Supply Chain Strategies in Rapid Changing Markets Miguel Suarez Vienna, November 27th 2013 Agenda 1. What does “supply chain strategy” mean? 2. What drives a supply chain strategy? 3. What are rapid changing markets? 4. Can a stable market turn into a rapid changing one? 5. How do companies face this challenge? 6. What are lessons to be taken? Supply Chain Strategies in Rapid Changing Markets 2 What is supply chain strategy? • Supply chain strategy is defined as the patterns of decisions related to supply chain activities, in accordance with the overall corporate competitive strategy. • Included in these activities are demand management, sourcing and procurement, capacity planning, warehouse and inventory management, transportation and distribution as well as the communication across the supply chain. • Main goal of a supply chain strategy is to maximize company's ability to meet customer demand at the lowest possible cost. • Changes to the supply chain strategy are, therefore, a necessary response to changes in customer demand and/or in the business environment. Supply Chain Strategies in Rapid Changing Markets 3 What drives a supply chain strategy? What do my customers need from the supply chain? How many relevant customer groups do I have? How many supply chain segments do I really need? Supply Chain Segment 1 Demand profile Supply Chain Segment 2 Service profile Supply Chain Segment n Source: Fisher (1997) Supply Chain Strategies in Rapid Changing Markets 4 What drives a supply chain strategy? Supply Uncertainty Within a supply chain segment Low (Stable Process) High (Evolving Process) Demand Uncertainty Low (Functional Products) High (Innovative Products) Efficient Supply Chains Responsive Supply Chains They supply predictable demand efficiently at the lowest possible cost. They respond quickly to unpredictable demand in order to minimize OoS and obsolete inventories. Risk-Hedging Supply Chains Agile Supply Chains Risk-hedging is generated by safety stocks, component standardization, multiple supply bases, etc. They are a combination of responsive and risk-hedging supply chain. Tight collaboration with suppliers and customers is key here. Source: Hau Lee (2002) Supply Chain Strategies in Rapid Changing Markets 5 What drives a supply chain strategy? Supplier Production Warehousing Strategy Efficient Responsive Risk-Hedging Agile Transport Retailer Consumer Capabilities Single sourcing MTS, Lean Central FTL, Rail, Ship Push regular demand VMI, consignment MTO, Extra capacity Postponement LTL, Truck, Air Pull impulsive demand Multiple sourcing Regional plants High safety stocks All Push regular demand Mix of responsive and risk-hedging Supply Chain Strategies in Rapid Changing Markets Impulsive demand 6 What are rapid changing markets? • Every market changes, some naturally very fast, others change only as a response of significant shifts in the business environment. • Established business models can disappear when their markets rapidly change if they fail to see, accept and respond to the change. • Two indicators exist to tell you when a trend is undeniable and will change your industry: – First is raw economics. – The other indicator is customer preference. • As a business leader, you have to not only recognize market changing trends but respond in the right time frame. You need to be ahead of the competition, yet keep early adopter risk low. Supply Chain Strategies in Rapid Changing Markets 7 Can a stable market turn into a rapid changing one? • Yes, unfortunately. • Changing economic conditions, new technologies, new competitors, globalization, etc. can trigger a sudden change of customer buying behavior. • The financial crisis of 2008 trigged the evolution of the “traditional consumer” into the “smart consumer”: – A smart consumer is agile and act quickly to price changes, with the ability of changing brands looking for the lowest price – A smart consumer is increasingly aware of all product aspects, from design, safety, origin up to their healthy, social and economic impact – A smart consumer demands simple, adding value products. Avoids extravagances. Supply Chain Strategies in Rapid Changing Markets 8 How do companies face this challenge? We don´t see the problem… Change? Why? We have been a very successful company for the last 20 years! We have seen this before, it is nothing. Supply Chain Strategies in Rapid Changing Markets We have a problem! We need to solve this quickly! Do whatever you need to do to solve it, but do not change our operations, just make them more efficient! 9 Case 1: SpiceCo Key Facts 20 markets in CEE Region Main production facility in Vienna, 12 subsidiaries and 8 distributors Country specific assortments. 