Responsive Supply Chains - TRANSLOG Connect Congress

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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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.
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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!
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