Saturday, May 14, 2005

Explaining supply chain management to a lay person

How many of you have gone shopping at a store and gotten annoyed by not finding what you want? Size, color, model, brand or any combination of them? How many of you looked at $40 DVD players and wondered who made them, how did they get them to the store and still made money of them. The process of getting what you want, when you want it, at the right price and quantity is supply chain management (SCM).

Most companies today have become driven by customer demand; they know, based on past history, to a reasonable level of accuracy, what will be sold in a particular geographical region in a week; they know it down to an item level, fairly in advance. Based on that they can figure out when they need to send how much to what region.

Most companies today have a good idea, based on history, how long it takes to produce an item, how long it takes to transport an item, what raw materials are needed to produce an item, how much do they have of those raw materials and when they can get the rest and make the item.

They also have a good idea of how much of that item is there at various points in the supply chain and how much needs to be shipped where and when.

This is supply chain management.

If that is the case, then how come, nearly 10% of the items (and 13% of the promoted items) are out of stock at any given time at any retail store?

The problem, usually, is us, the consumer!

We create product variety. Henry Ford decided that he was going to sell Model-T in "any color as long as it is black" and he nearly went out of business; he had to offer choice in color. What was true in Henry Ford's time has only become more prevalent now. The more the variety, the less the ability to predict demand for each individual type accurately. Its easy to find out the amount of tooth paste that will be sold in a store down the road. But it is impossible to predict how many "Colgate baking soda & peroxide whitening with tartar control Brisk Mint Paste" will get sold and how many "Colgate baking soda & peroxide whitening with tartar control Frosty Mint Striped Gel". There are 40 different types of Colgate toothpastes listed on their website and this is with out even getting into the size variations and promotional packaging! Any i-pod would not do for us today, it has to be a pink or blue i-pod!

The companies can try to counter this uncertainty caused by product variety by keeping a few of each; that way they would not run out of the items. Imagine the store size. There is another challenge. As consumers, we also want to stay current with fashion and product improvements. So Nike has to change their products nearly 80% every 4 months. If you like a Nike shoe, buy three pairs of it, because odds are that you are not going to find it when this pair wears out! This means keeping too many stuff will end up forcing the retailer to deeply discount left over stuff at the end of the season. This is called markdown and this adds on to product cost. So retailers would rather run out of some stuff than keep enough to make you happy every time. That way they would not have to sell a lot of stuff below cost later.

Yes, right now you get frustrated by not finding what you want. But help is on the way!

Electronic chips are getting embedded in products that can help everybody understand what is where; A Frito-Lay can learn if a particular type of potato chips is not selling at a particular store on a particular day when they expected to sell some. They immediately know that, most probably, the product is not on the shelf and they can take corrective action. You can go to, order something and pick it up at their store, with out paying anything extra, even if that store normally does not carry that particular product. With the internet and the business models that it has spawned, with the computing technology available today, with the sophisticated tracking devices, there will be less reason for you to get disappointed when you want to buy something. You will find what you want thanks to supply chain management!

Karthik Mani

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