Case Study Finished Goods Supply Chain

The Great Indian Bazaar the rapidly growing and evolving Indian retail market presents special and daunting distribution challenges for fast-moving consumer goods (FMCG) products, such as groceries, toiletries and other items that are used up and must be replaced in a short amount of time. For a typical producer, about 100 stock keeping units (SKUs, or product types) flow from 40 to 50 depots to 2,000 to 3,000 distributors, and then on to more than 1 million retail outlets, varying in size from the tiniest corner shop to large supermarkets. Depending upon the product and the companys manufacturing strategy, production could be sourced from a handful to as many as 50-plus plants spread throughout the country. Inevitably, not all plants produce all the products. At the end of the supply chain, every organization attempts to minimize product shortages and stock outs. The effort described here is aimed at improvements in availability of finished goods stocks. The project in this case study used Total Quality Management (TQM) concepts such as justin-time, value stream mapping, eliminating non-value-added steps and initiating demand pull supply in the flow in order to help transform the supply chain. The effort used these principles within the structure of TQMs Seven Steps of Problem Solving (similar to DMAIC), shown below: Step 1: Define problem Step 2: Find root causes Step 3: Generate countermeasure ideas Step 4: Test model Step 5: Check results Step 6: Implement in regular operation Step 7: Prepare QI story Step 8: Repetitive practice of SOPs The model was developed in the Western region of the company. The supply chain was divided in to three loops 1) depot to distributor, 2) factory to depot and 3) production. This case study is in three parts, each part dealing with one loop; the depot to distributor process is covered here in Part 1.

Step 1: Defining the Problem

To begin improving the depot to distributor process, a cross-functional team was assembled (sales, operations, planning, materials, IT) from the corporate and regional offices. After completing a two-day quality mindset training program, the team began the project. They started by defining the availability problem. In TQM, a problem is defined as the desired state minus the current status. In this case, the desired state is 100 percent availability, or all SKUs present at all distributors (DI) on all days (A100). For stock outs (or unavailability), the team suggested using this metric: 1 SKU stocked out for 1 day at 1 DI = 1 DISKUDay. Likewise, 2 SKUs stocked out for 2 days at 2 DIs = 2*2*2

DISKUDays. Therefore, the percentage of stock outs = the number of DISKUDays in a month*100/A100. For perfect availability, DISKUDays must = 0. Data for the daily stock outs at each retail outlet was unavailable. Therefore, the team could not determine the current status. However, to create some quantification of the problem, a crude value stream map for material flow was compiled for end-of-month status across the region (Figure 1). Figure 1: Current-state of Material Flow Total stock: 39 + approximately 14 (i.e., more than 50 a day) Key: Triangle = stock (days) points, square = stock (days), S&F = factories

The problems exposed were:

Heavy supply push to meet end-of-month sales targets Overstocking at DIs

The operating team confirmed this analysis. Part 1 of the project introduced the concept of demand pull from depot to DI. The metric selected was reduction in weekly skew in sales during the month. The team decided to pilot the demand pull process in nine distributors that get products from one depot in the region. A careful measurement of supply to distributors (primary sales) and supply from distributors to retail outlets (secondary sales) was made. The results are shown in Table 1. Table 1: Sales Measurements Week 1 2 3 4 Ideal % Sales 23 23 23 23 Secondary Sales % 17 25 21 23 Primary Sales % 6 12 24 27

The goal of the project was to reduce the primary sales skew (supply push) from 30 percent to 10 percent in the last 3 days of the month.

Step 2: Find the Root Causes

To help find the root causes of the problem, the team constructed value stream maps of the current state (Figures 2 and 3).

Figure 2: Current State Sales System

Figure 3: Current State Production Planning and Supply

The root causes of the problem were apparent: 1. Information of actual sales was not available until a week after the month ended, and it was therefore of little use in planning supply. 2. Production planning was based upon a forecast, because the system had to meet what they believed the demand would be 50 days later

Step 3: Generate Countermeasure Ideas

The countermeasure was clearly a demand-pull system, which would include the following features:

Quick sales information flow from DIs Supply to demand replenish stock Agreement on maximum stock levels (norms) for each DI for each SKU Shortest possible replenishment cycle to minimize maximum stock levels while ensuring minimum stock outs

The team also made a future-state map to incorporate these changes (Figure 4). Each stage gives its demand (Kanban) to its supplier, who supplies as per demand. Figure 4: Future State of Material Flow Key: K = Kanban (i.e., demand), S = Supply

While in principle this setup is very simple, getting it to work in practice involves very fundamental changes in mindsets across the supply chain (including 500 DIs, sales, logistics and factory management). The first step in breaking the mindsets was a series of meetings to help the team internalize the concepts through specially designed training sessions and four computer games, followed by a pilot.

