the five year plans have not been achieved, and hence the installed generation capacity cannot cope with the ever increasing demand of the Indian economy. Peak power and energy shortages are continuous phenomena. The status of generation capacity as on 31 January 2015 is indicated below:

Though the creation of generation capacity has been freed from any approval requirements either from the state governments or the Government of India, its success is crucially linked to the availability of primary energy source viz., coal, oil or natural gas and an assured supply of the primary energy on a long term basis at a reasonable price. Unfortunately the primary energy sector has not been able to supply the ever growing demand from the power sector or satisfy the demands of generation assets already created.

The thermal generation contributes 69.72% of the total generation capacity and is primarily dependent on coal and natural gas. Natural gas supports about 8.81% of the total generation capacity.

Natural Gas Supply Chain Demand for natural gas is primarily from power, fertilizer, industrial and city gas distribution sectors. Fertilizer & Power sectors are the anchor segments for gas market in India constituting about 70%+ of the demand. Gas demand in India was approximately 166 million standard cubic metre per day (MMscmd) in 2009 and was expected to increase to 230 MMscmd in 2015. If supported by reasonable gas price it could have reached an upside of 280 MMscmd and it had a potential to go up to 310 – 330 MMscmd if supported by reasonable price, time of day electricity tariff and gas storage. However in view of the drastic reduction in the production of natural gas from domestic sources the average consumption is hovering around 150MMscmd to 185 MMscmd during the last three years. This has created a large capacity of stranded assets unable to generate electricity even under periods of high demand.

Editors’ NoteWe are happy to release this year’s first issue of SCMC Digest, the Newsletter of the Supply Chain Management Centre at the Indian Institute of Management Bangalore. In this issue, we bring you an article on Energy Supply Chains and an article on issues and best practices in Procurement. As before, we have included summaries of Student Projects, doctoral theses and information on the Centre’s activities including Best Practices Exchange and our major event, the Biennial Supply Chain Management Conference that took place on 18-19 December 2014.

For the benefits of first time readers, here is a brief description of how the SCM Digest is structured. The first section, ‘PERSPECTIVE’ carries an article on broader issues of supply chain management. The second feature article, ‘FOCUS’ brings the insight on certain areas of supply chain Management. The next section ‘STUDENTS PROJECT’ and ’INSIGHT’ give brief accounts of selected students projects and research studies on SCM topics. The last section keeps you informed about the activities of SCM Centre.

As always, Readers reactions and feedback is vital to improve. Please send your views and suggestions on SCMC Digest and we would try our best to incorporate them in future issues.

Prof. LS Murty & Prof. Dinesh Kumar

Vol. 5 No. 1 July 2015

Supply Chain Management CentreIndian Institute of Management Bangalore

Disclaimer: The views expressed in this Digest represent the authors’ personal views and they do not represent the official views of their organizations, the SCM Centre or the Indian Institute of Management Bangalore”.

Corporate Sponsors

Focus 3

Student Projects 4

Insight 6

News at SCM Centre 7

Contents

PERSPECTIVE:Natural Gas Supply Chain

by Siravara MadhusudanEnergy & Infrastructure Sector Consultant

The Electricity Act, 2003 was enacted with the avowed objective of taking measures conducive for the development of electrical generation, transmission and distribution, promoting competition, protecting interest of consumers and supply of electrical energy to all. As envisaged in the Act, Government of India formulated the ‘National Electricity Policy’, ‘National Electricity Plan’ & ‘National Tariff Policy’. The policy formulations aim at an integrated development of generation, transmission and distribution of electricity. The generation capacity has to be augmented to cater to the ever growing demand for electricity and linked to the national GDP growth envisaged. To support the national growth perspective, the generation capacity, with a reasonable reserve has to be created well in advance. From 5th January 2011 procurers viz., the Distribution Companies have to procure electricity for their distribution purpose only through competitive bidding.

The Act and the policy formulations provide for generation capacity creation anywhere in India based on economics but subject to compliance with environmental and statutory requirements and no other approval is required from any procurer. However, the targeted additions of the generation capacity during

0102030405060708090

100

Northern Western Southern Eastern NorthEast

44.78

71.97

34.13 27.64 1.77

1.62

1.84

2.32

0 0

16.67

7.45

11.4

4.11 1.24

5.94

11.27

13.78

0.43 0.26

Renewables

Hydro

Nuclear

Thermal

All India Power Generation 258.62 GW

Northern

Western

Southern

Eastern

North-East

Diesel 0.01 0.02 0.94 0.02 0.14Gas 5.33 10.92 4.96 0.19 1.57Coal 39.43 61.04 28.23 27.43 0.06

0.0010.0020.0030.0040.0050.0060.0070.0080.00

GW

Region wise -Thermal Generation

Diesel

Gas

Coal

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In view of the severe constraints on supply of main primary energy viz., coal, the Ministry of Power, Government of India had planned generation capacity augmentation using natural gas as fuel to the extent of 35GW by 2015 which has not materialised on account of lack of assured supply of natural gas. It is also necessary to create generation capacity using a clean fuel such as natural gas to meet the objective of reduced carbon dioxide emissions.

The domestic gas supply was about 145 MMscmd in the first quarter of 2011. The demand from power sector was 71 MMscmd as on 31.03.2011 and was 49% of the natural gas supply. Part of the natural gas demand was also met by Re-gasified Liquid Natural Gas (R-LNG) imported through LNG terminals located at Dahej and Hazira. Two more LNG terminal at Dhabol and Kochi were commissioned in 2013. On an average 13.127 MMTonne per annum (52.5 MMscmd) of LNG has been imported during the three years 2011-12 to 2013-14 and forms about 34% of the total gas supply.

