0% found this document useful (0 votes)
8 viewsAgile SCs
document of agile supply chain
Uploaded by
shubhaditya.dm253074Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF or read online on Scribd
0% found this document useful (0 votes)
8 viewsAgile SCs
document of agile supply chain
Uploaded by
shubhaditya.dm253074Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF or read online on Scribd
/ 13
Agile Supply Chains
Learning Objectives
After reading this chapter, you will be able to answer the following questions:
How are agile supply chains different from traditional supply chains?
Under what situations do forecast updating play an important role?
How does a firm design its supply chain so that it can respond rapidly to forecast updating?
How do responsive supply chains differ from speculative supply chains?
What are the sources of supply chain disruptions?
How can a firm mitigate risks of supply chain disruptions?
industry, the launch of the iPhone created headlines across the world. Serpentine
queues could be seen in front of every Apple store. This was the case not only in the
United States but also in Europe. The frenzied crowds could barely wait for the stores to
throw open their doors
Ts as the largest commercial product launch in the history of the electronics
However, not even the best analysts could actually predict accurately the demand even
though Apple has long been known for its demand shaping ability. This time too, Steve Jobs
was confident that he had a winner on his hands. He was confident that the phone will sell,
10 million units within the first 18 months of launch. While the figures are yet to substan
ate this prediction, it is common knowledge that the supply matched the demand. This is
no mean accomplishment,
The pertinent question here is when an operation is planned on this massive scale, how
‘can we predict the demand? How does one ensure that the supply chain is equipped to
handle variations in demand? This problem is compounded further if we consider the long
and complex supply chain that Apple has put in place for the iPhone. To keep costs down
and maximize profits, the iPhone is manufactured in Asia. In the face of demand uncer-
tainty, the responsiveness of the supply chain is indeed very difficult to ensure.
In this chapter, we focus on solutions that can help firms deal with demand uncertainty
on a large scale. We examine the characteristics of agile and responsive supply chains,
Using illustrative examples. We also examine the consequences of uncertainty in supply on
the supply chain. We conclude the chapter with a brief discussion on possible methods to
handle disruptions in the supply chain |292 | Supply Chain Management
Supply chain configura
tion design,
Introduction
Operating in a global environment has resulted in an increased velocity of change on all parts
of business, On the one hand, customers are demanding lower cost and higher service while on
the other hand firms have to grapple with higher velocity of change on both demand and supply
fronts. Progressive firms ensure that their supply chain design and operations reflect the three
factors identified in Figure 12.1. For attaining a high level of supply chain performance, a firm,
not only has to ensure that the supply chain configuration is aligned with the business strategy
‘but also that its supply chain is robust enough to handle demand as well as supply uncertainty.
In this chapter, we focus on the robustness of a chain, and those supply chains that can handle a
hhigh level of demand uncertainty and supply uncertainty are termed agile chains
Low levels of demand and supply uncertainty can be handled using appropriate levels of safety
stocks in the system as discussed in Chapter. In this chapter, we focus on supply chains that have
to deal with high levels of either demand or supply uncertainty or both. Demand uncertainty has
received much attention from researchers as well as practitioners, As discussed in Chapter 2, based
on the nature of demand uncertainty, products can be classified as functional products or innova-
tive products. In the case of functional products, the focus is on meeting predictable demand in a
costeffective manner, while for innovative products the focus is on creating cost-effective response
mechanisms for handling unpredictable demand. Thus, for functional products one needs to
design efficient supply chains, while for innovative products one needs a responsive chain, Unlike
demand uncertainty, supply uncertainty has not received enough attention. Unlike demand, a firm
hhas a greater control on supply, and the popular view was that supply side uncertainty can be han-
dled by choosing appropriate partners in the chain, and as a consequence the focus had been on
supplier selection and supplier development rather than on the management of supply uncertainty.
