SUPPLY CHAIN AND INVENTORY MANAGEMENT

Seminar paper Presented to

MPSTME, NMIMS

In Partial fulfillment of the Requirement of MBA TECH

By

Rishabh Agrawal

Code: 330

Year of Graduation (2012)

TABLE OF CONTENTS:
(1)Abstract…………………………………………………………………………………........................................................1

(2)Introduction………………………………………………………………………………………………………………………………....2

(3)Key concepts of inventory management……………………………………………………………………………………….3

(4)Changing trends in the manufacturing layouts………………………………………………………………………………6

(5)A-Z about the supply chain……………………………………………………………………………………….....................7

(6)Market structure and the pricing policy…………………………………………………………………………………………8

(7)Demand and Cost Curves……………………………………………………………………………………………………………….9

(8)Pricing strategies used………………………………………………………………………………………………………………….10

(9)Challenges in the global scenario………………………………………………………………………………………………….11

(10)Supply demand and economies of scale…………………………………………………………………………………….12

(11)Strategies to combat the challenges………………………………………………………………………………………….13

(12)References………………………………………………………………………………………………………………………………..17
 Acknowledgement

I would like to thank Prof. RC Agarwal (Chairperson, MBA(Tech)) for giving this opportunity to
write this seminar paper which help me writing seminar paper in future.

I would also like to thank Prof. V. Sheshadri who inspired me to take operations as the area of
this paper.

I would also thank MPSTME (SVKM‟s NMIMS University) to provide me an opportunity to

work on the Seminar Paper and providing all the necessary help to accomplish the paper.

Rishabh Agrawal

MBA(tech)-Computers

Code-330
ABSTRACT:
This paper discusses the most important and the most versatile part of
the operations of any firm, supply chain and the inventory
management.

Starting the paper with some briefing about the JIT technique usually
used by a lot firms, the paper carries on with the elaborative discussion
about the supply chain.

In any business strategy selection of right supplier to obtain maximum

profit plays a key role for any organization because it is understood that
profit is the key for success for any company.

Continuing on the same note, paper also includes a brief discussion as to

how the quality has to be maintained for any product and any firm
whatsoever. After that a small case study is taken up to guide properly
what is managing inventory all about.

Demand and cost curves along with the economies of scale have been
clarified..Challenges faced by the firms in the global scenario as well as
the solutions to combat such problems have been discussed in the paper.
INTRODUCTION:

“The primary elements of Just-in-Time are to:

(1)have only the required inventory when needed,
(2)improve quality to zero defects,
(3)reduce lead times by reducing setup times,
(4)queue lengths, and lot sizes,
(5)incrementally revise the operations themselves,
(6)accomplish these things at minimum cost”.

KEY POINTS OF THE JIT

-The main objective of JIT manufacturing is to reduce manufacturing lead times.

-This is primarily achieved by drastic reductions in work-in-process (WIP).
-The result is a smooth, uninterrupted flow of small lots of products throughout production.
-Most successful JIT applications have been in repetitive manufacturing,
(batches of std. products, at high speeds and volumes)
-Successful use of JIT is rare in large, highly complex job shops where production planning and
control is extremely complicated.
-Smaller, less complex job shops have used JIT, but operations have been changed so that they
behave somewhat like repetitive manufacturing.
Changes required by the JIT:

Stabilize production schedules

Improve product quality
Cross-train workers
Reduce equipment breakdowns
Develop long-term supplier relations.
-JIT is a system of enforced problem solving.
-One approach is to lower inventory gradually to expose problems and force their solution.
-With no buffer inventories to offset production interruptions, problems are highly visible and
cannot be ignored.
-The job of eliminating production problems is never finished.
Continuous improvement – or KAIZEN -- is central to the philosophy of JIT.
INVENTORY MANAGEMENT:

In a push system, such as an MRP system, we look at the schedule/ forecast to determine what
to produce next. In a pull system, such as JIT, we look only at the next stage of production and
determine what is needed there, and then we produce only that.

