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Warehousing Management is part of a logistics management business process, which is itself is a facet of supply chain management. The general perception of the Warehouse is simply a place to store finished goods; semi-finished goods and raw material, inbound functions that prepare items for storage and feed manufacturing line and outbound functions that consolidate, pack and ship orders in order to provide important economic and service benefits to both the business and its customers. In my opinion Warehouse Management (WM) is not given required attention with the advent of Supply Chain.   Warehouse Management is considered as back-end job.  In my opinion, the WM is fundamental to supply chain success.  The flow of material is very critical to supply chain and the flow is seamlessly managed by the Warehouse.  WM is a science and an inefficient Warehouse or a process could cause disasters to the business.  This is a rudimentary attempt to familiarise the WH functions and its intricacies.  Hope you enjoy the same and I sincerely appreciate your feedback.

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Managing supply chain is increasingly a demanding task of satisfying the customer and the shareholders. Supply chain professionals worldwide have a daunting challenge of managing a global supply chain aligning with the business needs and financial downturn adds another dimension to the complex challenge structure. All agree that supply chain manager’s primary task should be apart from keeping customers or stores properly stocked and deliver the perfect order every time, they must balance the need for low costs, proper inventory levels and maximum service levels. They must ensure that supply chain management is an integral component of the company’s strategic direction and plan to create and maintain a competitive advantage.

Apart from the above-mentioned challenges and tasks of a supply chain manager, we have few more issues to tackle in the modern world and they are Globalisation; Terrorism; Product Proliferation; Scrambled Merchandizing and Customer Retention.  In order to balance all tasks and counter all challenges, we need a process and that is called Sales and Operations Planning.

Sales and operations planning (S&OP) is an integrated business management process developed in the 1980s by Oliver Wight through which the executive/leadership team continually achieves focus, alignment and synchronisation among all functions of the organisation. The S&OP planning includes an updated forecast that leads to a sales plan, production plan, inventory plan, customer lead time (backlog) plan, new product development plan, strategic initiative plan and resulting financial plan. Plan frequency and planning horizon depend on the specifics of the industry. Short product life cycles and high demand volatility require a tighter S&OP planning than steadily consumed products. Done well, the S&OP process also enables effective supply chain management (Source: WIKIPEDIA). S&OP is critical for any company that is targeting strong performance.

Let us understand global challenges faced by many organisations in different regions in order to understand how S&OP can help us to counter them.S&OP 1

As explained above more or less all regions in the world face some unique challenges such as demand for velocity improvement, faster and accurate order fulfilment, global supply chains, the pressure to reduce costs, and last but not least is to improve top line revenues.

Planning can be classified as two different methods, the first one deal with unconstrained planning.  This means typical material requirement planning, which answers the question of what is required to meet the demand without any constraints.  The second method is constrained demand planning.  This method with the help of a tool measures what can be produced with a given constraints and available resources.  Let us see who is good at unconstrained planning? EMEA and all other regions are doing very well both in responding to the unplanned event and also in an unconstrained environment. In my opinion, the most disappointing factor of the survey is that the best in class results in the case of responding to unplanned event or demand and conducting a gap analysis and initiating corrective actions indicate there is a lot of work on hand.

Constrained planning and the ability to respond to the unplanned demand in a timely manner indicate the S&OP 2level of supply chain flexibility and supplier collaboration, apart from manufacturing nimbleness.  Living with a problem and addressing the problem through gap analysis distinguishes the supply chain.  The world is the true classroom. The most rewarding and important type of learning is through experience,  there is only one thing more painful than learning from experience and that is not learning from experience.

But how many organisations are involved in going through the S&OP Process?  EMEA seems to be heading the group at a Macro level.  The S&OP success largely depends upon the SKU level measurement, all other regions are better compared to EMEA.  What is disappointing is that no other region is close to the best in class.  S&OP process is driven by the people and it is very critical that they understand the importance of the process and implement it effectively in order to drive the organisation in the right direction.  It is heartening to note that all other regions have done better than best in class in understanding the business systems and utilising them effectively.  Individual or functional (departmental) goals and objectives sometimes derail the S&OP process and that could result in heavy inventory and disappointed customers and shareholders.S&OP 3

It is needless to add that technology is very critical for the S&OP Planning and execution.  What is sad to know is that many organisations do not invest in specialised IT tools to drive the S&OP/Demand planning, they rely on ERP tools.  This was very clearly established by the survey undertaken by Aberdeen group. Demand forecasting in a retail and FMCG markets and within PUSH supply chain area is challenging due to product proliferation.  You need a specialised tool that could provide a variety of options and models with regard to your future demand.

