • •
•
Sourcing contracts and other purchasing decisions. Production decisions, including contracting, locations, scheduling, and planning process definition. Inventory decisions, including quantity, location, and quality of inventory. Transportation strategy, including frequency, routes, and contracting. Benchmarking of all operations against competitors and implementation of best practices throughout the enterprise. Milestone payments
Operational
• •
•
•
• •
• •
Daily production and distribution planning, including all nodes in the supply chain. Production scheduling for each manufacturing facility in the supply chain (minute by minute). Demand planning and forecasting, coordinating the demand forecast of all customers and sharing the forecast with all suppliers. Sourcing planning, including current inventory and forecast demand, in collaboration with all suppliers. Inbound operations, including transportation from suppliers and receiving inventory. Production operations, including the consumption of materials and flow of finished goods. Outbound operations, including all fulfillment activities and transportation to customers. Order promising, accounting for all constraints in the supply chain, including all suppliers, manufacturing facilities, distribution centers, and other customers.
Supply chain management
Organizations increasingly increasingly find that they must rely on effective supply chains, or networks, to successfully compete in the global market and networked economy. [2] In Peter Drucker's (1998) management's new paradigms, this concept of business relationships extends beyond traditional enterprise boundaries and seeks to organize entire business processes throughout a value chain of multiple companies. During the past decades, globalization, outsourcing and information technology have enabled many organizations, such as Dell and Hewlett Packard, Packard, to successfully operate solid collaborative supply networks in which each specialized business partner focuses on only a few key strategic activities (Scott, 1993). This inter-organizational supply network can be acknowledged as a new form of organization. However, with the complicated interactions among the players, the network structure fits neither "market" nor "hierarchy" categories (Powell, 1990). It is not clear what kind of performance impacts that different supply network structures could have on firms, and little is known about the coordination conditions and trade-offs that may exist among the players. From a system's point of view, a complex network structure can be decomposed into individual component firms (Zhang and Dilts, 2004). Traditionally, companies in a supply network concentrate on the inputs and outputs of the processes, with little concern for the internal management working of other individual players. Therefore, the choice of an internal management control structure is known to impact local firm performance (Mintzberg, 1979). In the 21st century, there have been a few changes c hanges in business environment that have contributed to the development of supply chain networks. First, as an outcome of globalization and the proliferation of multi-national companies, joint ventures, strategic alliances and business partnerships, there were found to be significant success factors, following the earlier " Just-InTime", Time", "Lean Management" and "Agile " Agile Manufacturing" practices. practices.[3] Second, technological changes, particularly the dramatic fall in information communication costs, which are a
paramount component of transaction costs, have led to changes in coordination among the members of the supply chain network (Coase, 1998). Many researchers have recognized these kinds of supply network structures as a new organization form, using terms such as "Keiretsu " Keiretsu", ", "Extended Enterprise", "Virtual Corporation", Global Production Network", and "Next Generation Manufacturing System". System" .[4] In general, such a structure can be defined as "a group of semi-independent organizations, each with their capabilities, which collaborate in ever-changing constellations constellations to serve one or more markets in order to achieve some business goal specific to that collaboration" (Akkermans, 2001). Successful SCM requires a change from managing individual functions to integrating activities into key supply chain processes. An example scenario: the purchasing department places orders as requirements become appropriate. Marketing, responding to customer demand, communicates with several distributors and retailers, and attempts to satisfy this demand. Shared information between supply chain partners can only be fully leveraged through process integration. integration . Supply chain business process integration involves collaborative work between buyers and suppliers, joint product development, common systems and shared information. According to Lambert and Cooper (2000) operating an integrated supply chain requires continuous information flows, which in turn assist to achieve the best product flows. However, in many companies, management has reached the conclusion that optimizing the product flows cannot be accomplished without implementing a process approach to the business. The key supply chain processes stated by Lambert (2004) are: • • • • • • • •
Customer relationship management Customer service management Demand management Order fulfillment Manufacturing flow management Supplier relationship management Product development and commercialization Returns management
One could suggest other key critical supply business processes combining these processes stated by Lambert such as: Customer service management a. Customer service b. b. c. d. e. f. g.
Pro Procure cureme men nt Produ Product ct develo developme pment nt and comm commerc ercial ializa izatio tion n Manufa Manufactu cturin ring g flow manag managemen ement/s t/supp upport ort Phys Physic ical al dist distri ribu buti tion on Outs Outsou ourc rcin ing/ g/pa part rtne ners rshi hips ps Perf Perfor orma manc ncee mea measu sure reme ment nt
a) Customer service Customer service management process management process Customer Relationship Management concerns the relationship r elationship between the organization and its customers.Customer service provides the source of customer information. It also provides the customer with real-time information on promising dates and product availability through
interfaces with the company's production and distribution operations. Successful organizations use following steps to build customer relationships: • • •
determine mutually satisfying goals between organization and customers establish and maintain customer rapport produce positive feelings in the organization and the customers
b) Procurement process Strategic plans are developed with suppliers to support the manufacturing flow management process and development of new products. In firms where operations extend globally, sourcing should be managed on a global basis. The desired outcome is a win-win relationship, where both parties benefit, and reduction times in the design cycle and product development are achieved. Also, the purchasing function develops rapid communication systems, such as electronic data interchange (EDI) and Internet linkages to transfer possible requirements more rapidly. Activities related to obtaining products and materials from outside suppliers requires performing resource planning, supply sourcing, negotiation, order placement, inbound transportation, storage, handling and quality assurance, assurance, many of which include the responsibility to coordinate with suppliers in scheduling, supply continuity, continuity, hedging, and research into new sources or programmes. c) Product development and commercialization Here, customers and suppliers must be united into the product development process, thus to reduce time to market. As product life cycles shorten, the appropriate products must be developed and successfully launched in ever shorter time-schedules to remain competitive. According to Lambert and Cooper (2000), managers of the product development and commercialization process must: 1. coordinate coordinate with with customer customer relationship relationship managemen managementt to identify identify customer-arti customer-articulat culated ed needs; 2. select select materials materials and and suppliers suppliers in in conjunctio conjunction n with procur procurement ement,, and 3. develop develop productio production n technology technology in manufactu manufacturing ring flow flow to manufacture manufacture and integra integrate te into the best supply chain flow for the product/market combination. d) Manufacturing flow management process The manufacturing process is produced and supplies products to the distribution channels based on past forecasts. Manufacturing processes must be flexible to respond to market changes, and must accommodate mass customization. Orders are processes operating on a just-in-time (JIT) basis in minimum lot sizes. Also, changes in the manufacturing flow process lead to shorter cycle times, meaning improved responsiveness and efficiency of demand to customers. Activities related to planning, scheduling and supporting manufacturing operations, such as work-in process storage, handling, transportation, and time phasing of components, inventory at manufacturing sites and maximum flexibility in the coordination of geographic and final assemblies postponement of physical distribution operations. e) Physical distribution
This concerns movement of a finished product/service to customers. In physical distribution, distribution, the customer is the final destination of a marketing channel, and the availability of the product/service is a vital part of each channel participant's marketing effort. It is also through the physical distribution distribution process that the time and space of customer service become an integral part of marketing, thus it links a marketing channel with its customers (e.g. links manufacturers, wholesalers, retailers). f) Outsourcing/partnerships Outsourcing/partnerships This is not just outsourcing the procurement of materials and components, but also outsourcing of services that traditionally have been provided in-house. The logic of this trend is that the company will increasingly focus on those activities in the value chain where it has a distinctive advantage and everything else it will outsource. This movement has been particularly evident in logistics where the provision of transport, warehousing and inventory control is increasingly subcontracted to specialists or logistics partners. Also, to manage and control this network of partners and suppliers requires a blend of both central and local involvement. Hence, strategic decisions need to be taken centrally with the monitoring and control of supplier performance and day-to-day liaison with logistics partners being best managed at a local level. g) Performance measurement Experts found a strong relationship from the largest arcs of supplier and customer integration to market share and profitability. By taking advantage of supplier capabilities and emphasizing a long-term supply chain perspective in customer relationships can be both correlated with firm performance. As logistics competency becomes a more c ritical factor in creating and maintaining competitive advantage, logistics measurement becomes increasingly important because the difference between profitable and unprofitable operations becomes more narrow. A.T. Kearney Consultants (1985) noted that firms engaging in comprehensive performance measurement realized improvements in overall productivity. According to experts internal measures are generally collected and analyzed by the firm including 1. 2. 3. 4. 5.
