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Apr, 01 2008

Profits in proficient supply chain

Having the right item in the right quantity at the right time at the right place for the right price is the strategy behind every successful business. Enterprises have increasingly come to believe that they must rely on effective supply chains to successf

Franchising is the best mode of expansion for any business. Though the end result is very effective, a lot of hard work goes into achieving it. Have you ever thought, while buying a commodity or merchandise, how the store or the company makes available all the material for us whenever required? Managing the supply of products for one or two franchisees might be easy for the franchisor but the supervision gets complicated with the existence of numerous franchisees and even more with the existence of a number of categories of a single product. Traditionally, different organisations along the supply chain operate independently for marketing, distribution, planning, manufacturing, and purchasing. These organisations have their own objectives which are often conflicting. A process called supply chain management (SCM) simplifies the entire working.

SCM is the phenomenon of planning, implementing and organising the operations of the supply chain as proficiently as possible. It takes care of movement and storage of raw materials, inventory, and completed supplies from the point-of-origin to the point-of-consumption. Supply chains exist in all the organisations, although the complexity of the chain may vary greatly from industry to industry and from firm to firm.

Process of SCM

The movement of goods in any business is a two-way procedure starting from the manufacturer and going to the retailer and then to the consumer. It travels back from the consumer in the form of payments and complaints to the retailer and further to the manufacturer. So we can say, SCM involves product flow, information flow and finance flow. The product flow includes the movement of supplies from the franchisor to the customer, as well as customer returns or service requirements. The information flow involves assigning orders and updating the status of delivery. The financial flow consists of credit stipulations and payment agendas.

SCM includes four major decision areas namely location, production, inventory, and transportation, and there are both planned and operational rudiments in each of these decision areas. Supporting this Sidhartha B Chowdhury, AVP & Head, Retail & Consumer Delivery, HCL Technologies says, “Supply chain management spans all movement and storage of raw materials, work-in-process inventory, and finished goods from point-of-origin to point-of-consumption. It also includes coordination and collaboration with channel partners, who can be suppliers, intermediaries, third-party service providers and customers.”

The geographic placement of production facilities, stocking points, and sourcing points is the natural first step in creating a supply chain. Once the size, number, and location are determined, so are the probable pathways by which the product would reach the final customer. The production decisions include what products to produce, and which plants to produce them in, allocation of suppliers to plants, plants to distribution centres (DCs), and DCs to customer markets. For the success of this process, there is a need to combine professional knowledge of each of these functions so that there is a coordination of resources between the franchisors and the franchisees.

Role of SCM in franchising

Supply chain management is the most complex part of franchising as it involves a range of franchise outlets. But once an apt technique of managing is formed, it helps the franchise business flourish in a big way. The supply chain forms the base for any kind of business. In franchising, various companies have formulated a definite procedure and have formalised the process of SCM for successful functioning. The role of SCM has assumed prominence over the years mainly due to the growing intricacies of supplying one`s business to franchisees along with materials and shipping out products in a more globalised supply chain. If upheld correctly and efficiently it can fetch enormous profits for the companies.

It is because of SCM that it is now easier to keep record of the production, stocks and sales. Agreeing with this DPS Kohli, Chairman, Koutons Retail says, “The process has made a smooth working and management of our supply of goods. We can analyse our sales and production in various ways. It is easy to keep a record of sale and production, like how much stock is lying in the warehouse and how much is in the stores. It helps in analysing which item is in more demand and in which region. Accordingly, we are able to change our short production policy.”

Chowdhury adds, “It has become an integral part of retail in today`s market. It enables consumer centric merchandising, lean replenishment, agile supply networks, seamless cross-channel operations and product and service innovation. Software solutions in SCM improve stock positions of products, ensure available informed staff, assure convenience by reducing time required to find items and also equip the staff for a faster, easier checkout.” Further emphasising on the advantages Tarun Lal, COO Yum! Restaurants International, Indian Subcontinent, says, “SCM helps in keeping cost under control. Single point dealing with vendors for rate contracts helps leveraging economies of scale and facilitates one system approach. This has also helped the company to maintain cordial and long lasting relationships with these vendors.”

Changes required for franchising

In case of franchising, the working is different from that of retailers. Changes are brought about not at every step of the supply chain but at certain levels.

