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SETLabs Briefings VOL 5 NO 3 Jul-Sept 2007

Creating Supply Chain Flexibility in the Flattening World By Sandeep Kumar and Ashish Kumar Tewary

Counter supply chain disruptions by building solid ‘sense and respond’ capabilities

M

odern day business is beset with

quality of supply chain collaboration, as also

changing governance paradigms. The

the process and functional modularization of

recent surge in business literature has veered the

supply chains.

way corporations are getting flatter and flatter.

Cost pressures, dearth of talent pools

Flat world has emerged as the mantra by which

and emerging markets were some of the reasons

businesses are getting redefined.

why supply chains assumed global dispersion.

Flat world encompasses an environment

Following Thomas Friedmanâ€&#x;s expostulation of

where traditional barriers to trade are breaking

flat world, researchers at Infosys have identified

down; hierarchies - both organizational and

four operational shifts that are driving mega

customer are being flattened; information and

transformation in the way demand is being

knowledge asymmetries across competition,

created for products and services globally and

customers and within the enterprise are being

the way it is being fulfilled [1]. We try to probe

eliminated. The competitive playing field is

these shifts in the supply chain context and look

being leveled.

at how flexibility can be achieved in supply chains in this flattening world. First and foremost, companies in their

EMERGENCE OF FLAT SUPPLY CHAINS The forces of globalization and the ever

journey to being the China price, are continually

flattening world are exerting renewed pressure

looking to refine their cost structures. This

on global supply chains. Supply chain flexibility

journey has taken many a company eastward

has moved beyond managing quality, cost and

with their sourcing strategies. However it is not

on-time delivery for a variety of norms and

only about reducing costs but also about entering

tolerances. It has come to include new product

new market segments by virtue of being able to

introduction cycle, partner integration and

sell at lower prices, while making money.

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As an example, GE Medical Systems

Change at a rudimentary level can be

(GEMS) redesigned its product offerings to

observed today, in that, the demand and the

offer 80% functionalities at 50% the US price.

supply chain are so tightly linked that the product

This redesign was done at its China R&D

or service design concept is well integrated with

centers. GE Medical Systems is now the market

the supply chain. As an example of companies

leader in China for these products and it is also

leveraging global talent and co-creation models

selling these products in price-sensitive market

for rapid product innovation, Eli Lilly launched

segments in the US. Another example is that of

“InnoCentive”, an online community based

Cisco which funded its investment in R&D and

business model to access global talent pool [3].

sales expansion by releasing over $2bn from

Eli Lily and other pharmaceuticals/chemicals

Selling, General and Administrative Expenses

companies can “post” R&D problems on the

(SG&A) globalization by reducing SG&A as

portal “InnoCentive” (with associated award

a percent of sales from 44.8% in FY01 to 36.3%

amounts) that can be solved by any of their

Companies stand to win the innovation game by exploiting their global talent pools in co-creating revenue-influencing innovation models

in FY05. For any new initiative, globalization is

scientists around the globe. P&G‟s strategy of

always in consideration, and Asia is always on

open innovation __with customers, partners and

the table [2].

other outside sources - now produces over 35%

A second operational shift is in the

of the company‟s innovation, thereby influencing

way companies are looking at the problem

billions of dollars in revenue. With over 35% of

of customer loyalty creation and retention. It

new products having co-creation elements from

is the product and service innovation cycles

outside P&G, R&D productivity has increased by

today that are determinants of better customer

nearly 60% in 2006 and has helped launch more

experience.

than 100 new products with significant outside

Today‟s supply chains need to have the

participation in the last 2 years. Significantly,

required integration to help manage demand

R&D costs have decreased to 3.4% of sales from

percolation seamlessly across supply chain

4.8% in 2006 [4].

partners. With customers being more and more

Making money from information - the

integrated into the product and service creation

third operational shift - has always been intrinsic

process, customer experience calls for greater

to supply chain management. At the core of all

transparency and visibility into the entire order

successful supply chains over the years, has

fulfillment cycle.

been, excellence in information management __

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both in terms of creating a robust information

example, Intel timed its asset acquisitions during

backbone underlying all physical and financial

business downturns to manage rapid up-scaling

flows as well as monetizing this information

in the boom years. By sharply accelerating

for decision support and business intelligence.

