Building a More Responsive, Intelligent and Demand-driven Supply Chain


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To improve supply chain performance, consumer goods companies must effectively respond to five key drivers: economic volatility, changing consumer preferences, regulatory compliance sustainability issues and technology advances.

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Building a More Responsive, Intelligent and Demand-driven Supply Chain

  1. 1. • Cognizant ReportsBuilding a More Responsive, Intelligentand Demand-Driven Consumer GoodsSupply Chain Executive Summary price multiples even if earnings per share and Achieving supply chain management excellence growth rates are similar between the companies.1 requires organizations to sit at the intersection of supply and demand and deliver exemplary Yet, leading up to the Great Recession, supply customer service without inadvertently allowing chains across many consumer goods sectors inventory to swell. That’s easier said than done. were not exceptionally nimble or flexible. Few In the intensively competitive PC industry, Dell, companies were able to adjust supply to declining for example, has deployed analytics to zoom demand, and even those that could were unable into “not normal” peaks and troughs to balance to show bottom-line improvements that were supply with demand. directly related to better use of capital. But Dell is an exception to the rule. Supply chain In addition, there are several external factors management practices have a long way to go in that influence the consumer goods supply chain helping organizations achieve this long-sought- (see Figure 1). These drivers, and their implica- after demand-driven equilibrium. In fact, it is tions, include the following: really only in the last decade or so that the direct link between supply chain management and Economic volatility. With globalization, corporate cash flow generation is well understood emerging economies are growing at a rela- or, more accurately, has received a broad level of tively faster pace than established markets. interest that can enable organizations to more Consumers in these markets are demand- effectively utilize precious capital. ing more, causing demand volatility, which requires increased supply chain flexibility. According to Gerry Marsh, a supply chain financial Consumer preference. Consumer tastes and consultant who works with some of the world’s preferences change at lightning speed and largest companies, businesses that are able to vary from region to region. Supply chains must use the supply chain to generate more cash flow be optimized to address these ever-changing than their competitors typically have higher stock preferences. cognizant reports | december 2011
  2. 2. Regulatory compliance. With the advent of offered chips that tracked their carbon foot- government initiatives such as the U.S. Food print along the supply chain. The company was Safety Modernization Act, it is mandatory for able to command a premium for this product importers to track and trace the entire supply line, until recession-induced pricing pressures chain for irregularities. This has benefits for emerged. customers but adds cost to the supply chain. Technological advances. This relates to the Sustainability. Consumers are showing exponential growth in basic computing power increased sensitivity to their carbon footprints. and the enormous quantities of data available They want to ensure that the products they to companies across the value chain. Compa- consume originate from a supply chain that is nies can make use of “big data” to optimize environmentally friendly. It has become ever their supply chains and enhance their profit- more critical to integrate sustainability objec- ability by intelligently responding to contin- tives with the broader supply chain objectives gencies. By analyzing big data, they can more of the organization. Before the downturn of easily create supply chains that are green, 2008, for instance, a UK semiconductor maker responsive, flexible and intelligent.Drivers of Change in CE Supply ChainsDrivers Implications RecommendationsEconomic volatility Worldwide demand has increased for Use flexible supply chains to enable regional Growth in emerging consumer goods products, as has the customization. markets need for regional customization. An example is Frito Lay, which has applied Pricing fluctuation a successful practice of developing Design agile supply chains that can cost-effectively of raw materials regionally popular snack food flavors offer regional customizations. in India to North America, where it now offers flavors developed to suit the palate of different areas of the U.S.2 Pressure has intensified on operating Accommodate price volatility by shifting costs. production to the