Supply Chain Management

By Rajnish Kumar

ITC Limited

Definition…• The term supply chain management was coined by consultant Keith Oliver, of

strategy consulting firm Booz Allen Hamilton in 1982.

• In essence, Supply Chain Management integrates supply and demand management within and across companies.

• Supply chain management and logistics, are used interchangeably

• Supply chain management (SCM) is the process of planning, implementing, and controlling the operations of the supply chain with the purpose to satisfy customer requirements as efficiently as possible.

Supply chain management spans all movement and storage of raw materials, work-in-process inventory,and finished goods from point-of-origin to point-of-

consumption.

Elements of SCM• Demand Creation and Forecast : Create a niche,Understand

customer needs/preferences,Gauge Market Potential,Study competitor environment

• Product Development and commercialisation : Product, Packaging,Price Structure

• Distribution Network Configuration: Number and location of suppliers, production facilities, distribution centers, warehouses and customers.

• Distribution Strategy: Centralized versus decentralized, direct shipment, Cross Docking, pull or push strategies, third party logistics.

• Information: Integrate systems and processes through the supply chain to share valuable information, including demand signals, forecasts, inventory and transportation etc.

• Inventory Management: Quantity and location of inventory including raw materials, work-in-process and finished goods.

Product Development

Inventory Management

Distribution

Demand Creation &Forecast

Customer

Demand Creation and Forecast

• It can be argued that whether we should treat demand creation as part of supply chain management ,if we see it in exclusion to forecast ,but as soon as we view both of these together it becomes clear that they are an integral part of supply chain management

• Actually this answers the basic Question – What is to be supplied and how much

• It’s the first step where a retailer can go wrong even after having the best SCM systems, processes and practices in the world

• It is critical that the retailer knows its customers, has a relationship with them that helps predict their behaviour to a reasonable degree and at the same time is able to keep the competition away

Distribution Network Configuration

• The supplier matrix would depend largely on the scale of operations and positioning of the store in terms of what margins the retailer is making on sales.

• Large suppliers with compliant factories and state of the art equipment are tend to be costlier.The retailer must look for a ‘best fit’ model so that the business is relevant and valuable for both parties.

• One may have production facilities near to the DC’s/Stores or decide to source from far away places depending on how far you have to go to get that last dollar.

• If the product is design oriented and the customers can pay more to get it faster one may decide to get it produced in the best facility nearest to the point of sales.

• Similiarly the number of DC’s and warehouses would depend on what savings can be generated through running these operations.In the initial stages of business the number of stores may not justify a dedicated storage facility to service a small number while the same may become necessary as the numbers grow.

Product Development and commercialization

• Once the retailer knows what is it that the market wants it needs to create options that can be commercially exploited

• It is imperative that the products on offer are differentiated from those available already.

• The retailer can show value attributes, packaging and price to make the offer attractive

• Once the proto types are ready and the pricing strategy is in place one needs to find ways to optimize production and take advantage of scale.

• It is Quite possible that the design team comes up with this great product with impeccable design, Flawless Quality and out of the world packaging but the production team cannot produce it at the price the market will like to pay for it.

• Also before placing any product on the shelf the retailer must make sure that it can be there every day for the period of sale envisaged ,without a hitch. Many a times new product offerings do more harm than good simply in terms of being out of stock and disappointing customers

Information• Clear, Concise and correct information at the right

time all the time is the key to an efficient Supply Chain Management System

• An organization needs to look at Data Warehousing and management as an investment and not a cost whose pay back will depend upon how effectively it is put to use

• Decisions will be based on information that is available to those who drive the business and therefore it becomes critical to the success of any enterprise

• If you do not know the rate of sales and the inventory on hand accurately you can never order enough and vice versa.

Inventory Management• The term inventory management implies limitations of planning, ordering

and forecasting in a system• Given a set of macro and micro conditions in a dynamic business

environment it is possible that decisions are not 100 % correct• If you have low sales you will obviously have more inventory and why

you will have low sales is simply because your product development or demand forecasts were inaccurate.

• Also it could be a great product with a reasonable demand forecast but due to lack of marketing and information to the customers it could not be sold as predicted

• Therefore it is important that an organization sees Inventory as part of a bigger picture and not in exclusion.The focus should be on what caused higher or low inventory and not on inventory itself

• Remmember that you are in business because of satisfying consumer demands and not because you manage inventory better than your competitors

The Bull Whip Effect !

• The Bull Whip Effect is a name given to amplification of variance or distortion of demand information in a supply chain

• It leads to :

- Cycles of Excess Inventory and shortages

- High costs

- Poor resource planning

Why Bull Whip effect ?• Structural and Environmental Causes - Demand Uncertainty - Separate Demand Forecast at each Level - Low trust on suppliers and logistics partner - Multi layered decision making - Localized incentives versus Global picture• Behavioral Causes - Ignorance of pipeline inventory as it does not always reflect in the

system- Limited capability to process and analyze information- Prone to Panic – Human Nature It is therefore imperative to institute processes and systems that

enable flexibility of supply chain, speed and information sharing within and without the organization

Zara’s Supply Chain

• While its rivals start planning their lines on average nine months before they hit the shelves, Zara has a reputation for instant reaction to fashion trends and rapid restocking of stores to meet demand on items that are hits.

• Zara can make a new line, from the initial concept to when it arrives in the shops, in just three weeks.

• It's also not afraid to pull items from shelves and cancel ones that aren't selling.

How they do it ?• The secret, according to CEO Jose Castellano, is its reliance on

communication, and the way it uses existing technology to take control of almost every aspect of design, production and distribution.

• Its design-and-manufacturing headquarters is a sprawling industrial complex with a vast network of underground tunnels lined with conveyor belts that transport clothing from one part of the complex to another

• Almost all of Zara's clothes are made here, right from the basic fabric dying stage.

• Designers are in daily contact with store managers, discussing which items are most in demand and which aren't

• This, supported by real-time sales data, allows the designers to action repeat orders and create fresh designs, and from their factory in La Coruna they are shipped directly to the stores, eliminating the need for expensive warehouses.

• From design to engineering it for low-cost production to taking the gray fabric and printing it and finally Cutting sewing packing and shipping to respective store locations in just 21 days ,think About it !

• It takes the coordinated and well synchronized team effort of 5 teams that share the same space at Zara Headquarters.

That’s why it is important for a retailer not only to focus on inventory but also on all aspects of demand creation and its fulfillment something that Zara seems to have mastered.

Chill !!!