The evolution of supply chains

The futuer of Supply Chains - or Demand Chain - as the new nomenclature suggests

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The Evolution of Supply Chains

By

Zubin Poonawalla

From the time trade became a part of our human life, supply
chains developed to ease the process. Since then, supply chains
have evolved – from the producer decided & driven activity to a
more customer centric activity. The producer still sets the agenda
for supply chain discourse – but not for very long. As customers
evolve, & as products proliferate, the balance will shift to the
customer. And adding to the effort will be Technology. The future
of supply chains – or Demand Chain – as the new nomenclature
suggests.

It is interesting to see the evolution of the supply chains. Four
metrics usually define a supply chain – Quality, Cost, Lead Time &
Availability. These four metrics are not fixed. They usually change
over a period of time, based on the business ecosystem. Therefore,
firms need to constantly change their supply chain strategy. Starting
with the early 80’s, where the philosophy was the product & the key
driver for supply chain quality. Over a period of time, the philosophy
changed to knowledge driven flows & the key metrics information.
This is aptly summed up in my Research Paper – Supply Chain
Migration From Lean & Functional to Agile & Customized. Most of
today’s supply chains are geared to manage efficient production in
countries like China, & moving them round to customers across the
globe. But as these low cost manufacturers loose their advantage & as
concerns about the carbon foot print of products become more
relevant, the traditional supply chains can leave firms exposed to
various risks.

One trend that has forced change in the supply chain is the
proliferation of products & variations. This has forced firms to align
their processes with their customer’s needs. Eg, the automobile
industry – from a time when we had three models of cars to today –
when the numbers are upwards of 100. This has changed the way
auto manufacturers look at customers. Remember the time when the
waiting list for a Premier Padmini & Bajaj Scooters was upwards of a

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year. The sheer number of models & variations has moved the
customer from the end point of the supply chain to the center of the
value chain. There are quiet a few interesting examples littered in the
annals of supply chain evolution. One such narrative is the Dell v/s
HP supply chain strategy. Both were selling similar products. – but
HP decided to adopt a Push strategy for its products, while Dell chose
the Pull Strategy. Their approaches differed in the point at which the
push-pull boundary was. This was a paradigm shift in supply chains.
Dell managed to clock an amazing growth. One major issue in supply
chain is the limited visibility of customer demand. Because of this
lack of visibility, & the fact that there were multiple levels – between
the factory & the final customer. – where inventory was aggregated,
supply chains were driven by the producer. As customer demand
moves up the supply chain, the pull factor takes over.

Supply chains are undergoing a drastic change – for one, people are
referring to it as Demand Chain – implying the pull from the
customer, as opposed to the push from the producer. This means that
the final customer demand is travelling farther upstream –
sometimes right up to the producer. This is visible in supply chains of
garment manufacturers. This calls for a different orientation of the
supply chain. And as customer preferences evolve, we will see a time
when the customer will be able to specify their requirement right till
the moment of shipping.

Across the globe, the primacy of the supply chain is now recognized.
Putting it in lay man’s words, The competitor that’s best at managing
the supply chain is probably going be the most successful competitor
over time. It’s a condition of success. This is easier said than done.
The supply chains of most international firms are not capable of
successfully meeting the demands of the volatile ecosystem.

A worrying aspect in India is the lack of R&D within the supply
chains. As we do not invest in R&D, most of the innovations we see
are borrowed from the west. As we evolve, we will see higher funding
for R&D activities within the supply chain in India. Eg – the
automotive supply chain – we are seeing considerable R&D activity
across the supply chain. Honda, for example has standardized the
parts of its products so that a shift in production from Civic to Accord
can be easily accommodated. We will see such efforts across the
chain. The increase in efficiency, effectiveness & flexibility of the
supply chain process will be the leverage for optimization.

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Collaboration, optimization & connectivity will be the defining
parameters of the supply chain in the near future. This will mean
increasing adoption of IT in supply chains. IT can help supply chains
become agile & lean.

What will be the shape of the supply chain of the future? What trends
will define these supply or demand chains? We can be sure of one
thing – customer demand is increasingly complex. Today, more than
ever, firms are at risk of deciding crucial strategies that can be
derailed due to forces beyond their control. The financial crisis of
FY08 had some interesting fallout on supply chains – they changed
the global trade flows of Currency values & capital movement. To
cope with these trends, some supply chain owners are adapting some
novel methods. Some are breaking up their supply chains into
smaller, more responsive units. The belief is that a smaller nimbler
supply chain can weather demand changes quickly. But, this in turn
requires a higher degree of collaboration, information sharing &
synchronization. Another strategy is to change the manufacturing
footprint – we are seeing a trend towards near shoring & re-shoring.
Again, a result of the financial crisis changing the cost of production.

Eg – the footwear industry. One of the major footwear manufacturer
in India used to manufacture its range of products in batches across
ten production centers. I was mandated to look at their existing
practices & re-engineer & optimize their operations. The firm was
either facing stock outs of its fastest moving SKUs or having excess
stock of the slow moving SKUs. The lead-time for fulfillment was
uncertain. After studying the processes, I recommended to split the
supply chain into three components. The fastest moving SKUs, with
relatively stable demand were allotted dedicated production centers
– assuring ready availability. For the SKUs which had an uncertain,
yet strong demand, they introduced batch runs with fixed delivery
turns. And for the slow moving SKUs, the dealers were assured
delivery, but based on longer, but committed lead times.

Not only did they change the production centers, they also changed
the planning process on my recommendations. The fast moving SKUs
were manufactured on fixed production plans, with a stable demand
outlook. The slow moving products were made to order, based on the
dealer demand. Together, its changes to production location &

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planning functions increased availability & increased sales. The firm
expects to close this FY with INR 1400 crores turnover.

Splintering a supply chain may sound complex – but as my
experience shows, this approach allows companies to reduce
complexity & helps them optimize the operational efficiency of their
assets & at the same time, the increased visibility helps the managers
to use productivity tools more effectively. To pull it off, the
management of the footwear firm integrated all operational heads
into their S&OP sessions, so that everyone was on the same page.

Clearly, supply chains will become smaller, interlinked & more
transparent. Gearing up for this can be a challenge to many tradition
bound firms.