Tuesday, December 15, 2009

The Push Pull Interface: the Optimal Point

A while ago, we talked about the basic characteristics of push or pull based supply chains. We also discussed how push or pull concept should be interpreted within a single supply chain as well as across multiple supply chains supporting the product life cycle from raw material to finished goods to purchase by a customer.

All that raises a question: how can one decide what will be the best point in the supply chain where the order-inventory interface must be located? Just to refresh, the order-inventory interface is the point in the supply chain where the demand fulfillment process changes from “fulfilling from inventory” to “fulfilling from orders”. While the article on considerations for push or pull provided a good view of attributes to be considered, they do not necessarily help in deciding where in supply chain the nature of demand fulfillment must change from inventory to orders. This is the question, I wish to address today in this article.

To answer the question, let us establish some basic facts. Supply chain for this discussion is represented as a chain of activities and nodes connecting supply with demand. Keeping with the convention, we represent the “supply” end upstream of the “demand” end. The Order-Inventory interface can then be located anywhere along the length of the supply chain. It can be closer to the demand end or closer to supply end or mid-way between the two. The question we are trying to answer is how to objectively decide the optimal point where this should be located for optimal supply chain performance.

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Next, let us explore through logic what happens when the order-inventory (OI) interface point moves along the supply chain? We will explore the impact of such movement from the point of what happens to demand as this point moves along the chain. For example, if we move the order-inventory (OI) interface closer to demand, it follows logically that the demand fulfillment lead-time will be lowest, while the flexibility to customize products to the order will be lowest as all demand is fulfilled from available stock.

The following table summarizes the observations.

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In Managing the Fickle: The True Nature of Supply Chains, we identified that a supply chain’s primary purpose in life was to combat variability in supply, demand, and lead-time. We had also established that supply chains achieve this objective by creating and managing buffers. Buffers can exist for inventory, resources, and time. The observations in the table above enable us to see how the movement of OI point along the supply chain affects these buffers. As the OI point moves closer to the supply end, the supply-chain’s ability to keep inventory buffers reduces, therefore it must compensate by establishing larger resource and time buffers to accommodate demand variance. Conversely, when the OI point moves closer to the demand end, the supply-chain’s ability to keep inventory buffers is enhanced, therefore it can make do with smaller resource and time buffers. Of course, the supply chains must maintain the smallest possible buffers to provide the desired cost performance for the target service levels. This is shown in the picture below.

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The point of evaluating the impact of moving OI point on the supply chain’s ability to create and manage buffers is simple. It allows us to see how supply chains will react to such a change and provides us with an objective view of how supply chain performance may get affected as a result. Higher inventories provide shorter fulfillment time, but come at the cost of higher carrying costs and obsolescence costs. On the other hand, higher inventories generally allow mass-production, thus increasing the resource utilization and reducing the cost of resource buffers because they can now be planned and utilized well to their capacity.

As creation and maintenance of all buffers needs capital, eventually the decision to place the OI point at a certain point in the supply chain gets reduced to balancing the cost of these buffers against the cost of stock-outs and lost sales revenue. If the costs of maintaining inventory is relatively higher when compared to the costs of resources and time, then the equation will tilt in favor of the OI point towards the supply side of the chain. On the other hand, when cost of inventory is low compared to the costs of resources and time, then the equation will favor moving the OI point closer to demand. Of course, these considerations are in addition to the basic nature of the products and demand which must determine the suitability of such analysis. But assuming that a supply chain type has been established (for example, commodities versus personalized versus engineered products), this analysis can help in establishing which echelon in the supply chain is the best for placing the OI point.

Here is a summary of the opposing costs to balance when making decisions about the OI point:

  • Costs related to creation and maintenance of Inventory buffers: Balance the costs of maintaining inventory with the costs of obsolescence and clearance of unwanted/excess inventory against the cost of stock-outs and lost sales.
  • Costs related to creation and maintenance of Resource buffers: Balance the costs of maintaining resource flexibility (ramping up/down as required, adding sub-contract capacity at short notice, etc.) against the cost of stock-outs and lost sales if resources cannot be ramped up to meet demand.
  • Costs related to creation and maintenance of Time buffers: Balance the costs of maintaining time buffers (cost of extra capital to maintain additional operations and inventory to hedge against variability in lead-time) against the cost of stock-outs and lost sales.

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These costs vary at every echelon of the supply chain network. If they can be modeled and evaluated at various potential echelons of the supply chain, the location for the OI interface can be determined in a more objective fashion. While some of these costs are hard to determine, judicious approximation would be better than making a decision that is completely subjective. Most likely, the optimal echelons will differ by the product’s demand and supply characteristics. Fast moving products will require inventories closer to the end-demand, while the inventories of the slow-moving products can be moved upstream. Similarly, inventories for commodities will be closer downstream, while personalized products must be maintained upstream and typically as sub-assemblies that can be configured to final customer demand.

© Vivek Sehgal, 2009, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

Friday, December 11, 2009

Book Review: Enterprise SCM

Jan Husdal has since 2005 been a Researcher with the Transport Economics Research Group at Møreforsking Molde/Molde Research Institute in Molde, Norway, where he is engaged in transport modelling, and cost-benefit evaluations of infrastructure projects.

Jan routinely reviews supply chain books. Though supply chain risk is his specialization, he has a deep understanding of the supply chains in general. Jan recently took time out to review my book and write a detailed review on his site, which I would like to share.

Click here to read Jan's review of my book: Book Review: Enterprise SCM

Clisk here to read more about Jan: About Jan Husdal « husdal.com

Commerce says Retail Sales up by 1.2% Without Autos

Well, that is really good news. On Nov. 13, I wrote that there is a very good likelihood that retail holiday sales this year will be better this year than last. This is a view not shared by NRF, though I would stick to it. That has been the trend so far and I think it is going to continue through the rest of the season. When compared to November, 2008, this month’s numbers are up by 1.9%! Click here for the news release from the bureau.

The best part is that while the total retail sales rose by 1.3%, most of the rise happens to be the real retail, as in without the autos. Autos did not contribute heavily to this number so that the retail without autos rose 1.2%. However, autos sales rose as well by 2.0% (6.7% over November 2008 numbers).

All in all, a definite up-trend.

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Tuesday, December 8, 2009

Strategy Alignment: Poor State of Affairs

While there is a lot of common sense talk about aligning strategies, it seems that it is easier said than done. I am sure that all of us have across situations in our careers where we have gone through this conflict ourselves – when the business strategy did not quite align with the IT strategy. The results range from less than desirable to disastrous.