INVENTORY RELATED COSTS:

(1)Carrying Costs.
(2)Ordering Costs.
(3)Stock-Out Costs.
Inv. Carrying costs –
1. Cost of Capital – Interest paid on the money tied up
2. Storage costs - Space, personnel, and equipment
3. Risk costs- Obsolescence, damage, pilferage, insurance
Ordering Costs - P O Paper cost / Follow-up, Visits, Calls
Production Set-up, Inspection, Receiving etc.
Stock-out Costs Back-order costs, Lost sales costs,
Lost customer costs ..

QUALITY REQUIREMENTS IN SUPPLY-CHAIN:

“The quality of a product or service is a customer’s perception of the degree to which the
product or service meets his or her expectations.”

(1)Quality of design
(2)Quality capability of production processes
(3)Quality of conformance
(4)Quality of customer service
(5)Organizational quality culture
-If production does it right the first time and produces products and services that are defect-
free, waste is eliminated and costs are reduced.
-Quality management programs today are viewed by many companies as productivity
improvement programs.
ELEMENTS TO IMPROVE THE TOTAL QUALITY:
-Top management commitment and involvement
-Customer involvement
-Design products for quality
-Design production processes for quality
-Control production processes for quality
-Develop supplier partnerships
-Customer service, distribution and installation
-Building teams of empowered employees
-Benchmarking and continuous improvement
(1)Philip Kotler : It is not just enough to satisfy a customer, but
it is important to delight him.
Delighting is - adding unexpected surprises to the offer

(2)Prof. W. E. Deming :
It will not suffice to have customer that are merely satisfied. An unhappy
customer will switch over. Unfortunately a satisfied customer may also switch, on the theory
that he could not lose much, and might gain.
Profit in business comes from repeat customers, customers that boast about your products and
service, and that bring friends with them
Examples of Customer Delight –
Carry Bag, Goods Return Guarantee

NEW TRENDS IN MANUFACTURING LAYOUTS:

-Designed for quality and flexibility
-Simultaneous – Product Flexibility & Volume Flex.
-Cellular layout within larger process layouts
-Automated material handling
-U-shaped production lines
-More open work areas, fewer partitions/ obstacles
-Smaller and more compact factory layouts
-Less space for inv. storage throughout the layout

A-Z ABOUT SUPPLY CHAIN:

In many business strategies selection of right supplier to obtain maximum profit plays a key role
for any organization because it is understood that profit is the key for success for any company.
It is tempting to take the literature on buyer behaviour as a frame of reference in organizations
and buying process involves:

Determining the specification of the goods and services that need to be bought.
-Selecting the most suitable supplier.
Preparing and conducting negotiations with suppliers in order to establish an agreement.
Placing the order with the selected supplier.
Monitoring and control of order.
Follow up and evaluation.

Above mentioned points are too much important for a supply chain to get maximum profit. In
general scope of buyer/purchasing function is far wider than the activities of the purchasing
department.

In other words best supplier is an invaluable resource to the organization requiring its product or
services. Such suppliers make a direct contribution to a firm’s success. They can assist their
customer with product development, value analysis, and timely delivery of the desired level of
delivery.

Good buyer-seller relations facilitate the buyer’s efforts to get superior performance, extra
services, cooperation on cost reduction programs, and a willingness to share in new processes
and procedures.

Selection and management of the right supplier is the key to obtain the desired level of quality on
time and the right price, the necessary level of technical support, and the desired level of service.
Buyers must care about above mentioned six important supplier oriented actions to satisfy his
responsibility.

Basically, Supply Chain management is a consistent chain of developing management of

logistics. If we look at past, SCM systems were not focusing on innovative approaches, these
supply chains started on manufacturing and finished with the sale to customer.

Now, experts are paying more attention on all the operations related to product manufacturing
like supplier selection, production development, inventory managing, scheduling demand,
transportation and other activities.

They are producing more comprehensive solutions for supply chain management systems to
provide maximum benefits for the company.

