Downgrading "Causes and Consequences"

ALARM FOR THE INDIAN ECONOMY. Just a week before India overtook Japan in GDP in PPP (Purchasing Power Parity) and became the third largest economy after US and China. Before two years India was one of the fastest growing economy after China. India's GDP is growing at the rate of 9.1%. But, what happened to the current scenario. India's GDP growth reduced drastically and now it's growing at the rate of 6.1%. There are various factors are responsible for this like inflation, tight monetary policy etc.., 

Now, a new threat has come. The treat is from S&P (Standard & Poor). S&P is the credit rating agency in US. They warned India that they would downgrade the credit rating of India from STABLE to NEGATIVE (BBB-). This is the worst credit rating. This won't happen now. If India doesn't take any step to improve its growth by controlling the inflation and make certain changes in economic policies of India, after two years India will be in a great trouble. If we see the Index of Industrial Production (IIP) in February, it was forecasted to 6.1%. But, it was only 4.1%. Indian government should also have to take a look into it.

What will happen if S&P downgrade the India's credit rating? What are the causes and consequences? The first thing happens is it will create a cataclysm in FII (Foreign Institutional Investors). The foreign investors invested billions of dollars in Indian market. If this downgrading happens, the investors will pull back their money from the Indian market. Actually the downgrading indicates that the risk of India repaying the loan is high. This will create some sense of fear among the investors. This will further affect the Indian economy.

Suppose if we take US, every year they have allocated certain amount of money to invest in other countries through FII. If they allocated 25% of money to invest in South Asian countries, in India they will invest approximately around 4%. Because of this downgrading, this percentage will get reduced from 4% to 2% or 1%. This is only from US. Not only US investing in India. Other countries like China, Japan, and European nations are also investing in India. This creates a huge set back in infrastructure, technology, real estate and etc.., development in India.

Another major issue is the depreciation of India rupee against US dollar. Before two day it was around 52.17 rupees equivalent to 1$. If this downgrading happens, rupee will depreciate further. This will affect the importers of India. But, it is good for the exporters.

This downgrading will create a domino effect. Indian government has to take necessary actions to reduce the impact of the effect and boost the growth of the economy. Otherwise, it will create a chaos and it further suppresses the development of the Indian economy.

Business Activity Mapping - Requirement Identification and Vendor Management

Steps involve requirement identification and dealing with a vendor:

Step 1:

The customer places the purchase order for the number of units of product they need i.e., the finished goods.

Step 2:

The Engineering department receives the purchase order and it will check the availability of finished goods. If the finished goods are there, they supply the finished goods to the customers. Then, the freezing of design and preparation of BOM will take place. If not, go to step 3

Step 3:

The Engineering department prepares a Bill of materials. They send the BOM to the purchase department. The Engineering department requires the raw materials for the production of finished goods.

Step 4:

The purchase department checks the BOM with the stocks of raw materials

Step 5:

If the materials mentioned in BOM are available in the material storage department, they send the materials to the manufacturing department for manufacturing. Then, after manufacturing the finished goods stored in warehouse and then transported to the customers.  If not, go to step 6

Step 6:

List down the items need to be purchased and send the list of items to be purchased to the purchase department. Then, the purchase department sends the purchase order to the vendor.

Step 7:

The vendor supplies the ordered materials.

Step 8:

Before the materials get stored in the materials storage department, the inspection of materials will be done. This is to check whether all the materials are within the specification limit or not.

Step 9:  

If all the materials are within the specification limit then the materials are accepted and moved to material storage department. Then go to steps 5 and 11. If not go to step 10

Step 10:

Materials which are non-conforming and falling outside the specification limit are rejected. Suddenly intimation should be given to the vendor about the non-conformity of materials. After sending the non-conformity, the rejected lots should be sending back to the vendor. But, some of the materials are within specification limit. They follow step 7

Step 11:

The vendor sends the replacement lots. Then go to step 7

Step 12:

After the materials get stored in the material storage department, good receipt note will be prepared and it sent to the vendor and the finance department. Then, finance department sends the process payment to the vendor.

