Brexit and Supply Chain Management

It’s time to revisit supply chain design and optimization books, software and research papers

Here is the initial list. Please revisit this page as I will continue to add to the list.


Supply chain design software


Adding Clicks to Bricks, and Vice Versa

The omnipresence and influence of Amazon is felt everywhere by the retail industry, even though actual e-commerce volume is currently less than 10% of the overall retail volume. With e-commerce expected to grow at a healthy clip the next several years, the urgency to develop cost-effective omni-channel capabilities for traditional retailers cannot be overstated. Continue reading Adding Clicks to Bricks, and Vice Versa

Can Connected And Smart Products Reduce Bullwhip Effect in the Supply Chain

Amazon’s collaboration with Brita on the Smart Pitcher is what busy parents have been waiting for a long time. It brings us closer to the Jetsons era and “The Autonomous House”. There is, however, one group that will be even more thrilled than busy parents with this development – Supply Chain Planners.

To understand why this is the case we revisit the Bullwhip effect. You can review the background in the seminal paper on The Bullwhip Effect in Supply Chains.

Some highlights from the paper by Dr. Lee, Dr. Padmanabhan and Dr. Whang below.

Not long ago, logistics executives at Procter & Gamble (P&G) examined the order patterns for one of their best-selling products, Pampers. Its sales at retail stores were fluctuating, but the variabilities were certainly not excessive. However, as they examined the distributors’ orders, the executives were surprised by the degree of variability. When they looked at P&G’s orders of materials to their suppliers, such as 3M, they discovered that the swings were even greater. At first glance, the variabilities did not make sense. While the consumers, in this case, the babies, consumed diapers at a steady rate, the demand order variabilities in the supply chain were amplified as they moved up the supply chain. P&G called this phenomenon the “bullwhip” effect. (In some industries, it is known as the “whiplash” or the “whipsaw” effect.)
Perhaps the best illustration of the bullwhip effect is the well-known “beer game.”3 In the game, participants (students, managers, analysts, and so on) play the roles of customers, retailers, wholesalers, and suppliers of a popular brand of beer. The participants cannot communicate with each other and must make order decisions based only on orders from the next downstream player. The ordering patterns share a common, recurring theme: the variabilities of an upstream site are always greater than those of the downstream site, a simple, yet powerful illustration of the bullwhip effect. This amplified order variability may be attributed to the players’ irrational decision making. Indeed, Sterman’s experiments showed that human behavior, such as misconceptions about inventory and demand information, may cause the bullwhip effect.

In the paper the authors highlight that the Bull Whip effect is caused, in addition to supply chain participant’s irrational decision-making, by the following

  • Demand forecast updating
  • Order batching
  • Price fluctuation
  • Rationing and shortage gaming

We will focus on the demand forecast updating aspect as smart and connected products can dramatically improve the situation. We will not focus on the other 3 as they have more to do with reducing cycle times and strategies that are specific to certain situations and industries.

Many industries have adopted some type of demand information sharing to reduce amplification of forecast variability in the supply chain. You can see examples of demand information sharing, including CPFR and VMI,  in the paper and in related literature. The Amazon and Brita Smart Pitcher relationship is a major step change and  transformation with respect to demand information sharing. The smart and connected Pitcher in this case can instantaneously transmit demand information to the Retailer (Amazon) and Manufacturer (Brita) at the same time. Such a scenario can be replicated for many product categories in consumer and industrial markets. It is not entirely fictional to imagine that in the near future supply chain participants will be getting demand signals instantaneously from smart and connected products as opposed to Point-of-Sale data or forecasts.

Zara’s Agile Manufacturing And Supply Chain Operations Have Toyota Production System Written All Over

Inditex, the parent company of Zara, at one point in 2015 was worth over $100 Billion in market cap. It is unusual for a company in Fast Fashion to be so valuable. Only Nike comes close. Obviously, such performance attracts all kinds of interest to understand the secret to its success. I read a number of research papers and case studies, which are listed below, to understand the secret sauce. After reading the papers and case studies, it became apparent to me that Zara practices a version of Toyota Production System suited for Fast Fashion industry.

Here are some of the Toyota Production System principles and strategies that Zara uses

Vertical Integration

Zara designs as well as manufactures majority of the apparel that customers buy in its stores. This is very much in contrast to the traditional high volume fast fashion practiced by the likes of Gap and H&M, which outsource most of the their manufacturing to contract manufacturers. This type of vertical integration is key to quick new product introduction cycles. In addition, most of the manufacturing operations seem to be centered around primary manufacturing facilities in Spain with suppliers also setting up their operations close the Zara’s manufacturing operations. Sounds a lot like how Toyota and its supply chain are organized around Toyota’s primary manufacturing sites.