spending during the 2001 recession, Intel built

As an example, using a sophisticated demand

up additional manufacturing capacity. During

driven supply networks (DDSN) strategy while

2002-2003 recovery, Intel was able to quickly

leveraging an information architecture that

and successfully launch new products, months

marries sophisticated planning, fulfillment, event

ahead of schedule. In 2003, Intel reported its

management and supply chain integration, Dell

highest rate of growth since 1996 and increase in

pioneered its famous direct distribution model

net income by 81% [7].

that enabled it to grow its global PC market

From the discussion above, we

share from less than 3% in 1995 to over 18%

understand that the forces of globalization are

in 2005 [5]. Likewise, Amazon.com embodies

leading to a mutation of the supply chain models

In today’s dynamic business environment, only mutated supply chain models stand to absorb global supply chain risks

the use of advanced multi channel commerce

in the rapidly changing world. Supply chains are

capabilities to efficiently fulfill millions of multi-

becoming increasingly global and flatter. While

item orders through seamless information flow

global sourcing and targeting emerging markets

and automation __ a feat that requires very

has become fundamental to every corporate

sophisticated coordination and timing [6].

strategy, it is also leading to emergence of virtual

The operational shift on “winning in the

supply chains with complete supply chain

turns” underlines the importance of being able to

functions being outsourced. The bottom-line is a

manage business cycles through business‟ crests

greater propensity of risk in terms of supply

and troughs. These business cycles typically

chain management globally.

call for a close look at existing business models and predicate disruptive changes. Supply chain

SO HOW ARE SUPPLY CHAINS REACTING

risk management has become a key theme in

TO THESE FLAT WORLD FORCES?

managing such disruptions successfully. Both

Empirical evidence suggests that supply chains

operational risk as well as event risk need

are morphing to help deliver to these flattening

to be addressed squarely through predictive

forces. Multiple supply chain structures are

mechanisms as well as through business proofing

emerging to successfully address changes

for managing scale and scope flexibility. As an

caused by flattening forces. Emergence of

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loosely

coupled

global

supply

chains,

final assembly in Everett, Washington [10]. A

redefinition of “core”, and increasing use of

thought here is that globalization and JIT do not

counter-trade in cross-country businesses are

seem to go well together as we are gravitating

some of the key changes.

towards stronger and centralized planning functions.

Value chain complexity is on the rise with supply chains becoming lengthier. As more links

Demise of “core”-

There is nothing called

get added and niche players emerge, the moot

“core” anymore. The term “core” is relative

question is on the need for command and control

and it‟s about supply chain modularization

capabilities that allow companies like Cisco, a

today. There are companies that are outsourcing

strong proponent of outsourcing, to manage a

complete functions that used to be called core in

supply network that has more than 300 suppliers

the yesteryears.

[8]. While companies have effected supplier consolidation and rationalization to manage the

Emergence of intricate supply chain networks -

expanding supplier base, the move towards third

Companies are moving away from the

party sourcing is making the average length of

integrated supply chain concept and today we

supply chains longer.

see loosely coupled supply networks. SLAbased transactional relationships rule. Long

Emergence of niche supply chain entities - As

term contracts between partners do not always

roles within the value chain get blurred, new

work. Take a look at the high technology

entities are emerging that help manage global

contract manufacturers who are trying to work

dispersion and spread of business operations

themselves into shorter and more flexible

as a core competency. In the process they also

contracts to help maintain their profitability.

expand their role in the value chain. An example

Another interesting aside is that companies

in the automotive industry is that of Magna,

today collaborate in one geography and

which aims to provide complete vehicle, design,

compete in another. Hutch Essar and Bharti

engineering and assembly services to its OEM

compete independently, but they both have

customers [9].

entered into an MOU relating to a comprehensive range of infrastructure sharing options in

Globalized supply chains - Supply chains are

India [11].

becoming more and more global with supply chain functions being physically distributed and

Technology is no longer the bottleneck - The

dispersed. For example, Boeing 787 program

single biggest disruptive influence on business

transforms its global supply base spread across

has been technology. As communication costs

countries as dispersed as the US, Japan, Italy and

go down to virtually nothing, processing

Taipei into design and manufacturing partners.

