Supply Chain Restructuring

Cost

Service Level0 100%

Existing Position

Enhancing Supply Chain Performance

.SC Integration

SC Reconfiguration

SC OptimizationInefficient Practices

Supply Chain Restructuring

• Restructuring Supply Chain Processes– Supply chain mapping

• Restructuring Supply Chain Architecture– Restructuring flow in chain– Restructuring placement of inventory in chain

The characteristics of vertical integration, vertical disintegration and virtual integration

Restructuring the supply chain

Supply Chain Mapping: Current Position

1. Shape of value addition curve2. Point of differentiation3. Customer ordering point

Supply chain mapping is characterized by three dimensions

Impact of Supply Chain Integration/ Optimization

Dimensions of Supply Chain Processes

• Value addition curve –Alter the shape: All processes are mapped on time and cost dimension. This dimension capture the rate at which cost gets added because of waiting inventory in chain - Truck Manufacturer

• Point of differentiation- Postpone: Point at which variety explosion takes place in chain– Painting booth in car, Packaging station in Packaged tea

company• Customer entry point in chain- Advance : Based on the

customer entry point in chain , chain can be charcterised as:– MTS, MTO, CTO

Restructuring: Some Case Studies

• Move from MTO to CTO by change in value offering ( Customer offering bundle)– Dell, National Panasonic (Focus on customer ordering point and

post differentiation)– Dalmia Cement

• Postpone the point of differentiation (DC)– Asian paints to manage variety, HP Printer, Benetton by

resequencing process– Bicycle assembling to reduce transportation cost. Problem –

Transferring critical operation can lead to dilution of product quality

• Change the value addition curve– Reliance Telecom

Changing the Shape of Value-addition Curve: The Telecom Industry

Reliance Infocom changed the shape curve by introducing conduit (with several openings where cable can be inserted at later stage) while trenching so that procuring the cable could be postponed. The cable was procured after entire trenching operations was completed.

Characteristics of Supply Chain Mapping : Shape of the Curve

• Area under the curve is equal to inventory in chain: Chain should be reconfigured so that area under the curve is minimized

• Higher the value added in initial part of chain, higher the risk: Chain should be reconfigured so as to re sequence activities so that time intensive activities are scheduled at the initial stage and cost-intensive activities are schedule at later stage– Map all activities on time and cost dimension– Schedule time intensive activities first and cost

intensive activities as late as possible Change the shape of curve from concave to convex

Characteristics of Supply Chain Mapping: Customer Ordering Point

• Before customer ordering point firm has to plan activities based on forecast. After customer entry point firm , planning is based on actual orders. – Forecast is always wrong

• Firm can redesign customer offering bundle with a longer delivery time – Customer offering consists of a bundle of product and services and can be

characterized using following five attributes:• Cost: Cost incurred by customer to own and experience

the product service bundle. Eg. Big Bazar, Mobile• Delivery time: Time taken from customer order to

delivery eg. Jewellery, Fast Food, Spectacles• Product variety: Range of choices offered to the customer.

Customisation is the highest form a variety where product and services are tailored as per customer requirements eg. Automobile, P&G

• Quality: Quality attribute captures product features, performance and reliability.

• Supplementary services: Set of supplementary services that surround core product offering to enhance the value to customers

Shift customer point as early as possible by redesigning customer offering bundle

TIME

Point of Differentiation

COST

Impact of Supply Chain Restructuring

Point of Differentiation

Order placed by customer

•Alter the shape of value addition curve•Postpone the point of differentiation•Advance the customer ordering point

Process Redesign: Benetton

Traditional process

Redesigned process

Dyeing Assembling garments

Assembling garments

Dyeing

Moving from the MTS to CTO Model: The Role of Innovations and Experimentations

• Firm can simultaneously work on advancing customer order and postponing point of differentiation so that combined effect would help firm in getting desired result.

• It is possible that both ideas individually may not help firm in moving from MTS to CTO model but the combination of both movements that is leftward movement of customer entry point and rightward movement of point of differentiation jointly might ensure that modified customer entry point is ahead of modified point of differentiation.