Government of India is encouraging import of primary energy - coal and gas to the extent of 25% to 30% of the demand.

Import of LNG Currently LNG can be imported through the re-gasification terminals at Dahej & Hazira in Gujarat, while two more are at Dhabol and Kochi were commissioned during 2013.

Following quantities of LNG have been imported in the last few years:

Year Imported LNG in million tonne2007-08 8.322008-09 8.62009-10 9.1482010-11 9.9312011-12 13.2142012-13 13.1362013-14 13.02

The cost of LNG is the major constraint in increasing its use in the power sector. The price of LNG imported in India varies from US$ 12 per million British Thermal Unit (MMBtu) to US$14 per MMBtu. Traditionally LNG price is linked to the prevailing crude oil price and varies from 14% to 15% of the crude oil price. Based on price linked to crude oil price, the cost of LNG delivered at the power plant premises, including inland pipe transportation costs, is expected to be:

JCC priceper barrel

landed cost at customer premises per MMBtu

$ 50 $10.88$ 60 $12.46$ 70 $14.04$ 80 $15.52$ 90 $17.19

The various cost components include the Delivery Ex-Ship price at the terminal, the ex-terminal price which includes customs duty at the rate of 5.15%, re-gasification charges at the rate of $1 per MMBtu, financing, custom handling, surveyor charges at the rate of $0.2 per MMBtu and landed cost at customer premises, comprising ex-terminal price and transmission charges, at the rate of $1 per MMBtu.

The Indian electricity market is a highly regulated market with severe limits on the “Energy Cost” component of electricity tariff. A large component of market is based on long term Power Purchase Agreements. A small quantum of the electricity is traded through merchant power sale where tariff is determined by supply & demand. However in terms of the volume traded, the Merchant Power is a very small segment, with seasonal variation of electricity price, which varied from Rs.2.90 to Rs.4.57per kWh. Usually summer months see a higher price for electricity.

Therefore it can be observed that the imported R-LNG cannot really supplement the power sector demand on account of its price linked to crude oil price. An alternative mechanism for LNG pricing instead of the traditional method as a percentage of the crude oil price becomes necessary.

Global LNG MarketAt the end of 2009, global LNG capacity was approximately 340 Billion cubic metres (BCM) per annum. An estimated additional 60 BCM of capacity under construction would have come on stream, but may be underutilised on account of reduced demand. Projects with a ca-pacity over 130 BCM are under various plan-ning stages and approximately 42 to 45 BCM is likely to be commissioned. Traditionally LNG is supplied to gas markets in North America, Europe and Asia Pacific. With the development of unconventional gas resources such as shale gas, North America has become self-sufficient and is likely to become a net exporter of energy. Unconventional gas reserves in Asia and Eu-rope have been estimated at 49,000 BCM and 59,000 BCM respectively. It is expected that a fairly large LNG supply overhang is likely to prevail in the coming days. European gas mar-ket is expected to grow at the maximum @2% over the next 10 years. Further in the decade of 2000-2010 anticipating greater demand for im-ported LNG a large number of re-gasification plants have been built in USA. However, with the advent of shale gas supply to US market and gas price hovering around US$2.6 per MMBtu at the Henry Hub (traditional location for deter-mining gas price for US gas market), practically the capacity utilization of all these facilities for importing of LNG has been reduced to zero. Many of these regasification plant owners are evaluating options of converting these facilities to bi-directional facility i.e., to say with lique-faction for export out of US. A couple of them have already obtained the US Federal Govern-ment approval for such a conversion and export. It may be of interest to note that with the new

discovery of shale gas, the ratio of gas reserves to consumption in US is upwards of 100 years based at the current gas consumption rates.

With depressed gas price in North America, the net back price of LNG to Middle East & Australian producers from US & European markets is expected to be low. The ‘Netback’ to LNG supplier (Middle East) defined as FOB supplier (ex-liquefaction terminal) from consumers in Europe and US is expected to be less than the Henry Hub price. Assuming that India could offer a slightly higher ‘Netback’ to Middle East LNG supplier of say US$3 to US$3.5 per MMBtu, a R-LNG price in India of US$7 to US$7.5 per MMBtu is achievable.

Further it is reported that the ‘Buyers’ are moving away from traditional long term supply contracts. Indian gas consumers can try this option and particularly its effect on long term funding of the projects using LNG as fuel input.

LNG Value ChainTo get a reasonable price of LNG imported to India all the components of the value chain starting from gas production to liquefaction, ocean transportation, regasification and inland transportation needs to be evaluated A traditional gas chain is show below:

The broad break-up of the gas value chain is

• Gas production• Liquefaction• Ocean transportation• Regasification• Inland transportation

LNG PricingInformation available about the capital investment in Australia and other LNG facilities indicate the capex for each tonne of liquefaction varies from as low as US$1230 to as high as US$1750. With FLEX LNG which incorporates liquefaction, storage and regasification facility in a single vessel it is expected that capex requirement can be reduced further to as low as US$710 per tonne of liquefaction. This kind of FLEX LNG vessel will also give flexibility to tap stranded offshore gas assets with reserves as low as 1 to 2 Trillion cubic feet (TCF). With the expected supply overhang of the LNG supply with low price in US market, US becoming a net exporter and very low rate of growth in European gas market, Indian suppliers can look to get an affordable LNG price.