There is no set formula for the smooth operation of the supply chain. Companies have different ways of carrying out their respective supply chains. Procuring of material by the franchisee is the most essential part. Some international companies have forayed into India and the procuring of material gets even more difficult and complex for such franchisees. In such a case, the franchisee may get the material from different countries and sources. Elaborating on the point Gautam Sahni, Master franchisee, US Dollar Store says, “We import from associate warehouses of our principles from various countries such as US, UAE, China etc. Since the lead-time is high, we do have to keep back up stocks to the tune of about 50 days plus supplies.” Alternately, the franchisor may appoint various vendors across the country to make available all the required material to the franchisees. The franchisees then form relationships with these vendors and keep them updated about their requirements. As and when required the franchisees automatically inform these vendors about the necessitated materials. Yum! has a centralised supply chain team that develops and maintains vendor base in line with business needs and demands. The team negotiates rate contracts on an ongoing basis on behalf of all franchisees with these vendors. Further, each franchisee has a small supply chain team to execute and coordinate with these vendors at operational level. The franchisees place orders, procure materials and pay to these vendors independently.

Confidence building between a franchisee and the franchisor is a must to achieve perfect SCM. Both the franchisor and the franchisee have a role to play in the process of SCM. Kohli elaborates, “The franchisee also plays an important role by keeping record of stock in his store. He can take immediate action over any shortage through the unified software and put up the requirement in the system. The concerned person in the company receives the request by default and accordingly the requirement is fulfilled through the specified process.” But there are certain companies where the franchisees have no role to play in the procurement of the objects and it is delivered to them directly by the franchisor. Sahni reveals, “Nanson Overseas follows Management Information Systems to maintain minimum stock levels and regulate procurement and supplies to provide best support services to its franchisees. We deliver merchandise at the doorstep of all our 30 franchised outlets.”

Technology assists SCM

During the past decade, globalisation, outsourcing and information technology have enabled many organisations to manage the supply chains in a better and organised way. According to AMR research, HCL is ranked higher than other Indian off shoring companies in retail capability with leadership status in supply chain. It provides expertise in software applications, technology development and offshore delivery. Combined with a deep understanding of retailing, it guarantees a unique proposition to the customers worldwide.

Chowdhury avers, “Technology plays an important role in the success of supply chain management. Even though the supply chain concept pre-dates the internet and other technological advancements, only through the use of various software solutions and communication, can it truly reach its full potential. Another very important factor technology plays in SCM is that companies today can effectively work with global partners notwithstanding language barriers and time differences. Using technology to handle most of the elements involved in supply chain management, including procurement and communication, makes the exchange of data and the running of the supply chain faster. One of the biggest benefits technology has given to the supply chain concept is the ability for companies to collaborate. These collaborations are designed for the mutual benefit of all parties.”

There are two main types of SCM software: planning applications and execution applications. Planning applications utilize advanced algorithms to establish the finest technique to fill an order. Execution applications track the physical status of supplies, the administration of materials, and financial information involving all franchisees and vendors. Elaborating on this Kohli says, “Through wide area networking system software and enterprise resource planning system we ensure that all the requirements get fulfilled. Software is used for automating logistics which helps the supply chain in automating the work flow as well as management of the system. We use WiZapp for this purpose.” But the most effective technologies for the franchise business are based on open data models that support the sharing of data both inside and outside the enterprise. The franchisor in this way can keep check on the working of the franchisees. By sharing of data, SCM applications have the potential to improve the time-to-market of products, reduce costs, and allow franchisors to better manage current resources and plan for future needs. An increasing number of companies are turning to web sites and web-based applications as part of the SCM solution for better functioning of their franchise business. Lal reveals, “We do not have centralised technology to keep a track on logistics. However, Yum! is exploring this option to consolidate and centrally track the logistics.” Radio Frequency Identification (RFID) technologies have helped franchisors to come up with new SCM solutions.

