Supply Chain Management in Larsen & Toubro Ltd - Essay Example

Case Study of Supply Chain Management in Larsen & Toubro Ltd. (Engineering Constructions and Contracts Division) The technological revolution had opened up various opportunities for business entities to raise their operational efficiency through a revamp in their supply chains. The establishment of an efficient supply chain is often linked to the streamlining of business processes and integration of different functions. This paper shows how the ECC division of L&T came up with a web-based SCM model to boost efficiency. Challenges faced, benefits with supplier collaboration, and importance of technology are tackled. Introduction A company's supply chain is a great factor in determining the efficiency of a business organization in sourcing its inputs, producing its products and delivering them to customers. In fact, some of the most amazing business successes in the past 20 years are direct results of finding more efficient supply chains in delivering products to customers. Supply chain management emerged only a decade ago together with the emergence of the word "supply chain" in the business scene. This development started from the business world's recognition of the importance of integrating and managing the processes within a business entity. The new revolution in supply chain management significant changed business processes and introduced radical revolutions which promote the operation efficiency of companies and gain competitive advantage in their respective industries. Perhaps, the most successful in revamping its supply chain is Dell Computers. In fact, supply chain management is often referred to as the Dell's model (Cavinato, 2002). Currently, supply chains generally perceived as the "proper blending of physical resources with financial, informational, and relational resources-all within the strategic context of competing in the marketplace (Cavinato, 2002)." Experts argued that there is no "one size fits all" supply chain and that different businesses need to employ unique business models to run their operations. The shift in business model necessitates major changes in a company's supply chain which in turn necessitates adjustments in the utilization of resources and business processes. This paper will look at the challenges faced by the Engineering Construction and Contracts (ECC) division of Larsen and Toubro Limited (L&T). The first section will give a brief profile and background of the company. Next, it will look at the costs of shifting to a more streamlined value chain. Afterwards, it will explore the importance of technology in the new supply chain as well as its long-term collaboration with its supplier's to the system's efficiency. An analysis of the material procurement system of the ECC will be presented. The paper will end with its findings and recommendations. The Company: Larsen and Toubro Limited (L&T) L&T traces its origins by the partnership formed by two Danish engineers Henning Holk Larsen and Soren Kristian Toubro in 1938. The firm is engaged in the manufacture of a wide array of engineering products, earthmoving equipment, chemical and industrial machinery, switchgear valves, welding alloys and cement manufacturing machinery. The ECC division of L&T handled the turnkey industrial and infrastructure projects in civil, mechanical, electrical and instrumentation engineering as well as turnkey construction services. The division is headquartered in Chennai and has operations dispersed in other countries like UAE, Bangladesh, Sri Lanka, Malaysia, and South Africa. The company's thrust of utilizing a business model to integrate the division's operations into a more cohesive one is the driving force in revamping the company's supply chain. From its manual operations, the company opted to employ a web-based SCM solution which took advantage of the recent trend in the information and communication technology (ICT) sector. Thus, the company was able to streamline its supply chain and boost the efficiency of its operation. Challenges in Integrating the Supply Chain A change in business models entails benefits as well as cost for a company. This is especially shown in the case of the L&T's ECC division. The main problem was the integration of the company's supply chain as significant players in operation are widely dispersed in different geographical region. Also, we can see that the functional areas and structure of the ECC division are not well integrated. These are six business units in the ECC division which handles different activities: Infrastructure Business Unit; Bulk Material Handling; Developmental Projects Business Unit; Minerals and Metals; Electrical and Instrumentation; and Chemical and Fertilizer. As we can see, these functional areas perform tasks which are very different from each other. Logically, these business units carry out different processes and therefore, diverse needs. It also follows that these business units necessitates different suppliers and customers which the units should collaborate with. It was also stated in the case that the company's operation is geographically diverse. ECC's operation is dispersed in six countries in different continents around the globe. In India alone, the huge number of suppliers which reached 6000, operating in over 350 locations becomes a major obstacle. The whole concept of supply chain is the integration of different business units and players involve in the company's operation. Therefore, the differences in the functions of business units and overwhelming number of suppliers in various locations become an obstacle. The problem then become finding a business solution which will fully integrate the division and its suppliers. Technology: Foundation in Supply Chain Management In the core of supply chain management is the utilization of the appropriate technology to integrate players and processes. Thus, the role of ICT in revamping the supply chain of L&T becomes fundamental. ICT was able to integrate the operation of the ECC as well as promote efficiency through the reduction of operation costs and time consumed in processing transactions. In response to the company's need in integrating its supply chain, L&T opted for a web-based SCM solution through the utilization of Microsoft technologies, specifically SQL Server 2000 and Windows 2000 Server released in 2000. This technology has streamlined the company's entire vendor network and facilitates smoother transaction. Through the use of ICT, the company also employed an enterprise information portal which streamlines the accounts and purchase processes by integrating