Four Dimensions of Supply Chain – Part 4

Five factors of supply chain influence the supply chain of any organisation.  They are sourcing, transportation, storage, inventory costs, and product differentiation as explained in the below graphic.

I will briefly introduce five elements of commodity-related factors that could influence your supply chain.  Integrated planning includes demand planning, material requirement planning and distribution requirement planning. The business success largely depends upon the integrated planning. Demand management is a structured process of tracking enterprise product demand enabling the procurement process to plan and source material for future.  According to a survey, the average forecasting error rates are Chemical, Consumer Goods and FMCG – 39%; Electronics – 29%; Manufacturing – Industrial 39%; Retail – 13%; Biotechnology – 34%; Aerospace – 28%; Transportation – 18% and            Construction – 28%.

In the age when competition between manufacturing companies has become global, making business operations as efficient as possible is the key to economic advantage. Unlike manufacturing companies few decade ago, nowadays manufacturers compete not only with other local businesses but also with other operations across the globe, both big and small. The core objective of MRP is to manage the seamless flow of material (components) into a manufacturing facility to meet the scheduled production orders and at the same time to ensure optimal inventory carrying.

How MRP works?

Source: MRPEasy

The next in the integrated planning is Distribution resources planning.  What is DRP? – “Distribution requirements planning (DRP) is a systematic process to make the delivery of goods more efficient by determining which goods, in what quantities, and at what location are required to meet anticipated demand. The goal is to minimise shortages and reduce the costs of ordering, transporting, and holding goods.”  The benefits of DRP include:

1. Coordinated shipments to save costs.
2. Optimise inventory level.
3. Optimise Storage requirement.
4. Last but not least is the satisfied customer.

Sourcing – Sourcing is a very big aspect of the commodity.  You can source it locally, one can source it from the low-cost country and some even source it from low-cost product manufacturing country.  There is a subtle difference between these two, the low-cost country many not be cost effective for some components or finished products, whereas some European countries are proving to be low-cost product manufacturing countries.  For example, steel is cheaper to purchase from Europe. The likes of ArcelorMittal, ThyssenKrupp and Tata Steel are expected to see those profits grow as with sources suggesting annual contracts for 2017 were set at levels 70% higher than for 2016. According to one estimate 15-30% production cost reduction Textile products, houseware and kitchenware 15-20%, injection moulded plastics 12-20% and in electronics 15-20% if the production is outsourced to a low-cost country.

The third element that could influence the supply chain as a commodity is Transportation.  It is needless to add that a fully functional and effective supply chain requires visibility between stakeholders but 82% believe that connectedness and visibility need to be improved and 12% believe there is no visibility according to BPI report. The same report also identified three major challenges the first one is poor coordination between partners (57%) and too little transparency and visibility (50%) and inefficiencies within the supply chain (37%). Transportation could be explained as a “blind spot”, we get no visibility of the product movement whether inbound or outbound, it is common for both components and finished goods.

Inventory – The majority of the working capital is deployed on inventory apart from capital assets.  Optimal inventory carrying is the need of the hour to balance service vs. cost.  Working capital signifies company’s operating liquidity. On an average depending upon interest charges, the inventory carrying cost is minimum at 24% per annum.  This is not visible in the P&L and hidden under finance costs, warehouse rental, insurance, obsolescence, workforce and many more overheads.

Product Differentiation – The objective is to create loyal brand equity such as Apple products and avoiding price comparison with the competitor’s products and value addition to the customer with a better feature of the product.  Further, customisation also could be considered as product differentiation.  It all looks good as far the customer is concerned.  Just step into a supply chain manager’s shoes and think how difficult to manage the supply chain with so much of variation and modular production systems.  The life cycle of the products is becoming shorter due to product proliferation and unrelenting competition.  In response, companies are restructuring the traditional manufacturing process and migrating towards concurrent engineering methods.

“Concurrent engineering, also known as simultaneous engineering, is a method of designing and developing products, in which the different stages run simultaneously, rather than consecutively. It decreases product development time and also the time to market, leading to improved productivity and reduced costs.”

All these business requirements put stress on supply chain right from planning to sourcing and manufacturing.  This implies the complexities of today’s supply chain.

SUPPLY CHAIN COMPLEXITY