segment of the supply chain with minimal price changes.Changing consumer Demand patterns are changing from Optimize the supply chain by using demand-sensingpreferences region to region. applications, which apply customer order flows, sales histories and shipping calendars. This enables organizations to more accurately forecast demand and address changing demand patterns.Regulatory compliance Adverse supplier responsibility reports Proactively embed regulatory aspects into the supply can damage company reputation. chain. This can lead to the generation of real-time alerts that identify non-compliance. The U.S. Food Safety Modernization Act stipulates that importers track and trace Use IT to track and trace the entire supply chain. everything in the entire supply chain. Use existing solutions to track the food supply chain from “farm to fork,” which helps consumer goods companies manage compliance at much reduced costs.Sustainability issues Health concerns, environmental awareness Integrate sustainability objectives within supply and food scares are increasing. chain strategies.Technology advances Legacy technologies help supply chains Enhance supply chains with “big data” to reduce latency respond with some inherent latency. and create more responsive supply chains.Figure 1Improving Supply Chain Management which is a 4% increase from June 2011. In fact, inThe U.S. consumer goods industry has seen March 2011, the monthly value of shipments hadrapid growth, despite minor hiccups, since June exceeded the pre-crisis peak level. As shipment2009. This is indicated by the growth of shipment volumes increase, timely fulfillment requires avalues from $120 billion to $130 billion3 in the more robust and efficient supply chain. In fact,intervening period (see Figure 2, next page). New the consumer goods industry is only as good asorders increased to $201.5 billion4 in July 2011, the various supply chains that support it. cognizant reports 2
  3. 3. Monthly Value of CG Shipments its operational complexity. Consumer goods 130 companies must respond with supply chains 125 equipped to accommodate vast differences in preference and demand elasticity. 120CG Shipments ($B) 115 Supply chains need to be flexible and agile; 110 one size does not fit all. The volatility of exchange rates and pricing of raw materials, 105 as well as wage increases across the value 100 chain, are wreaking havoc on supply chains. A CG company with a manufacturing facility Mar-11 Sep-10 Dec-10 Jun-10 Mar-10 Dec-07 Sep-09 Dec-09 Sep-08 Dec-08 Jun-09 Jun-08 Mar-09 Mar-08 in China and retailers and customers in the U.S., for example, could face problems if theSource: PricewaterhouseCoopers and Grocery ManufacturersAssociation. U.S. dollar were to decline against the Yuan, Figure 2 China’s currency. If this happened, the price of raw materials would rise, as would the cost of shipping, since fees collected by offshoreOne way consumer goods companies have shippers tend to be denominated in dollars.prospered is by dividing their supply chains This would put the supplier in serious jeop-into smaller, more manageable pieces. These ardy as a result of a significant reduction in itspieces are tailored to individual compo- operating margins. The decline in the U.S. dol-nents and stock keeping units (SKUs). Size lar would also increase wages in China in dollaris driven by scale; the smaller the piece, the terms, further reducing operating margins.more optimized the supply chain is likely tobe. This drives the need to create an “area of Organizations need to ensure their supply chainscomfort” for each SKU/group. For instance, a are flexible enough to avoid the aforementionedmultinational CG company was able to reduce issues. Building a more flexible supply chainits cost of goods sold by 15% by using efficiently around product segmentation is one proven waysegmented supply chains. to address these challenges.To improve supply chain performance, we believe A U.S.-based CG company, which had shifted allconsumer goods companies must effectively its manufacturing to China, faced this problem.respond to five key drivers: economic volatil- Its China plant was accustomed to producingity (growth in emerging markets and price fluc- the company’s entire range of products, as welltuations of raw materials), changing consumer as the underlying components. Amid an increasepreferences, regulatory compliance, sustainabil- in global demand volatility, customer complaintsity issues and technology advances. spiked as a result of product delivery delays. Some customers also experienced service issues,Economic volatility and forecasting was a problem, as well.Amid ongoing global economic turbulence, geo-graphically distributed demand, volatile exchange The company analyzed its portfolio of products torates and wage inflation in emerging