ASSIGNMENT COVER PAGE

Please complete Section A and Section B below and attach the cover page to the front of your assignment

SECTION A: STUDENT AND ASSIGNMENT DETAILS (Please complete the details below in full)

Student number
501687
Title
Mr
Surname
COETSEE
First name/s
WILLEM JACOBUS
Programme
BCOM HONS SUPPLY CHAIN MANAGEMENT : YEAR 1
Intake
JULY 2017
Module
STRATEGIC SUPPLY CHAIN MANAGEMENT
Facilitator
KUDZAI
Examination venue
CAPE TOWN
Submission type First submission 
Submission date
13 SEPTEMBER 2017
Postal address
49 MOSTERT STREET

VIKING VILLAGE

KRAAIFONTEIN
Work
Contact 021 948 3701
details
Home
N/A
Cell
079 272 0446
Email
wcoetsee@beekman.co.za

SECTION B: DECLARATION: I hereby declare that this assignment submitted is an original piece of work produced by myself.

Signature of student: WILLIE COETSEE .

Date: 13 SEPTEMBER 2017 .

STUDENT NUMBER: 501687 Page 1

COVER PAGE

TABLE OF CONTENTS PAGE

Question 1.1 3-5

Analyse the competitive strategy of a high-end store such as H&M and advise what key
customer needs the store must fill.

Question 1.2 5-9

Provide an evaluative account of how the bullwhip effect may present itself at H&M and how
the company can deal with this?

Question 2 9 - 13
As the extent and proliferation of globalisation increases, the corporate landscape changes
thereby requiring organisations to adapt. The 21st century is largely characterised by rapid
growth in globalisation and increased participation in the global economy.

Discuss how companies should prepare for globalisation in terms of responsiveness.

Question 3 13 - 15
Amazon has truly become a corporate giant. With a recent foray into the entertainment
space and a number of achievements under its belt, the company has redefined, in many
ways, the manner in which supply chains are designed and managed.

Conduct research and explain Amazon’s strategy for slow-moving, low-volume products and
fast-moving, high-volume items.

Question 4 15 - 19
It is imperative that organisations are able to integrate demand planning within aggregate
planning to inform manufacturing decisions. This is where sales and operations planning
become crucial in dealing with the predictable variability of demand (Chopra and Meindl,
2016).

Critically evaluate the methods by which manufacturer can tackle the seasonal demand
issue in operations planning.

Referencing 20

STUDENT NUMBER: 501687 Page 2

Question 1.1
Analyse the competitive strategy of a high-end store such as H&M and advice what key
customer needs, the store must fill.

Introduction
H&M, which ranks number three on Gartner's Supply Chain Top 15, is the world's second-
largest clothing retailer, and has 950 stores in 19 countries, with a whopping turnover of 14.6
billion Euros in 2013. Fashion isn't just all about dressing up and H&M's supply chain are a
testament to be globally recognised for being a successful and expansive retail giant in
terms of market and financial prosperity. The organisation's reliance on efficient and
integrated systems for retail inventory management in the major components of its supply
chain, has played a huge part in enabling success in its stock control management. This
was achieved by providing their customers with convenience, availability and
responsiveness within the fashion retail market, as H&M is famous for offering chic, trendy
styles with rapid turnarounds, described as “fast fashion”.

H&M Supply Chain and Competitive Strategy

An organisation’s competitive strategy defines, relative to competitors, a performance
feature of customer needs that it seeks to satisfy and able to reach dimensions like price,
time and quality through its products and services, which is silhouetted against other
competitors. Both the competitive and the supply chain strategy of H&M have aligned goals
and refer to the consistency between customer priorities, a continuous search for promising
markets, cost efficiency in production of goods, and reduction in lead times for their fashion
retail inventory, as illustrated in below supply chain model figure 1.1.

Figure 1.1 H&M Supply Chain Model

STUDENT NUMBER: 501687 Page 3

We can analyse H&M’s competitive strategy based on the following facts from the extract
as follow:

Customer Needs and Fashion Ideas

 As a fast-moving apparel retailer, it takes on an innovative direction in determining
consumer interests through both traditional analysis and experimental augmented-
reality technologies, as part of their marketing and sales strategy.
 H&M’s core operation relies on both its designers inspiration, creative directors,
pattern makers and the service of fashion trend forecast companies such as Worth
Global Styles Network (WGSN), to offer and stay on top of the latest fashion trends.
 Customer-driven reports of future trends in hand, help H&M creates collections that
strike a good balance between latest trends and the basics, which are adapted to
styles and models that will suit their customers.

