Winning Strategies Through Responsive Supply Chains: Efficient Customer Response

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1 Winning Strategies Through Responsive Supply Chains: Efficient Customer Response DINESH KUMAR ABSTRACT Efficient Customer Response (ECR) provides the framework for achieving goals of top-line sales growth with cost containment along with adding tremendous value to customers. It has been seen as one of the next generation strategic moves and paradigm shifts in supply chain management (SCM). This research project involved designing responsive supply chains for fast moving consumer goods (FMCG) industries. Key performance indicators (KPIs) were prioritised and mapped to the processes with the respective data. ECR models were developed for these role supply chain models based on supply chain common standards and lowest total logistics management cost. The benchmarked figures demonstrated the ECR readiness and leadership and gap analysis provided the roadmap for the implementation of ECR concepts and drivers. The effects of collaborative planning forecasting and replenishment (CFPR), value chain and supplier integration concepts on supply chains were simulated to reflect probable benefits. Key words: Efficient customer response; supply chains; fast moving consumer goods industry. 1. INTRODUCTION In customer centric markets, the shift from tough competition to winning collaboration and quickly responding to the customer s needs gives leverage to success to industries. Supply chains, always perceived as a complex entity, have been explored for betterment in this research work. In order to achieve higher efficiencies, supply chains have to be configured as per business drivers, which are identified by selecting critical performance parameters. These parameters are the handy tools for the supply chain practitioners to align their supply chain and to make the supply chain more responsive. This paper deals with understanding FMCG and defining the business drivers based on functional and structural attributes. FMCG industry responsive supply chain design was developed and analysed to explore opportunity areas. However, a similar model can be applicable to any other industry as well. 2. SUPPLY CHAIN DEFINITION Christopher et al 4 describes the supply chain as network of organisations that are involved, through upstream and downstream linkages, in the different processes and activities that produce value in the form of products and services in the hands of the ultimate customer. APICS 1 defines SCM as the planning, organising and controlling of supply chain activities while SCC 14 defines the supply chain activities as all customer interactions, from order entry through paid invoice; all product (physical material or service) transactions, from supplier s supplier to customer s customer; and all market interactions, from the understanding of aggregate demand to fulfilment of each order. In aggregation, these definitions explore supply chain as a seamless information and material flow between three entities; the customer, the company and the supplier. PAPER PRESENTED AT SAPICS 25TH ANNUAL CONFERENCE AND EXHIBITION 2 TO 4 JUNE 2003, SUN CITY, SOUTH AFRICA SAPICS 2003, ISBN

2 3. EFFICIENT CUSTOMER RESPONSE With the concepts taken from quick response (QR) and Efficient Consumer Response 2 6, Efficient Customer Response is a customised set of principles from the former for the FMCG industry. ECR streamlines the supply chain using several different business processes; cutting costs, maximising value and minimising inefficiency throughout the supply chain. ECR uses collaborative relationships, vertical integration and value chain management to achieve the above objectives. The ECR concepts and enablers are focused on the demand and supply management, similar to that of Efficient Consumer Response, with techniques for reduction in inventories and improving customer service levels. 4. FAST MOVING CONSUMER GOODS INDUSTRY One of the biggest and most complex supply chains; the FMCG industry has its unique sets of attributes, constraints and interfaces. Let us examine this industry in a little detail, in a series of supply chain activities PROCUREMENT PROCESS FMCG very often has a rather simple bill-of-materials. Instead of having myriads of suppliers, only a few suppliers are coordinated. Procurement activities mostly involve standard parts procurement, which are covered by either blanket or standard contracts. Sometimes, the area of concern is central procurement of materials for sub-contracted bodies. 4.2 PRODUCTION PROCESS Because of the simple nature of the production process (flow shops), it consists of few stages of operation performing on parallel lines. Automation helps in achieving shorter and more reliable lead times, even leads to less manual labour involvement (except the packing stage). Bottlenecks are handled efficiently with trained manual labour as capacity is limited and highly utilised. Sequence dependent setup times are quite relevant between product families incurring higher costs and loss in times, therefore batch production is inevitable. In some cases, non-core areas of production process are outsourced. 4.3 DISTRIBUTION PROCESS The goods are distributed via carrying & forwarding (C&F) agents and / or wholesalers / distributors to depots and retailers and finally to the customers. The channel often consists of three distribution stages. One or more factories supply to common a warehouse while large orders (OEM supplies) are directly shipped from the factory to the customers. Regional warehouses or depots mostly hold the inventories, while transhipment points, holding no inventories, add higher transportation costs due to higher transport frequency. The transportation activity is even sub-contracted to 3PL providers. One more function in the supply chain was explored because of its unique nature in FMCG industry, Sales. 4.4 SALES PROCESS The set of stock keeping units (SKUs) with low volume, weight and value per item, is really large in the make-to-stock (MTS) scenario. And, the targets are set (forecasted) based on the presence of the goods on the shelves. As products have a typically long life cycle, forecast is based on huge past data and sales are most of the times seasonal and influenced by promotions. The price of the goods and service levels really play a significant role in this industry. GOING BACK TO THE FUTURE 2