Now a survey by McKinsey finds that the situation is continuing (see exhibit 6 in the linked article). That is despite the recession. This is surprising and disappointing because such market pressures generally lead to the kind of organizational transformations that drive greater alignment to increase the efficiency of capital investments. The survey found that only 16% of the 444 respondents agreed their business and IT strategies were integrated and affected each other. Other 19% found no relationship between their business and IT strategies.

Misaligned business and IT strategy can lead to several undesirable consequences including the following:

  • Misdirected capital investments: Since almost all functional capabilities are enabled through technology, misalignments between the business and IT strategies leads to capital investments that are simply not compliant with the long term IT strategy and therefore just not sustainable. Examples of such investments may be technology platforms that are obsolete, not mainstream, require skills that are not abundantly available or unavailable in-house, or are not supported adequately by the suppliers. However, once established, such technologies must be maintained at the cost of business continuity or replaced with more compliant solutions at the cost of additional investments.
  • Unsustainable technology solutions: When business and IT strategies are independent of each other, the resulting technology solutions may be unsustainable as they simply do not support any direct business requirements and therefore do not add value.
  • Siloed solutions: Misaligned strategies typically result in siloed solutions that do not adequately support business processes. Integration, when possible adds complexity, cost, and ongoing maintenance to the solutions.
  • Organizational friction: When the business and IT strategies are established in isolation from each other, the resulting conflict affects the business and technology solution deployment teams, reducing the organizational efficiency, affecting project timelines and costs.
  • Cost and functionality compromises: As the misalignment between the business and IT strategies inevitably leads to multiplicity of solutions, it adds to the cost of technology, complexity of solution landscape, multiple vendor relationships, and sometimes compromised business functionality if the solutions cannot be integrated effectively.

Getting the strategies aligned is not hard, but it does require an organizational resolve to do that. Executive understanding helps and is a critical factor in bringing together the two teams in business and technology. It is tough, but worth every penny invested in the effort!

© Vivek Sehgal, 2009, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

Monday, December 7, 2009

Managing the Fickle: The True Nature of Supply Chains

The essential nature of the supply chains is to master the change, the variable, the fickle. Quoting the compact oxford dictionary:

variable

adjective 1 not consistent or having a fixed pattern; liable to vary. 2 able to be changed or adapted. 3 Mathematics (of a quantity) able to assume different numerical values.

noun 1 a variable element, feature, or quantity. 2 Astronomy a star whose brightness changes, either regularly or irregularly. 3 (variables) the region of light, variable winds to the north of the NE trade winds or (in the southern hemisphere) between the SE trade winds and the westerlies.

— DERIVATIVES variability noun variably adverb.

Variability or statistical variability or dispersion is the spread of a variable. Supply chains have a lot of variables. And supply chain management is essentially the management of the variability of these variables while maintaining predictably stable business operations of a firm. There are three main variables to manage: demand, supply, and lead-times. These are the three independently changing variables that supply chain managers cannot directly control. All supply chain processes are designed to manage these three variables with the objective of optimizing stability of operations, reducing the cost of changes (or volatility), and increasing the efficiency of asset/resource utilization in spite of the changes.

How do supply chains manage variability? Through buffers. In the supply chain context, the buffers provide the ability to absorb the shocks in the supply chain due to changes in these variables. Again, there are three types of buffers that a supply chain can create. These are inventory, resource, and time. Creating and maintaining these buffers costs significant amount of capital, but provides hedging against the variables of demand, supply and lead-time.

An Optimized Supply Chain

Supply chain management, then, essentially means managing the variability in demand, supply, and lead-time through creation and maintenance of buffers using inventory, resource, and time. Supply chain optimization is the science of optimizing the costs of maintaining these buffers for the best supply chain performance that could mean minimizing the volatility or cost operations, or maximizing the utilization of assets or resources.

© Vivek Sehgal, 2009, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

Thursday, December 3, 2009

Who is Your CFO’s Best Friend?

Look at your P&L closely and you will find it in the first two lines. After sales is the cost of sales. And their difference is the gross profit. So what is the big deal? Big deal is that cost of sales determines the gross profit and gross profit is the starting point for the famous bottom-line.

Cost of sales has aliases. It may be called cost of goods sold, cost of products, cost of products sold or something else similar in connotation. That is not important. What is important is what constitutes the cost of sales. Here are some explanations from the annual reports:

  • From P&G’s annual report 2009: “Cost of products sold is primarily comprised of direct materials and supplies consumed in the manufacture of product, as well as manufacturing labor, depreciation expense and direct overhead expense necessary to acquire and convert the purchased materials and supplies into finished product. Cost of products sold also includes the cost to distribute products to customers, inbound freight costs, internal transfer costs, warehousing costs and other shipping and handling activity.”
  • From Wal-mart’s annual report 2009: “Cost of sales includes actual product cost, the cost of transportation to the Company’s warehouses, stores and clubs from suppliers, the cost of transportation from the Company’s warehouses to the stores and clubs and the cost of warehousing for our Sam’s Club segment.”
  • From Target’s annual report 2009: “Total cost of products sold including Freight expenses associated with moving merchandise from our vendors to our distribution centers and our retail stores, and among our distribution and retail facilities; Vendor income that is not reimbursement of specific, incremental and identifiable costs; Inventory shrink, Markdowns, Outbound shipping and handling expenses associated with sales to our guests, Terms cash discount, Distribution center costs, including compensation and benefits costs.”

Typically, almost all the components of cost of goods sold (COGS) fall within the scope of supply chain processes. COGS also makes the largest part of company’s costs. The COGS compares to 50% of 2009 sales for P&G, 76% for Wal-mart, and 70% of sales at Target for FY2009. Therefore, if you had to start looking at reducing costs, COGS fits the bill nicely. This is the largest pie of expense in an organization and even a small reduction in this will naturally generate a large impact on the firm’s bottom-line. Following are some of most common expenses included in the COGS and the supply chain process that can potentially optimize it.

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So who is your CFO’s best friend? If the answer is chief supply chain officer (CSCO), you are already ahead of the pack. However, AMR reports that from about 90 organizations that they surveyed, only 38% of respondents identified a chief supply chain officer (CSCO) or equivalent executive vice president as their highest ranking official. Furthermore, of the 38% that stated they had a CSCO or equivalent, only 33% of them report directly to the CEO. This means only about 12.5% of the organizations they surveyed have a CSCO that reports directly to the CEO. (Read the AMR article: Driving Supply Chain Transformation Through the Chief Supply Chain Officer).