Cost Cust Custom omer er Serv Servic icee Prod Produc ucti tivi vity ty meas measur ures es Asse Assett mea measu sure remen ment, t, and and Quality.
External performance measurement is examined through customer perception measures and " best " best practice" practice" benchmarking, and includes 1) customer perception measurement, and 2) best practice benchmarking. Components of Supply Chain Management are 1. Standardization 2. Postponement 3. Customization
Supply chain management components integration
The management components of SCM
The SCM components are the third element of the four-square circulation framework. The level of integration and management of a business process link is a function of the number and level, ranging from low to high, of components added to the link (Ellram and Cooper, 1990; Houlihan, 1985). Consequently, adding more management components or increasing the level of each component can increase the level of integration of the business process link. The literature on business process reengineering ,[5] buyer-supplier relationships, [6] and SCM[7] suggests various possible components that must receive managerial attention when managing supply relationships. Lambert and Cooper (2000) identified the following components which are: • • • • • • • • •
Planning and control Work structure Organization structure Product flow facility structure Information flow facility structure Management methods Power and leadership structure Risk and reward structure Culture and attitude
However, a more careful examination of the existing literature[8] will lead us to a more comprehensive structure of what should be the key critical supply chain components, the "branches" of the previous identified supply chain business processes, that is, what kind of relationship the components may have that are related with suppliers and c ustomers accordingly. Bowersox and Closs states that the emphasis on cooperation represents the synergism leading to the highest level of joint achievement (Bowersox and Closs, 1996). A primary level channel participant is a business that is willing to participate in the inventory ownership responsibility responsibility or assume other aspects of financial risk, thus including primary level components (Bowersox and Closs, 1996). A secondary level participant (specialized), is a business that participates in channel relationships by performing essential services for primary participants, thus including secondary level components, which are in support of primary participants. Third level channel participants and components that will support the primary level channel participants, and which are the fundamental branches of the secondary level components, may also be included. Consequently, Lambert and Cooper's framework of supply chain components does not lead us to the conclusion about what are the primary or secondary (specialized) level supply chain components (see Bowersox and Closs, 1996, p.g. 93). That is, what supply chain components should be viewed as primary or secondary, how these components should be structured in order to have a more comprehensive supply chain structure, and to examine the supply chain as an integrative one (See above sections 2.1 and 3.1). Baziotopoulos reviewed the literature to identify supply chain components. Based on this study, Baziotopoulos (2004) suggests the following supply chain components:
1. For customer service management: Includes the primary level component of customer 2. 3.
4.
5.
relationship management, and secondary level components such as benchmarking and order fulfillment. For product development and commercialization: Includes the primary level component of Product Data Management (PDM), and secondary level components such as market share, customer satisfaction, profit margins, and returns to stakeholders. For physical distribution, manufacturing support and procurement: Includes the primary level component of enterprise resource planning (ERP), with secondary level components such as warehouse management, material management, manufacturing planning, personnel management, and postponement (order management). For performance measurement: Includes the primary level component c omponent of logistics performance measurement, which is correlated with the information flow facility structure within the organization. Secondary level components may include four types of measurement such as: variation, direction, decision and policy measurements. More specifically, in accordance with these secondary level components, total cost analysis (TCA), customer profitability analysis (CPA), and asset management could be concerned as well. For outsourcing: Includes the primary level component of management methods, and the strategic objectives for particular initiatives in key areas of information technology, operations, manufacturing capabilities, and logistics (secondary level components).
Reverse Supply Chain Reverse Logistics is the process of planning,implementing and controlling the efficient, effective inbound flow and storage of secondary goods and related information opposite to the traditional supply chain direction for the purpose of recovering value or proper disposal. Reverse logistics is also referred to as "Aftermarket Customer Services". In other words, anytime money is taken from a company's Warranty Reserve or Service Logistics budget, that is a Reverse Logistics operation.
Traditional and Supply Chain Management Approaches Compared
_________________________ ______________________________________ _________________________ ________________________ ____________ Approach Element Traditional Supply Chain ndependent efforts Joint reduction in channel Inventory managemenIt inventories approach: Minimize firm costs Channel-wide cost efficiencies Total cost approach: Time horizon: Short-term Long-term Limite ted d to need needss of curr curren entt As required for planning and Amount of information Limi transaction monitoring processes sharing and monitoring: contact for the Mu Mult ltip iple le cont contac acts ts betw betwee een n Amo Amoun untt of coor coordi dina nati tion on of Single transacti ction on betwee between n channe channell levels levels in firms firms and levels levels of multiple levels in the channel: transa pairs channel Transaction-based Ongoing Joint planning Compa Compatib tibili ility ty of corpor corporate ate Not relevant Compatible at at le least fo for ke key relationships philosophies: Breadth of supplier base: Large to increase competition Small to increase coordination and spread risk Channel leadership: Not needed Needed for coordination focus Risks and rewards shared over Amo Amoun untt of shar sharin ing g of risk riskss Each on its own and rewards: the long-term “Wareh eho ouse” use” orien rienta tattion ion “Distribution Center” Speed of operations, “War safety stock) orientation (inventory info inform rmat atio ion n and and inve invent ntor oryy (storage, flows: inte interr rrup upte ted d by barr barrie iers rs to velo veloci city ty)) inte interc rcon onne nect ctin ing g flow flows; s; Loca Locali lize ze to chan channe nell flows flows;; JIT; JIT; Quick Quick Respon Response se pairs across the channel.
INTRODUCTION
Some of the important important observable changes in in today’s global context are :
1. Shorte Shorterr produc productt life life cycl cycles. es. 2. Shorte Shorterr produ product ct chan changege-ove overr cycles cycles 3. Higher Higher rate rate of of new produc productt develo developme pment nt
4. 5. 6. 7. 8. 9. 10. 11.
Shor Shorte terr prod produc ucti tion on runs runs.. Quality Quality and productiv productivityity-quali quality ty integratio integration, n, in terms of zero-defec zero-defectt production. production. Total Total Quality Quality Control Control (TQC) (TQC) or company-wide company-wide Total Total Quality Quality Managemen Managementt (TQM). Equipment Equipment and proces processs technolo technology gy as a strategic strategic resource resource Flexib Flexible le Manu Manufac factur turing ing System Systemss (FMS) (FMS) Increa Increasin sing g importan importance ce of projec projectt managem management ent.. Technological changes changes in information information handling equipment and office office automation. Competitive strategy based on technology and training of employees in multiple multiple work skills, skills, participation and responsibility. responsibility. 12. Computer Aided Aided Design Design (CAD), and Manufacturing Manufacturing (CAM). 13. Increasing role of technological technological forecasting. 14. Increasing use of of automated decision decision aids like Decision Decision Support Systems Systems (DSS), Expert Systems (ES), and Simulation Experiments. 15. Combination of of technologies i.e. i.e. ‘technology fusion’ fusion’ for development of ‘hybrid’ technologies.
These and related changes have led to certain ongoing trends that dominate the world industrial scene, presently. These trends are: ♦ ♦ ♦ ♦
♦
Globalization. Automation. Knowledge intensive nature of production and service activities. Information technology based faster economic metabolism of organizations, markets and production systems in industrially advanced nations and Transnational strategic alliances between firms, organization network and inter organizational structures.
The following factors and their interactions further complicate the issue: ♦ ♦ ♦
♦ ♦ ♦
Over capacity of production facilities in many industries. Saturation and increasing segmentation of markets. Changing customer values, and more exacting requirements of product cost, quality, and performance of the users. Need to lower breakeven point owing owing to increasing increasing fractioning fractioning of markets. Emergence of unexpected competitors across the world. Unanticipated connections among industries owing to equipment and process technology changes in one branch of industry producing a cascading impact on other branches and sectors.
The foregoing picture of the state of global industrial competition brings out the exceedingly difficult and demanding nature of the requirements for coping with such a dynamic situation.
