Supply Chain Management

I had talked about how to do forecasting during recession in my earlier blog here. During my discussions with end users the common feedback has been that frequent forecasting can help in faster sensing of demand, it doesn’t help in reducing inventories. Some of the most common questions emerging from end users on short term frequent forecasting are –  

• How to deal with lead times which are longer than the forecasting period?
• How do I change my safety stock levels? Do I need to?
• How will my service levels will be affected?
• How shall I deal with larger demand variation in granular level forecasting?

It is of utmost importance for Supply Chain Practitioners to provide resolution to these pertinent end user concerns. Hence I thought I would share my perspectives at answering these questions through this blog. For explanation, I have designed an illustration taking a cue from a real business scenario, and skinning out all complexity to bare minimum in an effort to explain the main concept.

For understanding, let’s assume that business planning is done on quarterly basis. Demand for the quarter is 300 units. Forecasting frequency is once a month and monthly demand is arrived at by multiplying quarterly demand with weighted average of a month. Let’s say, the monthly demand is 100 units. Variation in demand is 20%. Existing service levels are at 90%. Lead time for the order delivery is 15 days. Safety stock definition is arrived at looking at lead time, and hence, kept as two weeks (~15 days).

The inventory held for this scenario by the planning manager was, 50 units (inventory to meet demand for two weeks)+ 20 units (on account of variation on 100% demand) + 50 units (safety stock calculated for two weeks) = 120 units. With this calculation, the planner was able to achieve 9 to 10 inventory turns and desired service levels. Hence, he believed that this was an efficient arrangement and will not benefit significantly from weekly forecasting.

Let’s investigate, if the planning manager starts doing weekly forecasting where variation in demand jumps from 20 t0 30%, how can he still reduce his inventory and increase the service levels? The demand for Week 1 is 15, week 2 is 20, week 3 is 30 and week 4 is 35. Weekly forecast is not equal to monthly forecast divided by 4. Each week’s forecast is, in effect, is calculated through history.

Earlier, Safety stock = Lead Time = 2 weeks. Lead time is a key factor affecting safety stock but so as service levels. In fact, Safety stock can be determined as a product of Service Factor x Variation in Demand. For the value of Service Factor (SF) = 1, we can achieve 84% of service levels. For 98% service level, the value of SF = 2.

Note on Service Factor : Service factor is calculated by using inverse of the standard normal cumulative distribution with mean zero and standard deviation of 1. Too difficult to understand? Just use NORMSINV function in excel. If your desired service levels is 92%, take NORMSINV (92%) = 1.41.

For the new inventory scenario, we will be ambitious and aim at achieving 98% of service levels. The Service Factor value will be 2. So, Safety Stock = Service Factor x Variation in Monthly Demand = 2 x 20 = 40 units. We will also have to factor lead time in the calculations. Earlier, lead time of two weeks was less than the forecasting frequency of four weeks, hence, it is agreeable to hold safety stock equivalent to the lead time. However, now the forecasting period is less than the lead time, we need to account this using Lead Time Factor. Hence, we will replace Lead Time stock of two weeks with Lead Time Factor = Square root (Lead time / Forecast period). For this illustration, this factor will be square root (2/1) = 1.414
Lead Time Factor x Safety Stock = 1.414 x 40 = 57 units.

Summarizing both scenarios in a snapshot:

Scenario 1:

Scenario 2:

The calculation shows that little back-of-the-page work can instantly realize the benefit of frequent forecasting through 15-20% inventory savings, yet improving service levels. It accounts for demand variation on both – weekly and monthly levels and provides enough inventory buffer to meet the demand. A planner can choose to consider only one of the demand variation and tighten the inventories further. The concept of demand pacing can be used very efficiently with such planning. Forecast for every week will be tweaked upwards or downwards based on the actual consumption data. Order quantity and frequency can be changed every week to pace the demand for the month and subsequently, for the quarter.