economies, learn more about the volatility of demand for eachsupply chains are becoming exponentially more SKU, as well as the overall volume of each SKUcomplex. The following are two cases in point: produced every week. This analysis was performed using cluster analysis on proprietary software. With globalization and growth in emerg- The impact on operational performance of the ing markets, the demand for products can volatility in demand and volume of each SKU was come from any part of the world. This also also analyzed, using advanced regression models. creates a situation where the tastes and pref- erences of global customers can vary signifi- The company divided its products into four cat- cantly. Colgate-Palmolive,5 for example, has egories (see Figure 3, next page). For the high- operations spread over 57 facilities in 11 dif- volume and low-volatility products, it kept pro- ferent markets worldwide, which increases duction in China. For high-volume/high-volatility cognizant reports 3
  4. 4. Demand Analysis by SKUs Volume Huge and stable demand Huge and unstable demand Volatility Low and stable demand Low and unstable demandSource: Cognizant Research Center assessment of Boston Consulting Group calculationsFigure 3and low-volume/high-volatility products, produc- network7 (CDSN), a continuous replenishmenttion was shifted to the U.S. For low-volume/low- process (CRP) and efficient consumer responsevolatility products, it moved production to both (ECR). CDSN uses demand-data and exceptionthe U.S. and Mexico. This reduced the company’s events data to inform decisions on product man-cost of goods sold by 15%.6 It also improved prod- ufacturing and replenishments. CRP is a usage-uct quality and service levels. triggered, vendor managed inventory system that frees up cash at both the supplier and retailerThe above segmentation also increased the ends. ECR involves collecting sales data at thecompany’s supply chain velocity, which is defined retailer’s end and immediately replenishing stockas distance over time. If the time is reduced, using automated order generation. The desiredneedless to say, the velocity increases. The outcome of all these initiatives is a focusedend-to-end pipeline time was reduced by the supply chain effort, starting at the customer.reconfiguration of the production facilities. Further, performance consistency8 and value delivery form the bedrock of the supply chain.Changing Consumer PreferencesConsumers have become more demanding, which It has been observed that there is an exponen-creates more time-to-market pressure. They seek tial increase in cost savings as a percentage ofbetter levels of service delivery. A quick analysis potential production savings if more ordering isof the books of CG companies reveals that a few done through CRP (see Figure 4, next page). Incustomers are often responsible for the major- CRP, the focus is on the tradeoff between increas-ity of profits. Therefore, all customers cannot be ing inventory and reducing out-of-stocks. Inven-treated equally. Customers need to be segmented tory or out-of-stocks occur when the supply doesdepending on their profitability, and as a result, not respond to demand immediately. It involvessupply chains need to be altered and configured mapping of supply chain processes for productaccordingly. Demand profiles can be used to seg- and data flow, assessing current capability andment supply chains for better results. Customer addressing improvement should provide insights into demo-graphic trends that contribute to targeted adver- CDSNs have also demonstrated their valuetising and proportion management initiatives. in improving organizational profitability. P&G reported $1 billion in incremental sales, a nearlyProcter & Gamble is a leader in tracing consumer 50% reduction in inventory and 20% lowerpreferences back to its supply chain. P&G has supply chain costs, from the time it implementedcreated methodologies to aid and abet this CDSN in the mid-1990s to 2010.9analysis, such as a consumer-driven supply cognizant reports 4
  5. 5. Projected Manufacturing Cost suppliers in China was using a chemical that wasSavings using CRP Ordering harmful to employees on the production line.10 100%Savings as % of Potential Production Such findings can mar the reputation of any com- 80% pany. To prevent harm to employees and company 60% reputations, companies can use data centers 40% across the entire supply chain more effectively, to generate an alert when violations occur, analyze 20% the situation and decide on an appropriate action. 