INVENTORY MANAGEMENT
INTRODUCTORY CONCEPT AND DEFINITION Inventory control cannot be treated in isolation. Inventories grow because of large lead times, long setup times, erratic output, etc. Inventory managers have an unenviable task on their hands. They are blamed at the drop of a hat. However the nature of the problem is such that, they on their own can do very little about the inventory on hand. Inventory management is but a part of the greater system that we may m ay well call as the production materials management system.
Traditionally, inventory control systems have been reactive in nature. The rule has been to provide for extra inventory as a means m eans to tackle the wide range of variability that confronts any organization. Inventories must flow. This becomes all the more important when cost is considered, for cost is like dust- it has a tendency to settle on anything sitting around. Rapid flow of materials allows little time for cost to accumulate.
Conflicting Pressures on Inventory Levels
Pressures for Small Inventories
1. 2. 3. 4. 5.
Interes Interestt or opp opport ortuni unity ty cost cost Stor Storag agee and and han handl dlin ing g cost cost Pro Proper perty taxes axes Insu Insura ranc ncee pre premi mium umss Shri Shrink nkag agee costs costs:: Pilfer Pilferag age, e, obsolescence and deterioration.
Pressures for Large Inventories
1. Customer service 2. Ordering or setup cost 3. Labour and facility utilisation 4. Transportation cost 5. Cost of purchased items
Four reasons for its importance are • •
Inventories can be a major commitment of monetary resources. Inventories affect virtually every aspect of daily operations.
• •
Inventories can be a major competitive weapon. Inventories are the major control problem in many companies.
Functions and types of inventories: Inventory serves various functions in a firm. Firms hold inventories to buffer against uncertainties in supply, in the production process, and in demand. Irrespective of whether a certain inventory is planned or not, it always serves the basic function of de-coupling supply from demand. Inventories can be classified in various ways depending on the specific purpose. Manufacturing companies have broadly two categories of inventories. They are: 1. Manu Manufa fact ctur urin ing g inve invent ntor ory y 2. Dist Distri ribu buti tion on inve invent ntor ory y 1. Manufacturing Inventory (a) Raw mater material ialss (eg.stee (eg.steel) l) (b) Semi-finished components components (eg Tata junction junction control, tata toyo making radiators) radiators) (c) Finished Finished component components(eg s(eg tyres) tyres) (d) Sub-assemb Sub-assemblies( lies(eg.ge eg.gear ar box) (e) Work in progress progress (WIP)(eg (WIP)(eg steel steel body) body) (f) Finished Finished goods(eg goods(eg Tata indica indica V2) V2) (g) Supplies Supplies/cons /consumabl umables(eg es(eg cotton,oil) cotton,oil) (h) Spares(eg Spares(eg m/c spare parts) parts) 2. Distribution Inventory (a) Finished Finished products products in in warehou warehouse se (b) Finished Finished products products in in transit transit FUNCTIONS OF INVENTORY CONTROL 1. To de-coup de-couple le demand demand and supply supply (marketi (marketing ng and productio production). n). 2. To take care care of physical physical impracti impracticalit cality y of getting getting right right amount amount of stock at exact exact time of requirement. 3. To econom economize ize produc production tion level level or smoot smoother her manufac manufacturin turing. g. 4. To de-link de-link various various successi successive ve stages stages in a productio production n process. process. 5. To reduce reduce materi material al hand handlin ling g costs costs.. 6. To take take advantag advantagee of quantit quantity y discount discountss – bulk bulk purchases purchases.. 7. To buffer buffer to reduce reduce uncertai uncertainty nty regardi regarding ng raw material material supply supply and prices. prices. 8. To earn earn favo favoura urable ble retu return rn on inv invest estmen ment, t, 9. To take take care care of variabl variable, e, seasonal, seasonal, immedi immediate ate custome customerr demands. demands. 10. To stabilize direct labour requirements requirements to improve improve labour relations. relations. 11. To facilitate manufacture manufacture of a range of products on the same facilities. facilities. 12. To take advantage of lower bulk transportation cost. 13. To disclose disclose slow moving and non-moving non-moving items. 14. To prevent loss through through loss, damage, damage, pilferage, etc. etc. ELEMENTS OF INVENTORY COSTS The types of costs that usually affect the inventory decision are: 1. The cost to place replenishment order. These are also referred to as replenishment costs or procurement or indenting costs. Cost of paperwork, typing and dispatching an order, • • Costs incurred in following up timely deliveries, travelling costs, purchase follow up costs, telephone, telegrams, telex, postal, email and other correspondence costs,
Costs involved in receiving the order, incoming inspection, checking, physical handing over to stores, Any setup machine cost, if any, directly charged by the supplier to the batch size, • • Salaries and wages of the purchase department. 2. The cost to hold inventory: These costs include all expenses incurred because of the volume of inventory carried. These are also called as inventory carrying costs. This may be a fixed sum per unit per time period, or it may be a fixed percent of value per time period. In more complex models it may consist of more than one element. That is, holding costs may consist of both physical storage and capital costs (foregone earnings). Among the r elevant costs are warehouse rental (implicit or explicit), clerical costs of counting inventory, insurance for goods and warehouses , security, taxes on inventory, obsolescence, damage, pilferage, theft (burglars and employees), reduced item life, spoilage, and the value associated with funds tied up in inventory. This cost of capital may be the actual cost of funds borrowed to purchase inventory, the interest that could be saved if that money were used to retire debt, the interest that could have been earned by depositing the funds, or and internal rate of return, representing gains gains made from using the same funds on, for example, example, a plant expansion. The components of this cost are – cycle stock costs and buffer stock costs. •
The Challenges of Inventory Management:
•
Maximize the level of customer service, and Minimizing the cost of providing an adequate level of customer service, promoting efficiency in production or purchasing
•
The organization’s Inventory Management System must carry out objectives set by upper management. It must perform in such a way to enhance the organization’s profit or performance. The objectives set by management will frequently fall into either of two categories: 1. Custo Customer mer servic servicee obje objecti ctive ves, s, and and 2. Invent Inventory ory invest investmen mentt objec objectiv tives. es. Thus we see the basic conflict of inventory management: some objectives call for economizing on inventory levels, while other objectives call for increasing inventories. These objectives may create conflict along departmental lines: finance wants smaller sums tied up in inventory, while marketing wants larger amounts so that customer orders can be more promptly satisfied. COSTS ASSOCIATED WITH INVENTORIES
From a managerial point of view, two basic categories of costs are associated with inventories: (1) inventory carrying carrying costs and (2) (2) inventory acquisition acquisition costs. These plus a related related variable costs are discussed in the following paragraphs. Carrying Costs
Carrying material in inventory inventory is expensive. expensive. Prior to the relatively recent periods periods of higher rates, a number of studies determined that the the annual cost of carrying a production production inventory averaged approximat approximately ely 25 percent of the value of the inventory. inventory. The escalating escalating and volatile volatile cost of money in recent years, however, has increased the typical firm’s annual inventory carrying cost to figure between 25 and 35 percent of the the value of the inventory. inventory. Five major elements make up these costs in the following manner:
_________________________ ______________________________________ __________________ _____ 1 Opportunity cost of invested funds 12-20% 2 Insurance costs 2-4% 3 Property taxes 1-3% 4 Storage costs 1-3% 5 Obsolescence and deterioration 4-10% __________ Total carrying costs 20-40% _________________________ ______________________________________ ____________________ _______ Let us briefly examine these carrying costs. When a firm firm purch purchas ases es Rs.5 Rs.500 00,0 ,000 00 wort worth h of a 1. Oppor Opportun tunity ity cost cost of invest invested ed fun funds ds. When
2. 3. 4.