For discussion, I have tried keeping the illustration as simple as possible. More complexity can be added by introducing lead time variation, constraints on order frequency and order lot size, order cost, different service levels for different customers etc. However, it is certain that organizations doing more frequent forecasting will be benefited through it. As shown in the illustration above, in spite of reducing inventory, it allows organizations to achieve higher service levels. Both of them are, critical during recessionary times!!

Posted by Mitul Shah at 9:06 AM | Permalink | Comments (1) | TrackBacks (0)

In the current downturn, organizations are typically looking at spending only on sustenance and not wanting to start any new projects/initiatives- however there are organizations which have a clear focus of ensuring that they make the right investments in a downturn to overcome the challenges faced and also be ready when the economy revives. Organizations are always thinking of planning and optimizing their investments and this is more relevant in the current economic scenario. Areas of investment in Supply Chain during the current dark period’ gave us some interesting outcome.

A recent poll on "Key Supply Chain investments areas in your organization" conducted on our blog concluded that more than 50% of the respondents mentioned supply chain planning (demand planning and supply planning) as the focus area in such an environment. Let me give you my perspective on the same.  Demand and supply planning becomes a key in this situation compared to the normal hay period. Demand and supply balancing will have an impact on the corporations working capital requirements. Hence an accurate demand forecast holds key which will ensure that supply will be in tune with the demand forecast and corporations do not carry excess inventory and minimize the working capital requirements. It is important to note that no sophisticated demand forecasting tool would have been able to forecast this downturn as there was no such occurrence in history to support this. However tools which could react faster to the declining sales in previous months and forecast accordingly would have helped corporations– this would have needed the support of human intelligence for forecast adjustments. The holistic  objective of getting the correct forecast numbers  seem to top the priority list  of corporations and hence investment in robust processes and tools in the demand planning area in the downturn. Along with good demand planning, supply planning also gains importance as corporations should relook at supply plans. Also getting this forecast right will help the fortunes of the company when the economy is on an upswing and hence the investment in the planning area is for all times.

Other investment areas are on expected lines. However I thought that Transportation management would have been higher on the investment agenda as the savings incurred are faster. In hindsight it could be that since demand has reduced therefore correspondingly there is reduction in shipping of supply and  the view may be not to invest in transportation management in a downturn.

Geographically there is slight difference in the thinking of the corporations. Corporations in US and EMEA have Planning and Strategic Procurement as the top 2 investment areas while corporations in the rest of the world have Supply Chain Risk Management as the key area for investment after Planning. One of the reasons could be that corporations in the US and Europe already have  addressed Supply Chain risks as quite a few of them have built global supply chains and hence may have addressed the supply chain risk aspect.

I would like your point-of-view on areas of investment organizations are adopting or should adopt in this down turn to thrive in the future. 

Posted by Amit Bakre at 6:17 AM | Permalink | Comments (3) | TrackBacks (0)

Many a time Returns Visibility is assumed to be limited to track and trace of the orders and inventory as they flow in the reverse supply chain. True visibility means having actionable insights into the lifecycle of the return order. This includes maintaining and updating information at unique item level throughout product lifecycle(manufacturing to end-of-life stages), tracking the return reasons and end state dispositions and understanding the customer demographics for the returns. 

Let’s take example of the Consumer Electronics Reverse Logistics ecosystem – the product category suffers from very high returns rates which has forced retailers to even charge a restocking fees, a source of irritation to customers. There are various participants - carriers or 3PL partner who manages the logistics, Sorting centers who classify the products for recycling or refurbish, refurbishers and resale partners. Due to the low CXO focus, reverse logistics usually gets less visibility during IT investment planning sessions. Most of the system landscapes I have come across at our clients have disparate systems managing various parts of the lifecycle of the returns with minimal or zero integration with the return channel partners like Carriers, Vendors, Consolidators or Refurbishers. The Return process is still labor intensive with MS Excel still being used as primary data exchange mode between partners. The complete cycle also lacks flexible, robust ways to automate business rules that govern what is a highly exception-oriented process.
 