Supply Chain - "DevelopED Nations VS DevelopING Nations"

Is there any difference between supply chain between the developed nation like USA and developing nation like India? Of-course, there are lots of differences. The differences are in terms of flexibility, speed, innovation, the way the supply chain is designed etc..,

The major difference between the two economies is the GROWTH. India is growing in a faster rate when compared to USA. The GDP growth rate of India is 6.1% YoY. In case of USA is only 1.6% YoY. But the real GDP of USA is US$14.5 trillion and India is only US$1.73 trillion. USA market is almost reached the saturation point. Per capita income of USA is greater than India. Here, we can see the contradictory things. They are high per capita income versus slow growth rate and low per capita income versus high growth rate. So, obviously the supply chain approach is different for these two nations USA and India.  Source: http://www.tradingeconomics.com/

In case of USA, if the company wants to make money or to increase the margin, reducing the price of the product or cost cutting in the supply chain doesn't make any sense. The customers in the developed economies always seek for some innovative products that make some difference in the way they are living. Their main concern is no money. Their main concern is about the availability of brand new product. So, the supply chain in the developed nations should be agile enough to meet the demand of the customers. The supply chain should be efficient. 

Suppose, let’s take an example a brand new tablet enters the market. Customers want that tablet and the demand is so high for the tablet. At that time, if the company things of reducing the cost in supply chain, it will lead failure in meeting the demand. The company should think of how fast I can provide my new product to the customers. The customers are also willing to pay a premium for the new product. The only way for the company to make money is by charging more money to the customers by increasing their margin in case the demand is not high. But, in the above case of tablet, the demand is high and also the people are willing to pay a premium. The company will be beneficial if they increase the price and it ultimately leads to increase in the bottom line.

In case of India, the majority of the population always looks for a low cost product. The challenge for the companies in India is how they are going to provide products at low cost. Economies of scale play an important role. Apart from it, the other way of reducing the cost is by supply chain activities i.e., starting from the procurement of raw materials, logistics and distribution channels. In contrary to the developed nations, the bottom line can be increased not by increasing the price but by increasing the quantity of goods sold in developing nations.

Another important challenge the developing nations facing is predicting the demand. In case of developed nations, they don't have much difficulty in predicting the demand when compared to the developing nations. There are various reasons behind it. The most important thing is developed nations are technologically advanced. Everything is computerised and each and every activity that is happening in nook and corner of the supply chain are electronically recorded. They have inch by inch information about the business. In case of developing nations, nevertheless the technology is in developing stage.

Another important reason for the efficient supply chain in the developed countries is their transportation facilities. They have well laid roads, railways and frequent air transport. Developing nations are still lagging in it. 

"Supply Chain Changed"

SCM is one of the areas in an organization where about 60%-65% of money flow. In a typical supply chain there is always tradeoff between cost and delivery of the products. But in the current uncertain market scenario, cost and delivery of products won’t create any competitive advantage to the organization. Supply chain should be ‘agile’, to cope with the mismatch between supply and demand. And also an effective supply chain should be adaptable to the market condition. 

Supply chain of an organization should be adaptable to the fluctuations and uncertainties. The organizations should be flexible enough to change their supply chain strategy to meet the uncertainties and fluctuations. To be effective in supply chain management, an organization should align their interests with the customers and suppliers. 

Supply chain strategy depends on the type of product in which the organization is handling whether it is a functional or an innovative product. If it is a functional product, the organization should use the efficient supply chain i.e., it should focus on reducing the lead time unless it doesn’t affect the cost. If it is an innovative product, the organization should use the responsive supply chain i.e., fast enough to meet the demand.

Let’s see some of the examples for functional and innovative products. For functional product take the example of soft drinks (Pepsi, Coco-cola). These soft drinks are fast moving items. They should be in each and every shop whether it is a local kirana store or any big mall. It should be available in all the places. The reason behind this is people need them. Suppose I'm travelling in any rural area and suddenly I want to drink some soft drinks and I approach a store and asking for a soft drink of any brand. If the brand is not available in the shop, what will I do? I'll ask for some other brand and I'll quench my thirst. The supply chain of the soft drinks should be effective and make sure that it should be available in all the shops. At the same time, supply chain should be cost effective. Because replenishment of stocks will happen every day in each and every shop. If it is not cost effective, it will increase the operational cost and ultimately affects the bottom line.

For innovative products like Apple ipads or iphones responsive supply chain is the best. Ipad is an innovative product. It is new to the market. People are seeing the product for the first time. Demand for those products will be high. If the company can't meet the demand then it will lead backlog. Backlog is loss to the company. The supply chain should be fast enough to meet the consumer's demand. Another important thing here is the company should be good in forecasting the demand. If the forecasting is sceptical, it affects in both the ways i.e., it may lead to lots of inventory or backlog. Organisation should be conscientious about predicting the demand.

Reference: "Marshall L.Fisher, What is the right supply chain for your product? HBR, Reprint 97205"
                            "Hau L.Lee, The triple-A supply chain, HBR, page 102-112"