Supply Chain for the Future

Posted in Operations & IT Articles, Total Reads: 2983 , Published on 06 July 2011
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With increase in global uncertainty and business complexity, existing manufacturing and supply chain strategies of companies are at greater risk.  Companies which are better able to cope with the fast changing supply chain dynamics will be successful in the coming times. Financial markets are so intertwined that crisis in any country produces shock effects across the world. Uncertainty in the emerging markets like China, Vietnam, and India etc puts pressure on the supply chain as many companies have shifted their manufacturing units to these low cost countries. Increasing appetite of emerging economies for commodities like iron ore etc is boosting global prices making it difficult to configure supply chain assets. Rising labor costs in the developing world is also causing restrain on the supply chain network.  Sometime back there was overnight increase of 20% increase in labor wages in some of the Chinese cities. Similar instances have been observed in countries like Bangladesh, Cambodia, and Vietnam etc.

Supply Chain for Future

Manufacturing and supply chain planners must also deal with rising complexity. As the technology is advancing, more and more products and its variants are getting into the market.  Number of SKUs is also increasing making the supply chain more complex.  The challenge for the companies is to optimize their supply chain for all circumstances.  Companies these days are splintering their supply chain to smaller supply chain to reduce complexity, save money and serve their customers better.  With varying customer demand, and hundreds of new SKUs, it has become really difficult for the companies to manage forecasting.  This results into service related problems leading to customer dissatisfaction.  For a global company, if all the manufacturing capacity is located in China, then it really becomes difficult to serve the customers in volatile demand scenario as the lead time in the supply chain is more and forecasting is difficult. It is imperative for the companies to analyze their product along two dimensions: the volatility of demand for each SKU it sold and the overall volume of SKUs produced per week. The resulting matrix can help companies fix their supply chain in such a manner that they are able to better serve their customers.

Consider an example of leading consumer durable company from United States which has its manufacturing capacity in china. This company analyzed its demand & volume and found out that around 50% of their profits come from 10% of SKU along high volume and low volatility dimension area while 30% of the profits come from 25% of SKUs along low volume low volatility dimension. Low volume high volatility contributes to 15% of the profits from 65% of the SKUs. For high-volume products with relatively stable demand, the company kept the sourcing and production in China. Low-volume, low-demand-volatility SKUs were divided between the United States and Mexico. And high- and low-volume ones with volatile demand were assigned to the United States. It made economic sense for the low-volume products to be manufactured in United States because the company could get them to market much faster, minimize lost sales, and keep inventories down for many low-volume SKUs. Now, forecasting can be easily done for high volume stable products from China as the high volatile products are not considered while forecasting which used to introduce noise in the forecasting process. For products manufactured in United States, company can directly manufacture to customer orders and no forecasting is required.

Thus in order to decide the how many splinters to introduce, it is essential to analyze the volatility of customer demand for a given product line against historical production volumes and to compare the results against the total landed cost for different production locations. This strategy to divide the supply chain allows the companies to reduce complexity manage it better because operational assets can be focused on tasks they’re best equipped to handle. Having multiple supply chain networks also reduces risk of dependence on single source.

In the coming years, only those companies who manage this complexity in supply chain will be able to withstand the uncertainties in the global environment.


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