There is huge amount of data in each information system silo that could be leveraged by other partners. Return data analytics is a rich source of information that can be leveraged by everyone involved in the returns lifecycle. Merchandisers and buyers can factor in cost of returns for certain product categories during the buying process, 3PL and Sorting partners can leverage these to route the products to a cost effective reprocessing channel, refurbishers and re-sale channels can plan their capacities based on historic trends for a product category and marketing managers, who are made of aware of why returns happen, can tweak the packaging, channel strategy or positioning to reduce the returns and improve initial consumer satisfaction. Companies higher on the analytics maturity curve can integrate this back to the product development process to build an information loop that drives continuous product design improvement.

Given that many companies are outsourcing their reverse logistics operations to third parties or have multiple partners involved in the execution, they should invest in building a unified reverse logistics platform through linkage of various partner systems that allows secure, reliable transfer of these insights back into the recipients that can leverage these. In my opinion this space is ripe for a SaaS or a platform based solution that allows companies to build a Reverse logistics platform for managing this often ignored side of supply chain.

Posted by Amarpal Sanghera at 12:24 AM | Permalink | Comments (2) | TrackBacks (0)

Recently I read a great news article in Supply Chain Digest titled “Triple-A Supply Chain” that actually talks about the article published in Harvard Business Review in the year 2004 by Hau Lee. I am sure most of you would have read it but for those who haven’t, I sincerely suggest that it is a must-read for all supply chain practitioners. Although the article is more than four years old, it is very pertinent in current business environment. Let me just provide the objectives of the three A’s mentioned in the postingf and then, I would like to share my viewpoints with respect to one of the A’s that I feel is the ‘most relevant and critical’ capability for all the companies. The three A’s that have been talked about are:

a)      Agility – it is about how quickly a company can respond to any change in its business environment. It refers to short-term changes.

b)      Adaptability – it is the capability of a company to adapt to business changes that are more permanent in nature and therefore, it is strategic and has a long lead time.

c)      Alignment – it is the ability to have common and shared interests across the supply chain including vendors and customers.

The description for each capability is pretty simple and straightforward but in practice, it is extremely difficult to achieve excellence in building these capabilities. I have observed that most of the supply chain performance improvement initiatives can be directly or indirectly mapped to one of more of these capabilities, and I strongly feel that it is an evolving exercise. Companies need to continually gauge their current performance, sense the future to-be scenario and quickly mould its supply chain, in order to sustain its competitive advantage. Talking about the three A’s, I feel that ‘Agility’ and ‘Adaptability’ are still under the company’s control to an extent, but building ‘Alignment’ as a capability involves close interaction with supply chain partners. And since, it is partner-driven, in my opinion, it becomes challenging to deploy and control activities or institutionalize any change that affects multiple parties. On top of this, as the business environment changes such as the economic crisis we are in today, where we have slowdown and demand de-growth in almost all the sectors, it becomes extremely challenging to sustain the ‘alignment’ of objectives and have mutually beneficial business policies.

Let me explain the concerns and pain points with the help of three real-life examples:

I recall one incident from my prior experience that’s worth mentioning. I was in charge of demand planning function for a region and we were facing problems such as poor order forecast accuracy and high inventory in days with one of our big distributors (in Asia region). Since our entire planning was based on demand forecast, it was very important to include such big customers right in the demand planning process and incorporate the events that occur at distributor level in refining the demand forecast. In order to facilitate this process, I travelled to meet the team at distributor’s end and had detailed discussions with the Planning manager, who was responsible for maintaining the distributor inventory. To my surprise, I realized that his personal KPIs of inventory targets were not aligned to our objectives and that became a constraint in implementing the improved process. We couldn’t influence his superiors to change his KPIs and had to resort to some work-around, but my point here is that “Alignment” of goals, objectives and probably, incentives is not complete unless and until changes are done at the ground  level. People tend to follow their internally set targets and what their superiors tell them to do. The key decision makers in the hierarchy greatly influence the priorities that are set in the supply chain. In fact, this is equally applicable within the company as well and it takes a toll to align interests of conflicting groups. In my opinion, people that belong to the same supply chain team including partners need to have alignment in their ‘thinking’ and ‘approach’ and that’s really an ‘art’ and probably that’s the reason why companies fail to do so.