power keeps following Moore‟s Law and

To beat Airbus, Boeing has deployed a radical

use

strategy where more than 100 design partners

many companies and economies are doing

collaborate on the design and engineering

leapfrogs skipping many an evolutionary step.

and more than 130 structural and systems

Retailers used to models such as re-order point

suppliers synchronize their operations to achieve

based supply chain planning (primarily as a

4

of

technology

becomes

ubiquitous,


consequence of the number of stock keeping

fires, wide-spread electrical blackouts and

units as well as the shorter planning buckets) are

operational challenges such as shipping

switching to time-phased planning techniques,

ports too small to handle the flow of goods

as earlier constraints around processing power

coming into a country. Today‟s leaner, just-

and processor costs have been sorted out.

in-time globalized supply chains are more

Technology has also made possible the concept

vulnerable than ever before to natural and

of work modularization in the connected world

man-made disasters __ a reality that creates

where work packets can be delivered virtually

greater demands on companies to keep supply

out of anywhere and at any time.

chains flexible and integrate disruption risk management into every facet of supply chain

The G Factor - As global trade barriers keep

operations. The reason is undoubtedly that,

falling down, governments everywhere are

with longer paths and shorter clock speeds,

putting in counter trade agreements to stimulate

there are more opportunities for disruption

local industry further fuelling globalization

and a smaller margin for error if a disruption

of trade. Another aspect of the governmental

takes place.

factor is the regulatory norms that governments prescribe and the impact that it has on the

We identify two main sources of supply chain

way

disruption risk:

businesses

operate.

Protocols

and

regulations such as the Kyoto protocol and the

Operational supply chain risk : Abrupt

ROHS (Reduction of Hazardous Substances)

discontinuity of supply (when a main

significantly impact certain businesses in certain

supplier goes out of business), people

regions.

(labor strikes, talent shortages), process (internal

process

changes

initiated

HOW DO WE QUALIFY THE NATURE OF

through external factors or through

SUPPLY CHAIN RISK?

internal process improvement measures),

The forces that are flattening the world have

systems (system failures, data security) and procedures fraud

created many supply chain risks in addition to the

• Business risk: Macro business risks

oft spoken benefits. With supply chains literally disintegrating, product designers, marketers

such as market risks, financial risks,

and manufacturers that were previously housed

regulatory risks (stringent emission norms

in a single facility are now spread over several

driving new

continents

process

in organizations

with different

engine/ manufacturing

technology),

socio-political

cultures, languages and business objectives.

environmental risks, natural hazards

These changes have brought new risks and

such as earthquakes, hurricanes, storms

challenges. Long-standing challenges, such as

and risks emerging from terrorism and

short product lives and uncertain demand, have

political insurgencies.

become even more vexing. When it comes to global supply

The essence of risk management boils down to

chains, the potential for disruption comes in

adequately appreciating the risks that a company

many forms, from large-scale natural disasters

is exposed to for different areas of business;

and terrorist attacks to plant manufacturing

identifying the „choke points‟ along the supply

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chain that would completely harm a business if

gains flexibility to quickly realign the supply/

disruption occurred; and then taking the right

demand mix to satisfy the changing global

set of preventive measures to allow for some

demand.

protection, remembering to periodically review

However, early detection of changes,

your supply chain plans and risk assessment

demands a well structured global planning

priorities.

and event monitoring mechanism for global coordination across functions and partners.

ARE COMPANIES BUILDING THE

Globally integrated information systems are

FLEXIBILITY TO MANAGE FLAT WORLD

critical to reduce the cost of communications and

SUPPLY CHAIN RISKS?

to make relevant information readily accessible.