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The following seems to be practical in the timeline of next 8 to 10 years.

• Finding and Development Cost : US$ 1.95

• Gas Storage Facility : US$ 0.15• Gas transportation : US$ 0.50• Liquefaction Facility : US$ 1 – US$2• LNG Shipping : US$ 1.25• Total CIF cost at India : US$ 5.85

per MMBtu

These cost values are based on onshore gas wells; even if stranded offshore wells are also tapped it can be still be expected that the CIF price of LNG may increase by another US$1 to US$1.5 per MMBtu.

There is also a suggestion that imported LNG price should be merged with the domestic gas supply price and a concept of ‘Pooled Price’ should be used to supply to different consumers in India. It is strongly felt that the concept of pooled price should not be adopted and gas market should be allowed to discover the price particularly for imported LNG based on market dynamics. Those suppliers who can optimize costs of different components in the LNG value chain and get a reasonable price delinking it from crude oil price should be allowed to develop their markets in India for LNG without imposing the concept of ‘Pooled Price’. Indian companies who have entered into long term agreements with over capitalized liquefaction facilities and linked to crude oil price should be allowed to develop their own market rather than on imposing them on the gas market in India

The gap between peak power demand and supply in the year 2015 is expected to be 6 to 8GW. Even if part of this shortfall is filled by gas fuelled generation, it would create a demand of 30 to 40 MMscmd and may be able to support a slightly higher price of R-LNG.

A quick move by all those concerned with supply of natural gas to Indian market to take advantage of overhang global LNG market, discovery of unconventional resources in both Asia and Europe, may be able to develop a robust gas market in India with imported LNG at a price not linked to crude oil price.

Mr. Siravara Madhusudan has over 35 years of experience in Engineering, Development and Management of ‘Energy & Infrastructure Sector’ projects. He has been associated with the development, execution, operation & maintenance of many thermal power projects. Before he retired, he was Director (Technical) of GVK Industries. He holds a Masters Degree in Mechanical Engineering (Heat Power Engineering) from Indian Institute of Science, Bengaluru and Bachelors Degree in Mechanical Engineering from University Visweshwariah College of Engineering, Bengaluru.

FOCUS:Approach to deliver value in Procurement using Total Cost of Ownership

by Jayasankar PillaiStrategy and Analytics, Consulting, IBM India Pvt Ltd

Procurement / Sourcing departments are under constant pressure to bring down costs (landed cost of commodities and operating costs) which is the main lever for a firm to drive costs and improve the bottom line. They are being asked to achieve the same constantly Year on Year with out compromising on compliance or firm’s ability to have an agile supply chain. The whole paradigm of Procurement as a siloed back office support function is being questioned by internal and external stake holders. This paper attempts to suggest some systemic procedures Procurement Department can undertake in their category Management practices using TCO (total Cost of Ownership) principles.

Changed role of Procurement Organizations in value delivery: Sourcing Organizations should have a paradigm shift in their thinking to unlock value by focusing on the non traditional areas other than cost reduction to achieve the same

Figure 1: Levers of Value creation in Procurement showing the non traditional ones in red

To achieve the above thinking, sourcing professionals have to imbibe strong category management process based on Total Cost of Ownership in all their decision making process.

Total Cost of OwnershipKnowingly or unknowingly we use TCO concepts in our daily lives sourcing decisions or make analysis of faulty decisions using the TCO concept. Whether it is housewife deciding on a particular type of daal to reduce the cooking

time OR a consumer of an automobile analyzing his buying decision of a car (base price + service cost + running cost) over the period of usage is using TCO concepts. The basic principle of Total Cost of Ownership (TCO) is to compute and analyze the total cost of ownership (Sourcing, usage and retiral of the product or commodity to be sourced together with a comparison of the relative benefits. A schematic diagram of the TCO concept is given below

Figure 2: Schematic representation of TCO concept

Basic Principles guiding a TCO calculationTCO can be pretty involved analytical fact based decision approach and sourcing decisions have to proactively do this with a degree of sophistication and detail warranting the specific decision making context. Procurement team should keep in mind the following basic principles in deciding the right TCO approach for decision making

• Variability of parameters: Sourcing decisions of commodities and services are complex and have the interplay of multiple variables and parameters. Good analytical sourcing personnel have to do a judicious removal of the variables not related to the sourcing decision in question and make the decision making parameters common across choices. Let me try to explain with the simplest example (do not mistake the example simplicity with the concept. This can turn out to be a killer in analysis). Analyzing landed cost of commodity at the factory to compare different suppliers located at different distance from the factory is method to reduce the variability

• Extent of analysis: Deciding on the extent of analysis is always a challenge for buyers. Whether it is the decision of which stage the cost plus have to reach OR deciding on the rigor of market/supplier analysis always Category Managers have to take judgment on the extent of analysis to back out their decisions. Thumb rule is that it should be an incremental approach, no decisions based on feeling / perception and to stop analysis at the point where you do not have a control

• End Product function Effect & Cause: When analyzing alternatives and its relative benefits, a common mistake we do is to over estimate the specs. Any incremental benefits which do not have an incremental bearing on the end product functionality are futile. This principle helps in rationalization of product specs. In an engine assembly having a gasket having 10 year life is futile when there are other parts in engine which needs to be replaced in 5 years.

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• Extent of data support to monitor the same: Do not try to make judgments (you or cross functional team) with out being supported by facts and figures. The perception of higher quality by a supplier A have to be always supported or validated with actual rejection rates not only at receipts but also at usage or at consumer end. TCO champions have to always drive the need of facts and figures in every decision.

