#Lessonsfromthebest : Old-fashioned

Author’s Note: Over the last few weeks, I have been using this space to write about the lessons I learn from organizations with respect to their supply chain management, but not limited to it. I have also been attempting to convey my learnings as a narrative, and a story of sorts. So, if you want to learn something informative whilst having some entertainment, go ahead and read away! If you want to read my previous blog posts, click here! 😊

Shanmugeshwari, MBA '21

Amrita School of Business, Coimbatore

Think about an industry which needs to predict demand 15 years before the actual supply . . .

 

Whiskey! 🍸

 

Until the early 2000s, demand grew steadily -- blends dominated 80% of sales and single malts accounted for another 15%. US & EU were the main consumers.

 

Soon, emerging markets (particularly India which guzzles 50% of the world's whiskey by volume) entered big-time & demand soared. Fuelled by artisanal food movements and critical popularity from TV series (like the one featuring Don Draper in it) skyrocketed its demand. Consequently, product mix changed but the need for aging whiskey continued to give a bottleneck to the industry.

 

Maker’s Mark one of America’s premium Bourbon Whiskey Distillers witnessed this surge in demand and shortage in supplies. Essentially, a bourbon takes six years to age. Maker’s Mark had no choice but to water down their proof content, to meet the rising global demand. This in turn increased their supplies by 6% and they communicated this clearly to its loyal consumers.

 

That is when necessity mothered invention.

 

• NAS (No Age Statement) Whiskey was born. Instead of Age, brand managers focused on color, innovative flavors, location, techniques like maturing in three different casks & opaque bottling to pique consumer interest.

 

• Aged versions morphed into Collector editions & became dearer.

 

And then came the innovations!

 

Microbreweries bloomed.

 

Aging techniques were patented, and products were watered down to meet the demand surge.

 

An interesting example of how an entire industry addressed supply chain challenges by leveraging the attributes of pricing, branding & product innovation!

#Lessonsfromthebest : SC Network Optimization

 Author’s Note: Over the last few weeks, I have been using this space to write about the lessons I learn from organizations with respect to their supply chain management, but not limited to it. I have also been attempting to convey my learnings as a narrative, and a story of sorts. So, if you want to learn something informative whilst having some entertainment, go ahead and read away! If you want to read my previous blog posts, click here! 😊

Shanmugeshwari, MBA '21

Amrita School of Business, Coimbatore

When the world just came out of recession in 2010, luxury took a hit. But Michael Kors was an outlier.

Kors modeled itself as an affordable luxury: giving recession-struck, cost-conscious American & European consumers a high style option. This was done by greatly overhauling its Retail distribution strategy & taking advantage of Low-cost manufacturing in China. It opened stores in newer countries, cities, malls & Duty-free zones.

This showed in revenue as $ 38Mn (2011) to $109 (2012) to $221 (2013). Soon becoming the best performing & most searched Luxury brand in the world.

However, three problems soon caught up:

• Overdistribution reduced its aspirational value
• Much of the growth was through markdown in the pricing structure that led to a weak P&L
• And finally, Michael Kors became one of the most counterfeited handbags in the world

Between 2013-14, the Inventory-to-Cash Ratio was around 0.5. This ratio being greater than 0.8 indicates a much higher inventory than what current assets can support. By 2016 this ratio sky-rocketed to 1.65, inventory increased by 37%, but cash reduced by 56%

How did they overcome this?

Kors stayed relevant by realigning its forecast and its distribution plans and giving us a good example of the inter-dependencies among Supply chain, Strategy & Finance.

They performed a supply chain network optimization study when they realized their long-term forecasts caused problems in the distribution centers as they couldn’t handle such large projected growth. By the time, they were moving from a high growth business to a mature business model. They started focusing more on how to utilize their retail assets for omnichannel distribution in order to derive maximum advantage for the lead times.

They reduced the number of touchpoints between the manufacturers and the customers. More goods were directly shipped to customers from the ports. Some orders went directly to the de-consolidators bypassing the distribution centers. Thus, by redesigning the supply chain, soon they developed a competitive advantage which over time became their core capability.