Perhaps, time to rethink the organization!

© Vivek Sehgal, 2009, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

Clicks Win Over Bricks

Here are the final tallies for the holiday retail sales so far:

Black Friday Weekend Sales Rise 1.6 Percent as Compared to 2008 (links back to the ShopperTrak’s news article).

  • Black Friday weekend retail sales increased a marginal 1.6 percent to a total of $20.5B.
  • Black Friday began the season with a large spend as retail sales totaled $10.66 billion, equaling just a 0.5 percent increase over Black Friday 2008 but representing the largest dollar amount ever spent on the day.
  • Black Saturday posted a slight 0.9 percent rise over last year with $6.107 billion spent.
  • Sunday retail sales increased a seemingly impressive 5.2 percent at $3.73 billion.

Online Cyber Monday sales up 5 pct and number of Web shoppers up 6 percent (links back to the Reuters story).

  • Online shoppers spent 5 percent more this Cyber Monday than they did last year.
  • More consumers flocked to the Web for holiday shopping though they spent slightly less per person.
  • Monday, Nov. 30 was the strongest Cyber Monday in terms of sales since the term was coined five years ago.

Now, some more data from the US Census Bureau: when you compare the rates of decline and rise for total retail and online retail, the online retail help up much better that the total retail. The chart below shows the quarterly change year-over-year for the two time-series. Focus specifically on the data from Q3-2008, the declines in the online retail have been smaller and the improvements in online retail stronger. Few points of note:

  • Online retail seems to have started growing again at growth rates stronger than the total retail. This is not surprising since that has been the trend all along with few exceptions during the recent recession.
  • Notice the trend of the green-line in the second chart – it shows the E-commerce as percent of total retail has a positive trend. The trend has held even during the last two years.

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Lessons for retailers:

  • Build your online stores if you have not yet!
  • When you do, pay attention to the bold new world of multi-channel retailing that you can leverage as a conventional retailer!

© Vivek Sehgal, 2009, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

Tuesday, December 1, 2009

Can Your Supply Chain do That?

What are the objectives of your supply chain management? What should they be? In short, the following four capture all that an optimally run supply chain can achieve.

  1. Cost (Lean): The supply chain management processes cover a wide scope of execution operations from managing replenishment orders to transportation and warehousing activities. Depending on the industry, the percentage of these operational costs towards the cost of goods sold can be anywhere up to 20%. Following the processes based on supply chain best practices can directly reduce these costs through better planning, optimization, and execution. Some of the supply chain planning processes also impact costs such as inventory planning. Well planned inventories can not only reduce the amount of inventory in the system thus reducing operational cash-flow requirements, they can also reduce costs by reducing obsolescence, having the right product at the right place, and by reducing the need for clearance pricing. In fact, all supply chain processes either directly impact the COGS or impact the operating cash requirements. And, in most cases, the impact of a better deployed process, automation, or optimization can be specifically calculated for obtaining financial return on the investments made.
  2. Flexibility (Agile): This is the second objective for the supply chain processes. Agility provides a supply chain the capability to react to the changes in demand or supply in an optimal fashion so as to maintain the service-levels and therefore, the top-line revenues. There are several processes that create such agility in the supply chains: cross-docking made famous by Wal-mart is one of them. Ability to push the selection of the destination of the inventory-in-transit to the last possible minute is the underlying concept that enables agility in a flow-based supply chain. This can manifest itself through several possible processes such as consolidation and de-consolidation centers, regional and local distribution centers, cross-docking and so on. Other processes that add to the capability of agility are sourcing and replenishment where the agility can be achieved through better visibility and collaboration among the partners in the inter-company supply chains.
  3. Risk: Supply chains must manage the uncertainties beyond the volatility of demand and supplies. Risk is primarily the disruption in the supply chain that is not attributable to the natural demand/supply volatility. While the probability of such disruptions is low, their consequences remain disastrous. Risk increases as the supply chains become longer, global, and need several independent corporate partners. Supply chains typically manage risk through better collaboration, visibility, and finally by developing backup plans for alternate sources of supplies if the primary supplies fail.
  4. Visibility: While visibility for its own sake is not an objective of supply chain management -- this is a capability that must be developed to support the three primary objectives mentioned above. Visibility can help reduce costs by detecting the most inefficient processes, provide agility through showing available alternatives, and manage risk better by identifying the most critical supply paths and the impact of their failure.

Evaluating your supply chain processes can expose inefficiencies and gaps that can help achieve or enhance the results in any of above four categories. Metrics can be set to measure the improvements: while the cost reductions can be measured more precisely, the impact of improvements due to increased agility and reduced risk can also be measured by comparing the results to the historical performance of the supply chain.

© Vivek Sehgal, 2009, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

Monday, November 30, 2009

Online Retail Sales Rise

Here is a snippet from Times report on black Friday: "Online sales fared considerably better this past weekend. ComScore, a digital research firm, estimates that cyber sales on Black Friday totaled $595 million, making it the second heaviest online spending day so far in 2009 and up 11% from Black Friday 2008. PayPal said it saw a 20% increase in the amount of money people spent using PayPal to purchase items this Black Friday from last year and a 140% spike in the volume of payments made by mobile phones. The mobile-phone transaction increase indicates that buyers shopping at brick-and-mortar sites were likely price-checking items with their mobile phones and then purchasing the item where they found it the cheapest."
Read more: http://www.time.com/time/business/article/0,8599,1943398,00.html?xid=rss-topstories#ixzz0YNpsSOTt

Of course that means more pressure for the retailers to manage all their sales channels optimally. Multi-channel retailing is more than just having brick and mortar stores along with online retail stores to capture orders. It is about developing capabilities that present a single consistent shopping experience to the customer and managing a single optimized supply chain for efficiently leveraging assets across channels. Click here to read the whole story on multi-channel retail capabilities.

© Vivek Sehgal, 2009, All Rights Reserved.