We define supply chain flexibility as the ability to

Global supply chain flexibility is then

reconfigure the supply chain, altering the supply

all about connectivity and global business

of product in line with customer demand. Flat

optimality - source resources and manufacture/

world forces are changing the face of the global

deliver from where it is most cost optimal and

supply chain along with the flexibility that is

sell where it is most profitable. Downside of this

needed to reap the benefit from globalization.

is increasing interdependency and much more

In the flat world, companies that have solid ‘sense and respond’ capabilities tend to amass flexibility in their supply chains

Companies‟ contingency planning to deal with

risk. Managers of global supply chains should

eventualities and ability to reconfigure the

realize that they are coordinating three types of

supply network and product design at low cost

flows __ material, information and cash flows.

to meet newer market needs are having larger

Political, technological or natural events could

impact than ever before on the supply chain

leave organizations isolated and exposed to

flexibility.

shortages of material. Companies that sell in the

In this context of flat world forces,

United States, but have substantial portions of

supply chain flexibility is about having the

their supply chains in China or in other countries

“sense and respond” capabilities to detect the

with currencies likely to appreciate against

changes early on and having the right supply

the dollar, face a significant risk of mismatch

chain structure, processes and product design in

in their expected U.S. revenues and non-U.S.

place to respond in a timely and efficient manner

costs. Bankruptcy of a key supplier without

to the changes. By making it easier and less

any prior notification can stop assembly lines

expensive to change the source of supply, firm

of an OEM.

6


Problems can range from dock strike in

detrimental to functioning of supply chain

California, a tsunami in Asia, hurricane in New

connections. Companies should act on two

Orleans to physical damage at a supplier that can

overarching strategies of (i) building supply

result in catastrophic impact for a company. One

chain responsiveness, and (ii) building visibility

example is a fire at a single-source supplier for

to supply chain information.

Ericsson, which led to lost sales of $400 million dollars accompanied by a drop in the stock price

Action 1: Build Supply Chain Responsiveness

by 1%, culminating in Ericssonâ€&#x;s exit from that

through design for desired flexibility in the

part of the business [11]. Even political problems

supply chain structure, supply chain processes

can bring about supply chain disruptions. Take

and product design.

the case where new agreement between the European Union and China caused a limit on

I) Supply chain structure:

annual imports. This in turn caused 80mn packs

Supply chain structure is the network

of clothing impounded at EU ports and borders

of organizations that manufacture and

even though retailers had ordered their autumn

deliver products or services from the

stock well before this agreement was enforced.

source to the customers. It deals with

Flexibility coupled with visibility to information helps companies negotiate supply chain issues with utmost ease

The

leverage

on globalization

is

supply network structure, the human

tempered by the management overheads of

resource

practices

and

workforce

supply chain connections. It is important to

capabilities.

ensure that all the connections are working

1) Supply network should have the

uninterrupted to eliminate any risk to the

ability to add and remove suppliers,

stable functioning of the supply chain.

select suppliers who can add new

However, companies need to do much more as

products

Aberdeen Global supply chain benchmark

relationships and have suppliers make

report

in 2006

found

that

only 11%

quickly,

vary

supplier

are

volume

changes.

Also

supply

actively managing the supply chain disruption

network

should

be

flexible

risk [12].

to adapt to new security requirements Availability of information at right

and provide guidance to its partners

time in combination with flexibility can

in order to comply with new

enable organizations to respond to changes

regulations.

7


2) Supply network should provide the

the ability to change processes as

ability to companies in transferring

demand changes, and also the ability

production from one plant to another

to adjust capacity. 2) Distribution flexibility: Logistics

when capacity is constrained. 3) Companiesâ€&#x; culture should allow

processes should have the ability

building integral cross functional

to adjust to global requirements,

teams to prevent decisions based

serve

on local optimization.

requirements, vary warehouse space,

Hewlett

vary

Packard has adopted this concept

distinct

customer

transportation

shipping

carriers,

and

for many of its products such as the

introduce product postponement.

Desk Jet printer, even going to the

3) Ensure alternate sourcing strategies:

lengths of re-designing it so that a

Alternate suppliers should be truly

generic semi-finished global version

divorced from the risks borne by the

could be built

preferred counterparts. This portfolio

localization

centrally with

being

performed

of suppliers should also include

by

transportation

regional partners[13]. 4) Workforce

capabilities

providers.