How to plan the TCO journey for category managementOrganizations willing to adopt the TCO process in procurement decision making have to follow a structured, process to imbibe this with sufficient agreement and funding from top management. This is due to the fact that Sourcing TCO decisions in Category Management extend the normal boundaries of procurement team to “New Product development “Operations & Production teams “ and to even Sales and Marketing teams . So it is better to have a structured approach agreed by all parties for reaping maximum organization benefits

Given below is a structured approach to enable TCO culture in sourcing decisions. Plan & Analyze phase should have pilot projects / ideas rather than churning out the ocean. In implementation an incremental approach per category is suggested with further projects learning from previous projects.

However care should be taken to quickly institutionalize the TCO approach across wide section of team through process, people and technology capability building. If not the initiative would die its natural death

Figure 3: Phased Approach for category Management through TCO methods

Plan Phase: The plan phase in an organization is to create the right environment of change to embrace TCO model in Sourcing process. Activities include setting up a team with roles and responsibilities, ideas around broad concepts category wise with projection of the projects and a high level project plan, Funding approvals for the same and a broad communication plan to cement the same with in the organization and cross functional team needs to be done during this phase. Team typically include setting up the Global, BU / Regional and Site team with roles of TCO champion, Core navigator members category wise, Analytical Support team etc. Their utilization % s across the organization & funding approval is secured for the same.

This phase also calls for creating initial hypothesis of the potential for value creation using a Value contributor model. The ideas

around each of the levers are brainstormed across the teams using process like ‘Jams’ and round tables. It might be worthwhile to include key suppliers also in the ideation sessions if the interaction process in mature.

Scope

Plan

Plan

Ideate

End Deliverable

Scope (Product, Process and Commercial)Levers of Value creation Hypothesis Tree

High Level Deliverable planCritical path planDetaled live plan

Team StructureRACI MatrixSkill gap matrixRoles and Signoff

Figure 4: End Deliverables during Plan Phase

Hypothesis tree and levers of value creation are powerful techniques which can be used for moderated ideation and scrutinizing the ideas which gives maximum value as shown below

Figure 5: Value Tree for reducing fuel costs and idea funnel for coming to executable projects

Analyze Phase: This phase is very crucial for vetting their ideas based on facts and figures. The analyze phase helps the procurement organization to do reality check with multiple techniques which are all powerful in their own specific context. Spend Analytics, Procurement Matrix Analysis and Supplier Market Analysis are the most common techniques used in this phase. The degree of sophistication / detail is dependent on the question / options under consideration. For high value items / ideas it is prerogative of the sourcing departments to do a detailed analysis before coming up with executable ideas. However my suggestion is to do an incremental analysis as we progress through our journey and do no wait till all the data is available before proceeding further. There are numerous other techniques to be used for analysis and vetting the sourcing strategies which will be dealt in detail in a separate paper.

• Spend Analytics: This is the tool where the procurement spend / past historic spend is analyzed to identify potential sourcing opportunities. Many end results like vendor wise variance, location wise variances, contract compliance, consolidated spend categorization etc., are powerful outcomes to come up with potential sourcing opportunities or potential ideas for execution.

• Procurement Matrix Analysis: The time tested Analysis of procurement complexity and spend value potential of categories can be used to validate the right sourcing strategies for the organization. Each quadrant of analysis output will give a broad view of sourcing strategies and how the categories can be clubbed to re group sourcing groups.

• Supplier Market Analysis: This analysis helps to view the supply complexity for the chosen category. How the suppliers view you is an important part on what the strategies we need to finally formulate for the category.

Figure 6: Broad framework of tools arriving at the right strategies

Execute Phase: Execute Phase is the real phase where the plans are put into practice. Category team navigators and / or TCO Champions have to make execution efficiency of primary importance here.

• Validate ideas and hypothesis continuously: The ideas & thesis will be validated using the following techniques in this phase:

Chit sheet costing: It’s a parameter based costing sheet to arrive at likely price ask. Doing this across supplier sources and for different types of materials with different process and usage conditions help us to find the target price ask during negotiations.

Linear Performance pricing : This is to create different scenarios of price and value creation to arrive at the possible strategies to execute the scenarios.

• Generate additional validation by Supplier and Internal stake holder workshops: Rigorous validations to be taken at each step to validate the decisions by all parts of business. For example when a usage decision on a product is taken up, there should be active questioning on the effect on the decisions on futuristic road map. While analyzing each of the cost parameters, effort needs to be put to extrapolate the same based on changing macro economic scenarios which have a bearing on the cost factors. Supplier work shops help to validate and substantiate these changed parameters in the contracting process with respect to the commercial and supply features of the contract. Unique features in contracting process to base the price on external indices can also be attempted to ease out these changes in the future.

• Execute the contracts: RFx (Supplier / price discovery measures) have to be undertaken to substantiate the hypothesis on real terms of the

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contracts. This is the time of reality check on Category management principles and outcome of TCO analysis. If there is a need for discovery process on product specifications, you need to do an RFI (Request for Information) before going to commercial discussions. Key here is to have a common understanding across partners on a common parameter of sourcing. The quantity and terms of supply help the suppliers to manage the risks effectively and allow them not to load these risk penalties to your purchase price.

Enable Phase: In the enable phase following actions need to be completed.

