9/22/2009

FMS DELHI

LENGTH OF SUPPLY CHAIN FOR AN FMCG PRODUCT (LUX SOAP)

Submitted By

Akhil Gupta MS 03

Doni Riba MS 22

Nitesh Duhan MS 28

Ravi Shankar Batta MS 35

Saurabh Kispotta MS 42

EXECUTIVE SUMMARYA successful organization is one which can efficiently integrate all its verticals and work in tandem in order to achieve its mission and vision. Every business activity be it marketing or sales or operations will not be successful unless and until they all of them perform in coordination with each other.

For manufacturers, marketing and advertising is very important. However they will not perform well until and unless their supply chain management is robust. If a product is not available to respond to a particular demand or if there is excess of products in the market with lower demand the organization will account losses. Brand Loyalty is a rather strong term but it has been found that Brand Loyalty can die because of non availability of a product.

Hence it becomes imperative for a manufacturer (or any organization as such) to strengthen the supply chain operations. The FMCG category is always a battleground for all the competing firms and the bathing soap category is no different. With more firms entering the market, maintaining the customer base is not very easy

Lead time is one very important factor on which the supply chain operations of the manufacturer depends upon. This project in essence calculates the supply chain length of an FMCG company and hence puts in picture the necessary lead time that is needed to shorten the demand supply gap.

Table of contents:

EXECUTIVE SUMMARY.............................................................................................................2OBJECTIVE....................................................................................................................................4STAGES OF PRODUCTION.........................................................................................................4

Demand Recognition and Production Decision................................................................................5

Raw Materials............................................................................................................................18

Processing..................................................................................................................................19

Packaging, Storage and Dispatch.................................................................................................21

DISTRIBUTION- CHANNEL STRATEGY.................................................................................22Distribution Intensity..................................................................................................................23

Results and Conclusion..................................................................................................................26References......................................................................................................................................30

OBJECTIVEFor the project we have chosen the following:

1. Industry – FMCG2. Product - Soap Bar

So our objective is to calculate the supply chain length of a soap bar. In the project we will try to calculate the total lead time that is required for a manufacturer of soap bars to place its product in a retail shelf starting from placing order for the raw materials.

The following diagram illustrates the Supply Chain of a Soap Bar. Our aim is to calculate the length of the supply Chain.

STAGES OF PRODUCTION

For the production of a soaps the following stages are involved

I. Demand Recognition and Production DecisionII. Raw Materials and ProcurementIII. Processing

IV. Packaging, Storage and Dispatch

Demand Recognition and Production Decision

Forecasting Demand

Forecasting demand—instead of simply forecasting sales—can help retail executives compete in today’s environment. Although matching stock to demand is critical to profitability, many retailers rely solely on sales forecasts. It’s true that sales forecasts drive many critical decisions. Retailers could not run their businesses without sales forecasts. They form the basis for buying decisions and dictate operational planning, such as replenishment and labor scheduling. Sales forecasts are also essential to financial planning and to all decision-making that flows from financial plans. However, if you rely only on sales forecasts, you may fail to exploit the full value of demand for your merchandise. You will be unprepared for the level of consumer demand, and you’ll have insufficient inventory levels, resulting in lost sales. Or, you will have excess levels of inventory, significantly raising your cost per item and decreasing revenue. This white paper offers guidance to help you profitably complete in today’s environment by forecasting the full demand for your products.

Often forecasting demand is confused with forecasting sales. But failing to forecast demand ignores two important phenomena:

• Stock effects—the effects that inventory levels have on sales. In the extreme case of stock-outs, demand coming into your store is not converted to sales due to a lack of availability. Demand is also untapped when sales for an item are decreased due to a poor display location, or because the desired sizes are no longer available. For example, when a consumer electronics retailer does not display a particular flat-screen TV, sales for that model are typically lower than the sales for models on display. And in fashion retailing, once the stock level of a particular sweater falls to the point where standard sizes are no longer available, sales of that item are diminished.

• Market response effects—the effect of market events that are within and beyond a retailer’s control. Demand for an item will likely rise if a competitor increases the price or if you promote the item in your weekly circular. The resulting sales increase reflects a change in demand as a result of consumers responding to stimuli that potentially drive additional sales. Regardless of the stimuli, these forces need to be factored into your planning and managed within the demand forecast.

FORECASTING DEMAND

Unlike sales, demand represents the relationship between item and quantity purchase intent, and the many variables that influence a consumer’s purchase decisions. These variables include:

• Item price

• Related item prices offered by the retailer or its competitors

• Promotional tactics

• In-store merchandising tactics

• Time of day, week, and year

To manage demand effectively and efficiently, it is important to understand, anticipate, and fully uncover the effects of these market forces on potential sales. This level of analysis and preparation will allow you to better address the effects of drivers outside your control, and ensure that the decisions you control are based on insight and fully support your business objectives. Forecasting demand allows you to manage and prepare for the many forces on item, assortment, and category demand.

Demand Forecasting Methodology : To obtain the most accurate forecasting results, market response forecasting and time series forecasting are used together to predict a retailer’s demand.