Design – Price Economy and Short lead Times

 H&M’s operations are built around their centralised headquarters with 100 in-house
designers to develop their own fashion trends to maintain control over resource
planning and manufacturing cost.
 Affordability is reached with strong supplier relationships, and close collaboration with
a range of 60 pattern makers, 700 suppliers and 20 worldwide production centres to
curate and coordinate each collection more than a year in advance.
 Two-fold design process, which involves long-term planning of collections, and real-
time design response stems them from a customer-driven production strategy and
seasonal supply.

Production and Manufacturing

 H&M outsource manufacturing by utilising over 700 partner companies in more than
20 countries, relying on a network of external suppliers to manage its buying and
production as they don’t owe any factories.
 H&M supply chain strategy is based around a pull strategy from its customers, as
they manufacture 80% of its retail inventory in advance and introduces the remaining
20% based on a push strategy on the most current market trends.
 H&M purchases garments from around 750 suppliers, with 60% of production taking
place in Asia and the remainder mainly in Europe to achieve the benefits of leanness.
 H&M fosters close and effective engagement with its partners by strategically locating
30 production oversight offices as a mediating function and to enable quick response,
easier contact and to ensure the goods are produced at the accurate quality and
price.

STUDENT NUMBER: 501687 Page 4

  H&M suppliers abide to the company's code of conduct.

Technological Integration
 H&M rely on IT integration between their central national office and the production
offices.
 With an efficient IT communication infrastructure in place, the company simply place
an order with one of its partner companies in the region that already have the
necessary fabrics to reduce lead times.
 The adoption of a modern IT infrastructure and a central inventory management
software system brought the average lead times down by 15-20%.
 Communication between various departments takes place electronically, especially
in regards to design and product development.

Conclusion
H&M's ability to rapidly churn out new styles has helped it become the second largest
apparel retailer in the world. H&M’s supply chain model of a fast, efficient and flexible supply
chain supports their strategy by achieving fast response times, maintaining a high variety of
fashion styles, and maintaining a steady supply chain rhythm and schedule. They are driven
by strong values such as simplicity, continuous improvement, team spirit, cost-
consciousness and entrepreneurship. Affordability and price economy is reached with
strong supplier collaboration, paired with manufacturing strategies that reduce lead times.
Flexibility and short lead times have reduced the risk of buying the wrong items and allowed
H&M stores to restock quickly with the best-selling products at affordable prices. All the
above is a combination of both their success and competitive strategy.

Question 1.2
Provide an evaluative account of how the bullwhip effect may present itself at H&M and how
the company can deal with this?

Introduction
The Bullwhip effect is the phenomenon where demand variability increases in supply chain
as you move away from retailer to manufacturer, in which forecasts yield supply chain
inefficiencies, and amplifying swings in inventory as one moves upstream along a supply
chain further away from the customer. The bullwhip effect was first recognised by executives
at Proctor and Gamble (P&G) in their supply chain for Pampers diapers. It was noticed that,
despite retail sales being fairly uniform, the orders placed by the distributor to the factory
fluctuated more than the sales at the retailer, and orders to suppliers fluctuated even more.
This amplification in order variation may cause irrational decision making, which can cause

STUDENT NUMBER: 501687 Page 5

a dramatic effect on firms resulting in excessive inventory, poor product forecasts,
insufficient or excessive capacities, poor customer service due to unavailable products or
long backlogs, uncertain production planning and high cost correction like high shipments
(Lee et al. 1997).Therefore, it is important to forecast and share information precisely to
avoid bullwhip effect which means that team members inevitably have to collaborate
effectively to avoid uncertainties.