3 Based on the above analysis, the FMCG industry is characterised by functional attributes applicable to each partner, entity, member or location of supply chain and also structural attributes describing the structure of relations among its entities, for example, topography and integration. In order to reveal redundancies and weakness to improve the performance of the supply chain as a whole and to make it more responsive, the ECR model is used. Other methodologies like lean production paradigm and theory of constraints (TOC) are widely accepted approaches focused on product bottlenecks and buffer management. ECR also provides its practitioners with tools and methodologies that can enable them to be more proactive using reliable integrated and collaborative supply chain management. FUNCTIONAL ATTRIBUTES Attributes Products procured Sourcing type Organisation of production process Repetition of operations Distribution structure Pattern of delivery Availability of future demands Products life cycle Products sold Portion of service operations STRUCTURAL ATTRIBUTES Attributes Network structure Degree of globalisation Location of decoupling points Legal position Direction of coordination Type of information changed between partners Contents Standard Multiple Flow line Batch production Three stages Dynamic Forecasted Several years Standard Tangible goods Contents Mixture Several countries Delivery to order Intra-organisation Mixture Merely unlimited Table 1. Functional And Structural Attributes For The FMCG Industry 5. SUPPLY CHAIN PROCESSES BENCHMARKING The FMCG industry supply chain design, positioned as a strategic activity, a long term planning exercise was developed using a basic SCOR model. The methodology involved: Analyse the base of competition. Configure the supply chain. Align performance levels, practices and systems. Implement supply chain processes and systems. The process reference model was defined by capturing the as-is state of the processes and derived the definition of to-be state. The below levels and corresponding metrics were evolved under the heads of reliability, responsiveness, flexibility, cost and assets. The model includes standard performance metrics for measuring process performance. The world standard comparisons are done using numerous grades on various parameters as in Figure1. Appendix A contains the questionnaire designed to address the supply chain design and the pain areas to evolve the supply chain metrics for an organisation. SAPICS - THE PROFESSIONAL SUPPLY CHAIN SOCIETY 3

4 Figure 1: Performance Reference Model For FMCG Industry The KPIs selected for the various business processes are listed in Appendix B. These parameters checked the current status level and the readiness of the organisation for the responsive supply chain design. 3 The ECR concepts and enablers were employed on the raw supply chain design to simulate the probable effects and demonstrate the advantages for transitioning to a responsive supply chain. The optimisation function for overall supply chain was mapped through minimisation of total logistics 9, 12 management cost as: Where: TLMC SC FMC VMC FFOC VFOC WC CIC PIC ICOC TC TLMC = SC + FMC + VMC + FFOC + VFOC + WC + CIC + PIC + ICOC + TC (1) = Total logistics management cost = Supply cost = Fixed manufacturing cost = Variable manufacturing cost = Fixed facility operating cost = Variable facility operating cost = Warehousing cost = Cycle inventory cost = Pipeline inventory cost = Inventory carry over cost = Transportation cost GOING BACK TO THE FUTURE 4