The terrorist attack in September 2001 forced firms to look at their supply chain vulnerabilities,
and firms have realized that they need to focus on both demand uncertainty and supply chain
disruptions. Managing supply chain disruptions involves managing certain events that have low
probability of occurrence but have high impact on supply chain performance.
Firms that have configured their supply chain design and operations to handle high-level
demand uncertainty effectively are known as responsive supply chains. Firms that have contig.
ured their supply chain design and operations to handle high levels of demand uncertainty and
supply chain disruptions effectively are known as agile supply chains.
‘Agile supply chains combine practices of responsive chains and will have practices in place
‘that can handle supply chain irregularities. To develop a better understanding of the character-
istics of agile supply chains, we discuss demand side responsiveness and supply chain disrup-
tion in separate sections.
Business
emane strategy
uncertainty
Supply chain Supaly chain
design and >} oer ee
‘operations
supply
Uncertainty Chapter 12: Agile Supply Chains
|293
INTERVIEW,
Madura Garments, a division of Aditya Birla
Nuvo, isa leading Indian apparel company with
2 tumover of Rs 9 billion, Madura Garments
hhas made its presence felt in lifestyle brands
(major brands: Louis Philippe, Van Heusen,
Allen Solly) and popular brands (Peter England,
Elements). Suresh Kumar heads the supply chain
and logisties at Madura Garments.
What isthe level of supply chain complexity at
Madura Garments?
Suresh Kumar: Madura Garments works with a
large number of brands and each brand offers a huge vari-
ely and, at any point in time, we have more than 100,000
active SKUs of style, colour and size in our portfolio. An-
ther dimension of complexity is the sheer number of chan-
nel partners. Our products are sold through a network of
more than 200 exclusive franchisees and over 2,000 premier
rand outlets
What supply chain challenges do you face?
Suresh Kumar: We are in the fashion business. Our product,
life cycles are short and the market is very volatile, Ina typi.
cal season, 75 per cent of our offering is new and only about
25 per cent is repeat offering. Further we do not release the
tent new offering at one go at the stat of the season. We en-
sure that every month in a season we introduce new offerings
so that customers see freshness in our collection throughout
the season. With a large vatiety and 75 per cent new offer
ings, ideally, we will like agile supply chains with short lead
times. Unfortunately, our supply chain lead times are very
long. The fabric requires 2-3 months of time and converting,
the fabric to garments takes anather month and warehousing
and logistics takes another 15 clays, so effectively we are talk
ing of 34 months of lead time,
What supply chain innovations have you adopted at Madura
Garments?
Suresh Kumar: We have been working with ideas of sup-
ply chain collaborations with a few of our suppliers. We
share data as well as fashion trends with them and based
on this information, the supplier stocks base materials.
SURESH KUMAR]
WITH
This has led to a recluction in the effective lead
time required for supplier from 3-4 months to
30-45 days. There is some amount of risk in-
volved but given our long-term relationship
with our suppliers and the trust they have put
in us helps them in taking certain risky dect-
sions which reduce cycle time and increase
agility in chain. We have also worked on in-
creasing our volume flexibility because we
have a lot of seasonality in our business. The
ability to increase capacity in supply chain at
short notices is of great value to us. By hav-
ing a large number of jobbers in our vendor base, we are
able to increase and decrease garment conversion capac-
ity within the chain at short notice. We also have real-
ized that not all our channel partners have the necessary
forecasting capabilities. So during trade shows when they
place their order with us, we share our data with them and
help them in improving their forecast so that they do not
end up buying the wrong kind of assortment during ¢
Unlike other parts of the world, significant festival
demand is a unique Indian phenomenon. So we have in-
troduced a third season in our planning called the festival
season. This has helped us in supply chain planning and op-
erations.
What are the challenges in supply chain management that
you ave likely to face in the future?