To get maximum benefits, it is need to understand project, calculate and deal with demand of
customer effectively, improve customer services, and increase market shares. In addition, these
models need to support. For example, advanced planning, scheduling for manufacturing, setting
up demands for customers, and transportation arrangement for distribution.

Traditional approach of a product delivering was manufacturing the products at once according
to demand then finishing goods and fill up warehouses. Later in 1960s, both transportation and
warehousing functions used to reduce inventory and to get more benefits with the help of faster
and reliable and proper transportation.

After that next development stage was to improve logistics that included
manufacturing, procurement, and order management functions.

A SMALL CASE TO SIMPLIFY:

SUPPLY CHAIN AND INVENTORY MANAGEMENT
BALRAMPUR CHINI MILLS LTD.
BRIEF BACKGROUND
Balrampur Chini Mills Ltd is one of the largest integrated sugar manufacturing companies in India. Its
allied business consists of manufacturing and marketing of Ethyl Alcohol & Ethanol, generation and
selling of power and manufacturing and marketing of organic manure. Company has nine sugar factories
located in Eastern U.P. having an aggregate crushing capacity of 73,500 tons per day.

Products
 Sugar
 Molasses
 Ethanol
 Alcohol
 Power
 Organic Manure

Goal
“At BCML, our goal is to achieve optimal utilization of our units and improve cost efficiencies which
would further enhance our profitability going ahead and thus improve the earnings ability of the
Company.”
- Mr. Vivek Saraogi,
Managing Director

MARKET STRUCTURE & PRICING POLICY OF THE FIRM

Destination of Firm Product:
Balrampur Chini Mills is the second largest sugar production company in India; its market is spread
almost all over the India. Specifically this market can be divided into two segments i.e.
1) Business to Business: In this the Firm Output is directly taken up by another firm as a raw
material for their finished goods manufacturing. This includes industries such as
a. Confectionaries
b. Foods and Beverages
c. Pharmaceuticals etc.
2) Business to Consumer: In B2C the firm’s Output goes directly to the consumers through various
distribution systems of free market. A total of 10 % of the firms output has to be sold through
PDS at subsidized rates (levy market) and the remaining can be sold in free market.
Major Competitors:
Sugar industry is one of the industries which is having a large no. of players in local, national and
international boundaries. In India we have a total number of 571 sugar factories in India as on March 31,
2005 compared to 138 during 1950-51.
National Competitors
 Bajaj Hindusthan Sugar & Industries Ltd
 DCM Shriram Industries Ltd
 Dhampur Sugar Mills Ltd
 Dharani Sugars & Chemicals Ltd
 Dwarikesh Sugar Industries Ltd.
BCML has been, both, a net importer and exporter of sugar in the past. During years of deficit
production, India has imported sugar from Brazil (AGRO INDUSTRIAS DO VALE DO RIO SAO FRANCISCO),
Australia (Sugar Australia) and South Africa.
Demand Curve Faced By the Firm:
Demand for sugar depends on the price of sugar and rising per capita income of the households. Sugar
being an essential commodity has a high inelastic demand and its income elasticity is also low. This is
due to the low share of expenditure on sugar from a household’s annual income, whereas the Firms face
a highly elastic demand curve due to large no. of competitors in the market.

Figure 1: Demand Curve Faced by Sugar Industry Figure 2 : Demand Curve Faced By
the Firm
Cost Curve Faced By the Firm:
In the short run the fixed cost faced by the firm is constant with respect to the quantity
produced where as the variable cost varies mainly due to the work force and the supply of raw
materials.

F IGURE 3:C OST C URVE F ACED B Y THE F IRM

Type of Market Structure:

 No. Of Competitors: The Major Market Share of the Sugar industry is concentrated with 4-5
dominant players.
 Product Differentiation: The product is identical in nature and no product differentiation is
possible, but quality of product may differ from producer to producer.
 Entry and Exit Barrier : The entry and Exit barriers in this industry are high because of a no. of
factors :
o Government Regulations
o High Setup Cost
o High Exit Cost etc.
 Control over Price: Firms have some control over price but due to the highly inelastic demand of
sugar the producers are barely able to enjoy the benefit out of it. Over this there are a number
of government policies, regulations and mechanisms which regulate the market price.
From the above discussion we can conclude that the Firm is operating under Oligopolistic Market
Structure.