5 When translated into mixed integer linear programming (MILP) equations resulted in by virtue of penalty functions, the objective function was defined as: ω (j) + r ϕ [ hi (j) ] Minimise (2 (2) as constrained multi-objective function. The relationship between financial performance indicators, logistical KPIs and ECR concepts and enablers form a complex network. The enabler KPI value network as defined for various ECR concepts and enablers showed the impact on the return on assets (ROA). For example, the ratio of the forecast on finished goods level to the actual sales quantity was used to measure the accuracy of the forecast on finished goods level. By increasing accuracy, inventory levels were lowered and order lead time reduced, resulting in less expenditure in terms of ROA. 6. ADDITIONAL MODELS Σ n j = 1 With the goal of competitiveness and customer service, the House of SCM was designed to reveal many facets of SCM. The integration of a network of organisations and coordination of information, material represented two main components of SCM 9. These were further broken down to building blocks of choice of partners, network organisations (for collaboration), leadership (aligning strategies of partners), process orientation (redesigning followed by a standardisation of the new processes) and advanced planning. Coordination and collaboration of flows was achieved through information and technology developments as well 8. The competitiveness achieved through competitive assets and competitive processes as conceptualised by House of SCM revealed the drawbacks of traditional planning systems. Elimination of silo philosophies, concurrent and continual planning lead to truly integrated and constrained planning 7. Collaborative Planning Forecasting and Replenishment (CPFR), an industry and technology-open process model was studied in context of the FMCG industry. CPFR leverages the best component of ECR and vendor managed inventory (VMI). It allows buyers, sellers and the carriers to come together, with reliability built at each delivery point in the supply chain, to exchange key information, provides visibility to status data and conformance to plan and then provides processes to jointly derive the plan itself. Value chain, an interlinked demand and supply chain, derives the seamless information movements, transforms the supply chain to a set of integrated systems and processes and thereby facilitates jointly driven business plans and execution against CPFR. The FMCG s value chain measured the values delivered to the shareholders at the end of a sales process. The supplier integration model catered to the needs of the relationships between seller and buyer at various levels in the supply chain for the fast information flows, reduced cycle time and reduced common inventory levels. The enabling technologies, like XML, were introduced to facilitate the information flows. 7. BENEFITS AND CONCLUSION Improving a process as complex as the supply chain can be daunting, as organisations are challenged with finding ways to meet ever-rising customer expectations at a manageable cost. To do so, businesses must identify which parts of the supply chain process are not competitive, understand which customer needs are not being met, establish improvement goals and rapidly implement necessary improvements. To efficiently deliver consumer value, organisations must reorient their business to make the customer a part of the main supply chain. Collaborative processes lead to further refinement in the processes, whereas value chain defines the business drivers. On the other end of the supply chain, suppliers are integrated well into the core planning system. SAPICS - THE PROFESSIONAL SUPPLY CHAIN SOCIETY 5

6 The supply chain design using ECR helped in finding the business drivers for the FMCG industry and benchmarked with the best practices to gear the supply chain. The project recommended the use of these business drivers to achieve Product and Cycle-time Excellence (PACE) by cutting down raw material and finished good inventories and cycle lead time. The drawbacks of traditional planning systems sets a goal for integrated supply chain management to optimise the total logistics management cost. APPENDIX A FMCG SUPPLY CHAIN PERFORMANCE METRICS This questionnaire tries to analyse the different areas in a supply chain where performance data can be gathered and analysed. Questions to the organisation are posed in the course of the analysis. Without base data from an organisation, it is difficult to establish metrics. Once the questions that have been posed are answered and a detailed organisational study has been done metrics can be defined. Therefore, only a guideline for establishing metrics is presented here. Metrics: Introduction Metrics should be defined such that: 1. The benefits to the organisation in quantitative / qualitative terms from metric improvement should be defined. This can be leading / lagging. This implies a very clearly defined metric and hence quantitative in nature. It also implies the cost structure for the entire procurement-manufacturingdistribution process is clear. 2. Data can be gathered in time and accurately and at low cost. 3. Action can be taken for deviations. This presupposes a history or a benchmark. 4. Responsibility is clearly identified for each metric. The process to be followed in case of metric deviation from history / benchmark should be clearly defined. If a metric does not meet the above criteria re-examine or discard the metric. It is very important to realise that any metric depends on the incentives to the personnel involved in the associated process. This is key in designing a good metric. Data gathering for any metric can be critical. It may be very expensive or time consuming to gather data for a certain metric. This has to be evaluated against the benefits. Organisational wide transparency or publishing of the results of the metrics should be present. Without such a process the incentives for improving the metrics will not be strong. Incentives linked to the metrics to be studied need to induce a positive reaction as a badly designed metric-incentive combination can lead to game playing and transferring responsibility. FMCG SUPPLY CHAINS FMCG supply chains are distribution intensive. While manufacturing is relatively simple, material movements across the supply chain become important. Sourcing decisions from the supplier side and deployment decisions at the depot / distributor side are important. Thus, lost sales are usually very important if one assumes surplus manufacturing capacity. The driver therefore will remain demand forecasting. Demand Forecasting Demand can be notoriously difficult to predict in such a market. A combination of causals such as seasonality, promotions and events with overcompensation of received forecasts from the distributors / retailers will lead to forecast inaccuracies. Tackling forecast inaccuracy should be the primary goal. This GOING BACK TO THE FUTURE 6