Wednesday, November 25, 2009

Green Supply Chains: Beyond the Cost of Energy

When you talk about green supply chains, a lot of attention is being paid to the cost of energy. A lot of companies believe they are pioneering the green supply chains primarily because they have become aware of the cost of energy and are explicitly working to control it. Energy used in transportation, lighting, manufacturing are quite visible. Retailers are talking about optimizing their transportation efficiencies, in turn reducing the energy used and saving a bundle. Some of them are also looking into store design as well: Wal-mart started using skylights a few years back to reduce the lighting needs during the day. Manufacturing companies are also looking at various ways to reduce energy consumed, some of them have taken a pioneering approach of not only looking at manufacturing alone but review the design of their products with sustainability in mind. One example is P&G: in redesigning their Tide detergents, the company managed to save water by concentrating the detergent, which also yields considerable savings in packaging (smaller detergent packages for the same number of washing loads), transportation costs (less weight and volume), warehousing (less volume).
{Click here to download or print this article}
What P&G example shows is that there is more to a green supply chain than reducing vehicle-miles in the distribution network.
I propose building an industry-wide data model that would capture the sustainability in a single number. In my book on enterprise supply chain management, I called this index as the Carbon Cost Index. Here is the basic concept:
This carbon cost index will model and support the effort to measure and control the human carbon footprint and related costs, legislative or otherwise. The following scenarios are likely possibilities to measure, impact, and control the carbon footprints of supply chains. A single corporate supply chain does not generally reflect the complete product life-cycle. Therefore, viewing the requirements of a green supply chain from a single corporate supply chain point of view constrains the scope of the thinking itself.
When viewed from a product life-cycle point of view, supply chains consist of three main phases of production, distribution, and disposal. Between the phases of distribution and disposal is the product usage, but since that phase is directly controlled by the consumer, I am excluding it from the supply chain point of view. Eventually, we must build a green index that reflects all these three phases of a product life-cycle in a supply chain. This index, can then be used variously for designing green supply chains across industries as a sustainability measure that goes across industries, corporate supply chains, and consumers to create sustainable business practices.
  1. Energy profile (Production). The energy profile will model the total energy requirements of producing the raw materials as well as the manufacturing process that converts them into finished merchandise. Such data will be typically supplied by the manufacturers, through a process very similar to the product specifications that the manufacturers provide today. The existing data pools like GDSN may be expanded to include this data for the energy profiles of the manufacturing process and the energy profiles of the raw materials.
  2. Distribution profile. This will capture the carbon footprint of the material movements required to manufacture a given product, with elements such as the distances traveled by the raw materials from their source to the factories, and by the finished goods to reach the retailer’s warehouses and stores from the factories. The modes available on these routes and energy profiles of these modes may affect such scores. It may also capture the distribution unit profile based on packaging that affects distribution costs.
  3. Recycle profile (Disposal). This profile will model the material’s recycling characteristics, types of facilities required, and regional laws governing recycling requirements by collecting data on the recycling profiles for the merchandise as well as for the packaging materials.
The Carbon Cost Index then will be a composite reflection of the above profiles that can be used in several planning and optimization functions for the supply chain processes. Of course, having such data available will also change the supply chains processes. For example, how sourcing may get affected if such an index were available today. And, assortment that may require matching products with a recycle profile that is aligned with the local regulations and available recycling facilities. Futuristic, yes, but I think that is where we must go for sustainable growth.
© Vivek Sehgal, 2009, All Rights Reserved.
Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

Tuesday, November 24, 2009

Off-sourcing: Is it For You?

Off-sourcing in itself is not a new phenomenon. It is estimated that more than 3/4 of American corporations are engaged in international sourcing. However, the changes in the last couple of years warrant that the decisions for off-sourcing be re-evaluated. The changes in cost of fuel, regulatory environment, and the recession are several reasons driving such evaluation. To evaluate the off-sourcing decisions made in the last few years, it is imperative to understand the drivers, considerations, and the effects of off-sourcing on the supply chain. We cover these aspects as follows.

Click here to download or print this article.

What drives off-sourcing?

The most overwhelming reason for the companies to off-source is the lure of reducing the cost of merchandise. A recent study by Grant Thornton (International sourcing: Offshore or near shore?) found that lower costs were the driving factor in the off-sourcing decisions for 79% of the respondents in the survey. That is an overwhelming number, but it is not surprising. What is surprising is how little the companies usually know about the total cost of their off-sourced products. Most companies do not have any established process or system to collect and compute the total landed costs for their products. While the cost of merchandise is easily obtained from the purchase orders, the other costs like transportation and warehousing are harder to establish and accurately allocate to products. Most companies have questionable processes to capture and allocate these costs. The value of ordered products is the most commonly used factor for allocation of logistics (transportation and warehousing) costs. However, these costs should be better allocated using the handling and storage characteristics of the products rather than simply using their value. A set of outdoor garden furniture is always going to have a substantially higher cost of transportation, handling, and stocking in the warehouse than a Wii game system, even though they may both have comparable purchase costs. The solution lies in capturing transportation costs using the weight and volume characteristics, warehouse handling costs using activity based costing, and warehouse stocking costs using the number of days and space utilized by a product stocked in the warehouse.

But, these three components only make part of the total cost of the products, other costs such as the cost of receiving, unpacking, and making it ready for the sales floor and the cost of promotion and clearance. These costs become significant for the off-sourced products simply because of the longer replenishment lead-time, which means that the demand forecasts driving the replenishments must be made for longer time horizons which tend to be less accurate than the short-term demand forecasts. Less accurate demand forecasts mean higher promotion and clearance budgets and in some cases, additional logistics costs associated with warehousing and dynamic inventory re-balancing to move products within the network where they can potentially fetch better prices. All of these factors add costs that are complex to model and capture, and harder to correctly allocate for any meaningful comparison among products.

No wonder the same report (International sourcing: Offshore or near shore?) found that, "nearly half of respondents (47%) see off-shoring as neutral or detrimental to their ROI".

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Considerations for Sourcing Decisions

Given the firm has a clear understanding of the total costs, what other factors should be considered for making sourcing decisions? Here are some considerations that would directly affect your total costs and should be considered for any off-sourcing decision. Not only do they affect the direct costs, but they also add process complexity that the corporation must be ready to deal with.