Market response forecasting : To accurately predict the consequences of your choices, you must factor how the market will respond to each decision. For example, you need to forecast how consumers will react to various prices. Such a model will look like a textbook demand curve, as shown in Figure 1. The curve itself—labeled D1—predicts demand at different prices, holding other variables constant. At the regular price of $2.65, it predicts weekly demand for about 1,800 boxes of cereal in a specific market. If this item were discounted to $1.95, without any other stimuli changing, demand would increase to about 5,000 units. The relationship between the quantity demanded and the price offered is expressed as the price elasticity of demand. Given the price elasticity, and a forecast of demand at a particular price, it is possible to forecast demand at alternative prices. In Figure 1, the curve labeled D2 predicts demand for the same item, in the same market, over the same price range, but under different conditions. These conditions can include changes in seasonal demand (i.e. during the holiday season or summer vacation), display prominence, and competitive offerings and price levels.

Figure 1: Market response to price changes

Time series forecasting : Pricing and promotion decisions greatly influence future demand, so calculating and predicting these outcomes is vital to realizing potential. Time series forecasting is a collection of methods for projecting forward from historic observations. A very simple example is a moving average. Of course, different methods are appropriate for different business conditions. The Holt’s Method is most suitable for basic or staple merchandise, while the Winter’s Method works best for seasonal merchandise, and Croston’s Method is appropriate for merchandise with little turnover. In all, there are more than a dozen methods to use, depending on your current situation. What is common across all methods is that the only data consumed in producing the forecast is derived of the learnings from previous similar situations. They permit modeling seasonal demand fluctuations, trend growth or decay, and lifecycle phenomena. Using time series methods, you need to utilize prior observations of demand. A good source of these observations is a point-of-sale system. These systems capture sales/transaction information, so it is necessary to make two adjustments in order to create your time series forecast. The first is to adjust the sales quantity to reflect the sales that you could have achieved if there had been no inventory defects. This may be as simple as extrapolating across weeks in which the item was out of stock, or as complex as dynamically adjusting sales when daily stock values fell below presentation or size count thresholds. For the second adjustment, you need a way to back out the effects of market stimuli on your observed sales. You can use the market response model, not to forecast the future, but to estimate what unconstrained historical sales would have been if price and other stimuli were held constant over the period of history under examination. This process is sometimes referred to as normalization. You can then apply appropriate time series methods to

that history, as shown in Figure 2. The forecast predicts the true or unconstrained demand at regular price, assuming no promotional tactics are employed for each period in the future.

Figure 2: Time series forecast of normalized demand

Shaping Demand

Thus far, you have predicted unconstrained demand (as separate from sales) and have looked at the impact of time and market influences on that demand. With this information in hand, you can effectively shape and respond to demand. Here are some of the ways retailers use this information to manipulate demand for products.

• Reassemble the pieces. Knowing how pricing and promotional tactics affect demand allows you to make better decisions regarding pricing levels and markdowns, which products to promote when, and what promotional tactics to employ—all in the service of achieving your business objectives—whether they are increasing profits, market share, or revenue.

• Predict promotional sales lifts. Merging the response knowledge with forward-looking promotional and pricing plans allows you to make better buying, allocation, and replenishment decisions, thereby reducing the cost of over-stocks and minimizing the frequency of out-of-stocks.

On both the demand and supply side of the profit equation, understanding the constituents of demand provides tangible financial benefits.

Demand Driven Execution

What happens once demand is understood? Having an accurate prediction of future demand might be interesting, but is relatively worthless unless you put it to practical use. To benefit retail organizations, demand intelligence should now become an integral component of planning and execution. As shown in Figure 3, demand is transformed into achievable sales by applying business rules and events, available inventory, pricing strategies, and product market viability.

Figure 3: Apply demand intelligence to planning and execution

Plans based on historical sales only perpetuate mistakes made in the past, because demand intelligence is unconstrained and not influenced by events and inventory. It is more accurate than isolated point-of-sale data at representing the voice of the consumer. In this way, demand intelligence provides an additional point of view that quantifies the real potential of various categories, locations, and products (see Figure 4).

You can derive achievable sales by integrating the demand forecast into each of the planning and execution processes, as shown in Figure 4. In each step of the diagram, the retailer mixes the “arts” of market trend analysis and merchandising with the “science” of demand forecasting. Once you understand anticipated sales, you can finalize your plan by incorporating the product mix; required weekly inventory levels, corresponding receipt flow, and exit strategies. You

should repeat this process at each planning stage—from merchandise financial planning to assortment and item planning.

Figure 4: Demand d rives planning and execution

Finally, you will execute your demand driven plan—executing pricing decisions, generating orders, and notifying suppliers. You incorporate marketing plans, determine in-store product positioning, and allocate and replenish individual items. However, at the start of all of these executables was a consumer driven forecast that was transformed into an intelligent sales plan.

Demand forecasting allows retailers to make better decisions about which prices to adjust and when, which products to promote, and what promotional tactics to deploy, in order to achieve objectives. The benefits are significantly more profound and productive than a simple sales forecast. The best informed decisions will help you increase profits, sales or market share—whatever your goal. By combining your knowledge of past performance under similar circumstances with forward-looking promotional pricing plans, you can make better buying, allocation, and replenishment decisions. In turn, you will reduce the cost of over-stocks and minimize the frequency of out-of-stocks. Understanding consumer expectations at given times and under different market conditions delivers tangible benefits—both on the demand side and supply side of your business.

Inventory

To obtain inventory control, one must first have records. Secondly, one must have some way to activate these records so that intelligent use can be made of them. The burden of record keeping should not be allowed to become paramount. The important thing is the action taken on the records, not the records. Thirdly, one person should be given the authority to control inventories for a given number of items. He, of course, will work within the frame-work set up by top management as to the desired inventories to be carried, but within this frame-work there is a great deal of leeway and, by smart requisitioning, he can do much to obtain lower inventories.