Step 4: Test the ideas

The team began the pilot at nine DIs and one depot. The steps followed were: 1. Identify depot and DIs 2. Train personnel 3. Develop an IT program to keep track of stock at the DIs and calculate the demand based upon stock norms and available stock 4. Design system in detail: -Calculate average sales per day of each DI over the last 3 months for each SKU -Determine feasible truck sizes for delivery and maximum stock replenishment

frequency feasible -Agree on stock norms to be maintained at DIs (these were at least 50 percent lower than the averages measured) -Most importantly, develop the formats and IT system to generate demand for each dispatch easily on the computer -Develop a pull tracker where the daily stock level compared to the agreed norm is plotted. If the tracker shows stock going above stock norm, action can be taken to stop the supply push. -Bring stocks down to norms much more difficult than one would imagine, as company results were based on primary sales and this one-time correction amounts to a loss of sales. Keeping in mind that disbelief that the concepts would work was widespread, intense discussions were required at each stage of the process. It took six months to simply get the pilot started. Compared to a stock norm of 4,800 cartons, the stocks were at 20,000 at the end of July. Savage de-stocking in August followed by tight monitoring and troubleshooting over six months gradually made the system work. December to March saw stock levels averaging at 70 percent of the norm, with some minor topping up still happening at the end of the month.

Step 5: Check the Result

Table 2 shows the change after the pilot project. Table 2: Sales Measurements After Pilot Secondary Sales % Postimprovement Week 1 Week 2 Week 3 Week 4 Days 29 to 30 20.6 25.1 23.4 23.3 7.6 Primary Sales % Primary Sales % PostPre-improvement improvement 20.9 28.9 24.0 27.7 8.5 6 12 24 27 30

The skew had virtually been eliminated primary sales were less than 1 percentage point different than secondary sales in the last 3 days of the month. Simultaneously, the variations in day-to-day sales reduced.

Supply was now clearly operating in the demand-pull mode. What was particularly heartening was the response from the distributors Stock levels are down and supply is even and as per demand.

Steps 6 and 7: Implement Across System and Document Results

After the pilot, the system was implemented across the regions 12 depots and 200 major DIs in the next six months. Numerous local implementation problems were doggedly overcome. A quality improvement story was prepared and presented to management. Based on this project, the organization eventually decided to extend this model countrywide. A model (covered in Parts 2 and 3 of this case study) for a demand-pull system in the upstream links of the supply chain also was developed.

Steps 1 and 2: Define the Problem and Find Root Causes

Drawing upon the current-state value stream map of material flow from Part 1 of the case study, the team realized that movement from factory warehouses to distributors occurred through two channels: 1) from S&F directly to the depot or 2) from S&F to the depot via a mother depot. The logic for dispatching was as follows:

Large-volume SKUs could easily make full truckloads and were dispatched directly to the depot. For smaller volume SKUs, a full truckload could only be achieved by batching a large number of SKUs for a number of depots. Such mixed loads were received from several factories for different SKUs. A full truckload was prepared at the mother depot for each depot by combining the small SKUs from a number of factories to each distributor.

Data indicated that 30 percent of the stock moved in the Western region went through the mother depot. The flow is indicated in Figure 1. Figure 1: Flow of Stock in Western Region

Step 3: Generate Countermeasure Ideas

The teams first countermeasure idea was to eliminate non-value-added stages of the process. Essentially, the existing system operated under the following pretenses:

1. Factories produce a mix of SKUs, some high volume and other low volume. 2. Minimizing changeovers with long runs of each SKU within the monthly planning cycle was the norm. 3. Larger-volume SKUs could go to the larger depots in trucks whenever the SKU was being produced. 4. Smaller SKUs going to all depots, and all SKUs to the smaller depots, were sent to an intermediate stock point called a mother depot. 5. Whenever a truckload was assembled for any depot, the mother depot dispatched the goods to that depot the aim being to minimize transport cost. TQM suggested the following system: 1. Map the average flows between each production center and its customer depot for the SKUs produced at that factory. 2. Estimate the frequency of dispatch for a direct truck depending upon truck sizes available and the total volume. 3. Use smaller trucks where possible to maximize replenishment frequency. 4. Supply to demand. 5. Eliminate the use of mother depot (non-value-adding stage) as much as possible, using it only as last resort for very small dispatch flows between a supply point and its customer. Using these principles, the team prepared a blueprint based upon past data. They agreed that a dispatch frequency of at least once a week was adequate given the stock of 10-plus days at the depots. The mapping of direct flows for the Western region is shown in Table 1. The mapping was done in three stages: 1. All volume flows for a month between each factory (left hand column) and depot (horizontal top row) were mapped. 2. The squares colored yellow showed the volumes that with normal size trucks could be replenished once per week at least. The squares in blue showed volumes that could be replenished directly at least once per week using smaller trucks. The squares that were neither blue nor yellow had to flow through mother depot. 3. To compute the volume that could be supplied directly, the squares with no color were equated to zero. Table 1: Direct Flows for Wester Region Depot G H I 0 0 0 0 0 0 0 0