Pricing Strategy:
Sugar prices have a negative co-relation with stocks-to use ratio. When the stocks-to-use ratio falls, the
prices are bound to rise and vice versa. Due to drastic fall in production in Sugar Season 2009, the
stocks-to-use ratio had come down to its lowest level in a decade. As a result price of Sugar had risen
from about Rs.17.50 per kg in December 2008 to about Rs.30 per kg in September 2009.
Factors Affecting Price of Sugar:
1) Sugarcane Pricing: The determination of price for sugarcane is a matter of critical importance both
for the sugar industry and the cane growers. The pricing procedure has been adopted so as to
protect the farmers & ensure them a good price for cane.
 Figure 4: Price Floor for Sugarcane to protect Farmers
2) Government Regulations: Sugar industry is one of the few industries that still remain under
government control. The government continues to regulate sugar release; sugarcane procurement
area and pricing of sugar cane. The centre also regulates the release mechanism for sugar. Release
can be classified as free sale sugar and levy sugar.

Figure 5: Price Ceiling of Sugar to protect Consumers

3) Variation in Sugar cane Production

Challenges
Industrial Challenges:

o Low installed capacities of Manufacturers resulting in high production cost: This is because the
amount of fixed cost beard by the manufacturers is almost the same therefore if the firm is
producing a very limited quantity of sugar every year, the sum total cost of fixed and variable
cost would result in overall high production cost.
o Outdated Manufacturing Technologies: This challenge needs to be tackled properly to avoid
under utilization of assets as well raw materials which in turn decreases the overall production
and increases the cost.
o Low level of professionalism
Challenges faced by firm in Global Scenario:
o Cyclicality of Sugar Industry: The domestic sugar industry typically follows a 4-5 year cycle.
Higher sugarcane and sugar production results in a fall in sugar prices and non-payment of dues
to farmers. This compels the farmers to switch to other crops thereby causing a shortage of
 sugarcane, causing an increase in sugarcane prices and extraordinary profits. Taking into
account the prevalent higher prices for sugarcane, farmers then switch back to sugarcane.

F IGURE 6: S UGAR C YCLE

Impact of Cyclicality of Sugar Industry:

1) Demand: The demand for Sugar is ever increasing as we can see from the Figure; (the demand
for sugar is increasing year by year). Hence the same can be depicted in demand curve as follows:
Price of Sugar

Quantity of Sugar
F IGURE 7: S UGAR C ONSUMPTION & P RODUCTION F IGURE 8: C HANGE I N D EMAND OF SUGAR

2) Supply: In case of huge sugarcane production, the sugar production is also in large quantity
which accounts for increase in supply. On the other hand in case where the sugarcane production is low,
the firm produces low quantity of sugar resulting in lowering down of supply. The same can be depicted
diagrammatically.
 F IGURE 9: S ITUATION LEADING TO INCREASE IN F IGURE 10: S ITUATION LEADING TO DECREASE IN
SUGAR SUPPLY DUE TO LARGE SUGARCANE PRODUCTION SUGAR SUPPLY DUE TO LOW SUGARCANE PRODUCTION

3) Economies of Scale: During the period of low sugar cane production, the quantity of sugar
produced is low i.e. at Q which is less than Q2. Hence the firm
operates in the economies of scale i.e. if the efforts to increase
the total output is made the overall Long run Average cost can be
lowered.