financial and backend systems. Generally, the utilization of ICT enables the ECC division to fully collaborate with its suppliers. Through ICT, the company was able to reduce the complicacies of paper handling. The case clearly stated that the different transactions within the division from raising the EMR to raising the EMRN invoice is done online and "no paper based documentation is involved." This leads to the reduction of operation costs as transactions are properly documented without deploying additional workforce. This system also eliminates potential for error and significantly improves management reporting and analysis. Overall, the utilization of ICT is in the fore of supply chain management. The use of appropriate technology has become one of the main considerations in the changes to be implemented. ICT helped as L&T's operational efficiency is enhanced while the use of plant and equipment is better managed. Generally, the application of a web-based SCM solution significantly improved ECC's competitive advantage. B2B Business Model and Efficiency One of the significant features of the SCM solution employed by L&T's ECC division is the collaboration between the company and its huge number of suppliers. Considering the great role played by the suppliers in the success and pitfall of ECC, the division has made an accurate move in getting more involvement from its suppliers to its operations. Presently, there is a growing trend of stronger collaboration between manufacturing firms and suppliers as they realize the huge opportunities brought about by long-term relationships between business partners. Business to business architecture is now a means of collaboration to promote overall efficiency in operations and servicing customers. In the case L&T's ECC division, long-term relationship with partners means adequate supply of inputs whenever needed in a fixed rate. As ECC chooses the supplier in outsourcing its different materials, the company has a stable supply of inputs with the best quality and options. The fixed rate charged by the supplier insulates ECC to any mount in prices in the economy. Long-term relationship of L&T with its suppliers becomes a mutually beneficial partnership. It is stated in the case, the ECC helps its suppliers identify its cost drivers and correct it by implementing changes. This improvement in the processes of the suppliers will have a positive repercussion to ECC in the form of lower input costs and higher quality materials. Closer collaboration with suppliers also mean significant improvement in the quality of inputs sourced. L&T's Material Procurement The material procurement process of L&T's ECC division is aided by the Enterprise Information Portal utilized by the division. The procurement of the material starts with the request from a project site which is forwarded to the regional project head. This request after the approval of regional heads is transferred to the material department who then issues purchase requisition to suppliers. Suppliers put their bid for the materials and the material department is responsible for awarding projects to the most qualified supplier based on specifications. The supplier then manufactures the product and delivers it to the project site which send acknowledgement of receipt to the accounts department. The accounts department issues the checked based on the invoice raised by the supplier. The material procurement of ECC division is an example of how it streamlines its network of vendors. Looking at the process, we can see that it has become beneficial for L&T as it facilitates a smooth transaction between suppliers and L&T. IT should also be noted that as geographical boundaries are eliminated, different suppliers can bid for the materials needed through the suppliers' portal. However, there are some loopholes in the company's material procurement mechanism. Though the company has significantly cut cost and time in the utilization of this system, this paper believes that it will be more efficient if only a small number of suppliers are chosen to provide a specific component for ECC. This will significantly reduce the time needed for procurement as the material department only needs to review a small number of bids. It is also of the best benefit of the company if it will be able to have a database which lists the prices of components that each different supplier provides. Then, the supplier can update the database from time to time according to the changes in their prices. In doing this, L&T reduces the time spent in evaluating bidding. The company also eliminates the process of informing customers about their need. ECC division will only contact suppliers if they require components. The company can also enhance its procurement of material if the material department issues purchase requisitions to suppliers and forwards also the order form to the accounting department. This will serve as check and balances as it can be noted that the amount that the ECC pays is usually raised by the supplier. As a form of verification, the company should also let the accounting department know how much was ordered and is payable to a specific supplier. This will ensure the accuracy of records and transactions. Conclusion & Recommendation L&T's ECC division has been successful in revamping its supply chain to boost its operational efficiency. The company is able to change its processes by utilizing the latest ICT technologies and applying it in its value chain. It should be noted that on the core of the company's revolutionary change is the huge role of ICT. ICT was able to integrate the company's different business functions as well as its geographically diverse suppliers. The company was also able to gain competitive advantage through the use of ICT and foster a stronger collaboration with its suppliers which has positive long-term implications. Right now, L&T's ECC division benefits from the current supply chain. However, there are still changes which can further boost efficiency. Like states above, the material procurement can be further streamlined and incorporated with more value-adding processes. Also, the company should not only focus on its relationship with suppliers but more importantly to its customers. However, the development of technology is fast paced. Everyday, new trends are emerging to make business processes more efficient. The larger challenge for the ECC division is to take advantage of these future technologies and utilize it for the company's utmost benefits. References Cavinato, Joseph. (2002). What's Your Supply Chain Type. 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