 

Reference for the financials from here.

#Lessonsfromthebest : Speed factory

 

Author’s Note: Over the last few weeks, I have been using this space to write about the lessons I learn from organizations with respect to their supply chain management, but not limited to it. I have also been attempting to convey my learnings as a narrative, and a story of sorts. So, if you want to learn something informative whilst having some entertainment, go ahead and read away! If you want to read my previous blog posts, click here! 😊

Shanmugeshwari, MBA '21

Amrita School of Business, Coimbatore

With more organizations focussing on localization with custom made products, goods are made at “Speed factories”. Though these factories have a quick turnaround to satisfy the demand, often they come with high production costs.

 

Let’s take an example, Adidas.

 

In 2018, Adidas came up with AM4NYC (Adidas Made for New York City). These shoes are made specifically for the runners and athletes at the Big Apple AKA NYC. These shoes were produced in the U.S., unlike most of its footwear which happens overseas.

 

As retail customers expect instant gratification and immediate deliveries, consumer-faced companies are starting to invest in these speed factories. However, these account for only a small percent. At least in the case of Adidas were out of the 300mn athletic shoes the company makes, only 1% of it comes from these speed factories. Adidas has the vast majority of its production in Asia and only two-speed factories in Germany and Atlanta.

 

Now, why is it companies allocate only a tiny amount of its total production to these speed factories, considering their fast turnaround?

 

This lies in the demand forecasting. If the exact long-term demand is known, these products could very well be manufactured overseas, but the nature of the demand for these customized shoes is uncertain. If people see their favorite celebrity sporting a new sneaker and they want to buy it immediately, predicting this kind of demand becomes hard, and producing them fast enough in Asia to meet the demand in the U.S. becomes tedious. Also, such unpredictable demand requires companies to maintain large safety stocks, which may have to be sold off at discounts in case they don’t sell it in the season.

 

This is where the Speed factory comes into play. If companies can get the latest and the best product to market faster, there’s no need for a discount and they can command higher prices.

Having a speed factory may be a worthwhile investment, as long as they have the best product mix to allocate to these factories. The local production via these speed factories can give the business a competitive edge, but over time if the demand becomes stable it only makes sense to have the production offshore.

Here is the making of Futurecraft M.F.G at one of the Adidas' speed factory,

You can read the tech stuff about these shoes here, Adidas AM4NYC Shoes

#Lessonsfromthebest : The Double A’s for a responsive Supply Chain

Author’s Note: Over the last few weeks, I have been using this space to write about the lessons I learn from organizations with respect to their supply chain management, but not limited to it. I have also been attempting to convey my learnings as a narrative, and a story of sorts. So, if you want to learn something informative whilst having some entertainment, go ahead and read away! If you want to read my previous blog posts, click here! 😊

Shanmugeshwari, MBA '21

Amrita School of Business, Coimbatore

 

Once Microsoft was forced to make a difficult decision as to whether it should manufacture a gaming console along with managing a global supply chain or outsource the manufacturing to a third party. They quickly decided that, because they lacked the manufacturing and logistics skills required, it would be in their best interest to outsource the development of this product. After reviewing several possible vendors, Flextronics, a Singapore-based contract manufacturer, agreed to outsource assembly and major logistics functions. Flextronics was a multinational company with many staff and has also partnered with other big corporations such as Xerox and Dell.

Microsoft and Flextronics also had prior business partnerships, and Flextronics was the maker of its mouse (mice?). The rapport and partnership that Microsoft had with Flextronics was a significant factor why Microsoft chose to go with Flextronics. In addition, Microsoft was searching for a partner who could deliver gaming consoles at a reduced price while ensuring high quality and was ready to work with Microsoft on a real-time basis. One of the advantages of Flextronics was its industrial park strategy, which helped to control the supply chain closely, minimize supply delays, and lower costs that were passed on to Microsoft. Second, Flextronics had an international presence and was able to move production from location to location as required to keep costs down.