  1. Regulations and Trade Agreements: What are the regulatory requirements for the products under consideration? Most of the international trade is subject to additional taxes, excise duties, value added taxes (VAT), etc, find out how this adds up to the total cost of the products when off-sourced. Find out if there are any trade agreements favorable to the products under consideration. These agreements may reduce your duties and taxes, or provide other financial incentives. The international trade is also subject to regulatory process requirements which means the importer typically has more paper work to prepare and file with the customs. Managing the extra paperwork is bound to add to your costs as this requires more processes, systems, or a contract with a service provider.
  2. Type of Merchandise: Not all merchandise is equally suitable for off-sourcing. Products that are innovative, fashion, and highly seasonal in nature may not be suitable for off-sourcing due to volatile nature of demand. These types of products require the ability to quickly react to the demand by either increasing the supplies or shutting them down, both of which are easier with shorter replenishment times. Other products that are more utilitarian in nature and have relatively stable demand may be good candidates for off-sourcing.
  3. Financing and Payment Terms: Off-sourcing may involve financial terms that are typically different from those in domestic sourcing situations. Make sure that the added complexity of procedures, advance financing, and/or guarantees are considered in making the case for off-sourcing.
  4. Multi-modal Transportation and Port Management: Managing the product at the port: loading, unloading, customs-clearance, and onwards shipment adds to the costs as well. Managing multi-modal transportation needs more complex systems for planning, optimization, and execution of the shipments. While this can be outsourced to a 3PL provider, corporations may lose the opportunity to optimize their transportation spend.

Finally, ensure that you have the systems in place to provide inventory visibility for the products in transit, which may allow you to dynamically plan their final destination as the ship moves closer to the home port to better match with any changes in demand during the time in-transit.

Off-sourcing: Effect on Supply Chain

All sourcing decisions affect the supply chains in several ways. They affect the costs as well as the ability of the supply chain to respond to changes in demand and supply. Evaluating how the supply chain will react to off-sourcing and ensuring that it is designed to address the process requirements involved in the off-sourcing is paramount for a successful execution of such decisions.

  1. Costs: Off-sourcing almost always will have additional supply chain costs in freight, inspection, financial instruments, drayage management, trade tariffs, and costs related to managing these processes. Make sure that these have been thought and properly estimated for an objective decision making exercise.
  2. Lead-time: Off-sourcing also typically results in much longer replenishment lead-time to the plants, warehouses, and stores. The effect of a longer lead-time on the supply chain is the reduced ability to react to changes in demand and supplies. This causes considerable strain on the processes, calls for more accurate demand forecasts, relatively stable demand, and reliable supplies.
  3. Risk: Increased costs, replenishment lead-time, and length of the supply chain all add to the supply chain risk. Longer chain and additional nodes provide new points of failure in the supply chain and substantially increase the risk of disruption, making it prone to factors that are not typical in domestic supply chains such as international politics, wars, and piracy.

Summary

Many companies are considering or reevaluating off-sourcing due to changes in the business environments such as cost of fuel, regulatory environment, and the ongoing sluggishness in the economy. Successful reevaluation requires that the managers clearly understand the drivers, considerations, and the effects of off-sourcing on the supply chain. Only an objective analysis of all these aspects can help establish the true value of off-sourcing for a company.

© Vivek Sehgal, 2009, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

Monday, November 23, 2009

Warehousing Efficiencies: Metrics and Controls

Enhancing warehousing efficiencies can reduce costs and enhance supply chain flexibility. To do so, managers must understand how to measure and control the efficiency of the warehousing functions. This was the subject of several posts last week.

It is now available as a single downloadable article. Click here to print or download this whole article.

Alternately, you can still access the individual posts as follows:

Measuring Warehouse Efficiencies

Affecting Warehouse Efficiencies, Part 1- Labor

Affecting Warehouse Efficiencies, Part 2- Inventory

Affecting Warehouse Efficiencies, Part 3- Slotting

Affecting Warehouse Efficiencies, Part 4- Product Flow

© Vivek Sehgal, 2009, All Rights Reserved.

Friday, November 20, 2009

Affecting Warehouse Efficiencies, Part 4: Product Flow

Last week, I talked about the three main categories of warehouse efficiencies. These were operational, stocking, and fulfillment efficiencies. In this series of four posts, I am presenting the levers available to an organization to enhance these warehouse efficiencies. There are four main levers to target and affect these efficiencies. These levers being Labor, Inventory, Slotting and Product Flow. Each of the four posts discusses one of these levers and expands upon the functional capabilities that must be developed to enhance warehouse efficiency. In Part 1, the role of Labor was covered, part 2, inventory management was covered, part 3 covered slotting, and here is final and concluding part of this discussion: Product Flow Analysis.

Flow Analysis:

Product flow analysis within the warehouse allows the warehouses to optimize the product flows through a warehouse. The objective of such an exercise may be to reduce the cost of handling within the warehouse by reducing the manual touch-points and increasing automation, determining the most efficient disposition of incoming inventory or finding cross-docking opportunities for quick pass-through. Like slotting, flow-path analysis should be conducted as part of warehouse planning to determine the best flows for product categories using demand patterns and other product attributes, some of which are discussed below. Determining optimal flow-paths and re-evaluating them as demand-patterns, product-mix, or product-attributes change ensures that the warehouse operates at its best, making most use of the available automation and other handling equipment.

  1. Product Handling Attributes: Product handling attributes determine what kind of equipment will be needed to handle the flows. Conveyable products may be easier to automate while others may require manually operated fork-lifts. Flow-path analysis considers these constraints to determine the best disposition and flow of the product within the warehouse from receiving until it is shipped.
  2. Flow-velocity Attributes: The demand and promotion attributes can affect the flow-paths to efficiently handle the products based on their flow-velocities. Fast moving products must be able to flow quickly to their stocking, staging, or shipping areas. If product is on promotion, an efficient handling within the warehouse will ensure that replenishments are most efficient and increased volumes due to promotion can be effectively handled.
  3. Inventory Consumption Policies (LIFO/FIFO) and shelf-life: The inventory consumption policies of first-in-first-out (FIFO) or last-in-first-out (LIFO) affect the flow-path decisions since they directly affect the disposition and shipping of the product based on their receiving order. Similarly, if the products have expiry-dates and must be shipped within a fixed number of days after receiving, they may be required to go to a specific area of the warehouse. These areas may be climate controlled or otherwise monitored for perishables to maintain product quality.

Improving product-flows in the warehouse directly improves the operational and fulfillment efficiencies in the warehouse. This fourth and the last part of this series concludes the discussion on the levers to drive the warehouse efficiencies.