Achieving lower inventories means the saving of dollars. And, after all, profits are what people are after in business. By keeping inventories in balance, he not only reduces the amounts carried but puts the company in a much more flexible position. In modern industry ability to change is important. The inventory control group has the responsibility to see that for its part the company is always ready to meet this ever-changing sales picture.

Skill in controlling inventories is one of the hardest tests of business management. Government reports show that this is one of the most common causes of business failures. Both big and small companies are vulnerable. Inventory control has a special importance to soap companies as a large portion of the cost of soap is dependent on the price of fats and oils.

However whether the business is making soap, autos, or safety pins, inventory control means dollars saved. It is not hard to visualize how high inventories tie up capital with heavy carrying cost and expensive warehousing. Also you run the risk of possible

Obsolescence due to changes in method or products, deterioration due to age, and of price reductions. On the other hand, if inventories are too low, costs are raised through uneconomical buying on a rush order basis, inefficient production scheduling, and possibly even a loss of business due to not being able to deliver goods on time.

Finished Goods Control : In considering how to control inventories, problems peculiar to the business concerned must be analyzed. Finished goods inventories depend on six main factors.

1. Methods of Sales. Companies such as mail order houses which sell directly to a retailer or to the consumer must have large stocks of finished goods ready for immediate delivery upon receipt of order. Companies, such as machine tool manufacturers, which work on a contract or job-lot basis, on the other hand, need not carry such a heavy inventory of finished goods. The large soap companies sell directly to the retail stores. They have their salesmen going to thousands of grocery stores throughout the nation taking orders. When these orders are sent in to the plant or branch warehouses, there must be sufficient soap on hand to fill the order. This order probably consists of at least four or five different types of soap. If any of these soaps are not on hand when the order arrives, it means the order must be held or shipped short. As an average branch warehouse handles several hundred orders a day, it is very important that there be an uninterrupted flow. The billing systems are designed for shipment and not for revisions. It has been estimated that revisions cost anywhere from 50 to 75c for each order revised. Thus if you are out of stock of a particular soap for four or five days and it was included on the several hundred orders each day, the cost of revising the billing would be considerable, to say nothing of the loss of business and customer good will.

2. Cost of Manufacturing Compared to the Original :Cost of the Raw and Packaging Materials. If your manufacturing costs are high in relation to your material cost, it means that greater emphasis should be put on reducing the finished goods inventory than when the materials' cost is the greatest proportion of the total cost. For soap the greatest cost is for the oils and fats. Packaging and the manufacturing costs run only 5 to 10%. Therefore it makes little difference whether you convert the materials into finished goods or store them as raw materials, providing other factors are equal.

3. Manufacturing in Economical Lots: When sales of an item are small, it is often best to manufacture several months' supply rather than to make separate runs for each month. The smaller the quantity of production, the greater the weight that should be put to carrying higher inventories.

4. Consideration of Even Labor: It is easy to see where you might desire to have steady work for a certain number of employees throughout the year rather than to have peak periods of employment and then heavy lay-offs a few months later. In the soap industry sales vary considerably month by month even though the consumer's probable usage of soap is fairly constant. Obviously, it is desirable to have level production throughout the year in order to hold the labor force at an even number. This is very difficult because of sales fluctuations and the great physical volume of soap that is moved. When you build up a two-month inventory of finished goods, you are not only tying up a large quantity of money but also are involved in a tremendous warehousing problem.

5. Price Variation: As previously mentioned, price variation of raw materials can have drastic effect on profits.

6. Obsolescence. When you build up too large an inventory on a slow-moving item, you are running the risk of being stuck if sales plans should be revised and this item dropped or the product changed.

Raw and Packing Materials Control : When you consider the factors that affect decisions on raw materials, you see that they are quite similar to those which affect finished goods inventories. These factors are :

1. Market Conditions. There are several purchasing conditions that affect the quantity of inventories that should be carried. First is the length of time necessary to obtain deliveries. Unless the usage is constant, it usually is a good idea to carry inventories that are large enough to bridge the gap between the time an order is placed and delivery is made. Second, the quantity to be carried is affected by economical purchasing lots. Buying in large quantities usually means cheaper unit prices. However off- setting this saving, you have to calculate the costs of storage and extra handling that may be required. Third, a number of items are seasonal. This means that when the production season is

on you must make your material commitments for the year or else pay premium prices to obtain materials out of season.

2. Storage Capacity: Obviously, you cannot store more goods than you have storage capacity for unless you can develop outside storage facilities. This storage capacity problem is not quite as simple as it first may seem, especially on items such as packing materials, where materials for many different products share the same warehouse space. The floor area must be apportioned between the various types of materials that are stored, and then intelligent coordination of purchase orders and production scheduling is needed to keep the space utilized to the best advantage. Packing materials for any one product must not hog all the available space.

3. Handling Problems: It is also important to consider the storage capacity in areas that are convenient to the point of use. Thus it is often best to buy in smaller lot quantities and have the goods delivered directly to the point of use rather than in large quantities if a portion of these have to be stored in distant area.

4. Deterioration of Materials Due to Age: When supplies are kept for a length of time, you run the risk of losing quality due to aging.