Flextronics used web-based information systems that allowed Microsoft to provide Flextronics with information on demand conditions. This sharing of information between the two would ensure that the production plans of all the players in the supply chain are well organized, such that inventory is minimum, shortages are avoided and the demand and the supply are regulated.

At the beginning of 2001, Flextronics had set a goal of taking the product to retail before the Christmas sale reached the shoppers. Since Speed-To-Market and technical support were the most critical ones for this new launch, Flex decided to select Hungary and Mexico as production bases, closer to the key Xbox target markets of the EU and the USA.

Microsoft was able to launch the product in record time on 15 November 2001 and posed a tough challenge to market leader Sony's PlayStation 2. X-Box sold a total of 1.5 million units by the end of 2001. Sony fought back by providing deep discounts on the product.

Flextronics moved the supply chain of the Xbox to China, realizing that speed would not be as important for long-term survival as costs would be. The resulting cost savings made it possible for Microsoft to match Sony's discounts and give it a chance to fight. This is a perfect example of agility and adaptability taking turns to make a robust and responsive supply chain.

For more on this,

The Making of the Xbox - How did the world's largest software publisher become a hardware manufacturer overnight? One word: Flextronics

#Lessonsfromthebest : Quality & Performance

 

Author’s Note: Over the last few weeks, I have been using this space to write about the lessons I learn from organizations with respect to their supply chain management, but not limited to it. I have also been attempting to convey my learnings as a narrative, and a story of sorts. So, if you want to learn something informative whilst having some entertainment, go ahead and read away! If you want to read my previous blog posts, click here! 😊

Shanmugeshwari, MBA '21

Amrita School of Business, Coimbatore

 

TIMEKEEPING AT OLYMPICS

When I was entering my teenage years, I religiously followed sports – all kinds of sports, any kind of sports. I remember watching the 2008 Beijing Olympics, carefully scheduling the time slots of my favorite sports along with my school timing. If there is one event that took the world by storm that year, it must be the Swimming! The year Michael Phelps made history winning 8 gold medals. I could still vividly remember how his 7^th race happened when Milorad Cavic almost grabbed that gold medal. But, suddenly, Phelps made a mini-stroke, propelling his upper body out of the water, and slamming the wall with his hands on the follow-through. Nobody could tell who finished first, because while one glided with big strokes, the other stroked shorter and faster. Even with the slow-motion replays, the reviewers could not decide.

So, how did they conclude who won the race?

How did they prove the protesting Serbian committee of Milorad wrong?

Luckily for the Olympics committee, they used high-tech timekeeping touchpad systems by Omega. Omega’s touchpad determined that Phelps won by one 1/100th of a second i.e., Phelps' time was 50.58 seconds while Milorad finished at 50.59 seconds!

Why did they choose Omega for this responsibility and not any other brand?

The Swiss Time Company has maintained its reputation for precision for over 150 years now and has introduced new technologies to enhance the timekeeping process.

The Mexico City Games of 1968 represented the first time that all Olympic sports, including the touchpad system for swimming, used electronic timekeeping. Omega and its subsidiary Swatch developed and introduced 20 new ways of timekeeping technology at the 1996 Summer Olympic Games in Atlanta, including the use of the Global Positioning System (GPS) to record the performances of 10,318 competitors, a record in itself. One hundred and ninety-six engineers and technicians came from Switzerland to support this hi-tech effort carrying 100 tons of equipment. Omega mobilized the aid of 450 engineers and technicians and 420 tonnes of equipment during the 2008 Beijing Olympic Games. While this support may seem unnecessary, preserving the reputation of Omega goods and services is a critical part of it.

In its line of personal timepieces, Omega applies the same degree of commitment. The Department of Quality Assurance puts every part of the timepiece through rigorous testing to ensure that it meets strict quality standards.

Four quality tests for Omega timepieces include:

• To analyse the accuracy of the piece, the movement of the internal structures of the timepieces is examined through stringent testing. In order to ensure that each watch retains an acceptable degree of temperature resistance, vibration resistance, and shock resistance, the Technical Development Department also performs laboratory tests.

