Dealing with variety in supply chain

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TOC InsightsDealing with Variety in the Supply Chain

SJSOM, 2 Sep

©2012 Vector Consulting Group. All Rights Reserved. 3

Changing Paradigm !

20 Shades of Black

To match your finer tastes

The New Pareto:20% of products contribute only 40-50% of sales


What is driving the variety explosion ?

Marketing & Sales speak :• “Customers are continuously looking for more variety”• “Competition is increasing range, we can’t be left behind”• “We don’t have products for so many customer segments”• “In order to grow, we must bring out new products continuously”• “Customer tastes are constantly changing, we need to match the same”

There is a constant drive to segment markets and bring out new products.

Looks Perfectly Fine !!

Why is it that in spite of growing range, companies are not growing, or in some cases de-growing ?


Flawed Assumptions !

Any Strategy leads to Desired Results, only if the underlying assumptions are correct.

Let us check the assumptions !


Flawed Assumption # 1

Customers are able to perceive difference between varieties.

Increase in variety creates new niche segments, leading to increase in sales.

However, it follows the law of diminishing returns. Thus after a point, increase in variety does more damage that benefit.

Our experience shows that, in most of the Companies, Performance measurements are a bigger driver of New product introduction, than the need to tap newer customer segments.

Discontinuation of Products is perceived to be risky (Hope that it might Click in future!) and hence is generally delayed.



Company has capability to expose the entire range to the customers

Company’s Range Range accessible to Customer

Our experience has shown that the range accessible to customers is sometimes as low as 20% of the Company’s range.

The Range accessible to Customer is limited by the following:1. The Display Space is limited2. In a forecast driven environment, the distributors/ dealers limit the range to

maintain ROI3. In a supply chain with high inventory, lead time for a new product to reach the

display is very high



Company has capability to manage the bigger range

Most supply chains are characterized by:1. Production and distribution on the basis of forecast

Forecast accuracy deteriorates with increase in Range. It leads to• Stock Outs = Loss of Sale• Excesses = Discount = Loss of profit

2. Push SalesDisaggregated variety when pushed downstream, leads to deterioration of Inventory turns• Limits company’s ability to buy more (increases stock outs) • Increase in markdowns

Both of the above factors can lower the inventory turns as well as increase the markdowns, bringing the company to its knees


Impact on Supply Chain

Whenever,Company Range > What customer can differentiate or > What Company can expose to the customer

The Demand gets disaggregated without any positive impact on Sales, Leading to the “Long Tail” Effect.

Long tail can increase setups in production to the extent that it impacts reliability of Heads.Long tail when pushed lower in distribution chain, magnifies the problem of Stock-outs and Excesses.


The Conflict.

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Grow Profitably

Offer More variety to customers

Increase Company’s Range

Ensure availability of existing range

Limit Company’s range

Conflict

Assumptions:Company is able to expose entire range to customerCustomer is able to differentiate variety

Assumptions:Long tail creates fluctuating demandLong tail may increase setups and hence can result in stock outs.Long tail deteriorates inventory turns and hence company’s capability to buy/produce.If Supply chain is unreliable, channel partners restrict range offering.


Solution Element #1

With increasing Range, forecasting tools will fail miserably.Pushing material downstream multiplies the damaging impact of disaggregation.

What is the way out?

Switch from “Forecast and Push based supply chain” to “Replenishment based on Consumption”

In environments of high variety, Fast Replenishment alone is not enough, You need Fast Replacement.

Plant Distributor Retailer

Fore

cast

Acc

urac

y

Day

s of

Inve

ntor

y

Stock OutsExcesses


Solution Element #2

Designers / marketers under pressure to bring out new productsThere is no scientific way to determine, when increase in variety becomes irrelevant.

Align Design with Supply chain strategy

Element 1 : • Limit boundary of creativity

• Limiting the pallet of designs from divergent point of “V” or “T” Plant• Can create additional designs, but will be available with Higher lead time• Sheer awareness of supply chain impact helps designers make effective

choicesElement 2 : • Differential Lead times

• Different stocking points in supply chain hierarchy• Leads to aggregation of demand into ‘Meaningful’ variety


Solution Element #3

Managing Merchandise to Improve Company’s capability to display more

The Buying experience usually involves 3 components for decision making:1. Look : Color, dimensions etc 2. Feel : Finish, Texture etc3. Sample/Functionality : test drive, read few pages of a book etc

Generally the varieties have aggregation in one or two of the above, and most of variety is created in one of the above components.

E.g. In Beds, Functionality features are limited (4-5 types), but variety is created by Look and Feel (40-50 types)

By Displaying 4-5 type of bed types and All variants of headboards, it is possible to display entire range of company in limited display.


The Conflict resolved

Grow Profitably

Offer More variety to customers

• Pull system• Look and Feel Tools• Bounded creativity

Ensure availability of existing range


Key Learnings

STP without considering Company’s Constraints can lead to significant erosion of sales & profits

Company Must Exploit (maximize sales from current range) before Elevating (Adding new range)

Any SKU which a customer cannot access, is a range only in the mind of marketer/ designer.

Dealing with variety in supply chain

Business

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