• Monitor & measure impact of the outcomes: In this phase proper tracking of the benefits and progress of the sourcing projects need to be attempted. I am of the opinion that the main management principle for any idea is “Measure, measure and measure”. If something cannot be measured, the outcome is suspect. Category projects need to be monitored on the KPIs, Financial impact on a continuous basis. There are category Management tools available which help to gauge the impact and continuously monitor the impact with gate levels for further approvals and initiating further projects.

Figure 7: Category Management Applications to monitor measure the impact

• Extend the TCO based sourcing capability to wider audience: Sourcing capability needs to be extended to wider audience in Procurement, HR and Finance teams. This is to bring other purchases into procurement gambit. Normally 10-15 % of categories are outside procurement influence and needs serious sourcing / category management practices viz media buying, real estate buying, audit / taxation consultancy buying etc where as structured process of category management will yield great results.

To sum it up, sound category management practice grounded on the principles of TCO are cornerstone to a CPO s ability to deliver value to the organization continuously. Adoption of these practices virally across the organization will open up 2 additional levers of value creation for procurement in the organization – Facilitator for revenue growth and Gate keeper for extended value chains.

Mr. Jayasankar P Pillai (Jay) is the Senior Managing Consultant (Strategy and Analytics), Leader – Procurement / Sourcing Practice and Leader – Analytics (CPG, Pharma and Manufacturing) at IBM India. He has more

than 20 years industry experience in Consumer Packaged Goods, Pharma, Natural Resources and IT Consulting in IBM, Mahindra-Satyam, Glaxo SmithKline Beecham and Marico Industries. He is B Tech in Mechanical Engineering from National Institute of Technology (NIT), Calicut, has completed Masters in Business Administration (PGDM) from SP Jain Institute of Management, Mumbai and Certified Global Business Leadership Program from U21 University in collaboration with Harvard Publishing School. He has published several articles on Procurement and Sourcing related topics.

STUDENT PROJECTSCauvery River Dispute: A Management Perspectiveby Deepak Yadav & Niranjan Das P Students of Post Graduate Programme 2010-12

Interstate river water disputes often arise when a river flows through different states or nations. Courts are faced with the situation as to how to sort out the claims of each state or the nation on some reasonable and rational basis. These disputes obviously are linked with the demands of riparian states for more water for respective development projects including generation of electricity.

For more than a century disputes are being raised between the then States of Madras and Mysore now the States of Tamil Nadu and Karnataka in respect of sharing of the waters of river Cauvery.

The river Cauvery is an interstate river with its upper hilly catchment lying in the Karnataka and Kerala States influenced by the dependable south-west monsoon during the months June to September, while its lower part lies in the plains of the Tamil Nadu State served by the not so dependable north-east monsoon during the months October to December.

Karnataka is upper riparian state it utilizes its requirements and also impounds water in the months of July to September for rain scarce seasons. Tamil Nadu grows three crops a season and receives very little rainfall during South west monsoon. So the requirement for the Khariff season needs to be met from the rain water flow of South west monsoon in Karnataka or the release from the Mettur and Krishnarajasagar Dams. Since the time of filling the Krishnarajsagar Dam and the requirement of Khariff crop in Tamil Nadu coincide it creates water scarcity for the Khariff crop grown in Tamil Nadu. Also due to the geography of state of Tamil Nadu it is not in a situation to store the water from North East monsoon in winter season. Hence Tamil Nadu is dependent on the stored water in upstream storage reservoirs.

This again creates the scarcity for the part of second crop and third crop.

To analyze the situation the students studied the demand and supply problem on the timeline basis. The data of the different projects like reservoirs, dams and anicuts of the basin were taken from the Cauvery basin map available from the Ministry of Water Resources of Government of India and other relevant sites. Although the water requirement can be precisely estimated based upon the crop pattern and the season of sowing, the rainfall varies in quantity as well as in the timing.

Since detailed data was available for Tamil Nadu, the study was limited to the bigger state of Tamil Nadu. The 60:40 principle - 60% of the total water requirement is needed in the first 1-2 months of the seasons (5-6 months) – was used to simplify the analysis and for calculating the demand on a 10-days basis. Similarly, the supply analysis was done using the inflow of water in the major projects/reservoirs on a 10 day scale. The delta value (excess/deficit) was calculated at each demand site of Tamil Nadu by subtracting total supply with total demand on a 10-day basis.

Analysis showed that most of the surplus is generated from Feb to May and the deficit season is July to September. So the deficit created in the South west monsoon season cannot be met. From October onwards considering the 42% live storage capacity in the basin which amounts to 318 TMC, the deficit of 540 TMC during second and third crop seasons, cannot be met.

From their analysis of Cauvery basin clearly the students concluded that given the rainfall pattern and water availability, the demand in basin is not sustainable as it renders the basin in deficit situation always. Considering that the water requirement is huge compared to the available supply, not every region demand can be met in every cropping season. They recommend that the stakeholders have to realize the severity of the situation and make compromises. For example, for the long term, the demand from various states can be capped at a sustainable supply level and focused on planning the efficient utilization of available supply. Public policy initiatives like Schemes, Subsidies, Interest free loan like schemes could be instrumental in changing the mindset/thinking of the farmers in terms of time of cropping and choice of crop. Overall swift and reliable communication channels are required to address the issues of huge deficit, specifically during low Monsoon years.