Quick New Product Introduction Capability

Zara can get a new product from a mere sketch to store in 4 to 6 weeks. That is extraordinarily quick and provides a whole level of agility to respond quickly to new fashion trends. One of the key strategies that Zara adopted is to follow and adapt couture designs, manufacture and distribute to stores a mere 2-3 weeks after they first appear on catwalks. The agility of the entire design and supply chain process is central to supporting the core strategy of Zara.

High Product Variability

Zara carries about 11,000 distinct items per year compared to competitors that carry 2000 to 4000 in stores. Zara’s fashion season oriented products only make up a small part of its business. Only 15 to 25 percent of a season’s line is designed ahead of the season. Up to 50% of its items are designed and manufactured in the middle of the season based on certain styles and design that become popular. Because of its quick new product introduction cycles Zara can take advantage of customers’ fleeting interest in new designs and styles.

Small Lot Manufacturing

Zara’s design, manufacturing and supply chain capabilities allow it to produce in small lots. The supply chain is designed to support Just-in-time like capabilities with small production lots and frequent shipments to stores. This reduces instances of waste created by large lots of designs that do not catch on and have to be sold for large discounts.

Low Inventory

Zara seems to be extremely cognizant of the perils of inventory. It is one of the main “wastes” in Toyota Production System. Holding inventory is very hazardous for fast fashion because products that are demand one day can be out of favor the next day. So holding large amounts of inventory can lead to heavy discounting or outright waste. Zara’s agile manufacturing and supply chain capabilities allow it to maintain low levels of inventory across the supply chain and replenish as many as 2 times a week.

Excess Capacity For Agility

Zara also seems to keep excess capacity in its manufacturing operations to be able to respond quickly to unexpected demand. This is in line with Toyota’s strategy for retaining some excess capacity by running only 2 shifts in some manufacturing plants.

Zara also has extra capacity on hand to respond to demand as it develops and changes. For example, it operates typically 4.5 days per week around the clock on full capacity, leaving some flexibility for extra shifts and temporary labor to be added when needed.

Zara’s new product development, manufacturing and supply chain operations provide a contrast as well as a significant departure from the dominant fast fashion business model. The strategy and implementation has significant similarity to the Toyota Production System and is very likely the source of its industry dominating competitive advantage.

Supply Chain Innovation

This paper by Dr. Rice and Mr. Cottrill highlights three innovations that have the potential to transform supply chain processes. One can argue that cloud computing and 3D printing are are not fundamentally supply chain innovations as much as innovations from technology and manufacturing areas that have the potential to improve supply chain processes and design.

There is certainly a lot of hype around 3D printing, but the authors observe correctly that the use cases for 3D printing are still limited to limited order or one off manufacturing. Although a large 3D print catalog for service parts is a worthy idea.

The omni-channel/integrated retailing is a supply chain innovation that has the highest potential to transform retailing. Companies that can master omni-channel by leveraging physical retail presence, on-demand logistics/transportation services such as Uber/Lyft and effective placement of inventory will be next generation retail leaders.

Sustainable Supply Chain

Sustainability is our generation’s biggest challenge. Supporting Sustainability is the right thing to do even though the expected benefit is some times hard to quantify or takes a long time to materialize. That is often the case when it comes to Sustainability in the supply chain. Your suppliers may balk at it, resist it and in some cases even ignore it. But your customers want your suppliers to be sustainable. You should too.

For supply chain professionals that prefer quantitative and rational approaches to inventory management, optimization, demand planning, etc. Sustainability can seem like an emotional endeavor built on a shifting sand of stakeholder concerns and priorities. What you will find is that ensuring Sustainability in the supply chain is firstly a lot more about common sense. Secondly, you will also find it that it is not that difficult to find common cause with your supplier to make the world a better place, at least better for the places and people that are impacted by your supply chain activities. Finally, you will need cooperation of your supplier as well as multitude of other stakeholders (auditors, regulatory agencies, not-for-profit organizations…) to make this successful. Fortunately, some of the sustainability aspects in the supply chain are directly driven via regulatory requirements such as Reduction of Hazardous Substances (RoHS), REACH and Conflict Minerals. Others such as labor standards, occupational health standards and performance, environmental footprint of supplier activities, community involvement and impact are more convoluted and require intensive collaboration with the supplier. You have at your disposal carrots or sticks to compel your supplier to do the right thing. You may end up using both.