© Vivek Sehgal, 2009, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

Thursday, November 19, 2009

Affecting Warehouse Efficiencies, Part 3: Slotting

Last week, I talked about the three main categories of warehouse efficiencies. These were operational, stocking, and fulfillment efficiencies. In this series of four posts, I am presenting the levers available to an organization to enhance these warehouse efficiencies. There are four main levers to target and affect these efficiencies. These levers being Labor, Inventory, Slotting and Product Flow. Each of the four posts discusses one of these levers and expands upon the functional capabilities that must be developed to enhance warehouse efficiency. In Part 1, the role of Labor was covered, part 2, inventory management was covered, today's topic is Slotting.

Slotting:

Slotting is the science of placing the products inside the warehouse. In all warehouses, there are bound to be locations that are closer to the receiving or shipping docks, convenient to access or easier to reach. As the number of such locations is relatively fixed, it would make sense to utilize them for products with the highest velocities. Slotting is the ability to judiciously determine the best placement of products in the warehouse based on different product attributes such as their demand, planned promotions, dimensions, weight, volume, orientation, affinity, co-placement constraints, crushability, and so on. While some of these attributes are static in nature, other like the demand and planned promotions change with time. The capability to optimally slot a warehouse increases the stocking as well as operational efficiencies. At its best, it should be achieved dynamically so that the routine warehouse activities of receiving, putting-away, picking, and shipping are continuously result into an optimally slotted warehouse as the demand patterns change.

  1. Maximize Warehouse Cube: Slotting necessarily fulfills two necessary functions. The first capability consists of analyzing the products to be warehoused and determine the size, type, and number of locations that would best serve to maintain the desired inventory levels. This maximizes the warehouse cube and helps in planning the correct number of racks, carousels, active and reserve locations, floor-space, and so on.
  2. Maximize Warehouse Operations Efficiency: The second capability of the slotting function is to continuously monitor demand patterns, past and projected, and direct new receipts to most optimal locations by dynamically selecting locations based on product and demand attributes. This helps in maintaining a warehouse that is always optimally slotted for best operational efficiencies. If a slotting solution cannot provide a dynamic slotting capability, it still can add a lot of value to slot when demand patterns or product mix changes, and execute the warehouse activities to attain the optimal placement of products. In the latter case, the solutions typically provide the ability to analyze the cost of additional activities against the expected benefits of re-slotting the products.

Slotting optimization directly enhances the operational and stocking efficiencies in the warehouse. Indirectly, it may also improve the fulfillment efficiency by ensuring more accurate location records for the products in the warehouse.

In the fourth and the last part of this series, I will talk about the opportunities to enhance warehouse efficiencies through flow analysis and planning in the warehouse that is a primary lever to drive the operational efficiencies.

© Vivek Sehgal, 2009, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

Wednesday, November 18, 2009

Affecting Warehouse Efficiencies, Part 2: Inventory

Last week, I talked about the three main categories of warehouse efficiencies. These were operational, stocking, and fulfillment efficiencies. In this series of four posts, I am presenting the levers available to an organization to enhance these warehouse efficiencies. We would be talking about the four main levers to target and affect these efficiencies. These levers being Labor, Inventory, Slotting and Product Flow. In each of the four posts, I will focus on one of these levers and expand upon the functional capabilities that must be developed to enhance warehouse efficiency. In Part 1, the role of Labor was covered, today's topic is Inventory.

Inventory Management:

Inventories in the warehouse consist of a substantial amount of working-capital tied up in the supply chain to ensure that the demand fulfillment rates can be maintained at desirable levels. Ability to fulfill store and customer orders is central to the existence of warehouses in a supply chain, but this must be balanced against the need to reduce system-wide inventory costs. Fulfillment metrics measure this ability of the supply chains to balance the service levels against the inventory. Inventory efficiency at the warehouse balances between the conflicting requirements of high fill-rates and low inventory costs. The following capabilities can help in maintaining both.

  1. Inventory Optimization: Inventory optimization solutions provide the warehouses with the ability to compute and maintain optimal inventory levels that are sufficient enough to maintain the target fill-rates. The inventory solutions typically work by analyzing the historical variance in demand, supply, and replenishment lead-times. These solutions compute the inventory levels required for the projected demand to maintain the targeted service levels. Optimizing inventory can typically reduce inventory in the system by 10-20% while still maintaining desirable service-levels. The problem becomes more complex when the supply chains have many levels and the inventory must be computed at each stocking point of each echelon of the chain.
  2. Inventory Visibility: Inventory visibility across facilities is another primary tool that replenishment managers can use to enhance warehouse inventory-efficiency. Inventory visibility enables dynamic source-selection for fulfilling demand in the supply chain. The conventional supply chains model stores tied to a specific warehouse for replenishment. This rigid relationship forces higher inventory levels in the system because each order must be fulfilled from a pre-determined source. Inventory visibility makes it possible to source orders from alternate sources, thus allowing lower inventory levels while simultaneously maintaining comparable service-levels. Solutions integrated with logistics can also account for the cost of such changes to make the best decisions.

Better inventory management processes directly affect the fulfillment metrics of the warehouse which are primarily focused on its ability to address demand. The examples of such metrics are fill-rates, on-time fulfillment, pick and ship accuracy, and so on.

Next time, I will talk about the opportunities to enhance warehouse efficiencies through better slotting management in the warehouse that is a primary lever to drive the stocking and operational efficiencies at a warehouse.

© Vivek Sehgal, 2009, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

Tuesday, November 17, 2009

Affecting Warehouse Efficiencies, Part 1: Labor

In a previous post, I talked about the three main categories of warehouse efficiencies. These were operational, stocking, and fulfillment efficiencies. In this series of four posts, I would present the levers available to an organization to enhance these warehouse efficiencies. We would be talking about the four main levers to target and affect these efficiencies. These levers being Labor, Inventory, Slotting and Flow. In each of the proposed four posts, I will focus on one of these levers and expand upon the functional capabilities that must be developed to enhance warehouse efficiency. Today's topic is Labor.

Labor Management:

Labor is typically one of the largest recurring expenses in a warehouse. Managing labor can result into huge savings in the warehouse. Most of the warehouse management solutions provide some labor management functions but seldom do they address all the following factors affecting the labor efficiency in the warehouse.

