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Volatile demand calls for quick response

The integrated supply chain
Robert Sabath
Mercer Management Consulting, Chicago, Illinois, USA
Your company has been restructured, reorganized and re-engineered. You have been downsized, rightsized and horizontally organized. You have been minding your ABCs, JITs, ECRs and DSDs. Your company is lean and mean, and you feel empowered and raring to go. The bad old days of slow economic growth and sluggish sales are coming to an end. Finally, the time has come when you can take a step back to see if your supply chain is up to the task of supporting your companys growth. If (in addition to all of the above) you have been working diligently to streamline and integrate your companys supply chain, it is likely that it is very much up to the task. If, on the other hand, these initiatives have impeded the development of an agile and responsive supply chain, your supply chain may not be able to handle the mission to hand. The trouble with traditional supply chains Traditional approaches to supply chain management rely on at least three discrete inventory buffers to smooth the flow of goods through production and provide a reliable response to volatile consumer demand (Figure 1). One major shortcoming of these approaches is that at each step back in the supply chain, volatility of demand increases and forecast accuracy decreases. Manufacturers and retailers find themselves drowning in inventory on many items at the same time that they are chronically stocked out of others. Another major shortcoming of traditional approaches is that they react very slowly to new demand trends. If a particular item suddenly becomes all the rage and starts to sell out in stores, replenishment orders go to retailers distribution centres, but no further, until minimum inventory levels are reached and an order is placed with the manufacturer. Manufacturers, in turn, fill orders from their distribution centre inventory until they hit their reorder point, and only then does the production planning group begin to plan new production. If the new sales trend continues, the system will not catch up. Traditional systems, with their step-wise reordering process up the supply chain, do not communicate underlying consumer demand trends and therefore tend to under supply the fastest selling items.
This article was first published in Logistics Information Management, Vol. 8 No. 2, 1995.

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International Journal of Physical Distribution & Logistics Management, Vol. 28 No. 9/10, 1998, pp. 698-703, MCB University Press, 0960-0035

Store item orders

Retailer case orders

Production orders

Consumer demand

In-store model stocks

Store replenishment

Retailer DC inventory

DC replenishment

Manufacturer DC inventory

Production

Raw material inventory

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Traditional approach

Static models set for a season

Replenishment Static minimum Replenish- Static minimum and maximum ment based and maximum based on periodic checks levels in weeks on retailers levels in weeks aggregate of demand of demand of store orders inventory Broadly defined groupings of items for inventory planning

Production is Reorder when reactive when minimum minimum DC inventory level inventory level is hit is hit

Broadly defined Standardized groupings of run lengths items for for all items inventory planning

Key Product flows Information flows

Figure 1. Traditional approaches to supply chain management

A third major shortcoming of traditional approaches is that they treat all items very much the same. Similar levels of inventory (measured in weeks of demand) are held for volatile and non-volatile items. Common material handling approaches are used across high- and low-volume items. As a result, opportunities are missed for reducing the cost of distribution. Chain-linked organization A way to circumvent the problems created by the traditional approach to supply chain management is to integrate the supply chain. An integrated supply chain (Figure 2) is linked organizationally and co-ordinated with information flows, from raw materials to on-time delivery of finished products to customers. Partnering-oriented business relationships are established between, and among, all supply chain members to facilitate co-ordination of supply chain activities. Similarly, supply chain processes (such as purchasing, manufacturing, marketing and logistics) within the company are managed horizontally across the company to minimize unnecessary hand-offs, silo behaviour, uncertainty and delays. The entire supply chain is linked by information about anticipated and actual demand, supply, and movement, and this information is used to coordinate the activities of all supply chain partners. Integrated, co-ordinated supply chain super-organizations are extremely responsive and can react quickly to support a partner companys rapid growth.

Suppliers

Inbound carriers

Manufacturer

Outbound carriers

Warehouses

Outbound carriers

Customer

Key Material/product flow Information flows

Figure 2. The integrated supply chain

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All supply chain partners share in business planning, forecasting, point-of-sale information, inventory, inventory status, and other activities and information related to co-ordinating the flow of products. When everyone plays from the same sheet music, delays are minimized. Suppliers know when to step up production, carriers can plan when to provide additional equipment, and distributors can provide added throughput capacity just-in-time. Products speed through the supply chain, unimpeded by uncertainty, start-up intertia, excessive hand-offs, flow interruptions, or paperwork delays. Expecting the unexpected For some kinds of business, however, uncertainty is the normal state of affairs, regardless of who composes the sheet music. Team Hanes, a sports clothing manufacturer in the USA is such a business. It is the kind of retail business in which consumers purchases tomorrow can be dramatically influenced by the outcome of a basketball game; or in which a falling idol can cause thousands of unwanted T-shirts to be left behind. This type of demand volatility can create operational and logistical nightmares. As if this were not difficult enough, this volatility must be managed for thousands of stock-keeping units (SKUs), the result of multiple seasons, sports, graphics, styles and sizes. In addition, Team Hanes has the kind of retail customer who wants five inventory turns annually and expects five-day order turnarounds, 95 per cent order fill rates and account-specific price tagging! A business such as this presents retailers and manufacturers with difficult trade-offs. How do you keep retail inventories low enough to achieve five turns annually, but still have sufficient inventory at retail to avoid stock-outs? How do you carry enough inventory in your distribution centre to fill unpredictable spikes in demand without exposing yourself to excessive close-out risks when teams slump? How do you balance the cost benefit of long production runs with low weekly demand levels for many items? Two years ago, Team Hanes proposed answers to these questions and launched their vendor management programme for licensed sports apparel sold in mass retail markets. Team Hanes solution was to work more closely with the retailer to manage the category. This included setting and actively monitoring store-level model stocks, placing weekly replenishment orders based on point-of-sale (POS) sell-through data, and shipping price-ticketed product directly to stores. By managing the entire supply chain from the retail floor back through production, Team Hanes would be able to compress cycle times, eliminate inventory holding points (such as retailer distribution centres), and respond better to volatile consumer demand. Building the infrastructure to support growth The overarching goal of Team Haness vendor management programme was to help the retailer and Team Hanes increase the volume of their licensed sports apparel business. However, with growth of the business, came the challenge of