5.
production material and keeps it in inventory, it simply has this much less cash to spend for other other purposes. purposes. Money invested invested in productive productive equipment equipment or in external external securities securities earns a return return for the company. Conceptua Conceptually, lly, then, then, it is logical logical for the firm to charge charge all money invested in inventory an amount equal to that it could earn if invested elsewhere in the company. This is the “opportunity cost” cost” associated with inventory investment. investment. Insurance costs. Most firms insure their assets against possible loss from fire and other forms of damage. An extra Rs.500,000 worth of inventory inventory represents an additional asset on on which insurance premiums must be paid. Property taxes . As with insurance, property taxes are levied on the assessed value of a firm’s assets; the greater the inventory value, the greater the asset value, the greater the asset value, and consequently the higher the firm’s tax bill. Storage costs. The warehouse in which a firm stores its inventory is depreciated a certain number number of rupees rupees per year over over the length length of its life. life. One may say, say, then, that that the cost cost of warehouse space is a given given number of Rs. per cubic foot per year. And this cost conceptually conceptually can be charged against inventory occupying in the space. Obsolescence and deterioration. In most inventory operation, a certain percentage of the stock stock spoils, spoils, is damage damaged, d, is pilfer pilfered, ed, or eventu eventuall ally y become becomess obsole obsolete. te. No matter matter how diligently warehouse managers guard against these occurrences, a certain number always take place. place. With new products products being introduced introduced at an increasing increasing rate, the probability probability of obsolescence is increased increased accordingly. Consequently, the larger larger the inventory, typically typically the greater the absolute loss from this source.
Generally speaking, this group of carrying costs rises and falls nearly proportionately with the rise and fall of the inventory inventory level. Further, the inventory level is directly directly related to the quantity in which the ordered ordered material is delivered. When the complete order is shipped at one time, the larger the order quantity; the higher the average inventory level vary nearly directly with the size of the delivery quantity. Relationship of inventory-related costs to inventory level ( AC = acquisition costs; CC= carrying costs.) If a firm has estimated its approximately inventory carrying cost, as a percentage of inventory value, the annual inventory carrying costs that would be generated by delivery quantities of various sizes can be calculated as follows: (Carrying cost per year) = (average inventory value) x (inv. carrying cost as a % of inv. value)
(Carrying cost per year) = (average inventory in units) x (material unit cost) x (inv. carrying cost as % of inv. value) CC = Q/2 x C x I Where CC = carrying cost per year for the material in question Q = order or delivery quantity for the material, in units C = delivered unit cost of the material I = inventory carrying cost for the material, expressed as a percentage of inventory value Acquisition Costs Looking at inventory costs in another light, a different set of indirect materials cost factors emerges. emerges. These factors factors all contribute contribute to the cost of generating, generating, processing, processing, and handling handling an order, order, along with its related paperwork. paperwork. Examples Examples of these these costs are listed below and can be thought of as inventory acquisition costs. 1. A certain portion of wages and operating expenses of such departments as purchasing and supply, supply, productio production n control, control, receiving, receiving, inspectio inspection, n, stores, stores, and accounts accounts payable payable - those those departments whose personnel devote time to the generation and handling of the order. 2. The cost of supplies such as engineering drawings, envelops, stationary, and forms for purchasing, production control, receiving, receiving, accounting , and so forth. 3. The cost of services such as computer time, telephone, fax machine, telegraphs, and postage expended in procuring material When considering this group of acquisition costs, observe that they behave quite differently from carrying carrying costs. costs. Acquisit Acquisition ion costs are not related to inventory inventory size per se; rather, they are a function of the number of orders placed or deliveries received during a given period of time. One simplified example will will illustrate this point. point. Suppose a buyer in the purchasing purchasing and supply department receives a requisition for a special fabricated part used in the manufacture of one of the firm’s products. Assume further that the part has been purchased purchased before and that price quotatio quotations ns from three or four shops shops are on file. The buyer first reviews reviews the present present inventory inventory situation and probably checks with production control to see if any significant changes are anticipat anticipated ed in future future production. production. Drawings Drawings and specificatio specifications ns of the part are then reviewed reviewed to refresh his or her memory regarding required tooling and other technical details of the purchase. Next, the buyer reviews the quotations to determine why the order was placed with supplier A last time. time. Before deciding deciding if supplier supplier A should again again receive the order, order, the buyer must also review supplier performance performance data. Finally, the buyer decides which which supplier should should receive the order and subsequently inquiries about the firm’s current shop loads and any other matters that have arisen during the investigation. investigation. It is entirely possible that a negotiation session session may also be required. In total, the buyer’s investigation may require anywhere from an hour to several days. The total cost of the buyer’s time to the company will be the same whether the purchase order is written for 20 parts or 200 parts. This process may result in the development development of a term contract with the supplier, in which case the buyer’s effort is spread over all deliveries of the item during the life of the contract. contract. If this is not the case, case, however, the next time the the buyer receives another requisition for this part, he or she will go through somewhat the same process, generating almost the same indirect cost for the company. In largest segment of the acquisition cost element is made up of these types of indirect labor and overhead costs, generated in purchasing and in the other departments that subsequently become involved in handling some activity activity associated with the purchase. The cost of suppliers suppliers and services consumed in the placement and handling of an order typically varies directly with the number of order placed. While these costs are are significant, they are considerably considerably less so that
the human and related overhead overhead cost figures just discussed. discussed. Although the variable variable acquisition cost per order varies widely among firms, depending on the specific cost inclusions, today the range appears to run from approximately $50 to $125 per order. If a firm experiences a certain annual usage of an item, the number of orders placed during the year will decline as the individual order quantity increases, thus generating lower annual acquisitio acquisition n costs. The experience experience of numerous numerous firms over the years reveals that this relationship is not linear, but that if follows the approximate contour of the AC curve shown in fig. If a firm’s cost accounting department can estimate its approximately acquisition cost per order, the annual acquisition costs that would be generated by order quantities of various sizes can be calculated as follows: ( Acquisition cost per year) = (number of orders placed per year) x (acquisition cost per order) AC = U/Q x A Where AC = acquisition cost per year for the material in question U = expected annual usage of the material, in units Q = order or delivery quantity for the material, in units. A = acquisition cost per order or per delivery for the material Economic Order Quantity Concept (EOQ)
If one has to make decisions about managing an inventory, it is useful to understand the behavior of the inventory-related cost cost factors just discussed. These factors often help a manager determine which items should or should not be carried in inventory, what inventory levels should be carried for specific items, and what order quantities are appropriate for given items. As its name suggests, this concept holds that the appropriate quantity to order may be the one that tends to minimize all the costs associated with the order -carrying costs, acquisition costs, and the cost of the material itself. Concentrating for the moment on the first two costs, fig. shows clearly that as the order or delivery quantity increases, carrying costs rise-and at the same time acquisition costs decrease. To see the total picture more clearly, if carrying costs and acquisition costs are added together over the order quantity range shown on the graph, the total indirect materials cost curve, TC, is produced. This transformation is shown in fig. The economic order order quantity concept simply says says that the sum of all the indirect costs associated with inventory will be minimized on an annual basis if the material, for which the graph is drawn, is ordered (or delivered) consistently in the quantity quantity that that corresponds corresponds with with the low point point on the TC curve. This is the economic order quantity . Note that the low point on the total cost curve coincides with the point at which the carrying cost curve intersects intersects the acquisition cost cost curve. This makes it easy to develop develop the basic formula that can always be used to calculate a materials basic EOQ. Recall the two simple simple cost formulas developed for annual annual carrying costs and annual acquisition acquisition costs. These can be now be used to develop the EOQ formula. Fig.: Graphic representation of the EOQ concept ( AC = incremental acquisition costs; CC = incremental carrying costs; TC = total incremental costs). EOQ occurs when Annual carrying cost = annual acquisition cost
CC = AC QCI/2 = UA/2 Solving for Q : Q2CI = 2UA Q = sq. root of 2 UA/CI This formula, then, is the fundamental mathematical representation of the EOQ concept. It can be modified to accommodate numerous special conditions, but in practice it probably finds its most effective application in this form. Professor Daniel Jones, who has researched various lot sizing concepts, says that the EOQ concept can be used in conjunction with a variety of inventory management systems, including JIT. He writes: “When the EOQ model model is properly employed, employed, there is a little difference between lot sizes based based on the JIT model model and the EOQ model.” He points out that that all relevant incrementa incrementall costs must be included when when using the EOQ model. This is perhaps perhaps an obvious obvious observation, but one that he finds frequently is violated in practice. So, despite some criticisms, the EOQ concept continues to be a versatile and useful too if it is properly applied. T Various types of inventory management techniques.