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INSIGHT:Sourcing and Pricing Issues in Supply Chainsby Prashanth ChintapalliFellow, Indian Institute of Management Bangalore

In practice, demand is price-sensitive and a firm can influence the demand it faces through the price it sets. A firm’s production and inventory decisions are made based on the demand that it faces. Hence, the price a firm sets indirectly affects its inventory policies, through the demand it faces. Moreover, the price a firm sets may also be influenced by the magnitude of inventory it holds. For large inventories, the price set tends to be low while for low inventories, it tends to be high. Due to this mutual interaction between the pricing and the inventory policies followed by a firm, it is essential that firms simultaneously decide their selling prices and inventory policies, in order to maximize their profits. That is, firms have to coordinate their pricing and inventory management to maximize their profits.

The research question we try to answer in this thesis is: How should firms coordinate their pricing and inventory decisions to arrive at efficient policies that maximize their profits?

We answer this question in different business contexts (or supply chains). The current thesis aims at exploring the joint sourcing and pricing issues in the following three different business contexts.

1. New product introduction when product shortage creates hype that results in additional demand,

2. Deteriorating products under Cournot duopoly when selling price is dependent on the product’s availability and quality, and

3. Perishable products when consumers are free to choose among units of different ages.

In the first problem, we analyse the optimal joint inventory/production and pricing policies of a monopolist when introducing a new product whose shortage may create additional demand due to hype. Hype is observed if the product is a major success and we term this condition as high demand for the product. A product that experiences low demand can be thought of as an unsuccessful product, and such a product does not exhibit hype. The product is successful, that is, experiences a high demand, with an exogenous probability that is known to the firm. The firm launches the product at the beginning of a two-period horizon during which the sales occur and the product’s shortage in the initial period enhances (due to hype) the demand in the subsequent period, when the product is successful. Though the firm knows the probability of success of its product, the actual state, success or failure, of the product is learnt after observing the demand during

the first period. The firm has to simultaneously decide the production quantities and the selling prices in the two periods with an objective of maximizing its expected profit.

In addition to deriving some structural properties of the optimal prices and inventory levels, we show that (i) firms do not always exploit hype, (ii) firms do not always increase the price of a successful product in the second period, (iii) firms may price out an unsuccessful product in the first period when the success probability is above a threshold, and (iv) such a threshold probability is decreasing in the first period market potential of the successful product.

In the second context, we address the problem of joint inventory and quality management of a seasonally produced perishable commodity under Cournot duopoly, when sales occur over a multi-period horizon. The good that is produced during a season has to be preserved in order to be sold during the future non-production periods of a year. The price that a firm can set depends on the extent of the product’s availability in the market, and on the product quality that the firm offers. Though the quality of the product is the highest when produced, the firms have to invest in retaining the quality of the product when storing it for future periods. Using deterministic inverse demand functions, we model the problem as a complete information two-period, two-player non-cooperative game where the objective function of each player is a two stage dynamic program. The inventory replenishment occurs at the beginning of the two-period horizon. We discuss the joint stocking and quality management for two kinds of perishable products, namely slow-deteriorating products, and fast-deteriorating products. In the case of a slow-deteriorating product, the firms’ decisions comprise of only stocking levels of the two periods. We solve this problem when the production yield of a firm is its private information. In the case of a fast-deteriorating product, the firms have to also decide the quality level of the second period inventory, apart from deciding the stocking levels of both the periods. We develop models to explore the impact of quality costs on the firms’ choices and identify the trade-offs that the firms perform among their production costs, quality costs and the quality levels.

In the third context, we address the problem of joint inventory and pricing management for perishable goods when a retailer offers both new and old units simultaneously for sale, and the consumers are free to choose between them based on their affordability. We model the problem as an infinite-horizon Markov decision process (MDP) and prove that when market prices are sticky, the optimal steady state policy is myopic when the product’s life is two periods. For all other lifetimes of the product, we show that the policy cannot have a myopic structure. For each of the above contexts, we discuss numerical examples to draw insights and to provide counter examples as proofs, wherever applicable.

FRONTIER:Financing Potato Value Chain by Prof. Gopal Naik, Prof. Devanath Tirupati & Dr. C. GaneshkumarIndian Institute of Management Bangalore (IIMB)

The goal of this project is to improve access to agri-food value chain (AFVC) financing for smallholder farm and small and medium agro-enterprise (SMAEs) in India. Accomplishing this broader aim involves the pursuit of three specific objectives:

i) via applied research, address three key knowledge gaps concerning the four types of value chain (VC) financing in the three types of VCs (traditional, transitional, and modern);

ii) address key knowledge-networking gaps concerning VC financing, using knowledge generated in our applied research; and

iii) using the output of (i) and (ii), identify promising VC-financing innovations to help small farmers and processing and distribution small and medium agro-enterprises (SMAEs) access dynamic value chains.

As far as we can determine, there is scant research evidence, and certainly no official data, on the relative shares of the four VC-financing sources in India, either in terms of their accessibility or their uptake rates. Policymakers do not have the necessary, actionable-information on any inefficiency of the available agri-food VCs (AFVC) farm and SMAE financing modalities that might beset the current VC-financing system. The policy implications of this knowledge gap are clear. Without this essential information on the four VC-financing sources, policymakers do not know whether the development of self-financing sources and organizations, or credit and subsidy interventions, or both should be prioritized, or how different financing sources interact and/or complement each other which could be used to improve the effectiveness of VC financing policies. The methodology of the project will address emerging research questions using surveys, case studies and stakeholder consultations. There are two sets of expected outputs from this project. First, we intend to complete country- and VC-specific reports of the findings from the above applied research. A workshop will compare them and draw lessons on supporting and designing innovative VC financing. In particular, policy reports on inclusive and sustainable AFVC financing will first be prepared using the findings from this research.

