Published: September 20, 2007 in India Knowledge@Wharton

When Martha Stewart, America's diva of décor, was released from federal prison in West Virginia in March 2005, millions of people around the world saw and read about it. Stewart's first public appearance since being imprisoned five months earlier had an interesting and unexpected aside: It created a new fashion trend.

At the time of her release, Stewart wore a grey-and-white poncho that had been knitted by a prison inmate. That garment attracted the interest of many women, and over the next few days, Stewart received numerous requests for the pattern and the type of yarn used to make it. Yarn companies and apparel manufacturers were eager to clamber onto Stewart's "prison poncho" bandwagon. The Lion Brand Yarn Company, a leading yarn-maker in the U.S., later said that in the first few days after Stewart's release, more than half a million people downloaded the poncho's crocheted and knitted patterns from the company's website. Apparel and logistics companies, however, ignored the hubbub. They saw little relation between their business and the emerging wave of business opportunities that the poncho was creating.

Anshuman Singh, chief executive officer of Future Logistics -- the logistics arm of the Future Group, a fast-growing Indian retailer -- spoke about Martha Stewart's poncho at the recent Global Supply Chain Summit 2007 held at the Indian School of Business (ISB) in Hyderabad. His view was that logistics firms had missed out on a huge opportunity. "In the first week after Martha Stewart appeared on her television show wearing this poncho, consumers went wild and demand soared, but neither the apparel companies nor their supply chains were ready," he said. "All around the U.S., there were lost sales."

Various speakers at the conference noted that companies in almost every industry are increasingly turning to supply chain excellence as a critical aspect of competitive strategy, and they are focusing on how to maximize the effectiveness of their supply chain networks to deliver business results.

Take retail, for instance. In categories such as fashion, food, general merchandise and home products, retailers have to deal with very small quantities -- and even individual pieces. Typically, moving an item from the vendor to the store involves at least six physical transactions. The scenario gets much more complicated when multiple vendors across several product categories are involved, each with its own requirements of logistics and supply chain set up. Food retail, for instance, has to deal with issues of freshness and perishable products. Apparel, in contrast, has to operate within a limited fashion time cycle. Household items tend to be either bulky or fragile, and so on.

In countries like India, where most retail stores are located in the heart of the city -- where rents are high and storage space is scarce -- supply chain management has even more serious business implications. Future Logistics, Singh said, now handles 2.5 million SKUs (or stock keeping units) a day across the Future Group's various retail formats around the country. By 2010, this number is expected to increase to more than 30 million SKUs a day. Singh reckons that even with 98% accuracy, some 600,000 pieces will not be delivered correctly, resulting in an estimated sales loss of more than Rs. 40 million ($1 million) a day.

"At Future Logistics, we believe that the biggest driver in consumer logistics will be the need for zero defect. While infrastructure, technology, automation, processes and people will all play an important role, zero defect can only be achieved through vertical integration across the entire supply chain -- from raw material supply, production, wholesale and retail. The different parts of the supply chain will no longer be able to work in silos as they do today," Singh noted.

Nike's Experience

Manufacturers, for their part, have realized that while they may have the best production facilities, compelling products, strong brands and great distribution networks, all of these mean nothing if the products are not available in stores when and where the customers want them. Ravi Kallayil, director of operations at Nike India, said: "Supply chain is one of the most critical aspects of Nike's corporate strategy. The primary goal of our supply chain strategy is to win at the moment of truth. This means that, as a manufacturer, we have to ensure that our products are in stock where and when the consumer shops."

At Nike -- which has $16 billion in revenues today with the goal of getting to $23 billion by 2011 -- process excellence is a key component of the company's supply chain strategy. According to Kallayil, Nike's three businesses -- footwear, apparel and equipment -- have some similarities since most of the products are made in Asia and sold to similar customers worldwide. Their production processes, though, are completely different. Much of this has to do with the fact that from the time Nike began in 1964, it has never owned a factory but has chosen to work through contract manufacturing. Said Kallayil: "We are trying to build our strength in process excellence through standardization. We are doing this through the concept of lean manufacturing, which Toyota has made popular."

Nike is also working towards what it calls "delivery precision." Kallayil explained that Nike conceives its products in the form of collections. A collection could consist of a top apparel, a bottom apparel, shoes, bag, cap, etc. This is how customers typically like to buy products. While Nike designs these products as part of one collection, each category of items is made in different locations. As a result, if supply chain execution goes awry, these products are not available as complete collections, and that leads to loss of sales. "Getting this streamlined is extremely challenging because it involves changing the way contract manufacturers work," said Kallayil.

At Dow Chemical (annual revenues: $49 billion), one of the key lessons the company has learned over the last few years has been that the supply chain strategy needs to support the business strategy. "It needs to be integrated. Otherwise, it is just a side event," said Peter Halloran, director of the supply chain expertise center at Dow Chemical International. "We believe that you cannot really have a successful business strategy unless you have a supply chain strategy underpinning it that allows you to get your products to your customers at the right price and the right time."

Dow has 157 manufacturing locations in 37 countries. It sells some 40% of its products in North America, 30% in Europe and 30% in the rest of the world. While India, China and the Middle East currently account for only 15% of Dow's sales, these regions are where Dow expects most of its growth in the coming years. "This is one of the reasons that we have located our global supply chain design center in Mumbai in India," explained Halloran.

A key business strategy for Dow is to develop joint ventures to source raw materials such as oil, natural gas and salt. (Some 50% of the products that Dow makes are basic material building blocks such as polyethylene, polystyrene, caustic soda, etc., which are used in various industries. The other 50% consists of products, such as adhesives and coatings, meant for specific industries.) Dow recently initiated a joint venture with Saudi Aramco in Saudi Arabia, from where it will be transporting several million tons of products a year to India, China and other parts of the Pacific. The design center in Mumbai is building the entire supply chain to support this venture.

"Our supply chains need to support our different businesses and different business models," Halloran said. "One of our key challenges is to design supply chains that can leverage what is common and use common platforms and, at the same time, customize parts of the supply chain wherever necessary to meet the end needs of the markets."

Dow also designs its supply chains in ways that address security and similar concerns. During the course of its business, Dow moves 50 million tons of products around the world each year, and all these emit greenhouse gases. "The supply chain design we adopt has a major impact on our products' greenhouse gas emissions, and that is key to our business," Halloran noted.

Supply Chains and Services

Information technology services firms have found that key concepts used in conventional supply chains such as demand management, strategic sourcing, inventory management, supply synchronization, project management, use of technology and so on, are also applicable in the services environment. Take inventory, for instance. Clifford Patrao, a senior managing consultant at IBM Global Business Services, pointed out that inventory in services is really "stored capacity" in people. A services organization needs to ensure that it has the right number of people with the necessary skills to build a responsive supply chain without overloading and adding costs. "One needs to use this inventory very effectively. At IBM, if people are on the bench waiting for projects to come in, they spend their time upgrading their skills through e-training courses."

In addition to internal resources, for a services company the supply chain consists of external entities including product vendors, specialist knowledge partners, sub-contractors, universities and educational institutions, etc. "The objective of the services supply chain is to leverage the capabilities of the entire chain to give the best possible solution to the customer," said Patrao. One aspect that makes the services supply chain unique is that the relationships are dynamic. "A partner in one transaction could well be a competitor in another transaction. You need to manage these complexities well. It is important to have role clarity and long-term strategies in place regarding what will be outsourced and what will be done in-house," he added. "At the end of the day, whatever the industry, it is the best supply chains that will win, and not individual companies."