F IGURE 11: E COMOMIES OF S CALE IN S UGAR

F IRMS
4) Price: As the demand of sugar is increasing every year and on the other side the sugar cycle
tends to decrease the supply of sugar in one half and increase the supply of sugar on the other, there
will be a change in price. The impact of above changes on price is shown as follows :
a. During First half of the cycle where there is increased production of sugar due to large
sugarcane cultivation

F IGURE 12: I MAPCT OF F IRST H ALF OF S UGAR C YCLE

b. During Second half of the cycle where there is decreased production of sugar due to low
sugarcane cultivation

F IGURE 23: I MAPCT OF S ECOND H ALF OF S UGAR C YCLE

 o The Sugarcane Pricing Policy: Introduction of Fair & Remunerative Price (FRP) that would
replace the earlier Statutory Minimum Price (SMP) for sugarcane procurement across the
country. The Centre fixed an FRP of Rs. 129.84 a quintal for the sugar season 2009-10, reflecting
an increase of 60 percent over the SMP of Rs. 81.18 a quintal paid in the previous season.
o Supply of sugar at subsidized cost for Public Distribution System: Sugar mills in the country are
required to supply 10 percent of their total production at a subsidized cost for the public
distribution system administered by the Central Government. Faced with an impending shortage
of the commodity in 2009-10, the government has recently increased the volume of levy sugar
requirement to 20 percent.
Resolutions & Strategies to Combat Challenges:

o High production costs are due to low installed capacities of the firm: The installed capacities
are increased by merger and acquisition of other running or sick units and transforming them
into profit making entities. This is a fast way of increasing the capacity. This helps the firm to
consolidate its market share and enjoy the economies of scale.
o Outdated manufacturing technologies have been upgraded so as to avail the benefits of
increased output, lower production cost and lower operational costs.
o Low level of professionalism is tackled by recruiting professionals from leading business
schools, engineering colleges etc. These professionals are well trained and masters of their
respective fields; are able to see a problem from various angles provide expert advice for the
problem at hand
o The Cyclical nature of the sugar industry is tackled by moving towards international trade and
harnessing international economies of scale. At the time of lower sugarcane produce, the firm
can import raw sugar (unprocessed) from the leading sugar exporters, process it and sell it into
the local market. This leads to utilization of full capacity of the firm. In the scenario of higher
sugarcane produce, the firm can produce more raw sugar and export it to sugar importing
nations.

Impact Of Above Strategy:

Sugar being an essential commodity has an ever increasing demand in the long run but as the
supply of sugar is also properly maintained by imports in the times of deficit, the overall effect of
this is increased demand even in the short run due to the lowering of prices. This can be seen
from the following graphs.
 F IGURE 34: L OWERING O F P RICE DUE TO I MPORTS F IGURE 45: I NCREASE IN D EMAND D UE TO
L OWER P RICES

This strategy not only ensures proper maintenance of demand and supply in the market but also
helps the firm to operate in the economies of scale and hence increase the total output on
account for decrease in long run average cost.

F IGURE 56: E CONOMIES OF S CALE IN S UGAR F IRM

o In India the sugar industry is regulated by various government regulations. The firm has to
supply to the government as levy, a part of its production for the PDS. This can be tackled by
establishing a unit in a sugar exporting nation and importing sugar from the unit. This produce
can be supplied to institutional buyers consuming sugar.

References:
1) Introduction to supply chain by R.B.Handfield and R.B.Nochols
2) Wikipedia.org,,google.com,,docs.google.com,,scribd.com
3) BCML (2010), Quarter 1, Financial Year 2010 Report , http://www.chini.com/bcml-q1-fy2010-results-
release-table.pdf
4) BCML (2009), BCML Company Annual Report 2008-09, http://www.chini.com/2009/bcml2009.pdf
5) BCML (2009), BCML Company Corporate Presentation, http://www.chini.com/2008/presentation-5th-jan-
09.pdf
6) Fundoodata.com, Directory of Sugar Companies, http://www.fundoodata.com/industry-
companies/Sugar/75.html
7) Welkerswikinomics.com, http://welkerswikinomics.com/blog/wp-content/uploads/2009/11/lrATC.PNG
8) Internationalecon.com, Trade Policies, http://internationalecon.com/Trade/Tch90/T90-23.php