5. Obsolescence: We have the same problem of obsolescence with raw and packing materials as we have with the finished goods. When changes are made in the sales plans, you are likely to be left holding supplies which are no longer required.

6. Meeting Sales Demands: This is the most important consideration of all. The purpose of carrying inventories is so that you will be able to supply production at a rate to meet sales. Nothing is worse than to lose sales on account of a lack of supplies. Each time sales jump up or down, the inventory control group must jump with them. Good inventory control means good balance. You must never be caught off balance and must be ready to go in any way that sales require.

The weight that should apply to each of the above factors constantly changes. You cannot establish a definite set of rules, but for each purchase made all the factors have to be considered in the light of the moment. The heart of control lies with the men requisitioning materials. They must review all the factors and place their requisitions using judgment backed up by experience and prayers.

Development of the Budget : Having now attempted to clarify the aims, how are you to best bring these about ? Not having a crystal ball handy, you have to do some guesstimating. Of primary importance in inventory control is the sales forecast. A good sales forecast eliminates 90% of the inventory control headaches. In order to prepare a good sales forecast, work must be done in coordinating sales hopes and advertising plans, fitting those in with anticipated profits, financial considerations, production capacity,

and purchasing ability. In most companies, at least four to six months before the start of the year, an annual budget is prepared. This states the sales expectations for the coming year, based on all the factors that can be anticipated. Usually this annual budget is prepared by a separate budget department, which sits in on and coordinates the consultations between sales, advertising, market research, etc. The annual budget is the basis for monthly sales and production budgets. Colgate is using a three month revolving budget which has given good results. This budget is made out each month with a projected budget for the following two months, thus forcing during each month a review of the next three months. The three-month budget is first prepared in terms of dollar sales and is later converted to units of dozen or gross. It is checked with the annual budget for any variances which would throw the profit pictures of the annual budget out of line.

Having decided what is to be sold, the next question comes up as to how much finished goods inventories can be carried. This is a problem for the top executives. Once it has been decided to carry, say, a one-month finished goods inventory on one type of item, three weeks on another, two weeks on a third, etc., it then remains for the inventory control groups to handle the details, product by product. They compare the expected sales figures with quantities on hand and the desired inventory to be carried. The difference is the amount that must be made. This is the production budget. If more than one plant is involved, it must be decided what and how much each plant will produce. This normally is a problem for the home office manufacturing, who consider the economics of transportation costs to the sale area,

plant capacity, etc. The budget is then passed to the individual plants and they, in turn, make a rebuttal in detail based on available labor and economical runs on the machines. Next the rebutted budget is broken down into the various raw and packing material com- ponent parts. This gives the requirement figures on which the material coordinator bases his purchase requisitions. The purchasing department places orders according to the requisitions or asks for a review if the requisition violates good purchasing policy. Finally the materials arrive, production is effected, and the product shipped to the customer.

Responsibility and Organizational Set-Up : The fixing of responsibility for these various steps in the development of the budget is a vital question. The sales department certainly is in the best position to furnish sales forecasts and should be held responsible for its accuracy. It is also important to fix responsibility for the purchase of items needed to meet the budget. Without control the purchasing department tends to buy all the materials needed in large quantities so as not to be bothered with reordering and to take advantage of volume price reductions. To counteract this tendency, responsibility for quantity should be vested in an independent group. This might well be the plant material control department. This department is the one faced with the storage and' handling problems as well as the responsibility of seeing that there is no shut- down due to lack of materials.

As such, this is the logical place for controlling all materials except fats and oils. Fats and oils, as previously pointed out, are in a different category. Knowing who would be responsible first for sales forecasts and second for material controls, you now approach the problem of setting up the detailed organization to carry out these responsibilities.

1. A Budget Department. This central control group prepares the annual budget based on the information supplied by the sales, advertising, and financial departments. It is their duty to check the detail budgets monthly to see that sales and estimated sales are in line with the original annual budget. Should there be any serious deviations, it brings this to the attention of top management for action. This budget department might well report to the comptroller of the company as its work is very closely allied with his responsibilities.

2. Home Office Planning. In firms with more than one plant it is necessary to have a home office planning group with the responsibility of deciding in which plant production should be carried out. They are usually called on to prepare the production budget, using the sales budget and the inventory levels as predetermined by the budget department.

3. Plant Planning Group. In this group you have your real controls over raw and packaging material inventories. They rebut the monthly production budgets, leveling out labor and seeing to it that generally the plant is run without sharp volume variations. Having the duty of setting up daily machine schedules for the month, they are best acquainted with the production capacity and storage and material problems. Theirs is the responsibility for the breakdown of the budgets into the various raw material and packaging material component parts. From this they prepare purchase requisitions based on their knowledge of production rates, finished goods inventory, storage capacity, and production schedules. These purchase requisitions should be coordinated with the purchasing department problems of purchasing in economical lots and with the lead time necessary to obtain materials.

4. Purchasing Department. The purchasing department decides who is to be the supplier and what the price should be. They make all outside contact with the suppliers, and any complaints as to quality, delivery, etc., should be put through this department. In the case of inventory control for fats and oils, where the cost of storage and handling are relatively insignificant, the important point is buying at low prices. This responsibility should then be directly that of the purchasing department.

