Supply Chain Management in SMEs: Way to profitable growth   - Download pdf

Supply chain management has emerged as a vital capability in today’s complex and competitive business environment. It has direct impact not only on operational excellence but also on other key issues such as Time to market, costs to market, response to changing customer needs, service during the life cycle and in fact overall business.

In India though the SCM will take some more time to mature, large companies have been able to leverage SCM to their advantage. However these concepts and training have not yet reached large number of SMEs, who are anyway at disadvantage due to limitation on resources. They also have disadvantage to have a limited view of the overall supply chain of the large companies.

Despite this, we have large number of SMEs supporting many large companies and outsourcing to various SMEs is a common phenomenon to build competitive advantage.

In India SMEs are also operating through variety of other business too. They are touching us everyday, in terms of both products and services.

Major segments for SMEs:

Four major categories contribute to most of the SMEs operating in India. They are:

  • Auto Components industry: Many small suppliers are producing large number of components for major manufactures. Without adequate resources /training, they always struggle to meet the targets on costs, quality and deliver. However the impact of any problems with these components can be phenomenal in case of recall of finished products due to quality problems or huge production losses suffered in case on non-availability. Age old saying that battle was lost for want of horse shoe nail has same connotation in today’s world.

  • Service industry: Many of service contracts today are operated through the SMEs. While service technicians are employed by SME, spare part support comes from the manufacturer. Impact on customer loyalty is huge if service provider cannot plan calls causing delay in attending the same or same faults are repeated many times or simply that fault remains unattended for want of materials. All these issues are common when the SMEs involved do not have good SCM practices in place.

  • Food and agricultural products industry: This is very complex industry in India with too many small players, lack of information flow, presence on middle-men, and use of primitive technology for processing and inadequate storage facilities leading to huge wastages. The list is really too large and in agro based economy like India, we cannot really afford the same.

  • Cottage industry, Textiles, handicrafts etc.: India has many such industries spread over thousands of villages. We have a history of village artisans providing leather articles, clothes, furniture, farming tools and so on... They continue to be empowering large section of society but have no linkages with market and distribution network. Obviously this serious impacts their ability to plan and also restricts growth.

Contribution of SMEs to economy:

Despite all the constraints, the Small and medium enterprises (SMEs) in sectors mentioned above and many other areas have been the backbone of the Indian economy. That is both a good and a bad thing.

The good part first. Employing close to 40% of India's workforce and contributing 45% to India's manufacturing output, SMEs play a critical role in generating millions of jobs, especially at the low-skill level. The country's 1.3 million SMEs account for 40% of India's total exports The bad thing is that SMEs in India, due to their low scale and poor adoption of technology, have very poor productivity.

Let us now look at some statistics on number of units and their growth in the country over the years (Based on study by ET bureau in June 2013)

SME Led Growth

We can also get good idea about geographical spread across states in the types on Industry when we look at the following:

SME Led Growth

SME Led Growth

SMEs in Global value Chain (risks and opportunities):

Some of the key structural changes that have taken place in global value chains in last decade are:

  • Sourcing from a few large and competent suppliers with global contract
  • Convergence of lower-tier suppliers
  • Consumer markets are shifting to developing economies
  • Trade in services is taking a more prominent role
  • Rise of e-commerce

SME Led Growth

These changes are like double edged sword. They push for improvements across the Supply Chain (SMEs being an important element) and can open up huge opportunities world-wide. However failure to respond would mean threat to the existence as cheap imports from China will dominate the markets.

Challenges in Supply Chain management in SMEs:

With a smaller size, narrow span of operations, and scarce resources, these businesses tend to be less advanced in their supply chain management (SCM) capabilities compared to large organizations.

As a result, SMEs

  • Have a higher total corporate costs
  • Lower overall efficiencies
  • Higher costs per unit because of low volumes
  • SMEs have to try a tad too hard just to get a supplier as the later prefers big parties

The problem becomes more acute for the SME when it decides to work with outsourced supply partners. In that case, the inconsistent product data and IT systems make it difficult to match all the manufacturing and distribution activity. Another area of concern is the lack of detailed process documentation.

Translating this to impact on SCM practice we notice that SMEs,

  • Face Disadvantage due to lack of volumes and low technology in use. Suffer due to Imbalance between demand and supply, leading to under utilized/stretched capacities.
  • Lack negotiating power both as buyer and as seller.
  • Inadequate resources to employ to monitor various stages of the supply chain.
  • Do not have planning /forecasting process leading to excess inventory /shortage
  • Are not able to train their employees
  • Lack exposure to various requirements in export market
  • Are unable to prepare for changes due to inadequate information flow with partners.
  • Need help in packaging, distribution network including reverse logistics. Need training in various import /export procedures

The list could be longer and there would be issues specific to particular industry /market as well.

On the positive side, SMEs can take advantage of a well-drawn out supply chain strategy for following reasons:

  • Small businesses are very flexible. Mostly, they are still very young and developing and hence, are willing to re-engineer existing processes.
  • Being small, they are integrated in nature whereby various business functions are usually performed by one or a few persons working together. This makes decision-making faster.

Moving Forward:

We all agree that the SMEs have important role to play in our economy and calls for immediate attention of all concerned. Government has also realised that that this sector needs attention and many schemes are being worked out. There is help from various industry forums too.

I am sure; we can contribute a lot in SCM area and methodology that we wish to follow is as follows:

  • Have discussions with large companies
  • Publish case studies and success stories
  • Address pain areas with guidance from experts
  • Offer training /workshops
  • Update all on relevant developments and

We will off course involve all stakeholders and are sure this will benefit all.

You are most welcome to write to me directly on or to the editor

We look forward to your inputs suggestions to take this initiative forward