The Infosys global supply chain management blog enables leaner supply chains through process and IT related interventions. Discuss the latest trends and solutions across the supply chain management landscape.

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February 27, 2009

Supply Chain - A strategic lever in a weak economy

Today’s news headlines are largely depressing reading. So this weekend I steered away from the newspaper and in fact picked up a relatively new strategy magazine [which will remain nameless]. The magazine headlined a story “Top 7 ways to increase sales” and provided assorted articles on marketing/ how to increase revenue etc. Flicking through the magazine I was pleasantly surprised to see a section dedicated to Supply Chain but was simultaneously disappointed to see only four pages of commentary [out of a total sixty-six pages]on this very strategic lever!

A recently published Supply Chain analysts report also indicated that many companies have begun to recognize the Supply Chain as a strategic differentiator rather than just the cost of doing business. This is validation of my opinion that “The Supply Chain” provides the highest return for a company’s transformation dollar in terms of [shareholder] value created. This is specifically true for any company in an economic downturn.

The Share holder view of the Supply Chain is inextricably linked to margin protection or expansion. In reality supply chain initiatives and projects drive value in equal measure from cost reduction and top line growth. Most managers will recognize this to be true. Let’s consider an - example of how Infosys helped a large CPG Company understand top line impact of a Supply Chain investment.

Supply Chain drives increased RevenueIn a recent project at a large CPG company, Infosys was engaged in helping the client evolve a business case for making significant improvements in their retail fulfillment [Demand] chain. Over 50% of the revenue is driven by different [sales and marketing promotion] events. As you can imagine, this causes significant volatility in their supply chain resulting in unfilled orders and poor on-shelf availability.

Effectively, this was a double whammy. On the one hand the client lost sales while on the other hand they spent trade promotion dollars and did not achieve the estimated lift projected. I have not even started to mention the costs as a result of the inventory build-up in the supply chain because a special product missed a promotion window.

Similarly, in today’s economy, most industries [read value chains] are global in scale. The supply chain can be a source of significant competitive advantage – providing advantages other than lower cost. In the example above a key outcome of the successful implementation of advanced planning capability would be improved fill rates and customer satisfaction (CSAT). While CSAT clearly impacts the top line, it is a major advantage if your supply chain is geared to meet customer requirements more effectively than your competition. This is a simple enough concept …

Essentially, my point is that a supply chain organization must consider itself as much a driver of the top line [through increasing revenue] as the bottom line [through reducing cost and working capital]. Most importantly, the supply chain organization is a source of lasting competitive advantage…

In an economic downturn Supply Chains will see more of the following:

  1. Reduced volume [material flow through] – falling net demand
  2. Volatility of demand – as customers try and forecast changing demand trends
  3. Intensifying competition - unreasonable performance demands on Supply Chain
  4. Shrinking capacities and failing suppliers in the supply network – increasing supply risk

I would propose that a weak economy is an opportunity for the enlightened Supply Chain leader to rethink strategic priorities in the context of the competitive landscape in a recovery cycle. It is critical to do everything to “keep the lights on” [KTLO]. However, the changed economic circumstances should be leveraged as an opportunity to transform the supply chain to become more agile and responsive. Position the company for when the economy starts to recover - Do not shrink your supply chain capabilities in a haphazard fashion but retreat in an organized way with an eye to economic recovery. Plan to “win in the turns”…

 

Impact of Economic downturn
 

 

Easier said than done – That is true. But here are four capabilities to think about. Each, while helping cope directly with the economic down turn also enables the company to build advantages it can leverage as the economy recovers…carrying momentum to leapfrog competition in an improved economy.

  1. Making your supply chain more “Collaborative” implies
    a. Ability to build -execution plans that incorporate inputs from within the organization [product development/ sales and marketing and finance]
    b. Ability to capture planning inputs from customers [extended value chain] and share the plan with an extended supply base

  2. Making your supply chain more “Responsive” implies
    a. Ability to capture changes to plan from supply network and customers
    b. React swiftly to new inputs  [smaller order sizes, LTL capability, order changes etc]

  3. Making your supply chain more “Agile” implies
    a. Visibility to supply chain performance

February 23, 2009

Power Supply and the Supply Chain - Part 2

In one of my earlier blogs, I had drawn a hypothetical comparison between a power production process and a best-in-class supply chain. We saw how supply and demand situation can result in a stable equilibrium. A stable equilibrium is defined as an interplay of balancing forces where any deviation from normal, results in greater propensity for self-restoration.