Methods

Having considered problems and the fixing of the responsibilities and organizational set-up, you can get down to actual operating practice. A problem of no small magnitude is the keeping of accurate inventory records. The problem of inventory control is largely a problem of obtaining and acting on figures. Colgate finds it necessary to take an actual physical inventory of finished goods at least once a month. Many companies have

perfected their book inventory methods so that they are accurate enough for figuring inventory control. However periodic physical inventories are advisable to uncover pilferage, etc. In order to ease the problem of recording you should try to standardize. Instead of counting production by the case, it can be counted by pallet or skid loads. This will reduce the quantities to be considered. Colgate has devised a system which has proved successful in keeping records. When a pallet load is produced, a transfer slip is made out by the producing department, transferring this to the shipping department. There are four copies of this transfer. One goes immediately to the accounting department, the second is sent to the shipping department for their records, the third stays with the producing department for their records, and the fourth is attached to the load itself with colored Scotch tape. The load is then transferred to the shipping department, where if it is loaded directly in the ears, the transfers are immediately taken off by the checker, giving him an account of the number of cases going into the ear, or if it goes into the warehouse, the transfer stays on until it is brought down from the warehouse to the actual shipping floor at which time it is removed and sent back to the accounting department. The accounting department then has a record of the original transfer to the warehouse and a record of shipment out of the warehouse. From this it is possible to have a daily book inventory of finished goods. These transfers can also be used to cheek against the quantity of cases invoiced by the billing department. The Scotch tape used to attach the transfer to the load is made of various colors. A different color is used for each month. This is to aid the shipping department in readily identifying the date of production so that the oldest stock can be shipped first.

In keeping raw and packing material inventories it is not necessary to take such a frequent physical inventory. However, in actual practice, due to spoilage and waste it has been found that at least a three month physical inventory is necessary. More weight is then put on the book figure. To prepare your book records it is neeessary to have the following:

1. An inventory of what is on hand.

2. A copy of the purchase order to see what is coming.

3. A copy of the receiving ticket to see what is actually delivered.

4. Usage figures for past production and projected usage figures for future production.

The first three of these are relatively simple to obtain. However figuring the usage is complicated by the fact that many items are used in making soap.

There are all types of chemicals, boxes, cartons, labels, banners, bottles, caps, etc. These have to be ordered anywhere from one week to six months in advance. Not only must you know the requirements for the coming month, but for several months in advance. Colgate's revolving three-month budget is of particular value in determining future needs.

Originally, the production budget was broken down by hand and the requirement figures posted in the purchasing department books. This was a full week's job for six people.

A mechanized system has been installed utilizing International Business Machines. With this the work of these six people has been completely eliminated, and the whole breakdown only takes a few hours. This system can be applied to a number of companies that use I.B.M. machines for payroll and accounting purposes. It can also be used by small companies without I.B.M. equipment through the use of I.B.M. branch offices which have the machines and are willing to run them for a very small fee. Here is how it works: A list of materials is made out for each product.

This shows, for example, on Super Suds, that for every large size case produced, there are 24 cartons, Symbol No. 2-1569, one corrugated case, Symbol No. 2-1533, and 35 plus, pounds of Super Suds, Base No. 20-650. Another list of materials specifies all raw materials and chemicals used in preparation of this soap, Base No. 20-650. An I.B.M. card is made out for each of these packing and raw material items. Each card shows its own symbol number and the stock number or formula base number for which it is used. Also punched in each card is the quantity needed for one case or one pound of base. When there is a budget of, say, 125,000 cases of Super Suds, Stock No. 72734, this is sent to the tabulating department, which multiplies each of the cards under No. 72734 by 125,000 times the factor marked on the card. This multiplication is all done automatically on an I.B.M. machine and punched on each card. The base cards for the various sizes are totaled separately, and the pound totals are used to multiply against all the components making up the base. All cards are then accumulated and put through a tabulating machine which prints on sheets of paper the quantities indicated by the punched holes on the cards. The original copy is given to the production planning department. The second copy of this printed sheet is sent to the purchasing department so that they can use this to check against the purchase requisitions issued by the production planning department. Thus, in spite of the great number of items, the complete budget for the following month and projected budget for the next two months can all be broken down into all the component parts within the course of several hours.

Requisitioning: The heart of inventory control should be in the requisitioning of materials. To requisition intelligently you must have accurate records as to where you stand today and projections of future requirements. Not being able to predict the future exactly, requisitions must be planned with the assumption that they may be increased, decreased, or cancelled entirely. The materials controller making the requisitions must always keep this fact in mind and not let himself or the purchasing department go overboard in ordering items even though they seem to be a sure thing at the time.

Requirements : When the three-month production budget is issued, the product card is posted with the budgeted number of cases; and the component cards are also posted, using

the I.B.M. breakdown. The signals are revised accordingly, and, if necessary, a purchase requisition made out. Expected deliveries are posted in the boxes indicating weeks at the bottom of the requirement card. In preparing a requisition, the materials controller looks at his stock record card for the inventory on hand and looks at the requirement card for the future usage and what is to be delivered. With this information he places the purchase requisition. The purchase requisition is sent to the purchasing department where the purchase order is made out and a copy sent back to the materials controller, who con- firms this on his requirement card. By using the visual system, the materials controller is able to keep supplies in balance product by product and will not over-order cases if he cannot get cartons. The purchasing department is usually split up with buyers of single items such as cases, another buyer for cartons, another buyer for certain chemicals, and another buyer for other types, etc. The materials controller, by requisitioning for the end-product as a whole, acts as a coordinator for the various purchasing agents. Thus if one item cannot be obtained until a certain date, there is no sense in bringing in the others before that time. The materials controller acts as a coordinator not only for purchasing but also for sales. He is in charge of supplies for a group of related products. He should know the production schedule and rate, how much finished goods are on hand, what the sales have been of finished goods in the past, and also when and how much supplies will be received. He participates in the laying out of the machine schedules for the items he controls, evening out labor, and coordinating the delivery of supplies. Knowing the production and purchasing problems, he is in a position to revise intelligently the production budget for the benefit of both sales and production. This revised or rebutted budget is sent back to the sales department along with machine schedules so that the whole company may know when an item will be ready for shipment.