• Redesigning customer offering bundle involves deep understanding of customer segment: Firm chooses a bundle of product and service by making appropriate choices on above five attributes. Depending on the market segment one has to understand utility functions of the customer set and chose appropriate bundle. There is a trade off involved in choices of attributes and understanding of the relative importance given by customers to various attributes would help firm in making appropriate choices. – Each of these attributes has multiple dimensions and understanding of customer

segment would help in choosing appropriate dimensions within each attribute.– Choice of attributes set and with in that choice of relevant dimensions has

implication for supply chain design and operations.• Innovations

– Dalmia Cements : Move from MTS to Pack to order– Titan : Offering prototypes in Jewellery line of products at retail outlets – Heavy Commercial vehicle manufacture

Restructuring Supply Chain Architecture

• Restructuring Flow in Chain– Usually within a firm all products with in a same business goes through similar flows. But one can

restructure a chain so that different material goes through different kind of flow. Depending on the nature of item one can design differential flow. We illustrate through example Of

• HUL where firm has created different material flow for different category of items such that all fast moving goods and slow moving goods and both category of goods.

• Firm can offer differential services : gold class service (Service with in 24 hours), silver class service (Service with in 72 hours).

• in service chain depending on the priority of customers stocking policies (where to stock the items) and mode of transport would be different for different category of customers. Company provide gold class service (Service with in 24 hours), silver class service (Service with in 72 hours).

- Fast moving vs Slow moving (High Volume SKUs vs Low Volume SKUs)

• Restructuring Placement of Inventory in Chain:– Restructuring of placement of inventory questions existing location of inventory and given

current demand structure and time and cost characteristics of process & supply chain structure .

The HLL Supply Chain

HPC Business:

·More than 400 SKUs (110 brands in 950 packs)

Restructuring the HLL Supply Chain

3-18

p1 DC1 c1

50,000

c2

100,000

c3

50,000 candidate distribution centers

customers with demands shown

candidate plants with fixed costs shown

p2 DC2

p3 DC33

1

2

Sourcing Distribution

P&G

Project Results & Benefits

• Integrated solution called for plant consolidations: by mid-1996, P&G had closed 12 sites and written off over a billion dollars worth of assets and people transition costs

• Over 6,000 people impacted, but treated fairly through early retirement, relocation, or retraining and placement

• As of 1997, annual savings were well over $250 million (before tax) – largest portion is due to lower manufacturing expenses, operating fewer

plants with less staff – some savings in packing materials and ingredients – …but with fewer DCs delivery expenses actually increased

The Wal-Mart supply chain

Financing Corporate headquartersWAL-MART

Video link

Supplier payment

suppliers

organizationallearning

Satellitecommunication

Point-of-sale dataRetail store

Communications support

Communications support WMDistribution centers

21

Source: Harvard Business review, Vol. 70, No. 2, March-April 1992, pp. 60-61

Inventory Placement in Chain: Illustration

Drop Shipping/ Risk pooling/ Transshipment

0 denotes absence and 1 denotes presence of stock point

Inventory Placement in Chain: Illustration

• A decoupling inventory is an inventory that permits the downstream portion of the supply chain to operate independently from the upstream portion.

• The firm works with 98% cycle service level at each stock point.

• Coefficient of Variation is Ratio of Standard Deviation to Mean

• Safety Stock in units= K √ L σd

• Weekly demand mean = 300

• Standard deviation = 100

• E[ D1 +...+ Dn ] = n · E[D] , Var( D1 +...+ Dn ) = n · Var(D) , and StdDev( D1 +...+ Dn ) = √n · StdDev(D) This is because of pooiling of variability at the sourcing and manufacturing stages. Aggregation is preferred when number of markets are larger.

• Relative Performance Ratio = Total safety stock value for the option/ minimum possible value of total safety ctock across all options

Supply Lead Time and Demand Distributions at Each Stock Point

Coefficient of variation at DC is .33 whereas at other stock point is .19245 because of the aggregation of demand phenomenon

Option SS at SP at the

end of sourcing

SS at SP at the

end of sourcing

SS at SP at the

end of

sourcing

Total Relative

performanceRatio *

(0,0,1) Units 0 0 1039.23 1039.23

Value( Rs.) 0 0 103923 103923 1.074225

(0.1.1) Units 0 489.8979 600 1089.898

Value( Rs.) 0 36742.35 60000 96742.35 1

(1,0,1) Units 346.4102 0 848.5281 1194.938

Value( Rs.) 17320.51 0 84852.81 102173.3 1.056139

(1,1,1) Units 346.4102 346.4102 600 1292.82

Value( Rs.) 17320.51 25980.76 60000 103301.3 1.067798

Comparison of the Safety Stock for the Four Options

Sensitivity Analysis• Demand Variability• Number of Markets• Cost distribution in Chain• Time Distribution in Chain• Change in Lead Time• Change in Mode of Transportation• Change in stages of Process