• • • • • • • • •
ABC analysis VED analysis HML analysis GOLF analysis SOS analysis LIFO FIFO technique MNG analysis FSN analysis XYZ analysis
a) ABC ana analys lysis
ABC analysis is based on "80 - 20" principle or principle of "Vital few" & "trivial many". According to this principle it is said that 80% of the inventory cost is due to 20% of the items (which are expensive) and hence their management is very much required to keep down the inventory cost. ABC analysis is based on "value "value analysis". (value of item based on its consumption)
'A' items are those whose cost is is very high, hence proper inventory inventory management and regular check for such items are required. 'A' category items should be managed by senior executive and monthly inspection for such products is required. These items should not be purchased in 'bulk’ but it must be purchased regularly in small quantities supplier of such items should be informed about the requirement of the product as per manufacturing plan. These items are 5% to 10% present and cost about 70% to 80% of total inventory.
'B' category items are not very expensive expensive as compared to 'A' category. category. Minimum inventory control should be done. These items are 15% to 20% present and cost 15% to 20% of total inventory. 'C' category items are purchased in bulk. They constitute 70% to 80% of total product and cost about 5% to 10%. They do not require regular inventory control. They are purchased in bulk to avail price discount benefit.
b) VED analysis VED analysis is based on criticality, availability etc. e.g. Car. V - Vital items E - Essential items D - Desirable items Vital items are those which when not present, the production may come to halt. Essential items are those which when not present may not affect the production for short period but during long run or hire cost of production may go up. Desirable products are those which do not matter of much important & production may go without it for long period of time. c) HML analysis This is based on price analysis. H - High cost (e.g. Rs.10,000 & above price) M - Medium cost (e.g. Rs.5000 to 10,000) L - Low cost (e.g. below Rs.5000) d) GOLF analysis G - Government NG - Non Government L - Local F - Foreign Golf analysis states that products which are bought from Government sources require more time and advance payment. e.g. STC, MMTC, ONGC etc. Non government products require less time in purchasing, less paper work & are given on credit. Goods from local suppliers can be bought on credit purchase easily. easily. Foreign goods require more terms and conditions, more paper work & legal documents like custom clearance etc. e) SOS analysis S - Seasonal OS - Off Seasonal Seasonal goods should be purchased in bulk during season and stored for off season. f) LIFO FIFO technique LIFO - Last in First out FIFO - First in First out g) FSN analysis F - Fast moving items S - Slow moving items N - Non moving items Non moving items should not be kept.
These are scientific inventory management techniques which are in current use and helps in effective inventory control and management easy to adopt and easy to be understood.
PURCHASING CYCLE
A.ESTABLISHING THE NEED FOR PROCUREMENT
Recognising the need for procurement Determining the requirements Spelling out specifications Communicating requirements to purchase: 1. Purchase Purchase indents/Bi indents/Bill-of ll-of-mate -material(P rial(Produc roduction tion items) items) 2. Purcha Purchase se indent indents(O s(Othe therr item items) s)
B.SCRUTINY OF PURCHASE INDENT
Completeness of description Appropriateness of request Routing of indent through stores. Logging indents into indent registrar
C.MARKET RESEARCH
Telephonic quotations Written quotations Scheduled buying Source selection & source development
D.ORDER PREPEARTION
Scrutiny of quotations Negotiations placing orders on suppliers Obtaining suppliers’ acceptance of purchase order
E.FOLLOW UP
Pre-delivery follow up Shortage chasing Reminders Personal visits Telephones/Telegrams Faxes/Telexes Posting of personnel at suppliers’ works
F.RECEIVING & INSPECTION
Receiving dispatch details (RR/LR/CAN) & logging them into the consignment register Collection of material from transporter godown Inspection for physical damages to the packages & number of packages Entering consignment details in GRN register Uncrating of goods Quantity certification Raising of G RN Intimating receipt of materials to the indentor Inspection of goods
G.STORAGE & RECORD KEEPING
Movement of materials to concerned store/rejection store Quality certification Application of protective coating/marking Storage of materials into appropriate racks Posting of receipt into stock card
H.INVOICING & PAYMENT
Receiving GRN s in accounts department Receiving suppliers’ bills Posting of purchase register Passing of bills Effecting payments
A) Supplier and Vendor/Ancillary Supplier Caters to a number of manufacturers • •
May or may not be on contract
•
Relationship is that of buyer and seller and superficial Breach may not affect both intensely
•
•
Relationship does does not involve joint decision making
Vendor/Ancillary Caters to upto 50% for the manufacturer • (single) • Supply based on a longer period of time contract • Partner's in progress and relationship is deep-rooted Any one backing out can cause intense harm • to other or breach of relationship can harm both Involved in decision making with the • manufacturer
B) Centralized v/s Decentralized Purchase Centralized • Purchase carried out for various units at the head office / purchase office at a
Decentralized • Each manufacturing unit buys locally
•
• • • •
•
central location Heavy discounts offered due to economics of scale Standardization is the key reason Logistics cost is high Supplier is big, national player CSD canteen purchases centrally
TAJ GROUP has stationary material supplied by a central re-cycle paper manufacturer in Delhi
•
• • • •
•
Discounts are less as compared to centralized Standardization is not the key factor. Logistics cost is low Supplier is local TELCO Pune,Jamshedpur & Lucknow purchases welding welding materials materials from different suppliers Mc Donald’s in Pune is supplied chicken by Venky's and in Delhi by Sunrise hatcheries hatcheries
C. Make v/s Buy Decisions Make Manufacturers produce in house house • • Cost of acquisition acquisition > cost of manufacture Company has the capacity to invest • •
• •
•
Company has no plans to divest or focus to core competencies L & T forges forges ahead into LTITL Requires 5 M's Men Material Machinery Method Money When secrecy in involved
Buy Manufacturers outsource • • Cost of manufacture manufacture > cost of acquisition acquisition Company cannot afford to block huge • capital Company plans to divest and focus on core • competencies SBI out sources its 17 functions • Not Required •
•
No secrecy involved
The Distribution Cost Analysis
For achieving the objectives of physical distribution, the company must have such a system which will minimize the costs. Any proposed system will have to include the following costs in the total distribution costs. 1. The The Frei Freigh ghtt Cost Costss 2. Fixe Fixed d Wareh Warehou ouse se Cost Costss 3. Variab Variable le Wareh Warehous ousee (inven (inventor tory) y) costs costs There is another cost which is difficult to measure. That is the c ost of lost sales due to delivery delay or the product not being available to the customer. For reducing the costs of various levels, it is necessary to analyze the costs. After examining the analysis, the distribution manager can identify the areas where costs can be reduced. The steps for distribution costs analysis are : 1. Gettin Getting g the the Deta Details ils of Cos Costt Data. Data. 2. Findin Finding g out out the Effec Effects ts of Handli Handling ng.. 3. Calcul Calculati ating ng the Cost Cost per per unit unit.. 4. Using Using Quanti Quantitat tative ive Techni Technique ques. s. 5. Anal Analyz yzin ing g the Info Informa rmati tion on.. 6. Sett Settin ing g the the Prio Priori rity ty Are Areas as.. obtained mostly internally; internally; some 1. Getting the Details of Cost Data : These can be obtained information may be required externally. fertilizers or 2. Finding out the Effects of Handling : In some products like cement or fertilizers glassware, it will be imperative to have minimum handling. Each handling will increase the probability of damage, breakage, pilferage.
3. Calculating the Cost per unit : After knowing the fixed costs and the variable costs, unit costs can be worked out for different numbers of units distributed.
4. Using Quantitative Techniques : It will be meaningful to know whether some quantitative techniques could be used to advantage.
5. Analysing the Information : After getting all the information, its analysis will indicate the areas where action is required.
6. Setting the Priority Areas : The distribution manager can think of the strengths and weaknesses of the Company and then set the priorities for cost reduction. The entire exercise of collection of cost data and its analysis will be of tremendous help is arriving at a decision as to how to reduce the costs. It is not an easy task due to various reasons. The interdepartmental nature of the work creates many mental barriers also. The cost components can be categorized as under : 1. 2. 3. 4. 5. 6.
Costs Costs at the Produ Producti ction on Point Point Costs Costs rela related ted to Mate Materia rials ls Move Movemen mentt Cost Costss of Ware Wareho hous usin ing g Costs Costs of hold holding ing the Invent Inventori ories es Costs Costs incurr incurred ed by the Dealer Dealerss Costs Costs incurr incurred ed by the Consum Consumer er Further, the costs could be of :
7. Shorta Shortage ge of of goods goods,, damag damaged ed goods goods costs costs 8. Distri Distribut bution ion Admin Administ istrat ration ion Cost Costss 9. Pack Packag agin ing g Cost Costss The details of the above can now be discussed.