Demand Variability and the Bullwhip Effect

The ratio of demand variability to order variability measures the standard deviation of
incoming demand and supply orders placed. A ratio less than one potentially indicates the
existence of the bullwhip effect. H&M represents a significant challenge for existing supply
chain techniques, due to high volatility of demand and increased product variety. In any
fashion retail operation, particularly of fashion garments, there is variability in consumer
demand due to changing tastes, which leads to longer lead times from design to production.
As consumer tastes become more diverse and fast changing, increasing the fashion range
and decreasing the garment lifecycle, whilst managing inventory becomes exponentially
challenging. Through point-of-sale data, the retailer has access to the customer demand
which is then used to place an order which will account for safety stock. The variability of
demand for the retailer will be higher than the variability of demand for the customer. Fashion
retailers generally offer clothes at much lower prices than luxury or mass-luxury brands, and
that has to be taken into consideration when designing a supply chain in order to minimise
costs where possible and bring these savings to consumers.

Causes and Countermeasures of the Bullwhip Effect

Demand Forecasting
Demand forecast rely on historical data to estimate current demand of a product, which does
not take into account any fluctuations. Inaccuracies occur when everybody in the supply
chain adds a certain percentage to the demand estimates, due to no visibility of true
customer demand, unless there is perfect information sharing taking place. The order placed
by a downstream partner will be viewed by the upstream partner as a signal about future
demand. The greater the variability in the orders from the downstream partner, the greater
the variability for the upstream partner will be. This implies holding greater amounts of
inventory, which include safety stock, to account for the variability in demand.

Countermeasures to Demand Forecast Inaccuracies

H&M centralised their design team to obtain single control of replenishment or Vendor
Managed Inventory (VMI) to overcome exaggerated demand forecasts. The supply planning

STUDENT NUMBER: 501687 Page 6

will be inaccurate without good information and the levels of inventory will have a high
standard deviation or variability. Lack of demand visibility can be addressed by providing
access to point of sale (POS) data, and a customer-driven approach to production as used
by H&M. H&M’s make use of traditional research methods, street trends and their own staff
to forecast demand and predictions of emerging trends.

Order Batching
Order batching occurs in an effort to reduce ordering costs, to take advantage of
transportation economics such as full truck load economies, and to benefit from sales
incentives. This creates variability in the demand as there may be a surge in demand at
some stage followed by no demand. It often accumulates demands before issuing an order
due to considerations of fixed order costs or optimum distribution efficiency.

Countermeasures to Order Batching

High order cost is countered with Electronic Data Interchange (EDI) and computer aided
ordering (CAO). H&M has introduced seasonal ordering collections to simplify the process
and dramatically cut the number of invoices. Random or correlated ordering is countered
with regular delivery appointments as H&M replenished stores with garments that are in high
demand on item level. The new high velocity retailers require frequent shipment in small
batches as an ongoing replenishment determined by ongoing sales data as well as customer
preferences at sales outlets in contrast to traditional apparel supply chain model where
manufacturers made typical bulk shipment per season.

Lead Times
The extent of order lead times has implications for demand variability. There is variability in
consumer demand due to changing tastes in any retail operation. Changing consumer tastes
and long lead times from design to production render ordering of garments risky. The long
lead times also hinder offering variety to consumers in terms of styles and range. As
consumer tastes become more diverse and fast changing, increasing the fashion range and
decreasing the garment lifestyle, whilst managing inventory becomes exponentially
challenging.

Countermeasures Lead Time Reduction

Effective information systems and information sharing can help to cut lead times. H&M does
not have factories but relies on a network of 750 external suppliers with flexible lead times
and low production costs. Lead time reduction leads to the ability to quickly fill customer
orders that cannot be filled from stock. H&M also pioneered vertical integration with the
distribution network. This vertical marketing enables H&M to directly gain and exploit

STUDENT NUMBER: 501687 Page 7

information about sales and customers and accelerate its response to the market. This lead
time reduction lead to:
 Greater degrees of forecast accuracy over a shorter forecast horizon.
 Reduction in finished goods inventory levels.
 Reduction in the bullwhip effect.

Price Fluctuations
Many retailers engage in forward buying, because of promotions and trade deals. The price
of a product fluctuates, which increases variability of demand. When the price of a product
is low, a customer buys larger quantities as to the price is normal. Manufacturers and
distributors regularly have promotions through price discounts, quantity discounts and other
promotions. During these periods, customers will stock up on and purchase in quantities
that do not reflect their immediate needs. When prices return to normal, the customer will
not make purchases until it has used up its inventory. This variability leads to the bullwhip
effect.