0% Feihe International, a leading producer and -20% distributor of premium infant formula, milk 0% 20% 40% 60% 80% 100% powder, soya bean, rice and walnut products Percent of Total Product Ordering via CRP in China, deployed an integrated food safetySource: William D. Peace Jr., “Supply Chain Management: solution, with the objective of increasingThe Real Wow Factor,” Feb. 3, 2011. customer confidence and improving quality. ThisFigure 4 solution enabled the company to trace foods, feeds, ingredients and food-producing animalsRegulatory Compliance through all stages of production, processingRecent years have witnessed a major spike in the and distribution. It also enhances traceabilitycontamination of packaged food and other con- across all stakeholders to significantly improvesumer products. The list is long, starting from quality, safety tracking, compliance monitoringmelamine-contaminated milk powder, lead-tainted and issue resolution. Such solutions are becom-toys and salmonella-containing peanuts. Some of ing increasingly important, as consumers becomethese tainted products resulted in thousands of more demanding and regulations, more strict.hospitalizations; a few deaths were also reported. Sustainability IssuesTherefore, regulations are important to assess the Consumers have become increasingly consciousimpact on human health by tracing all imported, of their carbon footprint and increasingly wantfully assembled goods and components that insight into the entire production process beforefactor into the entire U.S. supply chain. These they consume a product. Is the process green?regulations are also beginning to impact What is the environmental cost of product manu-how global supply chains are managed and facturing? Are there any negative externalitiesmonitored. Such regulations would add further in the entire process? Many CG companies hear— but necessary — costs to the supply chain. To about these issues directly from consumers andenable this, regulators would need voluminous from social media. The answer to these questionsinformation and analysis on compliance activi- is the use of green supply chains.ties. With today’s massive computing power, CGcompanies should be able to crunch data and Companies that follow green supply chain prac-present it to regulators in near real time. This tices proactively manage supplier environmentaldata analysis, with the ranges specified, should performance. Adoption of environmentally effi-be used to generate alerts whenever certain com- cient manufacturing methods, such as those usedpliance parameters are crossed, meaning that a by 3M, Procter & Gamble and Xerox, can helpregulatory mandate has been breached. reduce the carbon footprint. This involves using improved technology like carbon dioxide filtersConsumer goods companies are also required to reduce environmental impacts, more tightlyto publish a supplier responsibility report on managing product lifecycles and taking backtheir Web sites, consisting of labor and human expired products.rights violations, if any, employee health andsafety, environmental impacts and ethical The CG industry is increasing its efforts tobusiness practices, collected across the entire reduce the weight and increase the recyclabilitysupplier base. One such report published recently of products. The recycling11 rate of CG productby Apple disclosed that one of the company’s containers and packaging in the U.S. is 40%, cognizant reports 5
  6. 6. compared with the national recycling average capabilities of big-data supply chains. This dataof 34%. This not only reflects strong community would help identify consumer sentiment towardsupport for green manufacturing initiatives, but particular brands, as well as strong advocates forit also influences the existing regulatory regime, the company’s goods and services, who can bewherein new regulations are framed to increase positioned as product ambassadors. Companiesrecycling rates. can engage such ambassadors to help convey positive brand messaging far and wide via socialExploration of bio-technology-based products is media, thus reaching a wider pool of consumers.another step in greening the supply chain, as isdisposal of products when they have approached In this way, supply chains would becometheir “end of life.” Xerox has almost perfected demand-driven. To get there, processes needthis art,12 with an initiative that encourages to be designed from the outside-in, takingcustomers to return products to Xerox for demand-side factors into consideration. Muchrecycling, which the company then uses when of the data residing across the supply chain isremanufacturing machines, using strict specifica- hidden in isolated systems. The IT depart-tions of quality and performance.13 ment has little awareness, for instance, about sales and marketing data. If this data can beEuropean legislation also plays an important integrated across all business functions, thenrole in sustainability issues. The EU regula- new market opportunities can be identified, newtion on product quality and safety assurance product launches can be improved, and