For production decision the manufacturer must know the volume of the product to be produced. The stock taking function usually starts with the retailer/distributors placing orders for the products. Depending on the total volume of orders, the manufacturer will then take a production decision. This function is very important because the supply of the products should be equivalent to the demand otherwise there is the risk of bull-whip effect. In addition to the orders place by the distributors, the manufacturer itself also takes its own periodic forecasting.

Raw Materials

The raw materials in bar soaps are fats, fatty acids and inorganic water-soluble bases. Fats are extracted from mutton tallow, beef, coconut, palm and palm kernel oils. After extracting the raw material it goes to a treatment plant to make it pure.

A continuous process makes it into a liquid form of soap. During the process glycerin is produced as a by-product. The neat liquid soap then goes through a process called vacuum spray drying, to form dry soap palette.

In the final phase the dry palettes go to the finishing line. An amalgamator blends soap palettes with all other ingredients, colorants and fragrance. In a rolling mill and refining plodder the soap palettes are then homogenized and refined. In this section the soaps palettes get the desired texture. Then the palettes are cut into the bar size and in a press unit the stamping process is done.

The raw materials for a soap bar are:

1. Fats2. Fatty Acids3. Inorganic water-soluble bases

The fats for the soap are extracted from:

1. Mutton Tallow2. Beef3. Coconut4. Palm and5. Palm Kernel Oil

Oil (from the above sources) for the fats are procured from suppliers. Oil/fat has to be purified before the production begins. There are two strategies for doing the same

Strategy A - The suppliers will purify the oil and then deliver. In this case, the cost of production increases but the time duration decreases.

Strategy B - The manufacturer will purify the oil by itself. In this case the cost of production reduces but the overall time taken for production will increase.

The lead time for the supply of raw material is usually 3 - 6 weeks.

Processing

Soap and detergent manufacturing consists of a broad range of processing and packaging operations. The size and complexity of these operations vary from small plants employing a few people to those with several hundred workers. Products range from large-volume types like

laundry detergents that are used on a regular basis to lower-volume specialties for less frequent cleaning needs.

Cleaning products come in three principal forms: bars, powders and liquids. Some liquid products are so viscous that they are gels. The first step in manufacturing all three forms is the selection of raw materials. Raw materials are chosen according to many criteria, including their human and environmental safety, cost, compatibility with other ingredients, and the form and performance characteristics of the finished product. While actual production processes may vary from manufacturer to manufacturer, there are steps which are common to all products of a similar form.

Let's start by looking at bar soap manufacturing.

Traditional bar soaps are made from fats and oils or their fatty acids which are reacted with inorganic water-soluble bases. The main sources of fats are beef and mutton tallow, while palm, coconut and palm kernel oils are the principal oils used in soap making. The raw materials may be pretreated to remove impurities and to achieve the color, odor and performance features desired in the finished bar. The chemical processes for making soap, i.e., saponification of fats and oils and neutralization of fatty acids.

Soap was made by the batch kettle boiling method until shortly after World War II, when continuous processes were developed. Continuous processes are preferred today because of their flexibility, speed and economics.

Both continuous and batch processes produce soap in liquid form, called neat soap, and a valuable by-product, glycerin (1). The glycerin is recovered by chemical treatment, followed by evaporation and refining. Refined glycerin is an important industrial material used in foods, cosmetics, drugs and many other products.

The next processing step after saponification or neutralization is drying. Vacuum spray drying is used to convert the neat soap into dry soap pellets (2). The moisture content of the pellets will vary depending on the desired properties of the soap bar.

In the final processing step, the dry soap pellets pass through a bar soap finishing line. The first unit in the line is a mixer, called an amalgamator, in which the soap pellets are blended together with fragrance, colorants and all other ingredients (3). The mixture is then homogenized and refined through rolling mills and refining plodders to achieve thorough blending and a uniform texture (4). Finally, the mixture is continuously extruded from the plodder, cut into bar-size units and stamped into its final shape in a soap press (5).

Some of today's bar soaps are called "combo bars," because they get their cleansing action from a combination of soap and synthetic surfactants. Others, called "syndet bars, “feature surfactants

as the main cleansing ingredients. The processing methods for manufacturing the synthetic base materials for these bars are very different from those used in traditional soap making. However, with some minor modifications, the finishing line equipment is the same.

The processing of the soap involves a step by step addition of standardized concentrate and many raw materials and with so many ingredients in place, it usually takes 2 days to complete

Packaging, Storage and DispatchIn order to woo customers, the packaging of the soap must be attractive. Great care should be taken hence for package designing and package processing. Since the soaps are sent in batches, the soaps will be inventoried in the factory.

For final packaging individual soaps are put in a box of 72 each. The boxes will then be sent to the different warehouses depending on the demand.