North America organisations are heavily wedded to legacy systems compared to other regions.  It is sad that a matured market such as North America depends on the legacy and old systems and lacks the emerging market’s capability.  Further, NA does not boast an integrated ERP solution in place. It is clearly evident that emerging markets are more adventurous in investing in technology which could lead to better planning, less inventory, improved customer service and increasing top line revenue with the attractive bottom line.

S&OP 4We have made an attempt to understand how the world is managing S&OP business process.  Before I sign off, let me spend few minutes to explain the current challenges of S&OP process globally.  The first challenge is to align the process to the business strategy; we have often seen both heading in the opposite direction. The business ownership for the process, it is quite common to see S&OP as a sub-function of Supply Chain with more emphasis on managing supply than the demand.  In my opinion, the biggest challenge is managing the change (fear of failure).  This is very commonly seen in constrained planning situations.  Many people believe that S&OP process is all about the forecasting the demand but very few understand that it is a process to align the operational excellence with business needs in the form of customer demand.  Many do not see the value of S&OP in containing the inventory carrying thus resulting in cost reductions.  In order to address this issue what we need is executive governance.  The executive team should understand the importance of S&OP process and drive it effectively.  It is quite common to see Management team is involved in approving the outcomes and not driving the outcomes.  It would be effective if executive management drives this process aligning with organisational goals.  Another commonly noticed challenge is the new product launch.  Any product launch should go through product lifecycle management (PLM) process and all elements of PLM process should be thoroughly reviewed before the launch, if not the S&OP process will not help in achieving the product success.  The last but not least is connecting the planning to the execution.  Many organisations are good at planning, when it comes to execution, to a great extent many are not successful.  S&OP is only a business process, in order to make it successful, business discipline is critical and governance is paramount.

Cartoon Source: Cayuga Partners

SOP

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The Story of Three Arrows

three arrows

As we all know that the Global Economy is not heading in the right direction.  One of the best indicators of global growth is oil prices.  Oil prices (Brent) are assumed to average about $105 per barrel (pb) in 2013-2014, compared to $110 pb in 2012.  Unemployment remains elevated in many developed economies, with the situation in Europe being the most challenging. A double-dip recession in several European economies has taken a heavy toll on labor markets. The unemployment rate continued to climb to a record high in the euro area during 2012, up by more than one percentage point from one year ago. Conditions are worse in Spain and Greece, where more than a quarter of the working population is without a job and more than half of the youth is unemployed.

Christine Lagarde, Managing Director, International Monetary Fund (IMF), described the global economy recovery in 2013 as “fragile and timid” because the Eurozone is prone to political crisis and slow decision-making processes.

Some believe that China is the engine that propels global economy growth in the right direction.  There is a belief that China is recovering and that signals global recovery.  However, the statistics reveal a mixed result according transport intelligence.com.  The February figures from Container Trade Statistics (CTS) show that, if anything, container trades are heading downwards. Overall, Asian exports – including on intra-Asian trades – fell by 26.4% as compared to January and by 8% as compared to February last year. In addition, import activity for Asia fell by 10% compared to January 2012, whilst on a year-on-year it was down by 12%. The export traffic indicates a twelve month low.  This is confusing and one thing is certain and that is economic downturn is here to stay some more time.  When we look at the major air cargo carrier performance during the first quarter, the results are no different.  Lufthansa Cargo has reported a 1% increase in its aircraft utilisation in the first quarter of 2013. In a difficult market environment, the cargo carrier scaled back capacity by 7.4%. Due to a smaller decline in sales, by 5.9%, the company was able to increase its load factor to 71.4%.  Overall, Lufthansa Cargo carried approximately 400,000 tonnes of freight and mail in the first quarter of the year – a decline of 7.2% compared with the same period in 2012.

