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An insight into how to manage a consumer goods supply chain in an environment of ever increasing variety of end products.
LEVERAGINGTHE POTENTIALVCG employs the Theory of Constraints’ philosophy to bring about quantumjump in performance of organizations in its target industry clusters. Automobile & Consumer Retail Engineering Equipment Auto Components Goods & Construction Manufacturing www.vectorconsulting.in ©2012 Vector Consulting Group. All Rights Reserved.
TOC InsightsDealing with Variety in the Supply ChainSJSOM, 2 Sep202, Orion Business Park, Kapurwadi Naka, Phone: +91 22 2589 5896 Email: firstname.lastname@example.orgGhodbunder Road, Thane (West) – 400601 Fax: +91 22 2589 5897 Web: www.vectorconsulting.in ©2012 Vector Consulting Group. All Rights Reserved. 2
Changing Paradigm ! 20 Shades of Black To match your finer tastes The New Pareto: 20% of products contribute only 40-50% of sales ©2012 Vector Consulting Group. All Rights Reserved. 3
What is driving the variety explosion ?Marketing & Sales speak :• “Customers are continuously looking for more variety”• “Competition is increasing range, we can’t be left behind”• “We don’t have products for so many customer segments”• “In order to grow, we must bring out new products continuously”• “Customer tastes are constantly changing, we need to match the same”There is a constant drive to segment markets and bring out new products. Looks Perfectly Fine !! Why is it that in spite of growing range, companies are not growing, or in some cases de-growing ? ©2012 Vector Consulting Group. All Rights Reserved. 4
Flawed Assumptions !Any Strategy leads to Desired Results, only if the underlying assumptions are correct. Let us check the assumptions ! ©2012 Vector Consulting Group. All Rights Reserved. 5
Flawed Assumption # 1Customers are able to perceive difference between varieties.Increase in variety creates new niche segments,leading to increase in sales.However, it follows the law of diminishingreturns. Thus after a point, increase in varietydoes more damage that benefit.Our experience shows that, in most of theCompanies, Performance measurements are abigger driver of New product introduction, thanthe need to tap newer customer segments.Discontinuation of Products is perceived to be risky (Hope that it might Click infuture!) and hence is generally delayed. ©2012 Vector Consulting Group. All Rights Reserved. 6
Flawed Assumption # 2Company has capability to expose the entire range to the customers Range accessible Company’s Range to Customer Our experience has shown that the range accessible to customers is sometimes as low as 20% of the Company’s range. The Range accessible to Customer is limited by the following: 1. The Display Space is limited 2. In a forecast driven environment, the distributors/ dealers limit the range to maintain ROI 3. In a supply chain with high inventory, lead time for a new product to reach the display is very high ©2012 Vector Consulting Group. All Rights Reserved. 7
Flawed Assumption # 3Company has capability to manage the bigger range Most supply chains are characterized by: 1. Production and distribution on the basis of forecast Forecast accuracy deteriorates with increase in Range. It leads to • Stock Outs = Loss of Sale • Excesses = Discount = Loss of profit 2. Push Sales Disaggregated variety when pushed downstream, leads to deterioration of Inventory turns • Limits company’s ability to buy more (increases stock outs) • Increase in markdowns Both of the above factors can lower the inventory turns as well as increase the markdowns, bringing the company to its knees ©2012 Vector Consulting Group. All Rights Reserved. 8
Impact on Supply ChainWhenever,Company Range > What customer can differentiate or > What Company can expose to the customerThe Demand gets disaggregated without any positive impact on Sales, Leading to the“Long Tail” Effect.Long tail can increase setups in production to the extent that it impacts reliability of Heads.Long tail when pushed lower in distribution chain, magnifies the problem of Stock-outs andExcesses. ©2012 Vector Consulting Group. All Rights Reserved. 9
The Conflict. Assumptions: Company is able to expose entire range to customer Customer is able to differentiate variety Offer More variety Increase to customers Company’s Range Grow ConflictProfitably Ensure availability Limit Company’s of existing range range Assumptions: Long tail creates fluctuating demand Long tail may increase setups and hence can result in stock outs. Long tail deteriorates inventory turns and hence company’s capability to buy/produce. If Supply chain is unreliable, channel partners restrict range offering. ©2012 Vector Consulting Group. All Rights Reserved. 10
Solution Element #1 Forecast Accuracy Days of Inventory Stock Outs Excesses Plant Distributor RetailerWith increasing Range, forecasting tools will fail miserably.Pushing material downstream multiplies the damaging impact of disaggregation.What is the way out?Switch from “Forecast and Push based supply chain” to “Replenishment based onConsumption”In environments of high variety, Fast Replenishment alone is not enough, You needFast Replacement. ©2012 Vector Consulting Group. All Rights Reserved. 11
Solution Element #2Designers / marketers under pressure to bring out new productsThere is no scientific way to determine, when increase in variety becomesirrelevant.Align Design with Supply chain strategyElement 1 :• Limit boundary of creativity • Limiting the pallet of designs from divergent point of “V” or “T” Plant • Can create additional designs, but will be available with Higher lead time • Sheer awareness of supply chain impact helps designers make effective choicesElement 2 :• Differential Lead times • Different stocking points in supply chain hierarchy • Leads to aggregation of demand into ‘Meaningful’ variety ©2012 Vector Consulting Group. All Rights Reserved. 12
Solution Element #3Managing Merchandise to Improve Company’s capability to display moreThe Buying experience usually involves 3 components for decision making:1. Look : Color, dimensions etc2. Feel : Finish, Texture etc3. Sample/Functionality : test drive, read few pages of a book etcGenerally the varieties have aggregation in one or two of the above, and most ofvariety is created in one of the above components.E.g. In Beds, Functionality features are limited (4-5 types), but variety is created byLook and Feel (40-50 types)By Displaying 4-5 type of bed types and All variants of headboards, it is possible todisplay entire range of company in limited display. ©2012 Vector Consulting Group. All Rights Reserved. 13
The Conflict resolved Offer More variety to customers Grow • Pull systemProfitably • Look and Feel Tools • Bounded creativity Ensure availability of existing range ©2012 Vector Consulting Group. All Rights Reserved. 14
Key LearningsSTP without considering Company’s Constraints can lead to significant erosion of sales &profitsCompany Must Exploit (maximize sales from current range) before Elevating (Addingnew range)Any SKU which a customer cannot access, is a range only in the mind of marketer/designer. ©2012 Vector Consulting Group. All Rights Reserved. 15
:) Thank You ©2012 Vector Consulting Group. All Rights Reserved. ©2012 Vector Consulting Group. All Rights Reserved.