• In the concept stage, the exterior casing of each piece must be approved even before it enters the production stage. Before it advances to the next level, a series of checks, such as its ability to withstand water, is tested.

• Omega ensures that all facets of the timepieces can hold up against the toughest conditions in the world, meaning that each dial and hand is exposed to an ultraviolet examination to ensure that the timepiece stays intact following exposure to intense sunlight or humidity.
• While it may not be the most technical feature of the Omega timepiece, the strap of each piece must still uphold certain consistency requirements. To prove its durability, each one is put through rigorous mechanical tests.

The commitment of Omega to quality is what makes the firm so respected. Omega strives to offer a premium product that has withstood several tests of time, whether its watches that are used to help a person be on time for a business dinner or to assess the outcomes of Olympic performances.

 

#Lessonsfromthebest : Nokia vs. Ericsson

 Author’s Note: Over the last 5 weeks, I have been using this space to write about the lessons I learn from organizations with respect to their supply chain management, but not limited to it. I have also been attempting to convey my learnings as a narrative, and a story of sorts. So, if you want to learn something informative whilst having some entertainment, go ahead and read away! Also, if interested, make sure you catch-up on my remaining blogposts as well. Click here! 😊

Shanmugeshwari, MBA '21

Amrita School of Business, Coimbatore

 

 

MANAGING RISKS IN THE SUPPLY CHAIN

When a lightning struck a high-volt electric line in Albuquerque in New Mexico, a fire broke out in a fabrication line of the Royal Philips Electronics radio frequency chip manufacturing plant. Though the plant personnel quickly extinguished the fire in 10 minutes, this incident changed the mobile phone industry forever!

How?

At first, it was evident that only eight trays of silicon wafers were destroyed. A minor setback, sure. These wafers had they been fully processed, would have become the chips in thousands of mobile phones. But when dug deeper, this looked even worse! The fire, the smoke, and the water from the sprinklers contaminated millions of chips that had been stored for shipping. Now, this is a calamity.

A Look Inside: Semiconductor manufacturing plants are usually cleaner than hospitals

When the Philips engineers and managers were grappling with this issue, they realized that the clean-up would take at least a week. They decided to prioritize Nokia and its arch-rival, Ericsson, who accounted for 40% of the plant’s shipments once their facility was up and running.

Four thousand miles away, at a Nokia plant outside Helsinki, failed to get a routine input from Philips. The failure could well have been an anomaly. Nevertheless, the personnel informed the plant’s purchasing manager. A few hundred miles away, Ericsson also received a similar call from Philips. But since they hadn’t sensed any discrepancy in Philips’ performance until then, they did not perceive a need for concern or stepped-up action.

Over time, Nokia lost confidence that its partner had the problem under control. They moved towards adopting the response routines they had developed for such eventualities. Exactly two weeks after the fire, Philips admitted it would need more time to fix the problem; ultimately, the plant remained out of action for six weeks.

Recognizing that the problem with Philips could affect the production of several million mobile phones, Nokia took three pro-active steps:

• One team of executives and engineers focused on Philips, seeking a major role in developing alternative plans, it pressed Nokia’s case with Philips executives. By reorganizing its plans in its factories even as far as Shanghai, Philips responded.
• A second cross-continental team redesigned some chips so that they could be produced in other Philips and non-Philips plants. It consulted with Philips, where appropriate, to assess the potential effect of its decisions.
• A third group worked to find alternative manufacturers to reduce pressure on Philips. Two current suppliers responded within five days.

At the end of March, Ericsson finally started to appreciate the gravity of their issue. However, for reasons about which one can only speculate, it still did not act speedily. By then Ericsson had very few options left.

Nokia’s initial sensing of the problem and its rapid and effective response carried the day. Its profits rose 42 percent in the third quarter of 2000 as it expanded its share of the global market to 30%. The fire was not even mentioned in its quarterly statements and annual report for the year 2000.