During

the launch of the highly anticipated

should

be looked from a holistic perspective

Fusion, Ford manufacturing in Mexico

to

of

was hamstrung by the bankruptcy of

specialists. By working closely with

Collins & Aikman, a primary parts

specialist providers, greater levels of

supplier. Ford, along with other

customer

be

automobile

achieved at lesser cost. Auto makers

compelled

use 3PL specialist logistics providers,

backing to the floundering parts

where a 3PL runs the warehouse

supplier to ensure continuity in

and

manufacturing

encourage

involvement

value

can

OEM takes

often

ownership of

manufacturers, to

provide

operations

was

financial

[13].

inventory only when a production

Companies such as Dell and Cisco

line calls for it.

have suppliers in different continents for added flexibility. 4) Combine operational and financial

II) Supply Chain Processes Supply chain practices should have

hedging: BMW after frequently

contingency plans to deal with all kinds

suffering

of eventualities. It is almost impossible to

appreciation in its heavily European

predict all the eventualities in a global

based production operations, has

business

employed

environment.

Elements

of

from

strong

a combined

supply chain should have flexibility to quickly respond to unexpected changes.

expansion of production and sourcing

1) Systems and process design for

facilities in the North American and

Operations

has

hedging

strategy[14].

flexibility:

It

Euro

announced

Asian continents in an effort to create

systems

should have the ability to reconfigure

a more globally diversified supply

assets in line with customer needs;

chain, thus adopting more integrated

8


risk management approach in its

Action 2: Build Visibility to supply chain

handling of global risks.

information as this is the key to detect

5) Ensuring Business

business continuity

continuity: plan

and manage change. The company and its

should

trading partners and their partners need to

include a wide range of contingencies,

be very much a part of the risk-management

disaster recovery, the safety of

process.

employees, the retrieval of backup

of the environment in which supply chain

business

data

Visibility helps in getting a pulse

emergency

is functioning. This way it not only helps in

communication, possible relocation

early detection of changes but also enables

of business operations

collaboration amongst partners.

and the

sourcing of goods from alternate

I) Ensure visibility to manage change:

suppliers.

Integrated systems to coordinate activities

III) Product Design

throughout the entire supply chain from

Product design should be modular so as

raw materials and components to the

to reconfigure the products to minimize

end-consumer.

the risks in meeting market demands at

1) Improve visibility of in-transit

lowest cost. This can be achieved by

activity: Incorporate visibility tools

product design that enables component

to both track product movements

commonality

and also obtain information with

postponement

across of

products final

and

product

which to make financial decisions,

configuration.

serve customers, respond quickly to

1) Commonality is a big focus in Ford.

competitive threats, cut costs and speed delivery.

Commonality of parts across existing and proposed vehicle lines reduces

2) Improve visibility of supplier

costs and leverages economics of scale.

activity: Global supply chains are

This allows aggregation of demand

characterized by interdependencies.

and minimizes the inventory buffer

It is important to be signaled about

to address a particular risk level.

partnersâ€&#x; delivery performance and

2) Postponement

is about

delaying

their compliance with regulations.

final configuration of an item for as

Lead indicators should be agreed

much duration as possible. The aim

upon

of the global supply chain should

monitored

to

have

visibility into supplier activities. 3) Improve end-to-end automation:

be to carry inventory in a generic form,

and

i.e., standard semi-finished

Provide enhanced insight into current

products that are awaiting final

and time-phased end-to-end inventory

assembly or localization for enhanced

positions - in motion and at rest,

responsiveness. For example, Dell

including vendor managed inventory

assembles

- as well as mobile assets such as

different

configurations

based

computer on

market

containers and equipment. A key

demands. HP also uses the same

future enabler for this is RFID

concept for its Desk Jet printers [15].

technology.

9


in

4) Create visibility into lead indicators: Business

intelligence

(BI)

and

an

outsourced

business

model.

This cultural buy-in and visibility

affiliated data warehouses and event-

on both sides must be demonstrated

management tools track events and

in day-to-day behavior at all levels,

exceptions

or there will be cultural polarization

in

supply

chain

performance by constantly monitoring

between the business and the outsourced

leading indicators to supply chain

delivery function.

problems before they occur. BI has

Toyota was able to manage the risk

the sifting and sorting capability to

caused by bankruptcy of one of its

identify suppliers, routes, carriers and

key supplier. It applies weekly get-

ports

together for managers over videocon-

that

threaten

business

continuity. 5) Improve

ference to discuss any new rumors visibility

of

trade

and potential risks to work out a recovery

agreements for origin management:

plan just in case.