A comprehensive Questionnaire Survey of over 400 players in the potato value chain in Karnataka covering Hassan District and Bangalore City has been completed and the data is being analysed.

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Professor Srinivasan’s address was followed by a Q&A session with audience actively engaging on the topic.

In the second keynote address, Mr. Parasura-man T R, Deputy Managing Director, Kirloskar Toyota Textile Machinery Pvt. Ltd. (KTTM) observed, “In India, supply chains are focused around Delhi, Pune, Chennai and Bangalore. We need to diversify our supply chains and strengthen them with better infrastructure if we hope to add muscle to our manufacturing indus-try.” Supply chains in India, he said, were bat-tling issues like global competition and talent retention, and should be freed from additional challenges like local politics. Mr. Parasuraman rued the lack of attention paid to customer satis-faction in India.

Mr. Parasuraman T R, Vice President (Administration, Finance and Human Resources), Kirloskar Toyota Textile Machinery Pvt. Ltd. (KTTM) Industries delivering the second Keynote Talk at the Fourth Biennial Supply Chain Management Conference.

According to Mr. Parasuraman, supply chains in India must live by the following commandments - treat failure as an opportunity to learn and reflect; benchmark globally; do not hesitate to stop the line in case of anomaly; do not change process condition else that will affect quality; take quick action to address breakdowns; do change point management in a controlled manner; do real visualization; set challenging targets and, finally, develop people who are passionate and quality-conscious. He called for “hard work, team work, network and homework” to build quality circles and socially responsible supply chains that are strong on processes and driven by passionate people.

A section of the audience at the Fourth Biennial Supply Chain Management Conference.

The call for papers attracted over 100 submissions from academicians and industry; 59 papers were presented which included 20 industry papers.

There were 120 participants in the conference which included academicians, researchers, practitioners and students across the country.

This study is supported by the Asian Development Bank (ADB) and International Food Policy Research Institute (IFPRI), USA. The Airbus Group Chair at Indian Institute of Management Bangalore (IIMB) also provided partial support.

NEWS AT SCM CENTRE:Fourth Biennial Supply Chain Management ConferenceThe Fourth Biennial Supply Chain Management Conference was inaugurated on December 18, 2014 at the Indian Institute of Management Bangalore (IIMB). The two-day conference was jointly organized by the EADS-SMI Chair for Sourcing and Supply Management, IIM Bangalore and the Supply Chain Management Centre, IIM Bangalore.

At the inaugural session, Prof. Devanath Tirupati, Chair Professor of EADS-SMI Endowed Chair and Chairperson, Supply Chain Management Centre, introduced the theme, ‘Socially Responsible Supply Chains’, and the purpose of the conference.

Prof. Devanath Tirupati, Dean Academic, Chair Professor of EADS-SMI Endowed Chair and Chairperson, Supply Chain Management Centre, inaugurating the Fourth Biennial Supply Chain Management Conference.

In his keynote, Prof. Srinivasan G, Operations Area, IIT Madras, said: “There are 7 principles of social responsibility and based on these principles, researchers have listed 6 socially responsible supply chains - Lean & Agile Supply Chain, Reverse Logistics, Green Supply Chain, CSR Supply Chain, Sustainable Supply Chain, and Ethical Supply Chain.” He emphasized the need for research in understanding why firms were changing their supply chain strategies, where changes were taking place - products, services or regions, and what was the expected or actual impact of such changes on performance.

Prof. Srinivasan G, Operations Area, IIT Madras delivering the Keynote Talk on ‘Socially Responsible Supply Chains’ at the Fourth Biennial Supply Chain Management Conference.

The second day’s Plenary Session featured a Roundtable on ‘Building Sustainable Agricultural and Retail Supply Chains’ organized by IIM Bangalore and Hull University Business School, UK on December 19 (Friday), at IIM Bangalore.

Prof. Gopal Naik, Professor, Economics & Social Sciences area, and moderator of the roundtable, said: “Indian agricultural supply chain is not globally competitive. The problem is not at the farm-gate level but in the supply marketing context. Indian agri products receive 10% less price in international market because their quality fails to meet international standards.” Good supply chain, he said, should be in the interest of both suppliers and consumers. “Policy barriers should not strangle Indian agricultural industry,” he added.

He raised the key issues on this topic and invited the panel speakers to share their considered views.

Mr. Sunil G Awari, General Manager, Namdhari Seeds, argued that encouraging corporate and group farming was a perfect way to beat land holding challenges. “Fragmented agriculture activities lead to low quality crops. Developing crop zones based on nature of the soil to beat

Top Row :Mr. K M Parashivamurthy, Additional Di-rector of Horticulture, Government of Karnataka, Mr. Sunil G Awari, General Manager, Namdhari Seeds,

Middle Row: Mr. Praveen Dwivedi, President, Future Consumer Enterprise India Ltd. Prof. Gopal Naik, Professor, Economics & Social Sciences area, IIMB speaking at the Roundtable.

Bottom Row: Prof. Chander Lalwani. Dr. Ashish Dwivedi from HUBS, UK seen with Prof. Jishnu Haz-ra and Dr. DN Suresh of IIMB.

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glut or waste is another sure way for effective farming. Last but not the least, providing special vehicles, connecting cities and towns to supply maximum yield in short time, can also help,” he said.

Mr. K M Parashivamurthy, Additional Director of Horticulture, Government of Karnataka, said lack of coordination is the root cause for ineffective supply chain in India. He said: “Karnataka is reporting high-yield seeds every year. Farmers are competing to produce varieties of seed every year. This is due to protected cultivation and post-harvest management like green houses, pack house, refrigerated transport vehicles, ripening chambers and processing units. One of our successes has been precision farming, where water, manure, fertilizers and pesticides are accurately used, to yield quality crops.”