7 can decrease the usual distribution related problems of stock-outs, brand-sku mix errors and carrying cost escalation. How is data gathered for demand planning? Until what point in the supply chain is the data gathered? Distributor / Depot? As is obvious the further downstream, the historical sales and forecast demand data is gathered. In some companies, the manufacturer only pushes demand. In short, the Distributor / Depot is asked to sell a certain quantity. Is there any possibility to collect a forecast from the Distributor / Depot? If yes then what is the quality of this forecast? If this is relevant, it obviously improves the forecasting accuracy. Can the Distribution Centre (DC) influence the demand? How can this be measured? Are causals important in the industry? If yes, are they incorporated in the demand forecasting process? The accuracy of the forecasting process in terms of SKU mix at a location (DC / Depot) can become very important if the number of SKUs per product group is large. Inaccuracies will lead to large inter-depot transfers or loss of sales. In general, what is the pattern of the SKU sales? By volume? By revenue? Is the cost of marketing being included in evaluating the attractiveness of a SKU (brand)? How is the demand pattern along the channel? Is the so-called hockey stick effect present? The evaluation of the sales personnel performance is important. The sales personnel s incentives will determine their behaviour and hence the way the stock is pushed down the supply chain. Distribution Centres / Depots What are the incentives for the DC manager / owner to furnish a good forecast? Are there other sources of income for the DC apart from the commission? Does the sales tax / excise duty structure have any implication for the incentives to the DC owner? Is the geographical location of the DC / Depot structure optimal in terms of the demand pattern? Indicators like volume of inter-depot transfers, stock-outs, large inventory turns etc can be used here to determine the addition / deletion of a DC. What is the profile of the returns / damaged goods etc on a SKU / DCc / Depot basis? Where does the responsibility lie? Who is responsible for transportation? Are the transportation modes being used optimally? For example full truck loads, partial truck loads. Ideally, the master plan should plan this issue and hence metrics can be designed to evaluate and identify the efficiency of this process. Transportation costs are usually a significant percentage of the cost of goods sold. Can the transportation time be broken into measurable components? If yes, tracking these components and associating costs and responsibilities can provide a good way of evaluating the transportation process. Master Planning Is a combination of optimised long-term-short planning being performed? What is the freeze period for manufacturing? Planning horizon? Manufacturing lead times? Time taken to generate a long-term / short term plan? Planning frequency? Is the planning process iterative and has it got a demand-supply balancing step? If yes what drives the manufacturing constraints? Are there capacity constraints? If surplus capacity exists then is demand still being shorted? This indicates the sub-optimal allocation of forecasted demand to multiple (if any) manufacturing locations. SAPICS - THE PROFESSIONAL SUPPLY CHAIN SOCIETY 7