Improve Price Stability

The bullwhip effect can be mitigated by reducing variability of customer demand through
stabilising prices. High-low pricing can be replaced with everyday low prices (EDLP). Special
purchase contracts can be implemented in order to specify ordering at regular intervals to
better synchronize delivery and purchase. The simplest way to control the bullwhip effect
caused by forward buying and diversions is to reduce both the frequency and the level of
wholesale price discounting.

Centralised and Decentralised Information

Centralise demand information is seen as one of the most frequent suggestions for reducing
the bullwhip effect. In a situation where demand information is centralised, supply chain
partners can use actual demand information to create more accurate forecasts. High-
velocity operation depends on rapid information flow to a large extent. The importance of
information cannot be overstated as it is a vital element in decision making. Information is a
crucial component of H&M’s value chain, which integrates H&M stores with the logistics,
procurement departments and the central warehouse. An intelligent procurement system
processes sales data gathered from their central departments. Communication on design
and new product development occurs electronically between departments.

Information sharing and forecasting

Forecasting is a task made simpler by having access to the correct usable information. IT is
a crucial component of H&M’s value chain, which integrates their retail stores with the

STUDENT NUMBER: 501687 Page 8

logistics, procurement departments and the central warehouse. Their intelligent
procurement system process sales data gathered from central departments to keep both
their suppliers and manufactures informed. It is for these reasons that supply chains are
moving towards collaboration.

Strategic Partnerships
The bullwhip effect can be mitigated by engaging in strategic partnerships. H&M, which
relies on its suppliers aims to find the optimal time and supplier to order each item of clothing.
On an average, H&M is able to get supplementary orders in a few weeks for clothes that are
selling well. At H&M, the stock management is primarily handled internally. The store
stockroom within H&M called the ‘Call-Off warehouse’ replenishes stores with clothes that
are in high demand on item level. Strategic partnerships change the way information is
shared and inventory is managed within the supply chain.

Conclusion
The bullwhip effect is an obstinate phenomenon that will always be present in supply chains
and cannot be completely eliminated. Supply chain management demonstrated the benefits
of optimising product design for a supply chain, including postponement of customisation
and localisation in favour of generic products that can be customised according to customer
demand. It also highlighted the importance of having the right inventory in the right place at
the right time, thus allowing H&M to cost-justify changes in the supply chain network to
optimise inventory distribution.

Question 2
As the extent and proliferation of globalisation increases, the corporate landscape changes
thereby requiring organisations to adapt. The 21st century is largely characterised by rapid
growth in globalisation and increased participation in the global economy. Discuss how
companies should prepare for globalisation in terms of responsiveness.

Introduction
Global customers have emerged as needs continue to converge. As market conditions
change, increasing levels of product variety and customisation, the ability to respond to
customer orders in a timely fashion can provide a critical competitive advantage. A supply
chain can use a high level of product availability to improve its responsiveness and attract
customers, however, a high level of product availability requires large inventories which raise
supply chain costs. Companies are contemplating strategies to increase their
responsiveness to customer needs by offering a high product variety with short lead-times,
to achieve a balance between the level of availability and the cost of inventory. Its

STUDENT NUMBER: 501687 Page 9

competitive strategy is built around providing the customer with convenience, availability,
and responsiveness, through the optimal level of product availability that maximises supply
chain profitability.

Understanding Customer and Supply Chain Uncertainty

Uncertainty can be seen as the main reason for being responsive, and therefore the
conditions of reliable information about demand conditions, would hardly be a need to be
responsive. The need arises mainly from the uncertainty that stems from volume and or
product mix changes in customer demand. Uncertainty itself can emanate from different
sources, namely supply uncertainty, process uncertainty and demand uncertainty.
Companies need to design and create a strategic fit strategy whose responsiveness aligns
with the implied uncertainty it faces, as supply chain characteristics contribute to
responsiveness and efficiency.
Supply chain responsiveness is measured by the abilities of the chain to do the following:
 Ability to respond to fluctuations in demand,
 Ability to provide short lead times,
 Ability to handle large variety of products,
 Ability to come out with innovations and highly innovative products,
 Ability to provide a very high service level.

Responsiveness comes at a cost as the need to respond to a wider range of quantities

demanded, which increase both capacity and costs. This increase in total cost leads to the
second definition of supply chain efficiency, which is the inverse of the cost of making and
delivering a product to the customer. Another aspect of globalisation is the steady
convergence of customer needs. Customers in different parts of the world increasingly
demand similar products and services, opportunities for scale arise through the marketing
of more or less standardised offerings, as explained in below table 2.1.