In this blog, we will focus on certain key differences between these balancing forces in supply chain and in power production.

1. The Bullwhip Effect: A power grid is similar to a supply chain. There is a power factory that converts raw material like coal or a nuclear fuel or gravitational hydro energy into power in the grid. Distribution of power is much like a distribution in supply chain. Institutional consumers like railways or factories require bulk power unlike retail customers. A power distribution center has to constantly guage the requirement in terms of this loading mix and accordingly manage their transformers. In a supply chain, lack of collaboration could result in speculation  in terms of inventory hold in the nodes of the network resulting in wide fluctuations of stock levels as one moves downstream. Thankfully such a situation never happens in Power generation and distribution. By its very design, each and every node is interconnected. The upstream node proactively reacts to changing demand supply situation. If a downsteam node gets overheated in terms of demand, it could island that node to restore balance in rest of the network.

2. Inventory - a boon or a bane: Thankfully by its very design (or atleast so far), it is not possible to stock up energy. What flows into a node has to flow through or get consumed in some way instantly. Some of us though, specifically in developing countries, do use inverters for stocking and using energy due to unreliable power supply. The cost of doing this activity is exhorbitant due to the equipment yield factor. In the traditional supply chain though, inventory is essential. The fillrates, an essential KPI for supply chain, directly correlate with the inventory. Inventory consumes a sizable proportion of working capital and in some cases is subject to different kinds of market risks.

3. Cost Structure: In setting up a power supply chain, (read the networks), it is more about a fixed parameter of cost rather than a variable one. This results in a general long term view instead of sometimes a myopic view by a traditional supply chain. The costs are somewhat proportional to the flow-through volume in both cases though again variable parameters are predominant in the traditional supply chain.

All in all, these two seemingly different sectors have both differences and similarities.

The overall intent of these blogs was to understand challenges being seen by existing supply chains. From a modelling perspective, the power supply process is one of the interesting parallels that can be drawn. In not so unforeseen future, it is very likely that the supply chains would be akin to - a switching ON of a button inside a customer's dwelling that results in a virtual though automated procurement, production, distribution and delivery right at the doorstep - all in a flash just like power.

February 17, 2009

How do I forecast during Recession?

In a client meeting on Friday – the 13th, I encountered a “scary” statement!! The category manager told me that his gut forecast was more accurate than the one generated by his ‘expensive forecasting system’ for last quarter or so. The symptom was recent and the forecast was going away by as much as 40%!!! Could this be symptom of a recession? How do I forecast during such times? Complex algorithms are far more powerful in finding out hidden patterns and extrapolates them beyond the capacity of human mind. Then why would such powerful models fail to detect a recession which is so obvious?

Forecasting systems have typically 12-36 months data. This works well in identifying patterns during regular times but not during recession. The demand falls dramatically during such times. Even before the system detects the dramatic drop in demand, probably a quarter or two has already passed!! The result is burgeoning inventories in the warehouse.

The key to forecast during recession is to detect it first. The first real indication comes when Forecasting systems miss three consecutive forecasts. During recession they continue to over forecast. The flip side of this rule is that if you forecast only once a month or a quarter, you still lose the plot! The only way to capture is to manually compare last 6 weeks forecast. During recession, demand for consumer products reduces dramatically. Mapping end consumer demand is the best indicator of slowdown. This means, for retailers, they need to look at their weekly sales of baskets and for Consumer Product companies – look at secondary or tertiary sales data, or syndicated sources for detecting the rate of slowdown.