  1. Labor Planning: Labor planning in the warehouse means projecting the labor requirements and using them to ensure that adequate labor is available to support the expected levels of warehouse activities. The labor requirements in the warehouse can vary greatly by the season and demand patterns. To accommodate such variability, warehouses typically employ a mix of permanent and temporary workers and adjust the working hours in the warehouse. While most firms forecast demand and use this data to plan their replenishments and orders, seldom is this data used to project receiving and shipping activities at the warehouses and the required labor levels. However, there is no reason to not make use of such data, since this can provide a very dependable source of labor planning activities for the warehouses. Most of the contemporary warehouse management solutions still lag in this key aspect of labor planning at the warehouses in spite of its relatively simple requirements and strong potential for providing cost savings that advance labor planning can provide. By developing a labor planning process using the projected demand data, managers can establish the total labor requirements, identify the best mix of permanent and temporary workers, as well as define working schedules in advance for all workers at a warehousing facility.
  2. Labor Optimization: Labor optimization is another function that can be leveraged to reduce warehouse labor costs. The labor optimization process models the daily task requirements at a warehouse and identifies the best resources to complete these tasks within the constraints of resource availability and resource skills. Facility specific constraints such as seniority, number of breaks, user-zones, and so on can be modeled as well, if required. The mathematical model is solved to minimize the total cost of labor to finish the tasks. Such optimization can reduce the total labor requirements up to 10% in larger facilities. Mathematical modeling to optimize supply chain objectives is not new, but most warehouse management solutions are very tactical in their labor management aspects and simply have not taken the leap into supporting such requirements. On the other hand, retailers may be blamed as well: while they routinely use workforce management solutions for managing their stores, they have ignored (the equally strong case to use) similar solutions to optimize warehouse labor.
  3. Labor Standards: Deploying labor standards in the warehouses provides another method of measuring labor efficiency against the pre-determined engineered labor standards that provide the target efficiency levels for standard warehouse activities. These engineered standards are created by firms specializing in industrial engineering practices and the labor data is provided for integration in the labor management systems at the warehouses. Most high-end warehousing solutions provide the ability to integrate such data and measure the efficacy of the labor used in the warehouses. The actual task time is computed using the task elements and its attributes with the corresponding engineered standards. Using labor standards not only provides a comparison with the best practice, but also allows a relative measurement of individual workers that can be used for training and incentive purposes.
  4. Technology & Processes: Finally, there are technology and process enhancements that can increase the labor efficiencies in the warehouses. Such technology may provide automation such as conveyors and sorters, or, directly support user tasks such as pick-to-voice and pick-to-light technologies, or, simply support a better process such as a move from paper-based picking to RF based systems. Latter can direct the user tasks dynamically, provide task-interleaving, avoid congestion, and reduce traveled distance in the warehouse, all of which add to provide better labor utilization.

Better labor management processes directly affect the operational metrics of the warehouse which are primarily focused on the number of activities performed. The examples of such metrics are number of cases received and shipped, number of picks and put-away tasks completed, units handled, dollar value of the handled merchandise, and so on.

Next time, I will talk about the opportunities to enhance warehouse efficiencies through better inventory management that is a primary lever to drive the fulfillment efficiencies at a warehouse. In the meantime, you can read more about inventory planning process here.

© Vivek Sehgal, 2009, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

Friday, November 13, 2009

If NRF is Right, Not Much Holiday Cheer

NRF is projecting 2009 holiday sales to be 1.0% lower than 2008, that is on top of 3.4% decline that NRF reports in 2008.

International Council of Shopping Centers ("ICSC") forecasts 2009 holiday sales to increase by 1.8% over 2008.

We will know in a couple of months who was right. In the meantime, I gathered some data from the census bureau to do a little of my own analysis.

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Here are the key takeaways:

  • Retail sales for 2009 show an upward trend, but have stayed in a narrow band so far. The October retail sales numbers are not yet out, but are expected to be good.
  • The inventory to sales ratio for the retail has been steadily declining through the year. It still has some room to go down though not very much.
  • The manufacturing inventories also decline consistently through the year so far.
  • While the manufacturing new orders have shown a positive trend, it too has stayed within a very narrow band.

So what does this all mean? If NRF forecast of lack-luster holiday sales hold, there is not much reason to assume manufacturing sector will improve either. While GDP did show signs of growth in the third quarter, it is certain that some part of this GDP growth came from the stimulus money injected into the economy, though its effect in manufacturing and retails sectors still remains to be seen. But, if ICSC is right, then the manufacturing orders will need to pick up to build up the manufacturing inventories to boost the retail inventories and support the expected increase in holiday sales.

I believe there is a good chance that the retail holiday sales this year will improve over last year rather than decline. Just like the manufacturing and retail inventories. most individuals have also consumed through their personal household "inventories" and that means that generally the spending must at least be sustained simply to support routine daily activities. Also the overall retail sales levels for 2009 are substantially lower when compared to 2007 and 2008, which would again support the "sustenance" theory. This view is also supported by the personal consumption expenditures numbers from Bureau of Economic Affairs that show a positive trend from January through September.

We will all find out the answers rather quickly. The holidays are not that far off. In the meantime, enjoy the predictions!

© Vivek Sehgal, 2009, All Rights Reserved.

Want to know about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

Thursday, November 12, 2009

Wal-Mart's Quarterly Profits jump 3.2%

As reported here by AFP, Wal-mart's quarterly profits jumped 3.2% for the quarter ended October 31, 2009, compared to the same quarter last year.

Nothing unexpected really, except that this is 2009, predictions of recession having ended are still iffy at best and not many retailers are doing better than what they were doing a year earlier. The same news article reported Mike Duke, Walmart's president and chief executive officer saying of the results: "Increased productivity and improved inventory management led to a better customer experience and contributed to our strong financial performance."

Wal-mart's laser-sharp focus on supply chain is not lost on anyone. This is just one more time it has proved the value of the investments that Wal-mart had made into its supply chain.Increased productivity and inventory management are both results that can be achieved through better supply chain planning and operations. Optimizing inventory can lead to lower operating cash requirements by lowering the amount of inventory in the supply chain. Productivity improvements can be achieved in the stores and the warehouses. Wal-mart pioneered the cross-docking concepts for distribution that lowers inventory and increases the distribution efficiencies.

Since supply chains control a wide scope of operations for a retailer, reviewing the supply chain processes with the intent of creating competitive advantages almost always pays off. Ignore your supply chains at your own peril!

© Vivek Sehgal, 2009, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

Wednesday, November 11, 2009

Measuring Warehouse Efficiencies

Warehouses are one of the most labor intensive nodes in a supply chains. While there have been major innovations towards increasing warehouse productivity through process and mechanical automation, they still constitute a substantial part of the supply chain costs.

