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Keeping up with Order Fill rate in a Reactive Supply Chain environment

In continuation with an earlier blog, 9 months further on in the same project and with key business process learning in that context, I would like to add a further perspective to the Fill rate topic. Supply Chains, especially in the retail segment, face some unique challenges that are not easy to encounter without supporting technology. The product-life-cycle in the retail segment takes lesser time to take a new product offering into a state of "commoditization". The differentiators among competitors from a product characteristic view blur out within no time. As a result, the key differentiating factor is to manage to stock the product as efficiently and effectively as possible while controlling the cost to replenish pipeline inventory. The longer the supply chain can sustain such a model, the better the chances are of its survival in the long run.
Based on a recent supply chain transformation project that thankfully went successfully live, I feel the following are some key points any leadership should consider to take on this survival challenge:
- Put metrics in place to measure, track and manage key customer-oriented statistic in your supply chain i.e the percentage times an Order is fulfilled. Such a measure is ideally tracked from an absolute and percentage profit perspective and also tracked based on time delays in fulfillment, if applicable.
- Since merely having an Order Fill rate metric, is completely agnostic to workings of supply chain, there has to be another metric to keep a tight leash on the cost that this Order fill rate objective imposes. An average pipeline inventory in your organization is one such measure that is more inward-oriented to the organization. Such an average inventory could be measured in the factory, in-transit, Distribution Centers and even at Customer segments of supply chain such as their warehouses or in some cases their retail store itself - applicable in cases of VMI(vendor managed inventory) and DSD(Direct Store delivery) models.
- Make Order Fill rate metric as a Key Performing Indicator (KPI) to customer facing organizations.
- Make the Average Inventory metric as a Key metric to Logistics and other supply chain facilitator organizations.
All the above metrics can be tracked with appropriate technology in place. These unbiased measures coupled with a reporting layer help keep a retrospective view on orders that have already been fulfilled and a forward view in case of orders that are still open in the system to be fulfilled.
In spite of the above capabilities provided by the project, one area where the project always feels challenged is in the area of Organizational Change Management i.e the preparedness of all stakeholders to accept and embrace the transformation. More on that topic in one of my next blogs, while we savor the occasion of completing an Order Fulfillment project, achieved after a grueling one and a half years of relentless effort.



I am a bit confused here and would appreciate your inputs on my thoughts.

You mention that:

"The product-life-cycle in the retail segment takes lesser time to take a new product offering into a state of "commoditization"

Building on that, you mention that a key differentiating factor is to stock the product as efficiently as possible while controlling the cost....

My understanding was that if the issue is shorter product life cycle, the supply chain should be responsive rather than efficient and lean? If you fear that your product at the retail stores may soon become a commodity, you will actually ensure that you acheive higher fill rates, even at a little bit of extra cost, till your products turn from innovative to functional.Am I missing something here?

Again, if the issue is short product life cycle (before the product becomes a commodity), why are we measuring" Average" inventory? I do understand that this metric applies to retail in general as majority of retail products are functional, can be forecasted easily, have stable demand...blah..blah...(you know all that better than me of course)but here the opening issue is the short life cycle and that means that you hold inventory at critical points in your supply chain to acheive a higher fill rate (isn't it like that?).

Also, should average inventory be a key metrics for Logistics in this scenario? Logistics here has no control over the inventory as planners will decide the inventory to acheive higher fill rates for these short life cycle products.How come logistics can have a KPI which they can't control? Yes, planning dept can have this KPI but as the trend is, the key metric will be the fill rate for short life cycle products.

Hi Kumar

The questions you have raised are very relevant and thoughtful.

WHile there are gross variations around how products are handled in different CPG chains, the observation that I made were more in context of the project I am in - which I would willingly agree may not be a representative enough of the industry. However the company am talking about is a Fortune 20 company and has been always in Top 10 supply chains - as rated by research companies. Hence I should be forgiven to believe that they follow a close-to-Industry best practice.

When the introduction phase of a product Life-Cycle is very short, supply chain strategy needs to be reoriented. In case of a new product, since there is unpredictability around how the product would fare in the market, it is a usual strategy to stock it up to cover demand variations. A company spends fair bit of money on the props and packages to present it in a format that customers get attracted to. Since the involvement costs for a trial of a new CPG product is very low, the dynamics of a new CPG product demand is very different from a Hi-Tech/consumer electronics one. While the focus of former is packaging and presentation, the latter's focus is technology marketing. The organization is in an investment-mode during early life cycle since costs to present the product are fairly substantial and breaking even is only possible with efficiency than responsiveness. However the time the demand takes for the demand to stabilize is fairly quick - and hence supply chain planners need to be on the watchout for that inflexion point.

I agree to your comment that each organization may have to decide the right KPI for prodding its internal departments towards supply chain efficiency. Average Inventory is one such parameter, and it directly reflects into working capital of a balance sheet of the company. Lower the inventory, lower is the current assets of the company - that is again the reason why planners need to be aware of the inflexion point in the life-cycle else the working capital could go out of bounds. CPG companies financially track cash-flows of a product on its own rather than taking a portfolio approach.

By Logistics, I meant the execution side of planning. Many decisions are taken on the ground - example imagine Production line going down or trucks breaking down, or product not passing quality norms.Execution side takes decisions on last minute product substitutions or sub-contracting resources to keep up with the CFR. In this aspect, I agree to your comment on supply chain responsiveness by keeping variable components of supply chain on-demand.

However, as I said, all of the above are applied concepts and not exactly theoretical. Thus each Supply Chain has to go through its own kind of learning and evolution.


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