Table 2.1 Requirements to Supply Chain Responsiveness

Factors Main Links to Supply Chain Responsiveness

 Main requirement for being responsive, i.e. 100% reliable

demand would considerably reduce need for
responsiveness.
Demand Uncertainty
 Important sub-category is schedule instability, particularly
important for industries operating under rolling schedules.

 Often closely linked to demand uncertainty, yet conceptually

different.
Demand Variability
 Even if demand was 100% reliable, large swings (even if
known) in demand could still require responsiveness.

STUDENT NUMBER: 501687 Page 10

  Directly increases need for responsiveness, as less time is
Lead-time available to respond to customer orders.
Compression  Indirectly increases need for responsiveness through
increased demand uncertainty (changes in P:D ratio)
 Product variety can directly increase the need for mix
responsiveness
Product Variety
 High product variety increases the cost of using finished
goods inventories to fill orders

The curve in figure 2.2 showing the lowest possible cost for a given level of responsiveness.
The goal is to target high responsiveness for a supply chain facing high implied uncertainty
and efficiency for a supply chain facing low implied uncertainty. Lowest cost is defined based
on existing technology, as not every company is able to operate on the efficient frontier,
which represents the cost responsiveness performance of the best supply chain. Based on
this a company that is not on the efficient frontier can improve both its responsiveness and
its cost performance by moving toward the efficient frontier.

Figure 2.2 Cost Responsive Efficient Frontier

In contrast, a company on the efficient frontier can improve its responsiveness only by
increasing cost and becoming less efficient, and therefore a company must then make a
trade-off between efficiency and responsiveness. For companies to attain a high level of
performance, companies should move their competitive strategy and resulting implied
uncertainty, and their supply chain strategy which include their resulting responsiveness
towards the zone of strategic fit as illustrated in figure 2.3.

STUDENT NUMBER: 501687 Page 11

Figure 2.3 Finding the Zone of Strategic Fit

Tailoring the supply chain requires sharing some links in the supply chain with some
products, while having separate operations for other links to achieve maximum possible
efficiency while providing the appropriate level of responsiveness to each segment. Table
2.4 provides a comparison of efficient and responsive supply chains to support this
statement.

Table 2.4 Comparison of Efficient and Responsive Supply Chains

Efficient Supply Chain Responsive Supply Chains
Primary Goal Supply demand at lowest Respond quickly to demand
cost
Product Design Maximise performance at a Create modularity to allow
Strategy minimum product cost postponement of product
differentiation
Pricing Strategy Lower margins because price Higher margins because price is
is a prime customer driver not a prime customer driver
Manufacturing Lower costs through high Maintain capacity flexibility to
Strategy utilisation buffer against demand/supply
uncertainty
Inventory Minimise inventory to lower Maintain buffer stock to deal with
Strategy cost demand/supply uncertainty

STUDENT NUMBER: 501687 Page 12

 Lead Time Reduce, but not at the Reduce aggressively, even if the
Strategy expense of costs costs are significant
Supplier Select based on cost and Select based on speed, flexibility,
Strategy quality reliability and quality

To achieve strategic fit, a company must also ensure that all its functions maintain consistent
strategies that support the competitive strategy. All functional strategies must support the
goals of the competitive strategy.

Conclusion
Companies need to understand the supply chain's capabilities in terms of efficiency and
responsiveness, as the key to strategic fit is ensuring that supply chain responsiveness is
consistent with customer needs, supply capabilities, and the resulting implied uncertainty.
In the supply chain we can exhibit different levels of responsiveness, depending on where
in the supply chain its responsiveness is measured. This leads to the conclusion that at any
point in a supply chain, the supply chain will have a potential and demonstrated
responsiveness based on the global environment, opportunities and capabilities. Supply
chain responsiveness takes many forms, including the ability to respond to a wide range of
quantities, meet short lead times, handle a large variety of products, build innovative
products, meet a high service level, and handle supply uncertainty.

Question 3
Conduct research and explain Amazon’s strategy for slow-moving, low-volume products and
fast-moving, high-volume items.