Keeping in view of the global financial trend, business houses have to develop strategies that will take them through the tough financial conditions.  Any organisation will target three different improvements and they are, top line revenue growth, bottom-line improvement and increase satisfied customer base.  In order to meet the above, organisations will develop number of objectives, each describing a desired future condition toward which efforts are directed. An objective is a statement that clearly explains actions to be taken or tasks to be achieved by an organisation. If the objectives are accomplished, then the business should be a success.

Research reveals that most of the business organisation will have two types of business objectives and they are Economic and Socio-human objectives.  However, the organisation can focus on socio-human objective only when they are financially successful.  Hence, the focus is on economic objectives and they are mainly three objectives targeted by most of the entrepreneurs.  They are (1) Business prosperity through improved margins and increased sales volume (the upward arrow); (2) Speed to the market place to maximise product availability (the side way arrow) and (3) Cost reduction/optimization to make the product competitive to sustain in the market place (the downward arrow).  In fact all three objectives are inter-related and driven by cost trade-off decisions within supply chain.

The purposes of objective setting are, to establish a standard for evaluating the success of the business and set priorities for its management and staff. Objectives help keep management and staff focused on achieving set targets and keep them away from distractive activities that drain business resources.  The appropriate organisational goals will also to address the challenges of global economy.

The risks of doing business and competing in a global economy seemingly change by the day. At the same time, risk management and cost seem to go hand in hand, leaving many executives to wonder: Is it possible to reduce risks and still grow the top line? The answer is yes, and there are stories to prove it. A key ingredient is a “conscious” approach to managing risks in your organization’s supply chain. Every business that depends on goods and services in a global supply chain is at risk for various supply chain disruptions, or worse: contamination or product failure.

It is evident that the key to the success of any organisation lies in Supply Chain efficiency.  The industry has realised that if one manages the supply chain efficiently aligns it to the business dynamics; the success of the organisation is assured.  The optimisation of Supply Chain was handled by different section of experts in different ways.  Some think that technology is the solution to the supply chain efficiency some believe that the strategy is the key to the success. And some believe that people (the right team) are responsible for supply chain innovation through thought leadership.

Supply chain performance has never been as critical as it is today. In today’s dynamic world what is good today can turn into ugly tomorrow in market place.  At some stage buffer inventory was recommended to meet the demand fluctuations (JIC) and now carrying inventory more than required levels is undesirable and JIT is the favoured option. Under these ever changing circumstances, supply chain efficiency plays a very vital role in keeping the organisations alive. In order to achieve maximum benefit from a supply chain and creating competitive advantage in the supply chain wars, a supply chain must be performing at its best and continue to perform that way.  We have seen organisations flourishing through the product innovation and we are today witnessing organisational superiority in the market place through innovative supply chains.

If we take a hard look at the IT hardware industry, most of the big brands and your local assembler provide more or less same product.  However, there is huge price variation which is possible due to supply chain innovations.  When we look at the retailers, the product range is the same, origin of supply is the same and the quality of the product is almost the same.  However, there is huge price variation.  The reason is supply chain efficiency.  The procurement strategy, the distribution strategy and the organisational objectives make the difference.

Supply Chain efficiencies cannot be ignored by any industry in today’s economic downturn.  However, the truth is that some of the organisations do not recognise what is appropriate for their supply chain and pursue inappropriate policies and concepts.  Fortunately, we have only two supply chain processes and they are known as Pull and Push. The failure and success of the business model mainly depends upon selecting the appropriate process.  If a retailer who predominantly follows push process decides to use pull process, the end result would be a catastrophe.  At the same time if an IT hardware manufacturer decides to use push process, will end up with high inventories and obsolete stock in the warehouse.  If one can align the supply chain with the business dynamics, it is truly possible to register revenue growth and improve velocity and also reduce costs.

In today’s world what is critical to the business success is the right supply chain strategy that could meet customer expectations and the last but not least is the right team with the ability to think outside the box and innovate with thought leadership.

save costs

Image credit: San Francisco Sentinel

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Supply Chain superiority determines organizational competitiveness.  Some believe that supply chain superiority or excellence is achieved with the help of three elements; process, people and technology.  Another group would advocate continuous improvement, benchmarking and KPIs, and innovative thinking would lead to supply chain excellence.  Do you think these factors drive the excellence?  My answer would be, yes and no.  Yes because these are fundamental requirements of any supply chain but beyond these elements something else works behind the scene to improve your supply chain effectiveness.