Another instance that I would like to cite here is wherein one of our vendors wanted to improve its operational performance but lacked people with right skills. We had to go through multiple rounds of discussions to convince the leadership team to hire a person that finally helped in achieving the desired results. So, I feel that there should be some level of alignment in the ‘skill quotient’ of the supply chain partners; else it is very painful and difficult to adopt best practices across the supply chain on a continual basis.

And the last example is about a company that I have worked closely with, in supply chain planning domain. This company is an industry leader in adopting advanced supply chain practices and technology. They were moving at a fast pace to adopt CPFR practices with its key distributors in developing markets/regions, to have common and shared goals. They even went a step further to align the distributor’s KPIs with their planner’s KPIs to avoid any resistance and gain mutual consensus to make the execution successful. But in the last few months, I got to know that since their sales have got deeply impacted by the global economic slowdown, the business team lost its focus on this initiative and planned go very slow in taking it forward. Moreover, at distributor’s end too, the focus is more to control costs and put all such initiatives in the back-burner.

So, is it really possible to achieve alignment in supply chain? Not easy though, there are companies who have done this and continue to be competitive in business.

I would like to have your opinion on this topic. Any experiences, suggestions, feedback and ideas are more than welcome.

Posted by Aatish Goel at 4:25 PM | Permalink | Comments (5) | TrackBacks (0)

If there is a pandemic on the level of 1918 “Spanish Flu”, it will cost world over $3 trillion and drop the world GDP by almost 5%. While travel and hospitality are obvious to suffer from such events, it’s the retail industry which gets hammered across the world due to its complex supply chain networks. In Mexico, retail stocks fell by almost 5% and demand has dropped in the range of 10-15%. Till the time economic activity resumes and consumers feel safe, this demand is unlikely to come back to normalcy. Mexico also exports meat to retailers in China, US, Russia and many other countries. China and Russia has already placed a ban on importing meat from Mexico. However, the impact on supply chain is not limited to such direct linkages. In 2003 during SARS epidemic, one of the employees of Motorola in Singapore plant was infected and that forced company to shut down its entire plant.

Risk of pandemic is more real with the increasing number of threats and much faster pace of evolution observed in the flu viruses. It’s imperative for Retailers across the world to consider this as a major risk and develop an Integrated Supply Chain Response Plan for the same. Below are the few suggestions which would go in such a response plan.

• Ensure regular certification of meat and poultry suppliers.
• Understand the 2nd and 3rd tier linkages of suppliers and establish and early warning system should any news breaks out.
• Early detection will help in culminating the supply, cancelling the orders if in transit to avoid any infection.
• Access to necessary drugs and medical advices is important for rapid containment.
• Develop preparedness for evacuation and shut down and disposal of the infected stock. Establish escalating stages and guidelines to deal with increasing number of workforce being affected.
• Run a virtual scenario of certain percentage of workforce being unavailable and its impact on business continuity. Additional training given to the staff helps in taking over skill deficit in crisis times.

It’s important that all the safety and quality measures employed by the retailers are explicitly communicated to consumers and shareholders. If the outbreak happens, communication to employees, media, shareholders and consumers should be articulate with  clear assessment of the risk. These salient preventive steps can goa long way in ensuring customers trust in the retail brand.

Retail industry is hit by both – demand shock and supply shock during pandemic threats. Understanding the real risk involved and establishing integrated response plan involving suppliers and trade partners will provide critical strength to retail supply chains to get back to business as usual. 