Introduction
Amazon started as an online bookseller, but has expanded into a wide variety of media,
electronics, and other general merchandise categories in support of its business strategy.
Amazon strategy to become the retailer of choice for its customers, was developed in line
with their supply chain strategy through multi-tier inventory management systems,
superlative transportation, and highly efficient use of information technology. On the other
hand, Amazon stocks the frequently purchased and ordered items in its own warehouses
so that it can be responsive to the customer needs as well as not compromise on the delivery
times and the lead times. In other words, by segregating its inventory, Amazon was able to
be responsive to the customers as well as cut costs or cut slack where it was needed.

STUDENT NUMBER: 501687 Page 13

Amazon’s strategy for slow-moving, low-volume products and fast-moving, high-
volume items
Amazon uses a push strategy for high volume, fast-moving products and a push-pull
strategy for low volume, slow-moving products. For this reason they switched from pure pull
to a push-pull supply strategy. They established regional warehouses in order to aggregate
demand across large geographical areas, and to increase service levels. The push-pull
boundary in a supply chain separates push processes from pull processes. Items with low
demand are referred to as slow-moving items and typically have a high coefficient of
variation, whereas items with high demand are referred to as fast-moving items and typically
have a low coefficient of variation. High-volume, fast-moving products, whose demand can
be accurately matched with supply based on long-term forecasts, are stocked in stores.
Low-volume, slow-moving products are stocked centrally for on-line purchasing.

Push processes operate in an uncertain environment because customer demand is not yet
known. Pull processes operate in an environment in which customer demand is known. They
are, however, often constrained by inventory and capacity decisions that were made in the
push phase. We can define the difference between these two strategies as follow, and
illustrated in figure 3.1:

Figure 3.1 Difference between Push and Pull Systems

STUDENT NUMBER: 501687 Page 14

Push Strategies
 When the manufacturer uses its sales force and trade promotion money to induce
intermediaries to carry, promote, and sell the product to end users. The push system of
inventory control involves forecasting inventory needs to meet customer demand. The
company must know which products in which quantity are needed to be purchased.
 Disadvantages of the push inventory control system are that forecasts are often
inaccurate as sales can be unpredictable and vary from one year to the next. Another
problem would be when there are products left at the inventory because of the wrong
forecasting which increase the company costs for storing those goods.
 A Materials Requirements Planning (MRP) does make an important sense for a push
system. MRP combines the calculations for financial, operations and logistics planning.
It is a computer-based information system which controls scheduling and ordering.

Pull Strategies
 When a manufacturer uses advertising and promotion to persuade consumers to ask
intermediaries for the product thus inducing the intermediaries to order it. Companies
that operate a pull system they will begin with a customer’s order. They only make
enough products which is needed.
 An advantage of this system is reducing of cost of carrying and storing goods.
 The disadvantage of this system is to run into ordering dilemmas, for example if the
suppliers cannot deliver on time that finally is followed to the customer dissatisfaction.
 The JIT delivery model is a good example of pull inventory control system. By using a
JIT system the inventory levels will be kept to a minimum by only having enough
inventory, not more or even less, to meet customer demand.

Conclusion
The push-pull boundary exists where demand switches from a reactive pull to speculative
push production. For most of the Amazon bookstore supply chains the push-pull boundary
is between the customer order cycle and the replenishment cycle. The customer order pulls
the book from the book store shelf but the initial production of the book was triggered by a
build to order that moved materials along the supply chain to the retail outlet.

Question 4
Critically evaluate the methods by which manufacturer can tackle the seasonal demand
issue in operations planning.

STUDENT NUMBER: 501687 Page 15

Introduction
The demand of a given product is said to exhibit seasonality when the underlying time-series
undergoes a predictable cyclic variation depending on the time within the year. Demand for
many products changes frequently from period to period, often because of a predictable
influence, which include seasonal factors that affect products as well as non-seasonal
factors that may cause large, unpredictable increases or declines in sales. Seasonality is
one of most frequently used statistical patterns to improve the accuracy of demand
forecasts. Sound predictions of demands and trends are no longer luxury items, but a
necessity, if managers are to cope with seasonality, sudden changes in demand levels, and
price cutting manoeuvres of the competition, strikes, and large swings within the economy.
Seasonality refers to short-term, fairly regular variations generally related to factors such as
the calendar or time of day.
Responding to Predictable Variability
Seasonality can be an important factor in capacity planning, as predictable variability is
change in demand that can be forecast. Products that undergo this type of change in
demand create numerous problems in the supply chain, ranging from high levels of stock
outs during peak demand periods to high levels of excess inventory during periods of low
demand. Faced with predictable variability, a company’s goals is to respond in a manner
that balances supply with demand to maximise profitability. The goal of sales and operations
planning is to appropriately combine two broad options to handle predictable variability.