Packaged and Store

The final step in the manufacture of soaps and detergents is packaging. Bar soaps are either wrapped or cartooned in single packs or multipacks. Detergents, including household cleaners, are packaged in cartons, bottles, pouches, bags or cans. The selection of packaging materials and containers involves considerations of product compatibility and stability, cost, package safety, solid waste impact, shelf appeal and ease of us

Warehouses

A warehouse is a commercial building for storage of goods. Warehouses are used by manufacturers, importers, exporters, wholesalers, transport businesses, customs, etc. They are usually large plain buildings in industrial areas of cities and towns. They usually have loading docks to load and unload goods from trucks. Sometimes warehouses load and unload goods directly from railways, airports, or seaports. They often have cranes and forklifts for moving goods, which are usually placed on ISO standard pallets loaded into pallet racks.

Distributors

Individuals or businesses that purchase the right to sell ABC Corp.'s products but not the right to use ABC's trade name

One of the most common types of business opportunity ventures, a distributor or dealer is an independent agent who's entered into an agreement to offer and sell the product of another company but isn't entitled to use the manufacturer's name as part of its business name. Depending on the agreement, the distributor may be limited to selling only that company's goods or it may have the freedom to market several different product lines or services from various firms.

Here's an example: An authorized dealer of Minolta products might have a Minolta sign in his window, but he can't call his business Minolta. Often, the words "dealers" and "distributors" are used interchangeably, but there is a difference: A distributor may sell to several dealers, while a dealer usually sells directly to retailers or consumers.

DISTRIBUTION- CHANNEL STRATEGY

The following table describes the factors that influence the choice of distribution channel by a business:

Influence Comments

Market factors An important market factor is "buyer behavior"; how do buyers want to purchase the product? Do they prefer to buy from retailers, locally, via mail order or perhaps over the Internet? Another important factor is buyer needs for product information, installation and servicing. Which channels are best served to provide the customer with the information they need before buying? Does the product need specific technical assistance either to install or service a product? Intermediaries are often best placed to provide servicing rather than the original producer - for example in the case of motor cars.

The willingness of channel intermediaries to market product is also a factor. Retailers in particular invest heavily in properties, shop fitting etc. They may decide not to support a particular product if it requires too much investment (e.g. training, display equipment, warehousing).

Another important factor is intermediary cost. Intermediaries typically charge a "mark-up" or "commission" for participating in the channel. This might be deemed unacceptably high for the ultimate producer business.

   

Producer factors A key question is whether the producer has the resources to perform the functions of the channel? For example a producer may not have the resources to recruit, train and equip a sales team. If so, the only option may be to use agents and/or other distributors.

Producers may also feel that they do not possess the customer-based skills to distribute their products. Many channel intermediaries focus heavily on the customer interface as a way of creating competitive advantage and cementing the relationship with their supplying producers.

Another factor is the extent to which producers want to maintain control over how, to whom and at what price a product is sold. If a manufacturer sells via a retailer, they effective lose control over the final consumer price, since the retailer sets the price and any relevant discounts or promotional offers. Similarly, there is no guarantee for a producer that their product/(s) are actually been stocked by the retailer. Direct distribution gives a producer much more control over these issues.

   

Product factors Large complex products are often supplied direct to customers (e.g. complex medical equipment sold to hospitals). By contrast perishable products (such as frozen food, meat, bread) require relatively short distribution channels - ideally suited to using intermediaries such as retailers.

Distribution Intensity

There are three broad options - intensive, selective and exclusive distribution:

Intensive distribution aims to provide saturation coverage of the market by using all available outlets. For many products, total sales are directly linked to the number of outlets used (e.g. cigarettes, beer). Intensive distribution is usually required where customers have a range of acceptable brands to choose from. In other words, if one brand is not available, a customer will simply choose another. This would be the case applicable for the category of soaps.

Selective distribution involves a producer using a limited number of outlets in a geographical area to sell products. An advantage of this approach is that the producer can choose the most appropriate or best-performing outlets and focus effort (e.g. training) on them. Selective distribution works best when consumers are prepared to "shop around" - in other words - they have a preference for a particular brand or price and will search out the outlets that supply.

Exclusive distribution is an extreme form of selective distribution in which only one wholesaler, retailer or distributor is used in a specific geographical area.

Functions of a Distribution Channel

The main function of a distribution channel is to provide a link between production and consumption. Organizations that form any particular distribution channel perform many key functions:

Information Gathering and distributing market research and intelligence - important for marketing planning

Promotion Developing and spreading communications about offers

Contact Finding and communicating with prospective buyers

Matching Adjusting the offer to fit a buyer's needs, including grading, assembling and packaging

Negotiation Reaching agreement on price and other terms of the offer

Physical distribution Transporting and storing goods

Financing Acquiring and using funds to cover the costs of the distribution channel

Risk taking Assuming some commercial risks by operating the channel (e.g. holding stock)

All of the above functions need to be undertaken in any market. The question is - who performs them and how many levels there need to be in the distribution channel in order to make it cost effective. An example of a direct marketing channel would be a factory outlet store. Many holiday companies also market direct to consumers, bypassing a traditional retail intermediary - the travel agent. A wholesaler typically buys and stores large quantities of several producers’ goods and then breaks into the bulk deliveries to supply retailers with smaller quantities. For small retailers with limited order quantities, the use of wholesalers makes economic sense. This arrangement tends to work best where the retail channel is fragmented - i.e. not dominated by a small number of large, powerful retailers who have an incentive to cut out the wholesaler.