‘Suresh Kumar: With robust growth in India and the possi-
bility of a recession in several markets, India is emerging
as an important market for a lot of global players, So we
are likely to see more intense competition in the future. Fur
ther, we are also working with a lot of new fabrics including
rnon-iron, stain-free with 3x dry technology, double stretch,
Use of milkeprotein and soya fibres, as a consequence of
which the old data which we use for forecasting become
less reliable, We also want to see how we can use new tech-
nologies like RFID in supply chains. We have started a pi-
lot project through which we hope to learn ways in which
we can use new technologies for improving supply chain
performance
Supply Chains for High Demand Uncertainty
Environment
The demand for several product categories in the fashion industry and in the high-technology
industry is inherently unpredictable. Firms usually work with inaccurate forecasts and end up
with high obsolescence and lost sa
es costs. Supply chain restructuring discussed in Chapter 10 | 294 |
Supply Chain Management
suggests several approaches that are likely to be of great help for firms dealing with highly
‘uncertain market places. Supply chain restructuring essentially involves supply chain innova~
on involving product redesign, process redesign, network design restructure or value offering,
‘to customer so as to improve customer service and reduce cost.
In this section, we look at industries that have a high degree of demand uncertainty as
‘well as short life cycles. The garment industry in particular and soft goods industry in general
fall into this category. They suffer from poor forecast accuracy as they offer a large variety
and usually have product life cycles of a few months. By observing early sales patterns, firms
can update their forecasts and respond to the market with the use of quick response manufac-
‘turing and high speed transportation such as air shipments so as to reduce obsolescence and
lost sales costs, Zara, the Spanish fashion retailer, manages its supply chain effectively and is
known for its rapid response capabilities.
THE ZARA SUPPLY CHAIN
Zara is a chain of fashion stores owned by Inditex, the Spanish fashion retailer with a turnover of 8.2
billion Euros (as in 2006), With 12.2 per cent net profit over sales, Zara is one of the most profitable
apparel brands in Europe. Zara's success has been attributed to its focus an rapid response to the mar
ket. Unlike its competitors, Zara does not outsource all its procluction activities. Most of the production
capacity (in-house as well as outsourced) is located in Europe so that Zara can work with short lead
times. The bulk of the apparel is shipped by air so that Zara can ensure delivery in 72 hours to all its
retail outlets located! in diferent parts of the globe, Because of this ability to responcl quickly, Zara is
able to bring a product on the shelf ofits retail stores within 15 days of idea creation. Zara ensures that
it always has a fresh line of products at its retails outlet and no procluct is on the shelf for more than
four weeks.
We illustrate the concepts of quick response supply chains through the example of global
supply chains from the garment industry.
Forecast Updating
A global garment supply chain involves three main activities: fabric production, garment
manufacturing and transportation. A supply chain for garments has always been quite long
and the bulk of the time is taken up at the fabric manufacturing stage. Over a period of
time global supply chains in the garment industry have become longer because the bulk of
‘the manufacturing has shifted to China and transporting via sea from China has added to
the time required in supply chain operations. In the fashion garment business, product life
cycle is of the order of a few months and as a result the bulk of the supply chain decisions
are taken before the start of the season. Since the garment industry offers a large variety
and the product portfolio is changed every year, usually a firm is not able to predict likely
demand for each style offered for the coming season. Unfortunately, as can be seen in
Figure 12.2, most of the forecasts are usually off the mark. In Figure 12.2, we present data
on forecast accuracy as observed by Sport Obermeyer, a firm operating in the fashion gar-
ment industry. It compares forecast versus observed demand for representative items from
the product portfolio of the firm. The experience of Indian firms in the fashion garments
industry is similar. Firms have to realize that in spite of significant effort, quality of fore-
castis likely to be poor and extra effort in improving forecasts before the start of the season
is not likely to yield meaningful results, As a result, firms end up with lost sales in quite a
few items and also end up with excess stock in several other items that have to be salvaged
ata loss at the end of the season. Several players in this business believe that they have to
live with this gamble and they have focused their energies on reducing cost by moving Chapter 12: Agile Supply Chains 295
sales of women's parkas
Tot
° 500 3,000 11300 2,000 2,800
Int forecast
manufacturing to offshore locations in Asia, We will call this approach the speculative
approach. The best a firm can do is to use the inventory model for short life cycle products,
discussed in Chapter 4
In recent times, some firms have realized that even though forecasting before the start of
the season is difficult, data obtained from initial sales observed in the early part of the season
can help a firm in updating forecasts that are likely to have reasonably high forecast accuracy.