sustainably delivering the vendor management programme in an expanding number of retail stores across an expanding product line. Team Hanes recognized that profitable growth in this highly volatile category required an operational infrastructure that would meet consumer demand more reliably and with less system-wide inventory than traditional approaches. Mercer helped Team Hanes design a business system that would deliver these benefits of vendor management as the company grew. The business system developed with Team Hanes is expected to overcome the shortcomings of traditional approaches, by managing the entire supply chain in an integrated way, based on a single forecast of consumer demand (Figure 3). As described below, the single forecast of consumer demand, at the item level, provides the unifying perspective to integrate all activities in the supply chain. Using the forecast of consumer demand, retail models are reviewed weekly to optimize their performance. This review sets model stock levels to meet projected demand, not the last few weeks of sales. The combination of store POS data plus adjustments to model stocks determines weekly shipments to individual retail outlets. These replenishment shipments are picked in the Team Hanes distribution centre and shipped directly to the store. This approach eliminates intermediate inventory holding points and reduces the order cycle time. Within the distribution centre, higher volume items benefit from more automated material-handling techniques, further reducing costs and improving response times. Inventories required in the Team Hanes distribution centre are re-evaluated for each item each week, based on forecast consumer demand and observed volatility. Changes in consumer demand trends are automatically integrated into inventory planning over the relevant time period, highlighting potential shortages well in advance. Using this approach, the traditional metric of weeks
Consumer demand forecast

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Consumer demand

Instore model stocks

Dynamic models reviewed weekly, based on forecast consumer demand

Store replenishment

Team Hanes DC inventory

Production

Blank garment inventory

Replenishment based on consumer demand

Dynamic Production Matched to inventory managed for production schedule targets JIT arrival of established product in DC weekly, based based on on forecast forecast consumer consumer demand demand Run lengths sized to smaller of near-term consumer demand forecast or EOQ

Key

Product flows Information flows

Figure 3. Team Hanes integrated supply chain approach

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of inventory becomes meaningless; inventories are compared with week-byweek consumer demand forecasts, not past average depletion rates. Production plans are reviewed for each item each week, based on the future inventory requirements established above. Any items that are forecast to go beneath their required inventory levels are scheduled for production. This approach focuses the planning department on a forward-looking perspective of their requirements. Any difficulties encountered in meeting consumer demand are recognized and acted on when the problem is still a number of weeks out on the planning horizon. Production run sizes are optimized by item to balance economic order quantity (calculated on the basis of item-specific volume characteristics) against the forecast consumer demand over the near term. In this way, long production runs are used wherever possible, but finished goods inventories are always linked to an amount that is forecast to be sold in the next few weeks. Raw material inventories (blank garments) are sized on the basis of the projected print schedule, ensuring a match between production plans and blank inventories. The need for automation How can retail models, finished inventory levels, and production schedules be reviewed at the item level each week with anything less than an army of analysts? The key lies in automating virtually the entire process. All of the decisions in the day-to-day operation of the supply chain can be made from a single forecast of consumer demand, which the Team Haness computer system uses to recommend optimal tactics for each activity in the supply chain. These recommendations can be implemented automatically (small model stock adjustments, for example) or flagged for review (production schedules). Either way, decision making is supported by a system that accounts for the integrated impact of operational decisions throughout the supply chain and then suggests the appropriate approach. This business system is designed to deliver Team Haness unique value proposition to retailers consistently and reliably as the business grows. It allows Team Hanes to manage the end-to-end supply chain for licensed sports apparel, maximizing revenue and profitability for both the retailer and itself. For Team Hanes, a solid operational infrastructure is a critical foundation for growing the business. Getting ready for growth The efficiency of a companys supply chain and its capability in supporting anticipated growth can be assessed by way of the supply chain diagnostics guide: Is timely POS information used to provide early warning of rapid shifts in demand? Are agreed-on, accurate demand forecasts used to pull products through the supply chain from raw materials through manufacturing to

distribution to customers, in the right amounts and in the right assortments, when needed? Do major customers regularly provide their demand projections and plans for growth? Are major suppliers regularly provided with business plans and demand projections? Does purchasing, manufacturing, product flow, inventory and transaction information move seamlessly throughout the supply chain? Is there an electronic link (e.g. for demand measurement, forecasts, automatic replenishment, electronic funds transfer) with all major customers? Is there an electronic link (e.g. for forecasts, automatic replenishment, manufacturing resource planning (MRP) transmitted as purchase order, electronic funds transfer) with major suppliers? Is there an electronic link (e.g. for load planning, negotiating rates, electronic despatching, delivery acknowledgments, electronic fund transfer) with major carriers? Have service and performance measurements been implemented between each stage of the supply chain to monitor supply chain performance? Are supply chain processes co-ordinated and managed horizontally across the organization to minimize hand-offs and reduce cycle times? If the answer was NO to most of these questions, it is likely that the supply chain would be slow to respond to a rapid change in demand. Information delays, multiple hand-offs, suppliers inability to step up production quickly, difficulty in obtaining carrier equipment, and many other problems would impede a companys ability to respond quickly to growth triggers. If this is the case with your company, it is time to work on improving your companys supply chain efficiency and performance. Your competitors are already doing so.

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