Technopak I

WWW.PROGRESSIVEGROCER.COM AHEAD OF WHAT’S NEXT April 2008 • PROGRESSIVE GROCER • 37 PROGRESSIVE VIEWS changing consumer preferences it became even more important to bring in new products at a pace that would put a super-sonic to shame. But doesn’t this ‘pace’ go against the idea of ‘global’ supply chains that thrive on ‘best price’ sourcing? To some extent yes. No longer is the customer willing to wait three months to wear her favourite burgundy Zara blouse that would be made and exported from a country thousands of miles away. If burgundy has to be worn, its time is ‘now’ before everyone else wears it on the streets of Madrid. No wonder Zara has shifted some production closer back home so that Ms Maria can wear her burgundy blouse when she wants to. And what about the factories that have been built to benefit from ‘economies of scale’? We don’t have to go as far as Madrid to find examples this time. Its closer home. Just look towards Manesar. Hundreds of factories are coming up with thousands of By Sachit Bhatia “The customer can have any colour he wants so long as it’s black”. When Henry Ford said this a century back hardly did he know that a time will come when people will refuse to buy a particular car model if their first choice colour was not available (as per a recent survey if a first choice colour is not available on a particular model, 34 percent of customers will choose a different vehicle model). At that time Ford Motors had discovered the assembly line (Yes it was discovered! William C. Klann, an executive with Ford Motors, saw a “disassembly line” in a slaughter-house where animals were butchered as they moved along a conveyor. The efficiency of one person removing the same piece over and over caught his attention and he introduced the concept at Ford Motors), and Henry Ford was widely respected for his ‘lean’ thinking and making Model T a lot cheaper by increasing the plant’s productivity by seven times. Time and Toyota had further plans. They took the ‘lean’ concept further and it came out of the manufacturing arena out in the other functions of the firm. The concept started to make all processes more efficient – the productivities shot up, costs came down – customers huddled around the companies that stood apart from the competition thanks to getting ‘lean’ and ‘leaner’. Eventually many companies reached there and in late eighties ‘lean’ word became as house-hold as ‘Bond’ movies. All the players now were at a common ground and something more was required to cut costs further. The next decade saw management gurus taking the lean concept out of the organisations and extending it even to its suppliers. This was the time when the concept of lean supply-chains started getting momentum and efficiency no longer was limited within the four walls of the organisation. But while all this was going on a bigger challenge was just around the corner. Consumer, which had been spoilt with ever decreasing prices, started looking for more, started to demand newer things at much faster pace. The tone was also set by speed of information dissemination. The time came when the pundits of consumerism started to whisper, ‘Customer is not the King’, just to add hastily ‘He is God’. Soon the single focus ‘lean’ supply chain began to look like an incomplete work of an artiste and something more was needed to fill the canvas. But the question was ‘what now’? The concept of ‘agility’: ag-ile (aj-uhl, -ahyl) \ adj – quick in movement, nimble With the increase in competition and companies wooing the customers ‘agile’ supply chain became the new mantra to beat the nearest rival. Those, who could get the product on shelf when the customer wanted it, could sell more. With the fast The burgundy blouse It is not always smart to label yourself as lean or agile. Attributes Lean Agile Products Functional Innovative Demand Predictable Volatile Product life cycle Long Short Product variety Low High Customer drivers Cost Assortment Profit margin 5% -15% 20% -60% Average forecast error 5% -10% 30% -40% Forecast approach Calculative Consultative40 • PROGRESSIVE GROCER • April 2008 AHEAD OF WHAT’S NEXT WWW.PROGRESSIVEGROCER.COM PROGRESSIVE VIEWS machines so that they have ‘economies of scale’. But are they helping their cause? Every single factory wanting to maximise economies of scale will find itself struggling when Ms Maria comes knocking to place orders. Ms Maria wants quick response. She cares more for her burgundy blouse than anything else in the world. When to have agility? If you are a part of supply chain of an innovative product then you already would have heard from Ms Maria. Typical products that qualify for this distinction are electronics, and fashion items. These are the products which sell for their ‘distinct’ appeal and not really the function they perform (a white blouse can perform the same function as a burgundy one). They have short life cycles and shorter shelf lives. Demand for these products is difficult to forecast and stock-out rates are percentages that resemble inflation rate in Iraq (Iraq has an estimated inflation rate of 25 percent). But the profit margins of 20 to 60 percent on these products more than make up for the Iraqi numbers stated above. In the global market place however there is a rush to make everything ‘distinct’ right from biscuits to Barbie dolls. Number of ‘functional’ products is becoming smaller as each day passes. The markets are getting reorganised from being mass markets to highly fragmented ‘niche’ markets. So we already have the answer to, ‘ When to have agility?’ If there was any time to produce the burgundy blouse, it is NOW. Is ‘lean’ dead? No its not. It still is there for all products we term as ‘functional’. These are the products we use for our basic needs like food items, petrol, news-paper etc. These products have predictable demand and hence easier to forecast. The stock-out rates are nothing mentionable. All this attracts more competition and hence lesser profit margins. The below offers an easier explanation of the differences between lean and agile: The predictable demand of lean supply chain makes the tasks easier for companies as they can focus on one prime goal – reduction in costs. Sophisticated systems and processes ensure that technology plays the required role in meeting this goal. Inventory is minimised and efficiency throughout the supply chain is maximised to get the desired results. All upstream and downstream functions collaborate to make sure that the predicted demand numbers are met in the minimum cost possible. So is it ‘lean’ OR ‘agile’ for my supply chain? We wish life was as simple. But in one way it’s good that it isn’t. Intelligent supply chains throughout the world use both lean and agile approaches to their benefit. And there is no escaping the truth that in today’s global economy consumers and producers are more often than not separated by thousands of miles, mostly sitting in different continents. No one can deny the fact that for Zara to get burgundy blouse made in Manesar for cost reasons is as much important as it is for the company to serve Ms Maria in Madrid. This problem was incidentally addressed by another apparel retailer, not very far from Madrid, quarter of a century back. Benetton decided that unlike the routine it will not use coloured fabric to make garments rather than it will make all the garments in one natural colour and then dye all of them in the colour that was selling. This innovation was called ‘tinto in capo’ i.e. dye upon the garment. With that innovation it became possible for Benetton to produce large volumes of garments to exploit economies of scale at the manufacturing end (in line with the lean concept), and respond quickly to the colour that customer wanted to wear by quickly dyeing the garments in the preferred colour (in line with the agile concept). Soon this supply chain strategy also became a fashion rage with youth and till today every youth brand is incomplete without a range of ‘garment dyed’ shirts and teeshirts. So what Benetton did in the last century we should be in a better position to understand and benefit from. What Benetton did was something we call today ‘moving the de-coupling point towards the point-of-sales’. We all understand that if the goods are produced on demand rather than on forecast they will all sell. But at retail level we possibly can not tell our customer to order today and take it next week. Knowing that we can not wait till the demand happens we have to depend on forecasts. So what is the best option we have in the present circumstance? Well, how about reducing the time when the forecast is made and when the item is sold? Its anybody’s guess that the forecast will be more accurate in that case (forecast error increases with increase in length of the forecast). This is where ‘decoupling point’ comes into picture. Though the name sounds as if it would be an important milestone somewhere on ascent to the Mount Everest, luckily it is not so. ‘Decoupling point’ is the point where product differentiation happens, or in other words where products takes it final shape, the shape that it will be sold to the final customer in. In case of milk decoupling point is where milk is packed and is differentiated into ‘1/2 litre pack’ and ‘1 litre pack’. In case of furniture it is where one chair is painted white and the other is painted black. It is that final point beyond which no changes can be made and it will go to the customer in that shape, size, and colour that has been given at the ‘decoupling point’. Now what Benetton did without realising was that it moved the decoupling point much closer to the pointof-sale. Product differentiation was postponed to the very last stage. The garments were dyed in various colours upon receiving information from the point-of-sales as to what was selling. Forecasting error was reduced to the minimum. Conclusion It is not always smart to label yourself as lean or agile. Different strategies have to be employed for different products at different times. But the best strategy in any supply chain seems to be a prudent mix of both lean and agile. Lean before decoupling point, and agile after decoupling point. This will ensure you always are busy selling blouses to Ms Maria irrespective of the colour she wants. We would like to call this new age supply chain ‘Leagile’ n Sachit Bhatia is a Senior Consultant with Technopak Advisors. He has vast industry experience in apparel supply-chain and handles apparel operations/retail projects at Technopak. The projects include strategy formulation, manufacturing start-ups, supply-chain linkages, strategy implementation. Scope of projects cover supply-chain strategy for apparel set ups, and linkages between different partners in supply-chain.