productrequires organizations to identify, measure and recalls can be avoided. It is necessary to gain topcontrol potential dangers related to food safety. management support to make this happen.Critical values must be defined that serve as abenchmark against which actual outcomes are With technological advances, sophisticated mod-measured. Systems such as integrated food els of data analysis become available for use bysafety solutions can cost-effectively deliver all companies. Multi-tiered causal analysis (MTCA)the product quality and safety information is one such model. MTCA integrates point-of-salerequired for decision-making. data and syndicated scanner panel data into the forecasting process to determine the effects ofTechnological Advances consumer demand on factory shipments. AnotherFor years, consumer goods companies have used causal model can be applied to predict POS data,enterprise resource planning (ERP) systems, using variables such as retail price, in-storeadvanced planning solutions (APS) and supply merchandising vehicles, sales promotions andchain execution (SCE) software, along with busi- competitive retail activities.ness intelligence tools. Although such systemsresult in more responsive supply chains, there is For most manufacturers, up to one-third ofa huge amount of latency involved, between data procured parts will be “new” each year, withcollection and operational action. only small variations from earlier versions.15 A predictive model can identify these varia-Data collection process optimization and trans- tions and use them to determine what the netparency across the supply chain is the future. price change should be, sparing manufacturersWith the advances in computing power and ubiq- unnecessary expense.uity of data, there is a case for big-data supplychains14 to reinvent the game. Such supply chains Importance of Supply Chain Riskwould not only be more responsive, but they Managementwould also operate more intelligently. The conver- Responding to these five drivers does not guar-gence of technologies such as mobile, geoloca- antee growth and survival. There is another settion and digital is a big driver for big-data supply of events that can interrupt the most efficient ofchains. E-commerce players are using new tech- supply chains: natural disasters. The frequency ofniques of capturing and combining structured weather-related natural disasters has increaseddata from smartphones and other digital devices, tremendously over the last 30 years, fromas well as unstructured data from social net- fewer than 400 annual events in 1980 to moreworking sites such as Facebook, to enhance the than 1,000 in 2008.16 Tsunamis, earthquakes cognizant reports 6
  7. 7. and hurricanes can damage supply chains, A poignant example of supply chain risk manage-making global supply chain crisis management a ment emerges from a fire in 2000 that destroyedkey item on the CG agenda. a New Mexico electronics component plant that supplies parts to both Nokia and Eriksson. SinceCG companies typically dispatch crisis teams Nokia had a risk management plan in place, itto monitor supply sources, find substitutes for was able to secure parts from another supplier.scarce inputs and assess potential risk factors. On the other hand, Eriksson faced overwhelmingAfter a crisis strikes, these teams are tasked with supply shortages that led to estimated losses offinding patterns in price volatility and demand $390 million that year.18fluctuations. But such contingencies are often notenough to avert disaster. Greater real-time supply chain visibility can offer data from both the supply side and the demandToyota was significantly impacted by the March side (point of sale, etc.) If supply and demand2011 Japanese earthquake and tsunami. As result, chain information is shared just-in-time, then athe auto maker is taking steps to implement bet- back-up plan can be put into effect in the eventter supply chain risk management practices. As of a natural disaster. This plan could includeShinichi Sasaki, Toyota Executive Vice President switching over to another supplier that maycommented, “We are making checks now to see be waiting in the wings, or it may mean keep-what needs to be done to enable recovery within ing inventory of repair components on-hand totwo weeks when the next one — expected in the quickly deal with a shortage caused by naturalcentral Tokai region — hits.”17 The company is disaster.19also working on a three-step program for riskmitigation, which includes standardizing auto Demand analysis can play a key role across Japanese manufacturers; asking Demand signal data should include inputs fromsuppliers further down the supply chain to hold disaster prediction models to ensure the plan isa few month’s worth of inventory for specialized comprehensive. The challenge arises