1. Costs at the Production Point : These would include raw material, direct labour, machine time, power & fuel cost. a) Costs Costs of Storage Storage and Handling Handling : These These would would consist consist cost of of labour as well well as space. space. b) Financial costs which would involve costs of working working capital for finished finished goods inventory. Costs of deteriorating of goods can also be there at the production point. c) Packaging Packaging costs costs would would include include the the costs of material material for for packaging packaging as well well as the cost cost of labour needed for that.
2. Costs related to Movement of Materials a) Freight Freight costs costs would be be incurred incurred for the goods goods to be carried carried from from the plant/fac plant/factory tory to warehouse and then to the distributor/dealer. b) The company company may possess possess its own transpo transportat rtation ion equipment equipment in which which case it will have have capital capital costs as well as operating costs. Alternatively, it may be contracting the transport carriers with hiring charges. c) Insurance Insurance charges charges will will be paid for transpo transport rt insuran insurance. ce.
3. Cost Costss of Ware Wareho hous usin ing g
a) Here also also cost of storag storagee is incurred. incurred. If it is company' company'ss own warehous warehouse, e, capital capital costs costs and also operating costs are incurred. If it is a hired warehouse, then rentals are to be provided for. b) Financial Financial costs costs and adminis administrat trative ive costs costs are incurred. incurred. c) Sometimes Sometimes,, location location of the warehous warehousee is not ideal. ideal. More costs costs are incurred incurred due to a wrong wrong location. In such a case, the costs are called 'Improper Location Costs.' 4. Costs Costs of Handli Handling ng Invent Inventori ories es
a) The inventorie inventoriess are most most likely likely to be at three three places places : (i) at the Production Point, (ii) at the Warehouse, (iii) at stock points. At all the above places, capital would be employed and interest will be paid. That cost is to be calculated. b) The servicing servicing cost cost of inventory inventory would would include, include, (i) handling handling costs, costs, (ii) insuranc insurance, e, (iii) pilferage, (iv) deterioration, (v) obsolescence, (vi) Taxes. c) There There is one more aspect aspect to carrying carrying the the inventorie inventories. s. A minimum minimum level of invento inventories ries (Safety (Safety Stock) will have to be maintained. In addition to this, the stock levels would have to be increased during a particular time-specially when the demand of that product is likely to increase. 5. Costs Costs incurr incurred ed by the Dealer Dealerss
a) From the the warehouse, warehouse, the the material material will be going going to the distri distributor butor/deal /dealer. er. As per the terms terms of the contractual arrangements, the material may be delivered at the warehouse and thereafter, all the charges like transportation will be borne by the dealer. b) The dealer dealer will be incurring incurring costs costs for storing storing of inventorie inventoriess and handling handling as well as the financial costs involved in these. c) Sometimes Sometimes,, the containers containers are are returnable, returnable, like like in soft drinks drinks glass glass bottles. bottles. The costs costs of returning would also be an element of costs at this level. 6. Costs Costs incurr incurred ed by the Consu Consumer mer
It can be debated whether some of the costs incurred by the consumer-specially for transportation should form part of the distribution costs analysis. analysis. In rural markets in India, when fertilizers are purchased in bulk quantities by the cultivators, cultivators, they have to think of the delivery point and the costs incurred by them thereafter. In competitive markets, Consumers would expect some discounts/rebate towards these costs.
7. Cost of Storage’s, Damages, Damages, Pilferage’s Pilferage’s : For bulk quantities quantities - there is an insurance during transit transit and storage. But at some point, point, the goods would be uninsured. There may be damages due to handling or shortages due to theft.
There may be a difference between the value of insurance and the claims settlement. Provision has to be made for taking care of these costs.
8. Distribution Administration Costs : At the distribution manager's office, there would be costs incurred for office maintenance as well as administrative and managerial staff. These also need to be analyzed.
9. Packaging Costs : Apart from the normal costs related related to the immediate wrapping of of the product, costs would be necessary for special packaging for transportation and warehousing. For export markets again, specific packaging would be mandatory. All these packaging costs would form the costs of distribution. The distribution cost analysis is very important for the distribution manager. It would help him in identifying the weaker areas in the system and apply corrective measures.
Supply chain management at McDonalds (India)
Did you know that every year, Rs. 50,000 crore worth of food produce is wasted in India? This is mainly because of the lack of proper infrastructure for storage and transportation under controlled conditions. McDonald's is committed to providing quality products while supporting other Indian businesses. And so, we spent a few years setting up a unique Supply Chain, even before we opened our first restaurant in India.
A Supply Chain is a network of facilities including - material flow from suppliers and their "upstream" suppliers at all levels, transformation of materials into semi-finished and finished products, and distribution of products to customers and their "downstream" customers at all levels. So, raw material flows as follows: supplier - manufacturer – distributor – retailer – consumer. Information and money flows in the reverse direction. The balance between these 3 flows is what a Supply Chain is all about. When there is a balance in the finished product ordering, the Supply Chain operates at its best. Any major fluctuation in the product ordering pattern causes excess / fluctuating inventories, shortages / stock outs, longer lead times, higher transportation and manufacturing costs, and mistrust between supply chain partners. This is called the Bullwhip Effect. Depending on the situation, the Supply Chain may include major product elements, various suppliers, geographically dispersed activities, and both upstream and downstream activities. It is critical to go beyond one’s immediate suppliers and customers to encompass the entire chain, since hidden value often emerges once the entire chain is visualized. For example, a diesel engine manufacturer may be able to integrate a GPS locator system into its engine control system. Its immediate customer, a heavy truck manufacturer, may see no need for f or this functionality. However, the downstream customer, a trucking company with a large fleet, may be very interested in a locator system. Understanding the value to the downstream customer is part of the supply chain management process.
Big Mac's supply chain success
The seed of McDonald's success was sown in 1990 - six years before it started its actual operations. Sanjeev Bhar traces its supply chain management that played a vital role in its growth. About two decades ago, the QSR wouldn't have meant much to the Indian I ndian F&B segment. Today, the acronym has been seamlessly absorbed in the industry lingo. McDonald's, arguably, one of the first brands that left a strong imprint on the Indian QSR history, has much to do with this. And its success is credited to its well-established supply management chain. According to Vikram Bakshi, managing director and joint venture partner of McDonald's India (North & East), the company invested about Rs 400 crore even before its first restaurant commenced operations in October 1996. "We had to ensure that we had the back-end linked up to the farm level for delivery commitment." The company also deployed the latest state-of-the-art food processing technology for having a sound supply chain. The transition towards the latest technology, which has been subsequently noticed in other QSRs as well, changed the Indian fast food scenario to match international standards. Tracing its success path McDonald's had been working critically on its supply chain part. Considering, an international brand trying to make inroads into the Indian consciousness, consciousness, its Indian supplier partners were developed in such a manner that made them stay with the company from the beginning. Bakshi explains, "The success of McDonald's India is a result of its commitment to sourcing almost all its products from within the country. For this purpose, it has developed local Indian businesses, which can supply them the highest quality products required for their Indian operations." As per today's standings, McDonald's India works with as many as 38 Indian suppliers on a long-term basis, besides several others standalone restaurants working with it, for various requirements. In the supply chain management for a QSR, the distribution centres hold special place for bringing food right to the outlet counters. For McDonald's India, the distribution centres came in the following order: Noida and Kalamboli (Mumbai) in 1996, Bangalore in 2004, and the latest one in Kolkata (2007). McDonald's entered its first distribution partnership agreement with Radha Krishna Foodland, a part of the Radha Krishna Group engaged in food-related service businesses. The association goes back to July 1993, when it studied the nuances of McDonald's operations and requirements for the Indian market. Recalling the association, Bakshi remarks, "Better facilities and infrastructures were created along with new systems by them to satisfy McDonald's high demands, which finally culminated into an agreement with McDonald's India, for Radha Krishna Foodland to serve as distribution centres for our restaurants in Delhi and Mumbai." As distribution centres, the company was responsible for procurement, the quality inspection programme, storage, storage, inventory management, deliveries to the restaurants and data collection,
Vital Links in McDonald’s Cold Chain
All suppliers adhere to Indian government regulations on food, health and hygiene while continuously maintaining McDonald's recognised standards. As the ingredients move f rom farms to processing plants to the restaurant, McDonald's Quality Inspection Programme (QIP) carries out quality checks at over 20 different points in the Cold Chain system. Setting up of the Cold Chain has also enabled us to cut down on operational wastage Hazard Analysis Critical Control Point (HACCP) is a systematic approach to food safety that emphasizes prevention within our suppliers' facility and restaurants rather than detection through inspection of illness or presence of microbiological data. Based on HACCP guidelines, control points and critical control points for all McDonald's major food processing plands and restaurants in India have ben identified. The limits have been established for those followed by monitoring, recording and correcting any deviations. The HACCP verification is done at least twice in a year and certified. The relationship between McDonald's and its Indian suppliers is mutually beneficial. As McDonald's expands in India, the supplier gets the opportunity to expand his business, have access to the latest in food technology, exposure to advanced agricultural practices and the ability to grow or to export. There are many cases of local suppliers operating out of small towns who have benefited from their association with McDonald's India.