Inventory management

Inventory is a list of supplies and materials, which is held available in stock by a business. A franchisor`s inventory may exist in a warehouse or in a store accessible by consumers. Inventories not intended for sale to customers may be held in any premises of the franchisor. Stock ties up cash and if uninhibited it will be unfeasible to know the actual level of stocks and therefore impossible to control it. Managing inventory in the supply chain is vital to ensure high customer service levels. Nevertheless, it is also an extremely expensive asset to maintain. The use of strategies like eliminating dead stock, ABC analysis, systems contracting and stockless buying, vendor-managed inventory and efficient consumer response (ECR) strategies have reduced inventory expenditure for many franchisors. Cross docking is a practice used to decrease inventory storage by reorganising the flow between the manufacturer and the franchisor. Starbucks, a leading franchisor and brand of specialty coffee in the world is a pioneer in the field of inventory management. It is said that the ultimate goal of any effective supply chain management system is to reduce inventory.

Role of logistics firms

As SCM involves not just one or two people or companies, the coordination between the various players in the chain is a key factor in its effective management. Logistics form an important part of the process of SCM as it deals with the integration of information, transportation, warehousing, material handling, and packaging. Some companies have in-house logistics arrangements while many big companies have either partially or fully outsourced their logistics operations. Without efficient logistics providers the entire process of SCM would be a failure. Sahni says, “We have realised with experience that logistics play a very critical role in our case as our stores are spread all over India. As of now, we have local associate transport companies with whom we are dealing with for our supplies.”

While by having an in house arrangement for logistics the franchisor has the advantage of controlling and handling the flow of goods at his discretion, it has the disadvantage of distracting him from his real work as his creative energy would be channelised elsewhere. Similarly, having a third-party logistics provider for outsourcing the logistics operations has its advantages and disadvantages. The biggest advantage is that it allows the franchisors to focus on their core abilities. They can focus on the product development, manufacturing and customer satisfaction than worrying about the logistics for their franchisees. Kohli says, “We do take the services of Om Logistics and Speedage for our logistics operations. These companies implement and control the efficient, effective forward and reverse flow and storage of goods. The issue is not the transportation itself, but to streamline and control the flow through the value adding processes and eliminate non-value adding ones and to meet customers` requirement. Further, centralised warehousing facility supports smooth working of logistics management.”

Technological flexibility, geographical coverage and low transportation costs are some other advantages for the franchisors. On the flip side, it leads to loss of control by the franchisor. Furthermore, if not clearly stated in the contract, the service providers may charge extra usage fees. It is very difficult to reverse the decision to outsource once the organisation has signed up with a provider. Lal believes, “A logistic partner is important for handling primary transportation, warehousing and secondary distribution of stocks.” Successful SCM requires a change from managing individual functions to integrating activities into key supply chain processes by the franchisors There are various SCM service providers who play an important role in helping franchisors formulate innovative and efficient plans and execute their supply chain strategies. These service providers should be appointed by firms to assist them. However, opting for a service provider can be a precarious decision as many companies have failed in this practice. The franchisors must select a consultancy that closely matches their needs by understanding the key characteristics of the SCM service providers.

International scenario

Internationally, franchisors are developing competence in their practice of SCM. They are bringing in innovations and using strategies to build a viable advantage over other companies. RFID in SCM has gained greater viability in the US and is being used by all the major franchisors. It is a relatively new technology and the purpose of an RFID system is to enable data to be transmitted and processed according to the needs of a particular application. The data transmitted provides identification or location information, or specifics about the product tagged, such as price, colour, date of purchase, etc. For these reasons its popularity is growing in the overseas markets. Franchisors the world over are resorting to teams of merchants, distribution logistics programmes, information systems and professionals to carry out the work. These teams work together to plan the process of moving and selling of the merchandise. Technologies like auto purchase order system known as the effective customer response system (ERS), quick response system and collaborative planning and forecasting and replenishment (CPFR) are also completely developed and widely used internationally. Cross docking is still unheard of for various franchisors in India while international companies are making extensive use of the system. The emerging organised franchises in India have also sought to put into practice the winning technologies of global franchisors.

India fast catching up

SCM is the science of progress and integrates all the sectors of the country. While a number of new practices have been adopted internationally for SCM, Indian players still lag behind. It is still in its nascent stage in the country where franchisees prefer to be in direct contact with the suppliers. Though in principle SCM is widely accepted in the country, it has yet to be absorbed fully in business. The bigger companies, though, have a full - fledged supply chain for their franchise operations. The technologies being used are also fast catching up. They should be put to effective and resourceful use in the times to come. Its time the Indian franchisors become aware of the global trends in this field to emulate their international counterparts.

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