from thecomponents; and mandating that each produc- ways and means of accessing and integrat-tion process operates independently in terms ing huge volumes of data. With scalable dataof parts procurement. warehouses and integration techniques that compress latency to near-zero wait times, theseTo mitigate the risk of natural disasters, supply challenges can be overcome. Deeper suppliermust be diversified. And if particular suppliers relationships can also minimize losses fromare critical, then companies should consider business disruptions caused by natural disasters.acquiring component suppliers.Footnotes “Global Commerce Management: The Executive Business Case for Operational Excellence,” Supply1 Chain Digest, 2005. “Frito-Lay Tastes from Home # Giveaway,” Cuzinlogic, Aug. 23, 2011. frito-lay-tastes-from-home-giveaway/3 “2011 Financial Performance Report: Thriving in a Connected World,” PricewaterhouseCoopers and Grocery Manufacturer’s Association, 2011. food-beverage-consumer-products-sector-issues.jhtml4 “Advance Report on Durable Goods Manufacturers’ Shipments, Inventories and Orders,” U.S. Census Bureau, October 2011. Peter C. Witton, “Colgate Rethinks a Supply Chain,” Outlook Journal, Accenture, 2000, No. 1. cognizant reports 7
  8. 8. 6 Yogesh Malik, Alex Niemeyer, Brian Ruwadi, “Building the Supply Chain of the Future,” McKinsey Quarterly, January 2011. future_27297 Dan Gilmore, “Supply Chain Lessons from Procter & Gamble,” Supply Chain Digest, Aug. 5, 2011. “Supply Chain Lessons from Procter & Gamble,” Supply Chain Digest.9 “Supply Chain Lessons from Procter & Gamble,” Supply Chain Digest.10 David Barboza, “Workers Sickened at Apple Supplier in China,” The New York Times, Feb. 22, 2011. “Reducing our Footprint: The Food, Beverage and Consumer Products Industry’s Progress in Sustainable Packaging,” Grocery Manufacturers Association, March 2011. file-manager/Sustainability/ReducingOurFootprint.pdf12 “Global Imaging: Can You Say ‘World of Uncertainty?’” Digital Printing Blog, March 2, 2010. “Xerox 2010 Report on Global Citizenship,” Xerox Corp., 2010. citizenship-2010/sustainability/waste-prevention.html14 Lora Cecere, “Trends I Am Watching,” Supply Chain Shaman Blog, Nov. 28, 2011. http://www.sup- “Supply Chain Analytics: How Hard Should You Squeeze?” Deloitte Debates, Deloitte Development LLC, 2010. deloitte-debates/cefe46d054aaa210VgnVCM3000001c56f00aRCRD.htm16 “After Japan’s Earthquake: Rethinking the Supply Chain,” The Boston Consulting Group, June 2011. Kevin Scarpati, “Toyota Eyes Quake-Proof Supply Chain,”, Sept. 6, 2011. “Supply Chain Risk Management: A Delicate Balancing Act,” IBM Global Business Services, 2008. “Preparing for the Worst: Natural Disasters and Supply Chain Risk Management,” CFO Research Services, CFO Publishing Corp., 2009. Fuloria, Ph.D, Cognizant Research CenterSubject Matter ExpertsRamji Mani, Raghu Ramamurthy and Ganesh Iyer are Principal Consultants with Cognizant BusinessConsulting, with extensive experience advising companies on supply chain management issues acrossthe consumer goods and manufacturing industries. cognizant reports 8
  9. 9. About CognizantCognizant (NASDAQ: CTSH) is a leading provider of information technology, consulting, and business process out-sourcing services. Cognizant’s single-minded passion is to dedicate our global technology and innovation know-how,our industry expertise and worldwide resources to working together with clients to make their businesses stronger.With over 50 global delivery centers and more than 130,000 employees as of September 30, 2011, we combine a uniqueglobal delivery model infused with a distinct culture of customer satisfaction. A member of the NASDAQ-100 Index andS&P 500 Index, Cognizant is a Forbes Global 2000 company and a member of the Fortune 1000 and is ranked amongthe top information technology companies in BusinessWeek’s Hot Growth and Top 50 Performers listings.Visit us online at for more information. World Headquarters European Headquarters India Operations Headquarters 500 Frank W. Burr Blvd. Haymarket House #5/535, Old Mahabalipuram Road Teaneck, NJ 07666 USA 28-29 Haymarket Okkiyam Pettai, Thoraipakkam Phone: +1 201 801 0233 London SW1Y 4SP UK Chennai, 600 096 India Fax: +1 201 801 0243 Phone: +44 (0) 20 7321 4888 Phone: +91 (0) 44 4209 6000 Toll Free: +1 888 937 3277 Fax: +44 (0) 20 7321 4890 Fax: +91 (0) 44 4209 6060 Email: Email: Email:©­­ Copyright 2011, Cognizant. All rights reserved. No part of this document may be reproduced, stored in a retrieval system, transmitted in any form or by anymeans, electronic, mechanical, photocopying, recording, or otherwise, without the express written permission from Cognizant. The information contained herein issubject to change without notice. All other trademarks mentioned herein are the property of their respective owners.