Companies can bring down the cost of

Enterprise solution providers such as

their products by better automation

SAP have a number of products in the market

of origin management programs and

that are helping companies in developing

understanding on how to use

sense and respond capabilities - in automatic

preferential

in

data acquisition and transaction processing

their

trade

product

agreements

sourcing

for supply chain automation through Auto-id

and distribution decisions. Renault

infrastructure (AII); in setting and monitoring

has

used

design,

management

lead indicators through Event management

information housed in its centralized

origin

(EM); in identifying links, products, partners

trade compliance database to drive a

in the supply chain that are prone to higher

whole new low-cost car.

risk through BI/BW; in having a flexible IT

6) Improve visibility of regulation

architecture to have plug and play capabilities

compliance: Globally spread supply

and seamless data exchange with partners

chain

is

highly

penalties

caused

vulnerable by

to

through service oriented architecture. These

violation

application scenarios are supported by having

regulations

a “single version of truth” achieved through

regarding environment, safety, labor

common data definition across the supply chain

etc. SOX compliance is one way that

enabled by master data management (MDM).

of

country

specific

can help top management in managing this risk.

CONCLUSION

II) Ensure collaboration to manage changes

Globalization and the forces of the flattening

Automakers try to give supplier advance

world are creating huge supply chain risks and

notification of production changes. GM

it is unlikely that these would fade in the

uses its portal “GMP SupplyPower” web

near future. Cost considerations are driving

site to post updates for its 360oglobal

companies to explore innovative sourcing

suppliers.

strategies for physical goods as well as services.

It

is

also

important

The pressure on refining costs of doing business

to achieve cultural alignment especially

10


and the consequent move to tap resources

audit process is essential to providing on-going

globally is exposing companies to greater

feedback to management and supply chain

supply chain risk. An effective risk management

participants on the performance of their facilities

framework ensures that companies not only

and their compliance with agreed, supply-chain

manage their supply chain disruptions better

wide standards. Organizations can build a solid

in these scenarios but also put in early warning

sense and respond capabilities in their global

systems that help identify these upfront.

supply chain using enterprise products. How

There will always be natural disasters,

organizations manage their enterprise risk will

as well as corporate mistakes. In order to insulate

predicate success and failure and determine

themselves from the consequences, companies

whether they are able to win in the turns when

may have to spread their risks more widely.

supply chain disruptions occur.

The cost quantification of supply chain disruption risk could potentially change the significance of

REFERENCES

the cost arbitrage considerations that drive most

1. www.thinkflat.com.

global sourcing decisions.

2. Jeff Sanford, Beat China on Cost, Canadian

That does not necessarily mean fewer

Business, November 2005.

aircrafts will be queuing up to land at Louisville

3. www.innocentive.com.

and Memphis, or that fewer container ships will

4. P&G‟s New Innovation Model, Harvard

set sail from Asia‟s bustling ports. But it could

Business Review, Vol. 84, No. 3, March

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2006.

more to maintain a number of different supply

5. Tony Friscia, Kevin O‟Marah and

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and

6. Filling

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Tall

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Competitive Advantage, Wharton School

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11


11. What Vodafone will collect from the Hutch

355079.htm). 14. http://news-info.wustl.edu/news/

call, The Hindu Business Line, Feb. 18, 2007.

12. Global Supply Chain Benchmark Report,

page/normal/5446.html.

Aberdeen Group, 2006.

15. Ting Shen, A framework fro developing

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postponement strategies, MIT Research Paper, February 2005.

12


Author profile SANDEEP KUMAR Sandeep Kumar leads the Manufacturing and Supply Chain group at the Domain Competency Group in Infosys. He can be reached at Sandeep_kumar@infosys.com. ASHISH KUMAR TEWARY Ashish Kumar Tewary PhD, is Principal Consultant with Infosys ’ SAP Practice. He manages Infosys’ portfolio of solutions on SAP technology platform for RFID and Service-Oriented Architecture. He can be reached at ashish_ tewary@infosys.com.

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