Factory A 1 2 3 4 5 6 15

C 0 0 0 0

D 0 0 0 0

E 0 0 0 0

F 0

K 0 0

L 0 0 0 0

M 0

Total

0 0

0 0

0 0

7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 Total Total

19 8 0 10 0 0 46 99 22 9 0 389 439 127 7 0 326 1516 1525

8 5 0 5 0 0 19 59 8 5 0

10 0 0 0 0 17 20 0 0 0 0 0 32 17 0 0 0 0 0 0 0 20 17 0 0 0 0 0 21 27 0 0 0 0 0 34 324 0 0 0 0 31 15 0 0 0 0 14 97 0 0 0 0 16 17 0 0 0 0 0 0

0 0 11 10

0 0 14 112 44

221 25 130 42 3 0 233 742 746 24

36 16 36 0 0 0 9 0 0 0 0 101 25 28 34 84 99 16 465 44 316 46 187 374 308 147 406 590 405 915 262 576 275 6703 211 389 323 169 419 599 417 945 284 594 293 6914

47 40 29 180 10 63 203 63

123 87 70 23 23 39 23

0 9 48

0 60

0 97 43 18 13

207 79 62 60 16 286 72 28

Of the total volume supplied to all depots (6,914 tons in a month), as much as 6,703 tons (95 percent) could be supplied directly. Currently, about 30 percent went through mother depots. The configuration could therefore be run as shown in Figure 2. Figure 2: Improved Flow of Stock in Western Region

The system in Figure 2 would result in an additional 25 percent stock moving with several cost-saving advantages: 1. Combining transport from S&F to depot in one stage instead of two, resulting in transport savings 2. Eliminating unloading, loading and reloading and storage at mother depot 3. Reducing stock in mother depot and transit

4. Reducing product breakage in handling The teams second countermeasure idea involved mixing dispatches with all available SKUs, big and small. Existing dispatch practice was to dispatch full truckloads of large volume SKUs. The smaller SKUs were collected and dispatched to a mother depot. There, small SKUs from all factories for each depot were collected and dispatched when a full truckload was available. This inevitably led to large lead times, indeterminate arrival times at the distributors and resultant stock outs. The countermeasure proposed was to dispatch (and produce) to the demand mix in each truck. Software was developed so that the S&F could download the gap between stock norm and opening stock for each SKU daily, and calculate the requirement. Dispatch to each depot would be affected as per a predetermined minimum frequency (Table 1). Stock norms were determined based upon replenishment frequency and downstream demand fluctuations, and stored in the database.

Step 4: Test the Idea

It is not possible to test mixed dispatches, even on a pilot scale, unless production cycles and mix also are converted to short production cycles, each producing the mix demanded. The team did conduct a conceptual test to compare dispatch loading using the existing system and the proposed system. Table 2 shows an example of the difference. Table 2: Existing Dispatch Loading System vs. Proposed System Dispatch Plan (existing system) Depot 1 2 3 4 SKU 1 600 0 600 1,200 Other SKUs Dispatch Plan (demand pull) Demand 1 2 3 4 SKU 1 693 0 780 435 SKU 2 162 0 1,034 90 SKU 3 0 25 63 0 SKU 4 0 0 59 388 SKU 5 0 0 0 594 Total 856 25 1,935 1,507

5 Total O Stock 2,091 4,491 4,491 5,214 5 2,852 681 0 337 68 3,938 Total 4,760 1,968 88 784 662 8,262 O Stock 4,491 226 90 4,206 692 9,705

C Stock 0 5,214 C Stock

1,443

The demand-pull dispatch system was clearly superior, as it would get a mix of large and small SKUs directly to the depot at a much higher frequency and regularity. To implement Steps 4 through 6 (test the idea, check the result and standardize in operation), production scheduling also needed to be changed to the demand pull system. This major change will be described in Part 3 of this case, which also will describe the results achieved in the model.