Trikaya Agriculture Suppier of Iceberg Lettuce Implementation of advancved agricultural practices has enabled Trikaya to successfully grow speciality crops like iceberg lettuce, special herbs and many oriental vegetables. Farm infrastructure features: • • • •
A specialised nursery with a team of agricultural experts. Drip and sprinkler irrigation in raised farm beds with fertiliser mixing plant. Pre-cooling room and a large cold room for post harvest handling. Refrigerated truck for transportation.
Vista Processed Foods Pvt. Ltd. Supplier of Chicken and Vegetable range of products (including Fruit Pies) A joint venture with OSI Industries Inc., USA, McDonald's India Pvt. Ltd. and Vista Processed Foods Pvt. Ltd., produces a range ra nge of frozen chicken and vegetable foods. A world class infrastructure at their plant at Taloja, Maharashtra, has : • •
•
Separate processing lines for chicken and vegetable foods. Capability to produce frozen foods at temperature as low as -35 Degree Cel. to retain total freshness. International stardards, procedures and support services.
Dynamix Diary Supplier of Cheese Dynamix has brought immense benefits to farmers in Baramati, Maharashtra by setting up a network of milk collection centres equipped with bulk coolers. Easy accessibility has enabled farmers augment their income by finding a new market for surplus milk. The factory has:
• •
•
Fully automatic international stardard processing facility. Capability to convert milk into cheese, butter/ghee, skimmed milk powder, lactose, casein & whey protein and humanised baby food. f ood. Stringent quality control measures and continuous Research & Development
Amrit Food Supplier of long life UHT Milk and Milk Products for Frozen Desserts Amrit Food, an ISO 9000 company, manufactures widely popular brands - Gagan Milk and Nandan Ghee at its factory at Ghaziabad, Uttar Pradesh. The factory has: •
•
•
State-of-the-art fully automatic machinery requiring no human contact with product, for total hygiene. Installed capacity of 6000 ltrs/hr for producing homegenised UHT (Ultra High Temperature) processed milk and milk products. Strict quality control supported by a fully equipped quality control laboratory.
Radhakrishna Foodland Distribution Centres for Delhi and Mumbai An integral part of the Radhakrishna Group, Foodland specialises in handling large volumes, providing the entire range of services including procurement, quality inspection, storage, inventory management, deliveries, data collection, recording and reporting. Salient strenghts are : • •
•
A one-stop shop for all distribution management services. Dry and cold storage facility to store and transport perishable products at temperatures upto -22 Degree Cel. Effective process control for minimum distribution cost.
Cold Chain
The Cold Chain is necessary to maintain the integrity of food products and retain their freshness
and nutritional value. value. The Cold Chain is an integral integral part of the Supply Chain Setting up the Cold Chain has involved the transfer of state-of-the-art food processing technology by McDonald's and its international suppliers to pioneering Indian entrepreneurs, who have now become an integral part of the Cold Chain. The term Cold Chain describes the network for the procurement, warehousing, transportation and retailing of food products products under controlled controlled temperatures. McDonald’s restaurants store store products to be used on a daily basis, within a temperature range of –18ºC to 4ºC. About 52% of our food products need to be stored under these conditions before they are used.
Local Sourcing
McDonald's has always been committed to sourcing its requirements from local suppliers and farmers. This assurance is rooted in the philosophy of our company's founder, Ray Kroc. He firmly believed in mutual benefits arising from a partnership between McDonald's and the local businesses, thus ensuring that McDonald's commitment to growth was mirrored by that of its partners. In keeping with this belief, we have carefully identified local Indian businesses that take pride in satisfying customers by presenting them with the highest quality products. Adherence to Indian Government regulations on food, health and hygiene were a top priority. McDonald's India today purchases more than 96% of its products and supplies from Indian suppliers. Even our restaurants are constructed using local architects, contractors, labour and maximum local content in materials. The relationship between McDonald's and its Indian suppliers is mutually beneficial. As McDonald's expands in India, the supplier gets the opportunity to expand his business, have access to the latest in food technology, get exposure to advanced agricultural practices and the ability to grow or to export. There are many cases of local suppliers operating out of small towns who have benefited from their association with McDonald's India. All suppliers adhere to Indian government regulations on food, health and hygiene while continuously maintaining McDonald's recognised standards. As the ingredients move f rom farms to processing plants to the restaurant, McDonald's Quality Inspection Programme (QIP) carries out quality checks at over 20 different points in the Cold Chain system. Setting up of the Cold Chain has also enabled us to cut down on operational wastage Hazard Analysis Critical Control Point (HACCP) is a systematic approach to food safety that emphasizes prevention of illness or presence of microbiological data within our suppliers' facilities and our restaurants rather than its detection through inspection. Based on HACCP guidelines, control points and critical control points for all McDonald's major food processing plants and restaurants in India have been identified. The HACCP verification is done at least twice in a year and certified.
Suppliers Trikaya Agriculture - Supplier of Iceberg Lettuce Implementation of advanced agricultural practices has enabled Trikaya to successfully grow speciality crops like iceberg lettuce, special herbs and many oriental vegetables. Farm infrastructure infrastructure features: features: •
A specialised nursery with a team of agricultural experts.
•
Drip and sprinkler irrigation in raised farm beds with fertiliser mixing plant.
•
Pre-cooling room and a large cold room for post harvest handling.
•
Refrigerated truck for transportation.
Vista Processed Foods Pvt. Ltd. - Supplier of Chicken and Vegetable range of products A joint venture with OSI Industries Inc., USA, and McDonald's India Pvt. Ltd. Vista Processed Foods Pvt. Ltd. produces a range of frozen chicken and vegetable foods. A world class infrastructure infrastructure at its plant at Taloja, Taloja, Maharashtra, has : •
Separate processing lines for chicken and vegetable foods.
•
Capability to produce frozen foods at temperature as low as -35 Degree Celsius to retain total freshness.
•
International standards, procedures and support services.
Dynamix Diary - Supplier of Cheese Dynamix has brought immense benefits to farmers in Baramati, Maharashtra by setting up a network of milk collection centres centres equipped with with bulk coolers. Easy accessibility has enabled farmers augment their income by finding a new market for surplus surplus milk. The factory has: •
Fully automatic international standard processing facility.
•
Capability to convert milk into cheese, butter/ghee, skimmed milk powder, lactose, casein & whey protein and humanised baby food.
•
Stringent quality control measures and continuous Research & Development
Amrit Food - Supplier of long life UHT Milk and Milk Products for Frozen Desserts Amrit Food, an ISO 9000 company, manufactures widely popular brands - Gagan Milk and Nandan Ghee at its factory at Ghaziabad, Uttar Pradesh. Its plant has: •
•
•
State-of-the-art fully automatic machinery requiring no human contact with product, for total hygiene. Installed capacity of 6000 litres / hour for producing homogenised UHT (Ultra High Temperature) processed milk and milk products. Strict quality control supported by a fully equipped quality control laboratory.