On the other hand, six months later, Ericsson reported divisional annual losses of $1.68 billion, a 3% loss of market share, and corporate operating losses of $167 million. It also announced the outsourcing of cell phone manufacturing to Flextronics and the elimination of several thousand jobs; Flextronics took over Ericsson in October 2001. Ericsson's woes extended beyond cell phones and persisted in the years that followed. It finally returned to health in 2004, but as a much smaller company. The face of the mobile phone industry had changed forever, all due to a fire contained within ten minutes.

So, what do we learn from here?

Regaining the whole global production capacity after COVID-19 will not be a short process. It is highly likely that supply chain shortages will exist for a long time afterward. It is also likely that some parts of the supply chain will be more affected than others. Rather than looking for alternate vendors to deliver the parts or components that one needs, innovative companies can look at their products to identify whether they can be re-engineered to use the available supplies.

#Lessonsfromthebest : Supplier collaboration

Author’s Note: Over the last few weeks, I have been using this space to write about the lessons I learn from organizations with respect to their supply chain management, but not limited to it. I have also been attempting to convey my learnings as a narrative, and a story of sorts. So, if you want to learn something informative whilst having some entertainment, go ahead and read away! Also, if interested, make sure you catch-up on my remaining blogposts as well. Click here! 😊

Shanmugeshwari, MBA

Amrita School of Business, Coimbatore

IMPORTANCE OF SUPPLIER COLLABORATION

COVID-19 has amplified the importance of supplier collaboration. Companies have long-viewed collaboration with suppliers as the key to value creation in the supply chain. This has been considered more critical than having a global procurement network that helps with scale or spend analysis that helps reduce costs.

Greater collaboration between suppliers helps both the Top-Line revenue contribution and the Bottom-Line cost control.

Top-Line growth comes from,

• Access to new technology
• Insights about the market
• Access to supplier's business network and logistic infrastructure.

How does this help the Top-Line?

• Faster New product development
• Help and assistance in entering newer geographies sustainably.
• Getting access to the supplier's capacity during disruption or capacity shortfall.

Similarly, the Bottom-Line is affected by shared capital expenditure and jointly manages customer demand. These can be done by:

1. Most favored customer pricing

2. Having visibility of the upstream supply chain

3. Jointly reducing redundant SCM activities

4. Jointly securing low-cost manufacturing.

Along that line, when P&G and Kimberly Clark had their earnings call this April, both finished strong and with some realistic supply chain lessons for us.

Toilet paper comes in two varieties, consumer and commercial - the raw material, quality, packaging, and suppliers for both these varieties are different. Due to a shift in consumption during the quarantine, the household consumption of toilet paper rose by 40%, which is a huge leap for a product whose demand is primarily a  constant one.

It took time for the information to move up and manufacturers to respond to the real demand spike.

For a bulky low-value product, retailers relied on continuous replenishment and did not store inventory. Shifting commercial toilet paper to household consumption would need new retail relationships, contracts between suppliers, distributors and stores, change in packaging  and labeling and new truck transport routes.

Companies responded by running production 24*7, reducing assortments, simplifying packing, re-routing vehicles, directly shipping to retail and making innovations in the product as below!

Thus, supplier collaboration can help companies always deliver sustainable growth ranging from recessionary phases to periods of successive boom.

#Lessonsfromthebest : Make-to-Order

Intel, one of the world's largest computer chip manufacturers, needs no introduction. Nevertheless, despite introducing the low-cost "Atom" chip to market, the company had to drastically reduce supply chain spending. Supply chain costs for units selling for $100 were bearable at about $5.50 per chip, but the price of the new chip was a fraction of this, at about $20.

 

Intel needed to somehow reduce the expense of the Atom chip's supply chain but had just one area of leverage — inventory.

 

The chip had to work, so Intel could not make any trade-offs for service.

 

The only alternative was to try to lower the inventory levels, which had been held very high up until that point to accommodate a nine-week order period. The only way Intel could find cost savings in the supply chain was to push down this processing time and thereby reduce inventory.

 

Intel decided to try what the semiconductor industry considered an unlikely supply chain strategy: make to order.