tep 1: Define the Problem

The company supplied about 70 SKUs to more than 500 distributors through 13 depots from 24 factories in the Western region. After discussing the situation, the company decided to develop the market-mix-led demand-pull model for one product line with 13 SKUs produced from two factories through the 13 depots to 200 distributors. The metric for the project involved product availability, with availability being defined as the every SKU being available every day at every stock point. The unit used to measure it was defined as a data point (DP). A DP was defined as follows:

1 SKU available on 1 day at 1 stock point = 1 DP 2 SKUs available on 1 day at 1 stock point = 2 DPs 2 SKUs available on 2 days at 2 stock points = 8 DPs

Therefore, for the test population, % availability = % DPs / (maximum DPs during period) A stock point could be a depot or distributor. With the depot to distributor system already following the demand-pull model, the metric was applied to depot availability. The current state showed a 10 percent stock out of DPs. In phase one, the team agreed to try to reduce this by 50 percent to 5 percent stock out of DPS.

Step 2: Root Cause Analysis

The prevalent planning system was a forecast-based supply push system. The team completed a map of the forecasting system, shown in Figure 1. Figure 1: Information Mapping Arriving at Sales Forecast

Typically, the sales system added up the actual sales once per month to get an accurate count. The expected demand from the sales teams estimates spread out through the field, planned marketing promotions and monthly trends also were considered when issuing the sales forecast for the next month. There were two problems: 1. This forecast suffered from the typical bullwhip effect shortage/excess of stocks were magnified at each stage and led to wild swings in demand which only increased the amplitude of the bullwhip wave. 2. The sales forecast for any month was available one week after the month had begum and the real production plan only emerged nine days after the month had begun. This delay produced two serious distorting effects. First, for the first 10 days of the month, production followed the demand of pattern the previous months days 1-10. Second, the supply chain had only 20 days to react to changes in monthly demand patterns. Mismatches between demand and supply were bound to be the outcome of the current process.

Step 3: Generate Countermeasure Ideas

The team drew the solutions from just-in-time principles. They believed a dramatic reduction in the sales-to-planning cycle could be achieved by implementing demand-pull production. They reduced the number of stages needed to generate the plan by:

Aligning specific factories to specific depots for specific SKUs Monitoring stock levels at its customer depots for each factory daily Replenishing to agreed maximum stock levels at agreed frequencies depending upon downward supply Conducting fortnightly production planning based upon market aggregated supply to distributors during the past fortnight adjusted for stock levels at factory, depot and distributors Introducing special promotions and production requirements for each factory, to be communicated by central planning

Step 4: Test the Idea

Key personnel in the factory, planning and logistics departments were trained in the demandpull model. One product line with multiple SKUs produced in two factories and supplied to 13 depots was selected for the trial. Formats and operating principles for combinations of production mix to suit varying sales requirements were developed to set the stage for the trial. Modeling was done for four fortnights by generating the demand pull locally and comparing it to the demand that would have been produced with the monthly supply-push planning system. The employees discovered that the mix required was different, but it would only prove beneficial and not result in a supply disaster.

Step 5: Check the Result

The steady improvement in stock out DPs at the distributors and depots are captured in Table 1.

Table 1: Changes in DPs from July to March Month July Sept Oct Nov Dec Jan Feb Mar DPs Depot 2821 2730 2821 2730 2821 2821 2548 2821 % Depot 10.5 5.5 3.5 1.5 0.1 1.9 1.3 1.0 DPs Distributor % Stock Out

43,400 43,400 39,200 47,740

1.74 2.28 1.04 0.46

The improvements resulted in a 90 percent reduction on stock out days at the depot and 67 percent at the distributor. Also, 0.46 percent DP stock outs at distributors meant a total of 230 stock out days spread over 200 distributors and 31 days (i.e., stock outs must at best be just one or two SKUs stocked out at one point for one or two days, implying virtually zero stock out at the retailers). Likewise, 2,821 depot stock out points over 30 days and 13 depots means very short stock-outs that were made up before loss in sales at the retailer could occur. After experiencing three months of testing, the operating team, satisfied with the results and having had a long exposure to TQM, decided to roll out the model on its own. Just-in-time is a powerful method for improving delivery in a supply chain while reducing stocks, operating pressures and costs. Effective implementation involves cutting cycle times of both Information and materials by converting batch process to flow processes, removing non-value-added activities and establishing decentralized supplier/customer relationships with central control for special circumstances.