In order to make all above mentioned factors to work effectively three factors are critical.  The first and foremost is Collaborative Relationships.  The other two factors are Trust and Commitment.  In my opinion supply chain is all about managing relationships, demonstrating trust in relationships and committing to the core objectives. Let me explain how my theory works.  The below given graphic would explain various supply chain relationships:

As you can see from the above graphic supply chain manages internal and external relationships with various agencies.  Supply Chain relationship with Sales and Marketing, Manufacturing, Logistics, and various Vendors will ensure that the right product is made available at the right time and place at the right cost.  Sales team relationships with agents, distributors, retailers and consumers will make organizations grow and become competitive.

People make things happen, technology give us the ability to establish supply chain visibility and the process drives the activities.  However, all these factors could function in a silo apporach and make supply chains fail.  What is required is an integrated approach and integration is possible by establishing trusting relationships.  Effective relationship management can provide a positive contribution to sustainable supply chain superiority and also help to satisfy stakeholder interests.

Many organizations end up with huge inventories and wrong product on shelf and mounting supply chain costs.  The main reason for this catastrophe is lack of trusting relationships among supply chain partners.  In my opinion all above are supply chain partners.  The partners could include internal members as well as external members.  What is evident is that supply chain fails if the partners working for individual benefits without a common goal.  Someone said, we all stumble, that’s why it’s a comfort to go hand in hand.

Mutual trust was defined as “a shared belief that you can depend on each other to achieve a common purpose”.  Trust plays a crucial role in strengthening relationships and organisational changes and it is a critical component in building a collaborative relationship among supply chain partners. Trust creates an increase in openness among partners involved and it is perceived as a result of effective collaborative relationships and leading to higher levels of partner/customer satisfaction.  Trust is not gained in a day or two; trust is built up over a series of interpersonal encounters, in which the parties establish reciprocal obligations.

“An ounce of performance is worth pounds of promises”. In order to turn your promises into performance you need commitment. The third ingredient for the supply chain success recipe is commitment; commitment means to show loyalty, duty or pledge to the core organizational values.  In a partnership commitment plays a vital role along with trust. Someone rightly said, “unless commitment is made, there are only promises and hopes; but no plans.” Unless the supply chain partners are committed to a common goal which could deliver mutual benefits, it would be a challenge to establish a trusting and successful relationship.

According to a recent report from Boston-based AMR Research Inc., “companies that excel in supply-chain operations perform better in almost every financial measure of success. Where supply chain excellence improves demand-forecast accuracy, companies have a 5% higher profit margin, 15% less inventory, up to 17% stronger “perfect order” ratings, and 35% shorter cash-to-cash cycle times than their peers. Companies with higher perfect-order performance have higher earnings per share, a better return on assets, and higher profit margins — roughly 1% higher for every three percentage-point improvement in perfect orders”.  In order to achieve these two key measures (i.e. demand forecast accuracy and perfect order performance), committed collaborative and trusting relationships are crucial.

Hachiko – A Dog’s Story motivated me to write this article. This story is based on a true incident from Japan. This story is about the relationships, trust and commitment shown by a dog and also explains how invincible bonds form instantaneously in the most unlikely situations. We do not realize the value of relationships until reality bites.

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We all wonder from time to time about some intriguing words used in Inventory/Materials Management function.  I picked-up some unique, some common, some uncommon words from the glossary published by The Institute of Logistics and Transport, UK and furnished the same hereunder.