The second step to this is to recalibrate the forecasting system. It could be done through variety of ways. One of the most effective ways to do it is to reduce the history window used in forecasting. Instead of 24 months, 3-6 months data would provide better picture. It is possible that some of the algorithms may not work with this little data. But then, if human mind can forecast better than the complex algorithms during recession, why not use simpler algorithms with less history – bootstrapping, weighted moving average, exponential smoothing etc. These algorithms are not as accurate as ARIMA, Regression or Nerual Networks, but performs better than them with a very short history. Typically, recession lasts anywhere between 6-8 quarters. These models should be deployed during such times. If the system is already using these algorithms, all the coefficients needs to be recalibrated every 2-3 weeks.

Most of the companies do forecast at a distribution center level and at a product level. During recession, customers become more price sensitive and are likely to switch the channels for buying the same product. Channel forecast becomes a balancing factor in manage inventory and satisfying consumer demand at a low cost. Distribution centers serve all channels and they are likely to experience different variability during recession. If the channel level forecast is brought into the picture, it will iron out inventory mismatch between distribution center and end consumer demand resulting into significant cost savings, higher fill rates and improved customer experience. After all, demand forecasting is all about improving customer experience, and there is no better time to do so, when everyone is going wrong in doing so… recession!!

February 16, 2009

AGILE SCM CLOUD – Why do we need one?

Because we do. Is it that simple? No way.

I guess the answer to this question manifests when we take a close look at any SCM application environment and the landscape of the hardware and software technologies associated with it and the amount of effort required to integrate these applications.

For example: Let us consider the case of a major online retailer (similar to Amazon.com). Let us also assume, he wants to use ATG for order capture and Sterling as a background application for order management. Given the scenario (which BTW is one of the simpler scenarios in SCM domain), there is a host of solution design decisions to be made now; Choosing ATG and Sterling for order capture and management, database for both of these packages, and middleware to integrate these packages. Versions of each of these components will further induce certain restrictions that do not necessarily ease the problem at hand because each component is equally responsible to meet the overall SLA – response time (for UI), throughput (for batch mode). Throw in the infrastructure options to host each of the aforementioned components, hosting costs and HA and DR considerations, the problem gets transported to an all new tangent of heterogeneity.

At the crux of these options/complexities the online retailer just needs a product to showcase his inventory, capture orders, fulfil and manage the orders. The product should be highly available and disaster proof. It should scale to meet the growth in customers, vendors and inventory.

Wait a minute that is what SCM Cloud offers - a set of services that provide SCM functions to any cloud user in an efficient, scalable, reliable and secure way”. That is, Cloud masks all the heterogeneities involved in implementing various SCM functions and the tiers within each function and provides a purely functional view rather than having to deal with the inherent technologies. The following illustration provides this functional view with users enrolling (based on the SLA) to different SCM functions rather than JDA-TMS or Sterling-DOM.  

Functional View of SCM cloud

This view of the cloud makes us, the service providers the best ones to take the cudgel to implement the CLOUD. We must therefore prepare a pool of requirements and a pool of plausible technologies and create a layer of abstraction to free the user from choosing packages, best-of-breed solutions, databases, integration middleware, and infrastructure and think only about the required functionality and how much he can/should pay for it. Here is a simplified tiered-illustration of SCM cloud components.

Tiered SCM Cloud Architecture

 

Of course the biggest of all challenges in realizing this cloud is security. How do we isolate one user (from one enterprise) using the cloud from another user (from another enterprise). Of course all tiers. All the way down to persisting data. We have the technology to device such a model. For example a security vault that based on the SLA and user credentials internally instantiates a virtual machine for order capture and links appropriate data sources.

Oops!! I am just getting ahead of myself. Aren’t I? You just have to wait for my next blog guys.

February 15, 2009

What a 3PL Warehouse contract needs to include

Well, continuing from my previous blog on Warehouse Costs and Margins, let's now touch upon the components that needs to be included in the contract between the 3PL Warehouse service provider and the Client who will be using the services of the warehouse.

The contract includes, at a broader level, the terms and conditions on usage, rate and billing contract, payment terms, warehouses contracted, billing period, space utilised, the client's customers and warehousing activities agreed upon.