 

The company launched a pilot project in Malaysia, using a distributor. Through an iteration process, they were gradually searching for and eliminating inefficiencies in the supply chain to incrementally reduce order cycle time.

 

Further initiatives to improve the situation included:

• Cutting the test window for chip assembly from a five-day schedule to a two-week, two-day process

• Introduction of a formal planning SOP

• Switch to a vendor-managed inventory model wherever possible

 

Intel eventually drove the order cycle time for the Atom chip down from nine weeks to just two by its incremental approach to cycle time improvements. As a result, the company achieved a supply chain cost reduction for the $20 Atom chip of more than $4 per unit — a much more palatable rate than the initial $5.50 figure.

#Lessonsfromthebest : Data Rich SCM

 

“I woke up at 5:45 a.m., as I do every workday, and one minute and 40 seconds later, the world around me was changed … it was the scare of a lifetime”, she recalled the terrifying moment of the temblor and hours of stress as the extent of the calamity became clear.

 

It is one person’s account of the Kobe earthquake. 

 

The Kobe earthquake was one of the worst earthquakes that hit Japan. All vehicular mobility came to a standstill and the quake cost more than $100 billion in damage. But Seven-eleven Japan (SEJ) built a supplier network that is so strong and reliable, that while trucks were barely moving at two miles per hour to Kobe (if at all moving), Seven Eleven’s suppliers mobilized 6 helicopters and within 6 hours supplied Kobe with 65,000 units of Ready-to-Eat rice balls for the calamity stricken survivors.

Being a key grocery retail chain in Asia, SEJ has always followed a robust and highly adaptive store stock replenishment policy which involves 2-3 replenishments in a day. SEJ is also one of the most profitable retailers in the world and has remarkable low stock out rates. So, how has SEJ managed to sustain its performance for more than a decade now?

  Photo credits: The Portal to Texas History

7-Eleven Inc. is actually an American international chain of convenience stores, headquartered in Dallas, Texas. The chain was founded in 1927 before 70% of the company was acquired by Japanese affiliate Ito-Yokado in '91.(Source: Wikipedia)

When all other companies were focussing on maximizing speed and minimizing supply costs, SEJ adopted a different framework which is designed to promptly respond to the quick changes in demand.

 

Even before the Internet era picked up, SEJ understood the role of data exchange and invested in real-time systems like satellite connections and Integrated Service Digital Network (ISDN) lines to connect with its suppliers, distribution centers and logistics providers and also to track the customer demands.

How ISDN works,

1.      ISDN links their retail store with the HQ

2.     Data is gathered during every single transaction

3.     Store Manager & HQ Manager analyze the data

4.    HQ Manager aggregates the data & send it to the Store Manager and Suppliers

5.     Store managers review the information hourly.

6.     Gather weekly cycle information 

7.     Quality control data is analyzed by computerized decision support

The data allows the supply chain –

·to detect fluctuations in demand between stores,

·to alert suppliers to potential shifts in requirements, 

·to assist them with reallocating the inventory among the stores,

·to make sure that the company restocks at the right time.

SEJ also fostered this alignment by making supplier incentives and penalties clear.

 

SEJ schedules deliveries to every store within a 10-minute margin. If a truck is late by over half-hour, the carrier must pay a penalty equal to the gross margin of the products carried to the distribution store. When all other companies offered their partners incentives to enhance the growth, SEJ 's message to its partners was a little different. It was a win-win situation if they make SEJ successful; but on the other hand, if they fail to deliver on time, the carrier has to pay the penalty.

 

SEJ also helps its suppliers save money/time by skipping the usual time-consuming requirement that store managers do check every delivery truck's contents. They trust that for a continued long-term relationship, the delivery would be 100% aligned with orders.

 

This is a clear and simple case of how rules and incentives are used to build reliable supply chains.

 

Most firms are more conscious about aligning their own interests with all the firms that come under their supply chain. But instead of looking out for their own interests, these firms must take responsibility for the entire chain if they want to build a supply chain that is agile, adaptive, and rightly aligned.