5.000 SKU with long shelf lifes. Main customers are international retailer chains Raw material sourcing is done through traders Lead times: Sourcing 2 months, Production 2 weeks, NPD 9 months. Premium brand, low innovation rate, low marketing budget Supply Chain Strategies in Rapid Changing Markets 10 Case 1: SpiceCo The Challenge Supply Uncertainty Within a supply chain segment Low (Stable Process) High (Evolving Process) Demand Uncertainty Low (Functional Products) Efficient Risk-Hedging High (Innovative Products) Responsive Agile Source: Hau Lee (2002) After 2 years (2008-2009) of price increases, consumers started to buy heavily in discount chains. Retailers responded with short term promotions to loss of demand New brands entered the market, copying SpiceCo assortment to cheaper prices SpiceCo reacted with a significant number of innovations In 2011 forecast accuracy dropped from 85% to 55%. Out-of-stocks doubled. Stocks and obsoletes increased by 30%. Raw material shortages appeared as result of price speculation. Production and logistic costs increased on 7%. Supply Chain Strategies in Rapid Changing Markets 11 Case 1: SpiceCo The Solution Measures against higher supply uncertainty: • Contracting of 20% of critical raw material volumes directly in the countries of origin • Implementation of consignment stocks with traders for the remaining 80% of critical volumes • Introduction of VMI with selected packaging suppliers Measures against higher demand uncertainty: • Close involvement in the listing and merchandising of new products • Contracting of 15% additional production capacity at subcontractors Supply chain strategy changed. SpiceCo bought agility on the supply side for a higher cost (3%). It helped though to better serve a volatile market. Supply Chain Strategies in Rapid Changing Markets 12 Case 2: CrystalCo Key Facts 42 markets worldwide 7 production facilities, 2 DC in Liechtenstein and Singapore A global assortment with 1500 SKU, 66% basic items, 33% innovations with 12 and 6 month-shelf-lifes. 2500 mono-brand and 7500 multi-brand shops. Internet sales Lead times: Sourcing 2,5 months, Production 1,5 months, NPD 18 months. Premium brand, high marketing budget Supply Chain Strategies in Rapid Changing Markets 13 Case 2: CrystalCo The Challenge Supply Uncertainty Within a supply chain segment Demand Uncertainty Low (Functional Products) High (Innovative Products) Low (Stable Process) Efficient Responsive High (Evolving Process) Risk-Hedging Agile Source: Hau Lee (2002) After years of double digit growth, 2008 CrystalCo started to decelerate, losing market share Two global competitors, an Egyptian and a Czech company entered the market, with local assortments, more collections, more POS and cheaper prices. CrystalCo reacted by opening more own shops, exclusive design, higher prices and a wider global assortment. Forecasting accuracy became irrelevant, specially for novelty items. Cost of overstocks and obsoletes doubled up to 4% of turnover. Additional collections could not be implemented due to long lead times. Supply Chain Strategies in Rapid Changing Markets 14 Case 2: CrystalCo The Solution Definition of 2 supply chain segments: • Efficient supply chain for basic products • Responsive supply chain for novelty products Optimization measures for the efficient supply chain: • Clear selection criteria for “basics” and extension of shelf life to 24 months. • Decentralization of demand planning, logistics outsourcing for internet orders. Optimization measures for the responsive supply chain: • Central shop merchandising and push delivery • Modular design, component stocks and production outsourcing: shorter lead times Supply chain strategy remained for basic products and changed for novelties. CrystalCo focused on reducing lead times, enabling more collections, i.e. fresh products for the consumer. Supply Chain Strategies in Rapid Changing Markets 15 Lessons learned 1. There are 3 drivers of supply chain strategy: consumer requirements, demand uncertainty and supply uncertainty 2. A significant change of these drivers can be only addressed by a change of your supply chain strategy. Other solutions only delay the necessary change, deteriorating company's financial performance and consumer perception 3. There are 4 basic types of supply chain strategy: efficient, responsive, risk-hedging and agile 4. Different customer groups require different supply chain segments with the appropriate strategies. 5. Build up a new supply chain strategy takes years. Start now! Supply Chain Strategies in Rapid Changing Markets 16