Manage supply using capacity, inventory, subcontracting and backlogs.

 Capacity: Companies need to review their supply chain capacity, including inventory
requirements, procurement policy, and logistics, to make certain that there is sufficient
manufacturing and distribution capacity. In this step they can identify any potential
decision points such as the need to outsource for additional capacity, flexible working
hours and or labour.
 Flexibility: Flexibility can be a key issue in capacity decisions, although flexibility is not
always an option, particularly in capital-intensive industries. To manage supply with the
goal of maximizing profit, companies must manage their capacity through the use of
workforce flexibility, subcontracting, dual facilities, and product flexibility. In flexible
production lines, production rates can easily be changed to match demand and may be
varied. This system senses the fluctuation in the market demand and the production
system is then changed to match the demand. Flexibility allows an organisation to be
responsive to changes in the marketplace, and reduces to a certain extent the
dependence on long-range forecasts to accurately predict demand.

STUDENT NUMBER: 501687 Page 16

 Inventory: Design and use common components across multiple products of which the
total demand is relatively stable, even though each product displays predictable
variability. This will allow the supply chain that produces these components to easily
synchronise supply with demand and relative low inventory of parts has to be built up.
Secondly, manufacture inventory of high-demand or predictable-demand products with
the same peak demand season, if the previous approach is not feasible. It is more
feasible for a company to produce products that have more predictable demand during
the offseason, because there is less to be learned about their demand by waiting.
Therefore, production of more uncertain items should take place closer to the selling
season, when demand is more predictable.
 Subcontracting and Seasonal Workforce: Companies can make use of both temporary
workforce, and or subcontractors during the peak season to increase capacity to match
demand. Capacity is altered by in certain periods by using time flexibility of workers, use
of seasonal work force, use of subcontractors to supply peak demand, use of dedicated
facilities and some flexible facilities, and having flexible production processes.

Manage demand using short-term price discounts and promotions.

Demand in the supply chain can be influenced by using pricing and other forms of promotion.
Forecasting with seasonality and a trend is obviously more difficult than forecasting for a
trend or for seasonality by itself, because compensating for both of them is more difficult
than either one alone. When a promotion is offered during a period, the period’s demand
trends to go up as a result from a combination of the following three factors as per table 4.1.

Table 4.1 Source Chopra & Meindl, (2016)

Customers move up future purchases to the present. A promotion
may attract buyers who would have purchased a Corolla a few
Forward Buying months down the road. Forward buying does not increase Toyota’s
sales in the long term and also leaves the family sedan market the
same size.
An increase in consumption of the product occurs from either new
or existing customers. For example, Toyota offers a price promotion
on the Corolla, it may attract buyers who were considering the
Market Growth
purchase of a lower-end model. Therefore, the promotion increases
the size of the overall family sedan market as well as increasing
Toyota’s sales.

STUDENT NUMBER: 501687 Page 17

 Customers substitute the firm’s product for a competitor’s product.
When Toyota offers a Corolla promotion, buyers who might have
Stealing Share purchased a Honda Jazz may now purchase a Corolla. So, the
promotion has effectively increased Toyota’s sales while keeping
the overall size of the family sedan market the same.

John Deere offers a discount to farmers who are willing to take ownership of a plant during
the off-season. The further from the peak that a farmer places an order, the larger the
discount offered by John Deere. The goal here is to move demand from the peak period to
the off-peak period thereby reducing predictable variability. If a promotion primarily results
in forward buying, it is best to use promotions to reduce the seasonal peak by offering a
price discount during low-demand periods. Offering a promotion during low-demand periods
also makes sense if the manufacturer has a high cost of holding inventory or finds it
expensive to change production levels. In contrast, if a promotion results in a significant
increase in sales by attracting new buyers, it may be better to offer a price discount during
the peak period, when many buyers are in the market for the product. The increased cost of
production because of the higher peak demand resulting from a promotion is likely to be
offset by the margin obtained from new buyers.