8 Again, what are the incentives for the production planner / master planner in avoiding shorting of demand? Is capacity utilisation a parameter in evaluating the production plan? Is it really required? The cost accounting basis of maximum capacity utilisation can lead to a poor plan if there exists a demand-supply balancing step in the planning process. Does the master planning process include the transportation costs? In case of contract manufacturing, is the contract manufacturer (CM) being evaluated for on-time performance? Are the CM s capacity constraints being considered in creating a master plan? What is the variance of the long-term / short plan with actual produced quantity? Can this be linked to poor demand planning? Are there frequent unplanned shifts? Is procurement a long lead-time process? Is the raw material perishable and hence manufacturing has to be a push process? General Issues Are roles and responsibilities for all the related supply chain functions defined clearly? Are personnel performing activities they are not supposed to or not performing activities they are supposed to? Creating metrics is a cross functional procedure. Therefore, it is very important that all the concerned personnel are educated about the process. Obviously top management support is important. Since a metric can highlight inefficiencies, it can be construed as threatening by the affected personnel. This opposition can be significant and the entire process can be derailed. APPENDIX B MEASURING AND EVALUATING FMCG SUPPLY CHAIN PERFORMANCE Customer Service Measures 1. Order fill rate 2. Line item fill rate 3. Quantity fill rate 4. Number of stock-outs 5. Customer satisfaction 6. Customer returns 7. Order track and trace performance 8. Customer disputes 9. Order enter accuracy 10. Order entry times. Logistics Related Measures 1. Inventory turns 2. On time delivery 3. Lines picked per hour GOING BACK TO THE FUTURE 8

9 4. Damaged shipments 5. Inventory accuracy 6. Delivery times 7. Warehouse utilisation 8. Obsolete inventory 9. Cost of carrying inventory 10. Transportation cost 11. Documentation accuracy 12. Container utilisation 13. In transit inventories 14. Warehousing costs. Extended Enterprise Measures 1. Total landed cost 2. Point of consumption product availability 3. Total supply chain inventory 4. Channel inventories 5. Percent of demand / supply on vendor managed inventory (VMI) 6. Percent of customers sharing forecasts 7. Percent of suppliers getting shared forecast 8. Internet activity to suppliers / customers 9. Percentage of automated tendering. Purchasing Related Measures 1. Material inventories 2. Supplier delivery performance 3. Material stock-outs 4. Material acquisition costs 5. Expediting activities. Cross Functional Measures 1. Forecast accuracy 2. New product time to market 3. New product time to first- make 4. Schedule changes 5. Planning process cycle time. SAPICS - THE PROFESSIONAL SUPPLY CHAIN SOCIETY 9

10 REFERENCES 1. American Production and Inventory Control Society, 2. Andersson, E, 1999 Efficient Consumer Response, Final Paper, Stockholm University. 3. Beamon, BM, 1999, Measuring Supply Chain Performance, International Journal of Operations and Production Management, 19(3), Christopher, M, 1998, Logistics and Supply Chain Management Strategies for Reducing Cost and Improving Service, 2nd ed, London et al. 5. Davis, T, 1993, Effective Supply Chain Management, Sloan Management Review, 34(4), Efficient Consumer Response, 7. Forrester, JW, 1958, Industrial Dynamics: A Major Breakthrough for Decision Makers, Harvard Business Review, 36(4), Gattrona, JL, 1998, Strategic Supply Chain Alignment: Best Practice in Supply Chain Management, Gower Publishing, London. 9. Hartmut, S and Kilger, K, 2000, Supply Chain Management and Advanced Planning, Hiedelberg. 10. Kaplan, RS and Norton, DP, 1992, The Balanced Scorecard Measures that Drive Performance, Harvard Business Review, 70(1), Kumar, D, 2002, CPG Industry: Supply Chain Drivers Using SCOR, Vision: The Journal of Business Perspective, MDI, Gurgaon, India. 12. Kumar, D, 2002, Lean Supply Chain Design for Inbound Supplies IIEs Lean Management Solution Conference, Seattle, Washington. 13. Stevens, G, 1989, Integrating the Supply Chain, International Journal of Physical Distribution and Materials Management, 19(1), Supply Chain Council (2000a), Homepage Towill, DR, 1997, The Seamless Supply Chain-predator s Strategic Advantage, International Journal of Technology Management, 13(1), ABOUT THE AUTHOR Dinesh Kumar has a Masters degree in Supply Chain Management and four years of project and research experience in the same field. Dinesh is currently working with Siemens South Africa. In the capacity of a manager, he has successfully executed numerous supply chain projects in Europe and the Asia Pacific region. Dinesh, a CPIM professional from APICS, has presented several papers on supply chain management in national and international forums. CONTACT dinesh.kumar@siemens.co.za Telephone GOING BACK TO THE FUTURE 10