Radhakrishna Foodland - Distribution Centre An integral part of the Radhakrishna Group, Foodland specialises in handling large volumes, providing the entire range of services including procurement, quality inspection, storage, inventory management, deliveries, data collection, collection, recording and reporting. reporting. Salient strengths strengths are : •
•
•
•
• •
A one-stop shop for all distribution management services. Dry and cold storage facility to store and transport perishable products at temperatures up to - 22 Degrees Celsius. Effective process control for minimum distribution cost.
McDonald's opened its first store in India in October, 1996 and currently has 113 stores, spread across the North, West & South of the country. We have the sole responsibility of McDonald's entire supply chain all across India. We handle their entire range of services including procurement, quality inspection, storage, inventory management, deliveries, data collection, recording and reporting.
Over the years, subsequent to the commencement of our relationship, Foodland has regularly won the Best Supplier Award from McDonald's. McDonald's - Challenges • • •
Full Supply Chain responsibility Multi Temp. Products - Over 65 % temperature controlled Stores as far as 500 – 1000 kms
• • • • • • • • •
Drops per month - Over 1000 Movement mainly by road Regular movement of perishables by air Routing Challenges No margin for error – Operations critical client No Stock Outs at store On time delivery record – above 97 % Clean delivery record – above 99 % Unfailing inbound supply chain
Foodland : how it helps in supply chain of McDonalds?
Foodland provides Customized Distribution & Logistics services encompassing the e ntire supply chain, such as storage, handling and distribution solutions to various clients. The services are tailor made to suit each client’s requirements, which include organisations such as McDonald's and Radhakrishna Hospitality Services Pvt. Ltd. (RKHS) Objective
To provide a cost effective solution to our customers ensuring product integrity throughout the supply chain. Platter Of Services •
Supply Chain Structuring
• • • •
Inventory Planning & Replenishment Management Warehouse Management Customer Order Fulfillment Logistics – Temperature Controlled
It handles bulk transportation of temperature sensitive products. Key Features:
1. 2. 3. 4. 5. 6. 7.
Dedica Dedicated ted to ‘col ‘cold d chain chain’’ movem movement ent The only only logistics logistics soluti solution on provider provider with with expertise expertise in handli handling ng agri – produce produce Total Total kilomet kilometer er run run per per month month is is – 7,00,000 7,00,000 km Perishable Perishable tonnage tonnage handle handled d per per month month – 7,000 tons Robust Robust qualit quality y syst systems ems & proce processe ssess First in the the country country to use use multi multi temperat temperature ure vehicl vehicles es Use of innovat innovative ive methods methods to ensure ensure temperatu temperature re integrity integrity during during transit transit 8. Experienced staff – The BEST in the industry. Its experience of over a decade in the logistics & distribution industry has led us to believe that there is still one area which remains poorly serviced – that of
movement of small volumes of perishable items
across the country.
Our experience also tells us that many ma ny companies, for want of a cost-effective and reliable logistics solution, end up deciding not to market their products which are of a perishable nature in certain markets, thus losing out on potential revenue opportunities. opportunities. And because currently, there is no reliable service provider to cater to this need, companies have to move goods either by air, which is expensive, or through bulk carriers with very little control on the delivery schedule. Given the current scenario, combined with our domain expertise in the logistics & distribution area, we have launched a new service - Fresh Rush. Fresh Rush is a temperature controlled transportation service addressing the needs of small volume cargo . Fresh Rush – Features •
•
• • • • •
Multi temperature products, such as Frozen (below –18ºC) and Chilled (1ºC to 4ºC) can be transported Flexibility of load movement - A minimum of 500 kgs to maximum of 5000 kgs can be transported In transit temperature tracking Fixed schedule of pickup and delivery Well trained and experienced manpower Adherence to strict hygiene standards Consignment can be tracked through GPS system
1. Food Park, Kalamboli • • •
First of its kind in India Designed as per global standards The centre procures, value adds, stores and distributes various kinds of perishable and non-perishable food products
Food Park – Features • • • • • • • •
Spread over 33,000 sq meters Multi Temperature Zones Integrated Facility – Storage and Value Addition capabilities under one roof Ensured / Guaranteed Food Safety Paradigm shift in the way food is handled in the supply chain in India First of its kind in the region Benchmarked against global standards Codex / USDA / PFA compliant
• • • • • • • •
Scalable Dedicated storage for specific categories Sanitation / Hygiene standards – Trash handling Air / Water Quality – Treatment Plant / ETP Ripening Rooms, Crate Wash Facilities, Blast Freezer, Flake Ice Machine Value Added Services – Processing of Vegetables & Fruits, Meat, Sea Food and Poultry Controls – Building Management System (BMS) 100 % Power Back Up
Food Park – Capacity • • •
Capacity to manage over 6000 SKUs Can store 70,000 cases with 1,700 pallet positions and over 4,000 pick faces Processing o
Vegetable & Fruits – 21 tonnes per day Meat – 3 tonnes per day o Fish – 3 tonnes per day o Blast Freezing – 6 tonnes – per day Ice Machine – 2.4 tonnes per day o
• •
2. Kanjur Marg DC • • • •
Spread over 3,500 sq meters Dry Provisions DC Capacity to manage over 9000 SKUs Can store 80,000 cases with 1400 pallet position and 3,600 pick faces
3. Delhi DC (Noida)
•
Dedicated to operations in the North Highly functional DC Chiller / Freezer / Dry Storage
•
Capacity to manage 576 pallet positions
• •
Findings of study conducted
1. Every organisation, no matter how big or small in size,has its own forecasting techniques.This is because without forecasting forecasting the demand and supply requirements, requirements, the orders cant be fulfilled. fulfilled. Similarly, for order processing, Mc Donalds forecast its requirements on a daily basis. The study that we did in Indore, where there are three outlets of Mc Donalds, each one in a multiplex, revealed that their forecasting depends on a few factors like the upcoming movie release in that week and its response.
Likewise, we conducted this study in the month of March and the demand during this time is affected by the school and college examinations.The demand for different departments also vary from one outlet to another. 2.Mc Donalds has its outlets in different parts of the globe. In India too, Mc Donalds has numerous outletsin different cities, but they do not have any local vendor. They have a fixed vendor, that is The Radhakrishna Foodland, which caters the range of 230 products that Mc Donalds require. The Radhakrishna Foodland not only process the fooditems but also handle the logistics logistics partially.The delivery center is at Mumbaiwhere from the required stock is transported to different locations. The concerned person told us, that due to the ephimeral shelf-life of tomatoes, it i sthe only commodity that they make purchase from local markets; specifically specifically of four to five inches inches diameter which undergoes a thorough sanitization process, only after which it is used. 3.Every organisation has its inventory cycle.The Mc Donalds outlets do keep a safety inventory. They keep the buffer stock for a period of three days,and their stock is stored at the outlets itself. Every product used in preparing the menu items come with an expiry date, like the French-fries served in Mc Donalds has a life of two hundred and seventy days. But once the menu items are cooked,they are not kept for more than ten minutes, after which they are dumped as waste. There are daily product safety checklist which is maintained manually as well as with the help of computer softwares too,helping the staff in assessing the stock quantity at the end of each day. 4.Radhakrishna Foodland had been working with Mc Donalds for the past ten yearsand the trems abd conditions for choosing the network design was decided by the headquarters of Mc Donalds itself.The food items are transported via air conditioned trucks having different chambers.Each chamber is designed for the different kind of stock at different temperature levels,as per the suitability and requirements of the stock.All the raw material comes in a frozen form.The trucks have pre-defined destinations to reach each day.The sources at Mc Donalds told u sthat the trucks from Mumbai reach Indore on Monday,Pune on tuesday, Hyderabad on wednesday and so on at Bangalore and Gujarat too. The items which are to be procured from foreign territories comes to India via ships, like the french fries are obtained from new Zealand via shipments. 5.They do assess their daily requirements via safety checklists.The rounding and scheduling of ouput and input is done manually and through computer based softwares too. 6.Mc Donalds does not have any third party logistics. 7.With the evolvement of the new technologies and convenient softwares, the conventional methods of maintaining suplly chain records are now a passe`. Mc Donalds too use a standardized visual Foxpro based program via which the outlets are linked with the head office and the Radhakrishna Radhakrishna Foodland too. 8.Mc Donalds believe in the saying "Customer is the King" and thus the the complaints , if any, from the customers end are duly heard and resolved as per the need of the situation.