Sport Obermeyer Ltd found that if forecast can be revised after observing 20 per cent of the
actual demand, as shown in Figure 12.3, the forecast error will drop down by a significant
amount. Essentially, one will find that the standard deviation of demand for an updated fore-
cast will be of a much lower magnitude compared to the standard error associated with initial
forecasts. That is, if one defines a parameter called forecast correction factor, one will observe
the following.
Tol sales of women's parkas
° 500 1000 «1800 2000 «2800 «3.000300 -—«4,000
Updated forecast (incorporating fst 20% of eles)
Figure 12.2
Initial forecast versus
actual demand
Figure 12.3
Updated forecast versus
actual sales. | 296 |
Responsive approach.
Supply Chain Management
Updated standard deviation of demand for the season =
Forecast correction factor x Initial standard deviation of demand for the season
The forecast correction factor is likely to be in the range of 0.10.4 in the context of new
products,
FORECAST UPDATING AT SPORT OBERMEYER?
Sport Obermeyer is a skiwear design and merchandising company. It offers a new range of products
for every winter. Typically, retailers place firm orclers on the firm in March atthe time of the Las Vegas
fashion show. Given the long lead time in fabric supply, information obtained during the Las Vegas
show was too late and, therefore, Sport Obermeyer was forced to work with highly unreliable internal
forecasts. It faced the classic problem of production planning for shor life cycle fashion products with
highly uncertain demand. AS a solution, it came up with the innovative idea of “Early write” pro-
gramme and invited 25 select retailers in January to its design office. Based on orders received during
the “early write” programme, Sport Obermeyer updated the forecasts. It found that updated forecasts
based on the “early write” programme reduced forecast error substantially, Sport Obermeyer was able
to cut clown on the quantum af obsolescence as well as markdawns, which are the usual problems
faced by all fashion merchandising firms.
Responsive Supply Chain: Optimal Use of Dual Sources of Supply
Responsive supply chain approach takes advantage of lower variability of demand observed
in the updated forecasts. Given the fact that fabric manufacturing takes a long time, one will
have to stock fabric, and based on the revised forecast, the later part of the season can be ser-
viced from responsive garment manufacturing facilities that are located close to the market.
Further, firms can use faster modes of transport like air so that the time taken in transportation
can be cut down by a significant amount, We call this approach the responsive approach. In
a responsive approach the firm divides the season into two components: speculative time and
responsive time, The speculative part of season is managed using a long but efficient chain
using the speculative forecast available before the start of the season. Demand for the later part
of the season is serviced using a responsive supply chain based on updated forecasts derived
from observation of initial sales
Let us say we have a season of time period 7, and demand is uniformly distributed
‘throughout the season. This is divided into reactive time period T, and the speculative time
period. Demand during the speculative period is serviced from a cheaper source of supply
requiring long lead times. Of course, forecast accuracy is very poor at this stage. The specu-
lative time period is further divided into T, and T, as shown in Figure 12.4. The time period
T, is used for observing the initial sales pattern, and at the end of this period, forecasts are
‘updated and orders are placed on a responsive manufacturing facility for manufacturing the
required garments with an appropriate product mix for the likely demand in time period T,,
The time period 7, is used for manufacturing garment from fabric and transporting the same
to markets using faster modes of transport,
Speculative Reactive
r r r