Implementing Sales and Operations Planning in Practice

 Coordinate planning across enterprises in the supply chain: The entire supply chain must
work towards the one goal of maximising profitability, for a company to manage
predictable variability successful. It is difficult for an entire supply chain to agree on how
to maximise profitability, as within an organisation, sales often have incentives based on
revenue, whereas operations have incentives based on cost. Therefore, different firms
are judged by their own profitability, not necessarily by the overall supply chain’s
profitability.
 Ensure that senior management owns the sales and operations planning process: To
handle predictable variability in a profit-maximising manner, companies must coordinate
the management of both supply and demand. This requires coordinated planning across
all stages of the supply chain to select pricing and promotion plans and aggregate plans
that maximise supply chain profit. Given competing interests, this alignment is unlikely
unless the sales and operations planning process owner is a senior leader with sufficient
authority.
 Ensure that the sales and operations planning process modifies plans as the reality or
forecasts change: It is important that early warning alerts be built into the sales and
operations planning process. A change in demand or supply circumstances may leave

STUDENT NUMBER: 501687 Page 18

 the reality different from plan. In such a situation, it is important for the planners to alert
the supply chain regarding the old plan and provide a new plan that accounts for these
changes. Even if there are no short-term alerts, the output of the sales and operations
planning process should be modified as forecasts or marketing plans are adjusted.
 Take predictable variability into account when making strategic decisions: Predictable
variability has a tremendous impact on the operations of a company. A firm must always
take this impact into account when making strategic decisions. However, predictable
variability is not always taken into account when strategic plans are made, such as what
type of products to offer, whether or not to build new facilities and what sort of pricing
structure a company should have.

Conclusion
When sales vary significantly according to season, the manufacturer makes special
provisions to integrate the acquisition of raw materials and labour with an effective
production schedule which satisfies customers' requirements. Seasonality will compromise
the performance of the manufacturing and supply chain operation. Actions to alter the
demand through price discounts and various promotions need to be considered along with
the supply variability actions to maximise the profit. Promoting during a peak-demand month
may decrease overall profitability if there is a small increase in consumption and a significant
fraction of the demand increase results from a forward buy. Therefore supply chain
managers and marketing managers have to coordinate their actions to create an optimal
plan for managing the seasonal and variable demand through both demand management
and supply management actions. The ultimate defence against seasonality is its elimination
to achieve smoothing in demand, production, and the supply chain.

STUDENT NUMBER: 501687 Page 19

REFERENCES
1. Adapted from J. Holton Wilson and Deborah Allison-Koerber, “Combining Subjective
and Objective Forecasts Improves Results,” The Journal of Business Forecasting, Fall
1992.
2. Albaum, G., Tse, D. K., Hozier, G. C., & Baker, K. G. (2003). Extending Marketing
Activities and Strategies from Domestic to Foreign Markets. Journal of Global
Marketing, 16(3), 105-129.
3. Bowersox, Closs, Cooper and Bowersox. (2013). Supply Chain Logistics Management.
4th Edition. McGraw-Hill.
4. Chopra and Meindl. (2016). Supply Chain Management: Strategy, Planning and
Operation. 6th Edition. Pearson.
5. E-BusinessWatch. (2011). CASE STUDY: HENNES & MAURITZ. Retrieved from
http://ec.europa.eu/enterprise/archives/e-business-watch/studies/case_studies/
documents/Case%20Studies%202004/CS_SR01_Textile_2-HM.pdf
6. Lee, Hau L. “The Triple-A Supply Chain.” Harvard Business Review (October 2004):
102–112.
7. Pienaar,W.J & Vogt, J.J. (2012). Business Logistics Management: A value chain
perspective. Fourth Edition. Oxford University Press.
8. Prokesch, Steven. “The Sustainable Supply Chain.” Harvard Business Review
(October 2010): 70–72.
9. Stacey, R.D. (2007) Strategic Management and Organisational Dynamics, 5th edn.
Harlow: FT Prentice Hall.
10. Wisner, Tan and Leong. (2016). Supply Chain Management: A Balanced Approach. 4th
Edition. South-Western, Cengage Learning.

Websites:
1. Council of Supply chain Management Professionals: http://cscmp.org/
2. Supply chain online: www.scdigest.com

STUDENT NUMBER: 501687 Page 20