ABC Classification The classification of inventory, after ABC analysis, into three basic groups for the purpose of stock control and planning. Although further divisions may be established, the 3 basic categories are designated A, B and C as follows:
A Items – An item that, according to an ABC classification, belongs to a small group of products that represents around 75-80% of the annual demand, usage or production volume, in monetary terms, but only some 15-20% of the inventory items. For the purpose of stock control and planning, the greatest attention is paid to this category of A-products. A items may also be of strategic importance to the business concerned.
B Items – An intermediate group, representing around 5-10% of the annual demand, usage or production value but some 20-25% of the total that is paid less management attention.
C Items – A product which according to an ABC classification belongs to the 60-65% of inventory that represents only around 10-15% the annual demand, usage or production value. Least attention is paid to this category for the purpose of stock control and planning and procurement decisions for such items may be automated.
Bill of Material A listing of components, parts, and other items needed to manufacture a product, showing the quantity of each required to produce each end item. A bill of material is similar to a parts list except that it usually shows how the product is fabricated and assembled. Also called a product structure record, formula, recipe, or ingredients list.
“Control Group” Cycle Counting The repeated physical inventory taking of a small “control group” of parts, in the same locations, within a very short time frame to verify the design of a new inventory process. It is the only form of cycle counting not truly used to measure inventory record accuracy.
De-Coupling Stock Inventory accumulated between dependent activities in the goods flow to reduce the need for completely synchronised operations
Economic Order Interval (EOI) In fixed order interval systems, the interval between orders that will minimise the total inventory cost, under a given set of circumstances, obtained by trade off analysis between the cost of placing an order and the cost of holding stock
First-in, First-out (FIFO) 1. Stock Valuation – The method of valuing stocks which assumes that the oldest stock is consumed first and thus issues are valued at the oldest price.
2. Stock Rotation – The method whereby the goods which have been longest in stock are delivered (sold) and/or consumed first.
GUS Classification A classification of products into three categories for the benefit of goods flow control and stock control, based on a products area of application within a product division.
G = General products that may be required in several main article groups or operations centres and are administered centrally in the division
U = Unique products that are used uniquely in one main article group or operations centre but in several of its products, and administered locally in the division
S = Specific products that are used exclusively in one higher level product, and whose procurement is effected per individual order
Holding Cost The cost associated with holding one unit of an item in stock for one period of time incorporating elements to cover: Capital costs for stock; Taxes; Insurance; Storage; Handling; Administration; Shrinkage; Obsolescence; Deterioration.
Independent Demand A classification used in inventory control systems where the demand for any one item has no relationship with the demand for any other item and variations in demand occur because of random influences from the market place
Just-in-Time JIT A dependent demand inventory control philosophy which views production as a system in which all operations, including the delivery of materials needed for production, occur just at the time they are needed. Thus, stocks of material are virtually eliminated.
Kanban A simple control system for coordinating the movement of material to feed the production line. The method uses standard containers or lot sizes with a single card attached to each. It is a pull system in which work centres signal with a card that they wish to withdraw parts from feeding operations or vendors. Loosely translated from Japanese, the word “Kanban’ means literally means “billboard’ or “sign”. The term is often used synonymously for the specific scheduling system developed and used by Toyota Corporation in Japan.
Last-in, First Out (LIFO) 1. Stock Valuation. The method of valuing stocks which assumes that all issues or sales are charged at the most current cost but stocks are valued at the oldest cost available. 2. Stock Rotation. The method whereby the goods which the newest goods in stock are delivered (sold) and/or consumed first.
Materials Management The planning, organisation and control of all aspects of inventory embracing procurement, warehousing, work-in-progress, shipping, and distribution of finished goods.
NDC National Distribution Centre. Centralized distribution warehouse depot serving the whole country
Obsolescent Stock Parts which have been replaced by an alternative but which may still be used until stock is exhausted.
Perpetual Inventory System An inventory control system where a running record is kept of the amount of stock held for each item. Whenever an issue is made, the withdrawal is logged and the result compared with the re-order point for any necessary re-order action.
Quarantine Stock On-hand stock which has been segregated and is not available to meet customer requirements.
Rotable An repairable inventory item that can be repeatedly restored to a fully serviceable condition and re-used over the normal life cycle of the parent equipment to which it is related. Such items have a repair lead time as well as a procurement lead time and normally have a serial number that is retained throughout the rotable life regardless of the extent of replacement of its component parts.
Service Level The desired probability that a demand can be met from stock (for an individual item, group of items or a system) which can be expressed in a number of ways:
Percentage of orders completely satisfied from stock.
Percentage of units demanded which are met from stock.
Percentage of units demanded which are delivered on time.
Percentage of time there is stock available.
Percentage of stock cycles without shortages.
Percentage of item-months there is stock available.
Total Acquisition Cost (TAQ) The sum of all the costs to an organisation of carrying an item in stock including reorder, carrying and shortage costs.
Unit Cost The cost to an organisation of acquiring one unit, including any freight costs, if obtained from an external source or the total unit production cost, including direct labour, direct material and factory overheads, if manufactured in-house.
Vendor Hub Third party operation of a warehouse, funded by suppliers, containing Vendor-Owned stock for delivery to a customer.
Working Stock The stock of materials, components and sub-assemblies (excluding safety stock) held in advance of demand so that ordering can done on a lot size rather than on an as needed basis. In other words, the normal stocks formed by products arriving in large regular orders to meet smaller, more frequent customer demand. Also known as cycle stock or lot size stock.
X ???????????
York antwerp Rules A set of rules in marine insurance relating to the adjust of general average
Zero Inventories Part of the principles of just-in-time which relates the elimination of waste by having only required materials when needed.