Numbers of Distribution Channel Levels

Each layer of marketing intermediaries that performs some work in bringing the product to its final buyer is a "channel level".

Results and Conclusion

The entire Supply Chain is a large complex manufacturing process involving many steps from the time order placed and demand forecasting made. An essential demand forecasting with maximum possible accuracy is essential and software have to be put in place to maintain safety stock and proper lead times.

Length of supply Chain critically takes about 5 to 13 weeks after the demand forecasting has been made/orders placed

A Case Study of HUL and LUX

HUL’s distribution network is recognized as one of its key strengths -- that which helps reach out its products across the length and breadth of this vast country. The need for a strong distribution network is imperative, since HUL’s corporate purpose is “to meet the everyday needs of people everywhere.”At Hindustan Unilever Limited, distribution network is one of the key strengths that help them reach their products across the length and breadth of this vast country. It has 2000+ suppliers and associates 7,000 stockists and direct coverage in over 1 million retail outlets across India.To meet the ever-changing needs of the consumer, HUL has set up a distribution network that ensures availability of all their products, in all outlets, at all times. This includes, maintaining favourable trade relations, providing innovative incentives to retailers and organizing demand generation activities among a host of other things. HUL boasts of placing a product across the country in less than 72 hrs.The first phase of the HUL distribution network had wholesalers placing bulk orders directly with the company. Large retailers also placed direct orders, which comprised almost 30 per cent of the total orders collected.Today, the goods are transferred from the factory to the company warehouses and are sent to the distributor from there on a daily basis. From the distributor, the stock reaches the market through daily sales. Typically, these include the salesman registering the order of a retail outlet and delivering the goods the next day.Recently HUL has changed its traditional way distribution and came out with a new strategy of distribution. It‘s because of the change in buying pattern of the consumer due to more disposable income. There are different channels of distribution like Modern Trade, which covers all chains of super markets like Food World, who get the stocks directly from the company. Wholesalers and second leg of big retail outlets called Super Value stores come under the surveillance of the distributor along with the mass retail outlets. There is also this new concept in the HUL distribution channel called Kiosk. Kiosk is a small shop that sells only sachets and low priced items (below Rs.10/-). Kiosk also does not come under the surveillance of the distributor.

In addition to the ongoing commitment to the traditional grocery trade, HUL is building a special relationship with the small but fast emerging modern trade. HUL's scale enables it to provide superior customer service including daily servicing, improving their range availability whilst reducing inventories. HUL is using the opportunity of interfacing more directly with consumers in this retail environment through specially designed communication and promotions. This is building traffic into the stores while yielding high growth for the business.

Information Technology for Success of Supply Chain

An IT-powered system has been implemented to supply stocks to redistribution stockists on a continuous replenishment basis. The objective is to catalyse HUL’s growth by ensuring that the right product is available at the right place in right quantities, in the most cost-effective manner. For this, stockists have been connected with the company through an Internet-based network, called RSNet, for online interaction on orders, dispatches, information sharing and monitoring. RS Net covers about 80% of the company's turnover. Today, the sales system gets to know every day what HUL stockists have sold to almost a million outlets across the country. RS Net is part of Project Leap, HUL's end-to-end supply chain, which also includes a back-end system connecting suppliers, all company sites and stretching right up to stockists. Powered by the IT tools it has improved customer service, while ensuring superior availability and impactful visibility at retail points.

For rural India, HUL has established a single distribution channel by consolidating categories. In a significant move, with long-term benefits, HUL has mounted an initiative, Project Streamline, to further increase its rural reach with the help of rural sub-stockists. As a result, the distribution network directly covers about 50,000 villages, reaching about 250 million consumers.

Distribution will acquire a further edge with Project Shakti, HUL's partnership with Self Help Groups of rural women. The project, started in 2001, already covers over 5000 villages in 52 districts of Andhra Pradesh, Karnataka Madhya Pradesh and Gujarat, and is being progressively extended. The vision is to reach over 100,000 villages, thereby touching about 100 million consumers. The SHGs have chosen to adopt distribution of HUL's products as a business venture, armed with training from HLL and support from government agencies concerned and NGOs. A typical Shakti entrepreneur conducts business of around Rs.15000 per month, which gives her an income in excess of Rs.1000 per month on a sustainable basis. As most of these women are from below the poverty line, and live in extremely small villages (less than 2000 population), this earning is very significant, and is almost double of their past household income.

For HUL, the project is bringing new villages under direct distribution coverage. Plans are being drawn up to cover more states, and provide products/services in agriculture, health, insurance and education. This will both catalyse holistic rural development and also help the SHGs generate even more income. This model creates a symbiotic partnership between HUL and its consumers, some of whom will also draw on the company for their livelihood, and helps build a self-sustaining cycle of growth.

References

Gunasekaran A, Patel C, McGaughey RE (2004) A framework for supply chain performance measurement.

Gunasekaran A, Tirtiroglu E (2001) Performance measures and metrics in a supply chain environment.

Michael Armstrong (3rd Edition) Performance Management: Key Strategies and Practical Guidelines

Peter Meindel, (2007) Supply Chain Management Schwarz LB (2004) The stat of practice in supply chain management: a research

perspective, in applications of supply chain management and e-commerce research in industry.

HUL www.hul.com