In the billing contract, both storage based and activity based pricing are agreed upon. All activities that will be charged to the client will be listed with their individual rates. The method of charging will also be indicated, viz, weekly, monthly, quarterly or yearly. For storage based billing, the type of method will be agreed, whether fixed rental fee, pack UOM based or storage UOM based. This is decided based upon kind of items being stored, the kind of packaging, duration of storage and various UOMs in which the items may be stored. Fixed rental could be decided mostly when the similar kind of items having the same weight and dimenions, occupy almost a  fixed space each month or for a period. In case there is a wide variation in the packaging in terms of size and weight, the Pack UOM based pricing is preferred. However, if the item is stored directly in its UOM, rather than its packaging type, then Storage UOM is taken up.

Billing period can either be daily, weekly, fortnight, monthly, bi monthly, quarterly, half yearly  or annual.  However, activity billing and storage billing cycles are maintained separately. Also separate invoices for storage and activity can be created, based on the client's request.

The client should also include a list of his customers (who are basically suppliers) in the contract that will utilize the services of the 3PL warehouse. He will also have the option of having dedicated storage loactions reserved for each of his customers, which will roll up to reservations at the client's level. There can be an extra reservation fee that can be levied on top of the storage charges.However, the client can also opt for random storage of goods, wherein he would not have dedicated positions for each of his customers.

February 10, 2009

What IT hooks do 3PLs hang their business coats on?

The global economy is changing. That's arguably the only thing that can be stated as fact about this change. The only other thing that could be stated as fact is the continuous need for corporations to make profits, serve customers and to provide value to shareholders. This is true for 3PL providers and their customers too. So, what do 3PLs do to be prepared for the coming change? What are the IT hooks they hang their business coats on?

I will be sharing my experience with the facets of 3PL IT force multipliers on 24th Feb 2009. Please register here to be a part of the webinar.

 


 

The business' urge to move up the value chain is a lofty goal, but difficult to act on. It is so, because, of two challenges: 

1. How to move up the value chain?

2. How to measure the value?

For a 3PL, (1) usually implies moving from being a tactical "space and hands" operation to a strategic "two companies with one mind" relationship with their customer. This requires organizational commitment and execution excellence, with information management being key to execution excellence.

Resolving (2) is even more difficult. Moving around the value chain is pointless, unless it can be measured, shared and proven. A 3PL requires the infrastructure that will help extract value for itself from the value it derives for its customers.

While all this requires organizational focus, good IT solutions can make a fundamental difference to a 3PL's ability to differentiate and to gain from its differentiation.


 

 

February 4, 2009

Sell through comparison across stores and DCs

I was recently part of a set of workshops to identify improvements for a certain client's store experience. The key considerations where generic in nature; enhance the customer store experience, enhance the employee store experience with positive impacts on the company's bottomline.

As part of the discussions we talked about sell through based fulfillment optimization for direct to customer orders. The question that cropped up is whether sell through optimization can be applied uniformly across stores, and whether DCs should be considered at par. Can we just apply the classical sell-through formula or do we bias it?

A simple way of looking at sell-through is to consider it the rate of stock reduction. For the purposes of this discussion lets assume the metric is monthly and the formula is stock sold / stock on hand at the start of the period. Lets also assume that the inventory is seasonal in nature (say fashion) and the stock on hand will not be replenished.

      Month 1     Month 2   Month 3
Sales 500 250 125
Start Inventory 1000 500 250
Sell-Through 50% 50% 50%

 Here, while the sell through remains the same, the actual absolute sales are reducing. On the other hand, if one takes a cumulative view, and then averages out for the period the real rate of reduction comes through. The formula is Cumulative stock sold / (stock on hand * no of months considered for the cumulative period)

In the case, the sell-through percentages are:

      Month 1     Month 2   Month 3
Sales 500 750 875
Start Inventory 1000 1000 1000
Sell-Through 50% 37.5% 29.1%

This now gives a more accurate representation of the actual slow-down in sales!

So, what are the cons of a cumulative weighted sell through for seasonal non-replenished stock?


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