Mr. Praveen Dwivedi, President, Future Consumer Enterprise India Ltd. said that the time had come for India to take a close look at policies, build appropriate and relevant supply chain design and strengthen infrastructure. Attacking clichés of the supply chain industry, he declared: “Farm sourcing and reduced waste costs are methods that have yielded no results.” Describing the Indian consumer as an “opportunistic payer”, Mr. Dwivedi said this fact along with depleting farm resources, lack of returns on investment, no improvement in supply chain design and less remunerative domestic markets were major concerns of agricultural supply chains in the country.

Best Practices Exchange Meet:The Annual Corporate Sponsors’ Best Practices Exchange Meet with ‘Focus on Procurement’ was held on Friday, February 20, 2015 at IIMB. Senior executives from six organisations presented Best Practices and unique experiences in Supply Chain Management in their organizations.

Mr. Jayasankar Pillai, Strategy & Analytics Leader, Procurement & Sourcing, IBM outlined the evolving view of Procurement and using the IBM’s Corporate Procurement Officers Study described the focus on Value Creation of Procurement and the need to focus on category management and procurement fundamentals to increase the efficiency of the purchasing organization. “Strategic purchasing plays the role of a facilitator by reducing ‘idea to market time’ and harnessing innovative potential,” he remarked, adding that accurate prediction of sales volume was the key for procurement decisions.

Mr. V Nagendra Prasad, Assistant Vice President, TVS Logistics Services Ltd. described how his firm used the techniques to define, measure, analyze, improve and control the issues in procurement, warehousing and inventory management to establish viability as a 4PL player assembling generator engines for a 3rd party. He described in detail the

mathematical formulation used in managing inventory and how it helped them reduce their costs and increase throughput.

Mr. A.K. Mittal, Manager, Corporate R&D, Bharat Petroleum Corporation Ltd. spoke on the ‘Challenges in Procurement for R&D Organizations’ describing the peculiarities and challenges involved, such as lack of a proper vendor base, absence of structural levels of working, lack of fixed specifications, too few players in the procurement of equipment, for R&D department of an oil company. According to him, lack of supplier interaction, over specified tenders, low market competence, poor management of risk act as barriers and fail to facilitate proper procurement in R&D organizations. “Procurement needs to evolve

Speakers at the Best Practice Exchange Meet -

Top Row: Mr. Jayashankar Pillai, Strategy and Analytics Leader, Procurement & Sourcing Line of Business, IBM; Mr. Nagendra Prasad, AVP, TVS Logistics Services Limited.

Middle Row: Mr. A. K. Mittal, Manager, Corporate R&D, BPCL; Ms. Anukampa Patnaik, Senior Manager QA, R&D, Manhattan Associates.

Bottom Row: Mr. Rohit Saksena, Manager Supply Chain Analytics, Dell and Mr. SK Ramesh, Sr. GM Quality and Supplier Development, Bosch.

with experiments to create a sustainable procurement for the R&D organizations,” he observed.

Ms. Anukampa Patnaik, Senior Manager QA, R&D, Manhattan Associates, and Ms. Anukampa Patnaik crisply explained the nitty-gritty of ‘Transportation Procurement’. She described the intricacies of successful transportation procurement and how an IT enabled environment can give the best results for an organization, using case studies to illustrate the issues and solutions of transportation

procurement and bidding. She stressed that a successful bid required collaboration between shipper and carriers, sufficient carrier response time, complete information disclosure, data consistency, etc.

Mr. SK Ramesh, Sr. General Manager, Bosch described the issues of ‘Transformation in Supplier Management’, using the Bosch Production Model. He explained how Bosch works closely with its upstream suppliers to improve quality as well as reduce cost. He underlined the importance of supplier training, supplier performance to make commercial and technical buyers aware of suppliers’ competencies.

Mr. Rohit Saksena, Manager Supply Chain Analytics, Dell briefed the audience on the goals of the Supply Chain Practitioners Council (SCPC) to improve the supply chain and logistics ecosystem of India. He urged seasoned professionals to take up leadership roles to percolate the know-how and experience gained from exposure to world-class supply chains.

Over 100 supply chain practitioners from more than 40 organizations attended the annual Best Practices Exchange Meet and the 7th edition of Supply Chain Practitioner’s Council (SCPC).

Each presentation was followed by a discussion. Audience included 40 SCM Professionals from several leading organizations in and around Bangalore. Participants found the deliberations very informative and valuable.

Advisory Council Meeting:The thirteenth meeting of the Advisory Council of the Supply Chain Management Centre was held on Tuesday, September 21, 2014. Mr. Sharad Sharma, Mr. S. Ravichandran, Mr. Sumeet Agarwal, and Ms. Ushasri T.S. representing the Corporate Sponsors took part in the Advisory Council Meeting. The Advisory Council wanted the Centre to continue its present activities and discussed approaches for enhancing the visibility and contributions of the Centre.

Airbus Group Endowed ChairFollowing the change of name of EADS to Airbus Group, the EADS-SMI Endowed Chair for Sourcing and Supply Management at IIMB has been renamed as Airbus Group Endowed Chair for Sourcing and Supply Management. An Agreement to this effect was signed by Dr. Sushil Vachani, Director, IIMB and Dr. Klaus Richter, Chief Procurement Officer, and