Tuesday, March 4, 2008

Untangling the Supply Chains: Retail vs. Manufacturing

At a high level, supply chains address the same needs for all companies, managing the flow of goods and services in an optimal fashion. However the core supply chain competencies change based on the industry vertical. Understanding these differences enhances a corporation’s ability to leverage their supply chain assets and solutions effectively. Here is a quick summary of such competencies for retail and manufacturing environments.


For Retail, the primary investment is in the merchandise flowing through its network, at rest or in motion. (We exclude any real estate assets from this discussion as these are not core to supply chain operations. Whether a retail company owns the stores, or leases them, does not impact its operations substantially). Therefore managing this asset (inventory in the network) becomes core to a Retailer’s success. That is why the Retail supply chains are distribution focused. After the cost of merchandise, the largest overheads in retail are related to their stocking and distribution of goods. So much so that GMROI for Retailers is quite commonly interpreted and computed as Gross Margin Return on Inventory (as against Gross Margin Return on Investment). A lean distribution chain means optimal services levels between the supplying and consuming network nodes and a higher inventory turns. The level of inventory directly affects the operational cash-flow and ability to service customers – and both these competing needs must be managed effectively.

For Manufacturers, the goods (raw materials as well as finished goods) within the network are a large investment, but another substantial investment is in manufacturing/process equipment, and resources. All equipment gets depreciated over time irrespective of the percentage utilization. However such equipment adds value to a manufacturer’s operations only when it is being utilized. Therefore manufacturers must worry about maintaining optimal levels of inventory to maintain the services levels among the supplying and consuming network nodes but also about keeping the equipment and resources effectively utilized. In doing so the focus of the supply chain changes considerably from being distribution focused to being asset focused (though the relative importance of asset utilization over optimal inventory management will be determined by the cost of raw material to finished goods ratio that represents the value added). This introduces the need for manufacturing planning, scheduling and sequencing so that all manufacturing operations as well as transportation operations are optimally planned for best use of resources.

Size of the Network:

Another difference that accentuates the different core requirements for the Retail and Manufacturing supply chains is simply the size of the network. A retailer’s network typically consists of multiple warehouses, and a large number of retail locations that may run into thousands. A manufacturer on the other hand will normally have only a handful of manufacturing locations and warehouses. Therefore managing the flow of material (merchandise, raw materials, or finished goods) through this network through optimal transportation, and warehouse planning becomes much more important in a retail environment.

Also the sheer number of items dealt within the Retail environments is huge compared to most Manufacturing environments (exceptions exist). This adds a large number of vendor shipping locations to the network making it unwieldy and complex for retailers.

Type of Network:

As above, Retailer’s network primarily consists of storage locations (such as warehouses) and selling locations (such as stores). A Manufacturer’s supply chain network primarily consists of storage locations (warehouses for raw materials, or finished goods), and manufacturing locations (factories). An extended network for both the environments can model the vendor’s shipping points as well.

These nodes represent different activities in the supply chain, and therefore present different planning challenges. While the Retail chains typically emphasize managing inventory and service levels, the Manufacturing chains also manage resource planning and usage.

This also affects the service-time length of supply chains. Manufacturing supply chains usually have longer end-to-end lead times (due to manufacturing process lead times) and therefore inherently less flexible to volatility. Retail chains can be nimble if managed and modeled well though the size of these chains tends to make them harder to optimize.

Capacity Constraints:

In a Retail chain, the capacity constraints are seldom modeled. Most of the capacity can be modeled as infinite as this capacity is mostly an outsourced service. Relevant capacities in Retail that can potentially constrain the supply planning are the supplier capacities, stocking capacities and transportation capacities. As most retailers have multiple suppliers and merchandise that can be easily substituted, the supplier capacities can be considered unconstrained. Same goes for the transportation capacities, as more carriers can be added on routes where required. That leaves the warehousing storage constraints as the only real constraint, but even these are seldom modeled in Retail chains.

In contrast, the Manufacturing chains are constrained by manufacturing capacity (available resources, time, skills, etc.) and this is a real constraint that must be modeled for feasible planning.

As a result, the Retail supply planning primarily consists of propagating demand through the supply chain tiers largely unconstrained, with only the inventory levels and inventory multiples having been modeled. The latter adequately address the need to maintain the desired service levels.

In contrast, the Manufacturing supply planning consists of propagating demand through the supply chain tiers constrained by the manufacturing/processing capacity (the capacity modeling a composite of required resource, skill, and material) at each node, in addition to the inventory levels and inventory multiples that must be maintained for sustaining the desired service levels.

Collaboration with Partners:

In both environments, collaboration with partners can become a true differentiator. However it can provide a substantially higher return in Retail environments than in (most) manufacturing environments. The underlying reasons go back to some of the differences discussed above. In a manufacturing environment, there are quite a few parameters around resource planning that are fully controlled within the corporation’s four walls, and these alone can provide a compelling ROI for a supply planning exercise. For retailers the main asset being managed through the supply planning is inventory, and a fully collaborative chain can allow for last minute changes, diversions, and re-balancing of this asset across the network for most optimal demand fulfillment.

Therefore each supply chain opportunity needs to be evaluated based on the industry vertical, company specific requirements/expectations. The technology solutions then follow the requirements and expectation analysis. There are several vendors available for supply chain solutions, and each one brings specific strengths that companies will do well to understand and apply in their specific situations.

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