Warehouses generally measure their effectiveness through various metrics that can be grouped in one of the following categories:

1. Operations: The operational metrics measures the efficiency of warehouse operations. This is primarily focused on the number of activities performed. The examples of the metrics in this category would be number of cases received and shipped, number of picks and put-away tasks completed, units handled, dollar value of the handled merchandise, and so on. The main focus of the operational metrics is to measure the efficiency of the material handling operations within the warehouse, whether they are handled through labor, automation or a combination of the two. Equipment like the conveyors, forklifts, automated carousel systems, diverters, bar code scanners, sorters, label applicators, dimensioning systems, automated guided vehicles, and so on can help enhance operational efficiency in a warehouse.

Measuring Warehousing Efficiencies

2. Fulfillment: The second set of metrics at the warehouses measures their ability to fulfill orders on time and in full. Response time and perfect order metrics fall in this category and consist of measuring fill-rates, on-time fulfillment, and pick and ship accuracy (right product in right quantity for right customer) at the warehouse. Other metrics contributing towards perfect orders, like correct invoicing and order entry is generally outside the scope of warehouse functions. Fulfillment metrics measure the efficacy of the inventory planning and replenishment systems for the warehouse. While these functions are generally centralized, they directly affect the warehouse’s ability to fulfill demand. More and more companies are realizing this and providing inventory planning visibility to the warehouse managers. Since the inventory and replenishment planning systems can project future build-up of inventories, such data can be used directly by the warehouses to enhance their labor and stocking efficiencies as well.

3. Stocking Efficiency (Slotting): This set of metrics primarily measures the efficacy of the warehouse space usage. How does the warehouse make use of its space, horizontally and vertically? These metrics show how racking and slotting needs are being fulfilled and how these decisions affect the operations by affecting picking, put-away, and replenishment task efficiencies, active and reserve locations. How efficiently are item volume, density and orientation, demand patterns, and handling patterns used in deciding the stocking locations of the items in the warehouse? Incidentally, the metrics that measure these (stocking) efficiencies are reflected directly in the operational metrics: a well slotted warehouse maximizes the warehouse cube and simultaneously enhances the operational efficiency by saving the overall distance traveled in the warehouse, work balancing to avoid congestion, enhanced ergonomics by making it easier to handle products through optimally stocking them by location, height, and handling characteristics, and finally the order fulfillment accuracy by considering demand patterns.

There could be a fourth category of warehouse metrics as the financial metrics that measure the costs of labor, operations, utilities, depreciation of capitalized assets, and fixed costs. I have skipped these metrics; however, since they directly depend on one of the others mentioned above and will improve directly in response to the improvements in the other metrics.

In a following post, I will go over the supply chain levers available to managers to control the above measures to achieve better distribution efficiencies.

© Vivek Sehgal, 2009, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

Monday, November 9, 2009

The What, the Why and the How of Supply Chains

Like anything else, understanding what is a supply chain is important. This field of management has been evolving. What was considered supply chain management a decade ago, has emerged, evolved, and extended. As firms realize how integrated their operations really are, the scope of functions considered as part of the supply chain processes continues to extend. Supply chains have been around since the industrial revolution began mass-production in early 1900s, but they have never been studied, developed, and managed with so much thought and consideration. For all these reasons, then, it is important to understand the what of supply chains.

But that is a start, not an end in itself.

Once you understand what are supply chains, the why and the how starts. After all, there is no problem that can be solved without understanding the why and the how. That is where the Enterprise Supply Chain Management comes in. This is a book that provides a functional tour of the supply chain processes in a firm. Instead of dwelling on the what, it dwells on the why and the how. It is written simply with a straightforward purpose: to provide an overview of the supply chain functions in an enterprise; and, for each, provide a brief why (why is this function important, what questions does it answer?), and a brief how (how does the function address the questions, what are the process inputs & outputs). It is a quick introduction for anyone who needs to take the next step: that of designing a supply chain and solving the problems and move beyond simply learning what are supply chains. It is concise and provides short succinct narration for all supply chain functions rather than going into long literary diatribes!

Get it on Amazon and other book-stores that sell management books. Or, click here to look inside and check the table of contents.

Friday, November 6, 2009

Seasonal Indices, Anyone?

Seasonality is a fact of demand for many products. The demand changes with the time, however, displays the same general pattern of ramping up/down time after time. Such repeating demand patterns generally occur due to seasonality. It does not have to be annual, just cyclic in nature & repeated at regular intervals. To tell if demand is seasonal, simply look at the demand curve over a long enough period of time and if you see the same pattern repeated over time, it most likely shows seasonal pattern. How much history do you need to make a firm determination? Well - that is a question that depends on the length and frequency of the season. Usually, you should have data that shows more than three complete cycles of seasonal demand to be sure that seasonality exists. Based on the frequency and the length of the season, you may do fine with historic demand data for as less as 4-5 months or 3-4 years or longer to be sure that there is a seasonal pattern in the data. For example, if the pattern was monthly and showed a spiked demand in the first week of the month followed by a low-stable demand for the rest of the month, then the historical data for just a few months will be sufficient to establish the pattern. Now, consider a demand pattern that shows cyclic activity once a year, say in early summer that lasts for 45-60 days: then you will need 3-4 years worth of history to establish the pattern.

Forecasting techniques normally de-seasonalize the historical demand data before projecting the demand into the future. The projected demand is then re-seasonalized to produce the final projected demand. Why go through all this trouble? Because, the de-seasonalized historical demand generally represents a time-series that is much more stable and lends itself easily to statistical projection. Chances are, that this process will enhance your forecast accuracy substantially.

So, how do you de-seasonalize data? That is not particularly hard either. The forecasting solutions find a base-line demand that is stable and then create a seasonal index on top of the base-line demand that recreates the seasonal cycle over the length of the season. The index is created using the historical seasonal demand over the base demand and can be reviewed frequently to make ensure the indices reflect the demand patterns correctly. The seasonal indices can be created by week or by month depending on the total length of the demand cycle and the build-up and decline patterns. In some cases, the indices may be created even by the day to reflect a high ramp-up of demand.

Read more about the demand planning process here or click here to download the article on the process. This article was also published in Logistics Insight Asia.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

© Vivek Sehgal, 2009, All Rights Reserved.