Posted by Mitul Shah at 12:35 PM | Permalink | Comments (0) | TrackBacks (0)

This is in continuation to my earlier blog which covered Day 1 of Ariba Live: http://www.infosysblogs.com/supply-chain/2009/04/notes_from_ariba_live_1.html#more

Day 2 of LIVE also had Ariba come out with information on new solutions and services. Supplier Risk Management and SPM program Management are new service offerings. A Supplier Information Management solution also gets added on to the bouquet of Ariba offerings.  These Supplier Management related offerings underscore a couple of interesting trends:
-          With supplier bankruptcies rising by 74% over the last year, Supplier Risk Management is becoming all the more relevant.
-          Ariba is leveraging its supplier network data to increasingly offer “broker” kind of services. With services like Supplier Information Enrichment, Risk Management and Supplier Information Management, Ariba seems to be moving from selling software/consultancy and providing a market place for buyers and suppliers; to taking a more active role in supplier selection and supplier management for buyer organizations.

In a survey conducted by Ariba, increasing spend under management has been identified as a top priority. With the economic recession putting a squeeze on credit and cash, there has been increased focus to bring complex services inside spend management. Even the traditionally difficult to penetrate bastions, like Marketing and Legal, are now been brought into the Spend Management fold.
Having stakeholder support is critical for Spend Management programs, and the current economic conditions have brought a lot of senior management focus to such programs. Hopefully, the benefits achieved from these programs will make sure that they continue remain in the focus in better economic times too.

Posted by Sameer Prashar at 3:40 PM | Permalink | Comments (0) | TrackBacks (0)

When you think about it, no other domain in core SCM (and I'm not including indirect procurement in core SCM) has won over such a lot of converts into on-demand as TMS. We just do not see that many WMS, OMS, B2B-commerce or any other SCM functions being so prevalent in the on-demand space. I know a few contract management examples (Frictionless pretty much ran in this fashion, there are a few examples of Upside as well), but TMS simply dominates.

My view on this is that it has to be either (a) an acceptance of lower customization in the package (mostly configuration driven) or (b) willingness of the transportation department to be fairly insular in the overall SCM scheme of things or both. Why? it comes with a solid payback of quick onboarding in as little as 10 weeks to 4 months. While keeping my own views on this, I did raise this with Patrick as well. He did concur and also added the difficulties on the other side, especially, trying to make WMS or OMS on-demand in large corporations where he felt there could be greater levels of customization demands purely from the fact that they were early riders on the software space. TMS, on the contrary, really came to its own only in the 90s and companies are still deciding on enterprise strategies around this function.

One of the audience members gave a positive testimony of onboarding 135 carriers and going live in just 4 months with Sterling's on-demand TMS offering (the Nistevo acquisition) while multiple folks did agree that an on-premise for similar sized larger companies would typically take 2 years to go live. Patrick in his session also highlighted offerings from JDA/Manugistics and i2, esp the latter since this offering came out of nowhere from the company and has given them some extra momentum, compensating for drops elsewhere. However, he did agree with my suggestion that going on-demand on TMS does inhibit an integrated Supply Chain Execution (SCE) play especially with everything else remaining on-premise.

One final takeaway from my side: On-demand ventures like this work on a "change management" plane as well. From the success stories, it looks like people automatically lower customization expectations which could only explain such fantastic go-live schedules. So "on-demand" as a change management tool could be an additional point of leverage for companies trying to convince their managers. Me? I'm waiting for integrated SCE in a cloud!

Posted by Gopi Krishnan at 12:51 PM | Permalink | Comments (1) | TrackBacks (0)

APO Demand Planning offers great set of functionalities tuned to very popular business requirements. The key is to come up with a design that takes care of multiple dimensions including Scale & Scope management, Product Life-cycle Management and finally a platform to manually att value to the Statistical Forecast planning process. APO Demand Planning also offers extensions and customizations that can meet some of the complex and atypical business requirements. The end objective of a DP implementation is to make sure that the planners use the tool and make them more productive than before. These thoughts have been summarized in an insightful technical white paper prepared specially for different stakeholders in a DP project.

Posted by K. Srinivas at 7:49 AM | Permalink | Comments (0) | TrackBacks (0)