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Today’s business success to a large extent is driven by supply chain efficiency. The role of the Supply Chain has never been as critical as it is today.  Supply Chain Managers world wide are facing the daunting task of satisfying customers as well as stakeholders. Supply Chain speed and flexibility have become two key factors that deliver the competitive differentiation and increased profitability.  Apart from keeping customers or stores properly stocked and deliver the perfect order every time in a globalized business environment, supply chain managers are expected to continuously monitor supply chains in order to identify risks that would hurt the profitability of the organization and develop suitable strategies to counter them.

What are Supply Chain Risks?

In one definition, “risks” are simply future issues that can be avoided or mitigated, rather than present problems that must be immediately addressed – Cornelius Keating

Supply Chain risk mitigation is also about proactively working to avoid future risks. We have internal risks and external risks within supply chain. Let us examine some of the internal risks:

  • Skewed demand forecasts;
  • Excess inventory Carrying;
  • Procurement Fraud;
  • Poor component Quality;
  • Frequent production line stoppages;
  • Poor Product Quality;
  • Loss of Productivity;
  • Crisscross movement of goods;
  • Increasing supply chain costs;
  • Inefficient product lead time;
  • Diminishing product margins;
  • Wrong product mix;
  • Poor Supply Chain Visibility;
  • Appalling customer Service;
  • Rigid & Sluggish supply chain performance.

The above are some of the internal risks which are known to all of us and there is no need to spend time explaining each risk.  Some of them could be risks and some of them could be called as present problems/challenges.

Supply Chains do face some external risks and they include:

  • Globalization;
  • Terrorism;
  • Failing economies;
  • Uncertain Political environment;
  • Rising Legal and Regulatory Risks;
  • Cheap Fakes.

I may have to explain why Globalization is a risk.  Globalization means increasing competition and severity of competition varies from region to region thus making supply chains complex.  Complex supply chains deliver multifaceted risks.  Further, global sourcing is becoming more popular thus putting extraordinary stress on supply chain lead times coupled with global terrorism.

Fortunately, the very trend (globalization) that increased risk also becomes a solution to manage the risk.  For example, increasing cost of labour could lead to outsourcing the activity to low cost countries thus avoiding cost risks.  However organization is not shielded from outsourcing risks.

The attack on the morning of September 11, 2001 has changed the way business is done world wide.  An element of uncertainty has crept into the supply chain which has resulted in additional costs, increasing buffer inventories, delayed production schedules and long lead time to market.  The uncertain demand and global competition is making planning process complicated and terrorism has added one more dimension to the demand forecasting.

“For example Ford had to idle several of its assembly lines intermittently as truck loaded with components loaded with components were delayed at the Canadian and Mexican borders.  Toyota came within hours of halting production at its Sequoia SUV plant in Indiana, since a supplier waiting for steering sensors shipped by air from Germany, but air traffic was shut down.  Ford and Toyota and other manufacturers were vulnerable to transportation disruptions because they operate a JIT inventory discipline, keeping material on hand for only a few days and sometimes only a few hours of operation.” – (Source: “Supply Chain Management under the Threat of International Terrorism” by Yossi Sheffi)

The health of Economy plays a vital role in making supply chains more efficient. Inflationary Pricing threatening to destabilize some Supply Chains and according to Marsh’s Supply Chain Risk Management Practice, three macro-economic trends are creating troubling domino effects in companies’ supply chains and they are:

  1. Beware of country actions and labour unrest;
  2. Beware of fuel prices triggering work slowdowns and logistics delays;
  3. Beware of bankruptcies and delays in your supplier base.

Failing economies making supply chains world wide vulnerable.  We are not talking about one economy here; the world is concerned about unpredictable chain of economic failures.  Mexico in 1994, Southeast Asia in 1997, Argentina in 2002, recent Greece economic failure could lead to wave of defaults across Europe thus leading towards global economic disaster. Another disadvantage of globalization is chain of reactions.

Fake products are destroying business all over the world, heavily contributing to black economy which complicates how we operate our supply chains.   According to International Chamber of Commerce (June 2010), worldwide €700 billion were lost in sales annually due to Counterfeiting and Piracy and a recent study by Frontier Economics revealed that counterfeiting and piracy cost G20 governments more than €100 billion a year in lost in tax revenues and place 2.5 million legitimate jobs at risk.  Loss of sales due to fake product supply, demand forecasting is challenging and thus resulting in supply chain inefficiencies.

Further, ever changing regulatory requirements putting additional stress on supply chain.  Technology companies are increasingly face environmental mandate that required eco-friendly products thus increase in costs in R&D and product recycling. FMCG business is required to re-label their food and beverages packaging in order to report traces of common allergens.  Global warming is influencing automotive standards.  All regulatory requirements may cost supply chain, in order to negate the disadvantage of additional costs, supply chain manager are expected to identify new areas to improve supply chain efficiency and reduce costs.

Apart from internal and external risks, in my opinion there are two more risks which are our self creation.  They are:

  1. Product Proliferation;
  2. And scrambled merchandizing.

Product Proliferation

Product proliferation is the bye-product of product differentiation.  In order to gain competitive advantage in the market place, organizations are introducing product differentiation resulting in product proliferation thus competing with one another in the same market.  In simple, two products belonging to the same organization compete due to product proliferation.  This trend is prevalent in Technology, Retail and FMCG industry.  The risk involved in managing product proliferation is not recognizing demand decline stage and efficiently determining the EOL (end of life) for the product.  Ideally, any new product introduction (NPI) should determine EOL for an alternative product thus product balancing can be maximized.

“Product proliferation can erode margins by 18 to 25 percent and is the root cause of all complexity within an organization.” – EMCIEN.  Further, product proliferation could deliver following supply chain inefficiencies:

  1. Additional R&D time and costs;
  2. Ineffective Product Life Cycle Management;
  3. Customers preferring new product and ignoring old models;
  4. Increasing variations creating planning challenges;
  5. Product mix related challenges;
  6. Decreasing margins due to increasing costs and obsolete inventory carrying costs.

Scrambled Merchandizing

The market segmentation no more exists due to scrambled merchandizing.  Every one is selling any product.  You find consumer electronics products in grocery store and stationary in a FMCG store and surprisingly butcher selling electronics and magazines/drinks and food products.  The latest trend is grocery store selling petroleum products.  On top of it, hyper stores were launched, which is a combination of super market and department store, selling groceries and general merchandize.  Increasing SKUs making it complicated to control the inventory and planning efficiently.  Thus today’s supply chains are complex compared to 19th and 20th century supply chains.

In order to avoid catastrophic business disruptions, organizations today are focusing on implementing enterprise wide supply chain risk management programs.  The emphasis is on prevention and control.  By creasing a visible and integrated supply chain, half of the job is done.  Visibility and integration delivers planning efficiencies and cost savings.  By proactively probing into inefficiencies using tools such as variance analysis, activity based costing will allow us to identify the problem early and that allows us to work on solution before it becomes unmanageable. Proactive behaviour and risk preventing programs also delivers low insurance costs. Insuring adequately is part of risk management program.  Supply Chain risk prevention program should be individually customized based on several dynamics.  The mantra to success is proactive thinking and establishing a visible and integrated supply chain.  Further, establishing enterprise wide supply chain risk management programs and educating all supply chain personnel about the importance of prevention is critical.  Organization could develop several strategies, but ultimate it is the people who should understand the importance and implement the same.

Cartoon Source: smallbusiness.podbean.com/2009/08/

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