9/22/2009

FMS LENGTH OF SUPPLY CHAIN FOR AN FMCG

DELHI PRODUCT (LUX SOAP)

Submitted By
Akhil Gupta MS 03
Doni Riba MS 22
Nitesh Duhan MS 28
Ravi Shankar Batta MS 35
Saurabh Kispotta MS 42
EXECUTIVE SUMMARY
A successful organization is one which can efficiently integrate all its verticals and work in tandem in
order to achieve its mission and vision. Every business activity be it marketing or sales or operations will
not be successful unless and until they all of them perform in coordination with each other.

For manufacturers, marketing and advertising is very important. However they will not perform well until
and unless their supply chain management is robust. If a product is not available to respond to a particular
demand or if there is excess of products in the market with lower demand the organization will account
losses. Brand Loyalty is a rather strong term but it has been found that Brand Loyalty can die because of
non availability of a product.

Hence it becomes imperative for a manufacturer (or any organization as such) to strengthen the supply
chain operations. The FMCG category is always a battleground for all the competing firms and the
bathing soap category is no different. With more firms entering the market, maintaining the customer
base is not very easy

Lead time is one very important factor on which the supply chain operations of the manufacturer depends
upon. This project in essence calculates the supply chain length of an FMCG company and hence puts in
picture the necessary lead time that is needed to shorten the demand supply gap.
Table of contents:

EXECUTIVE SUMMARY.............................................................................................................2
OBJECTIVE....................................................................................................................................4
Stages of Production .......................................................................................................................4
Demand Recognition and Production Decision........................................................................5

Raw Materials........................................................................................................................19

Processing.............................................................................................................................20

Packaging, Storage and Dispatch..........................................................................................21

DISTRIBUTION- CHANNEL STRATEGY................................................................................23

Distribution Intensity...............................................................................................................24

Results and Conclusion.................................................................................................................27

A Case Study of HUL and LUX..............................................................................................28
OBJECTIVE
For the project we have chosen the following:

1. Industry – FMCG

2. Product - Soap Bar

So our objective is to calculate the supply chain length of a soap bar. In the project we will try to
calculate the total lead time that is required for a manufacturer of soap bars to place its product in a retail
shelf starting from placing order for the raw materials.

The following diagram illustrates the Supply Chain of a Soap Bar. Our aim is to calculate the length of
the supply Chain.

STAGES OF PRODUCTION

For the production of a soaps the following stages are involved

I. Demand Recognition and Production Decision

 II. Raw Materials and Procurement

III. Processing

IV. Packaging, Storage and Dispatch

Demand Recognition and Production Decision

Forecasting Demand

Forecasting demand—instead of simply forecasting sales—can help retail executives compete in

today’s environment. Although matching stock to demand is critical to profitability, many
retailers rely solely on sales forecasts. It’s true that sales forecasts drive many critical decisions.
Retailers could not run their businesses without sales forecasts. They form the basis for buying
decisions and dictate operational planning, such as replenishment and labor scheduling. Sales
forecasts are also essential to financial planning and to all decision-making that flows from
financial plans. However, if you rely only on sales forecasts, you may fail to exploit the full
value of demand for your merchandise. You will be unprepared for the level of consumer
demand, and you’ll have insufficient inventory levels, resulting in lost sales. Or, you will have
excess levels of inventory, significantly raising your cost per item and decreasing revenue. This
white paper offers guidance to help you profitably complete in today’s environment by
forecasting the full demand for your products.

Often forecasting demand is confused with forecasting sales. But failing to forecast demand
ignores two important phenomena:

• Stock effects—the effects that inventory levels have on sales. In the extreme case of
stock-outs, demand coming into your store is not converted to sales due to a lack of
availability. Demand is also untapped when sales for an item are decreased due to a poor
display location, or because the desired sizes are no longer available. For example, when
a consumer electronics retailer does not display a particular flat-screen TV, sales for that
model are typically lower than the sales for models on display. And in fashion retailing,
once the stock level of a particular sweater falls to the point where standard sizes are no
longer available, sales of that item are diminished.

• Market response effects—the effect of market events that are within and beyond a
retailer’s control. Demand for an item will likely rise if a competitor increases the price
or if you promote the item in your weekly circular. The resulting sales increase reflects a
change in demand as a result of consumers responding to stimuli that potentially drive
 additional sales. Regardless of the stimuli, these forces need to be factored into your
planning and managed within the demand forecast.

FORECASTING DEMAND

Unlike sales, demand represents the relationship between item and quantity purchase intent, and
the many variables that influence a consumer’s purchase decisions. These variables include:

• Item price

• Related item prices offered by the retailer or its competitors

• Promotional tactics

• In-store merchandising tactics

• Time of day, week, and year

To manage demand effectively and efficiently, it is important to understand, anticipate, and fully
uncover the effects of these market forces on potential sales. This level of analysis and
preparation will allow you to better address the effects of drivers outside your control, and
ensure that the decisions you control are based on insight and fully support your business
objectives. Forecasting demand allows you to manage and prepare for the many forces on item,
assortment, and category demand.

Demand Forecasting Methodology : To obtain the most accurate forecasting results, market
response forecasting and time series forecasting are used together to predict a retailer’s demand.

Market response forecasting : To accurately predict the consequences of your choices, you must
factor how the market will respond to each decision. For example, you need to forecast how
consumers will react to various prices. Such a model will look like a textbook demand curve, as
shown in Figure 1. The curve itself—labeled D1—predicts demand at different prices, holding
other variables constant. At the regular price of $2.65, it predicts weekly demand for about 1,800
boxes of cereal in a specific market. If this item were discounted to $1.95, without any other
stimuli changing, demand would increase to about 5,000 units. The relationship between the
quantity demanded and the price offered is expressed as the price elasticity of demand. Given the
price elasticity, and a forecast of demand at a particular price, it is possible to forecast demand at
alternative prices. In Figure 1, the curve labeled D2 predicts demand for the same item, in the
same market, over the same price range, but under different conditions. These conditions can
include changes in seasonal demand (i.e. during the holiday season or summer vacation), display
prominence, and competitive offerings and price levels.

Figure 1: Market response to price changes

Time series forecasting : Pricing and promotion decisions greatly influence future demand, so
calculating and predicting these outcomes is vital to realizing potential. Time series forecasting
is a collection of methods for projecting forward from historic observations. A very simple
example is a moving average. Of course, different methods are appropriate for different business
conditions. The Holt’s Method is most suitable for basic or staple merchandise, while the
Winter’s Method works best for seasonal merchandise, and Croston’s Method is appropriate for
merchandise with little turnover. In all, there are more than a dozen methods to use, depending
on your current situation. What is common across all methods is that the only data consumed in
producing the forecast is derived of the learnings from previous similar situations. They permit
modeling seasonal demand fluctuations, trend growth or decay, and lifecycle phenomena. Using
time series methods, you need to utilize prior observations of demand. A good source of these
observations is a point-of-sale system. These systems capture sales/transaction information, so it
is necessary to make two adjustments in order to create your time series forecast. The first is to
adjust the sales quantity to reflect the sales that you could have achieved if there had been no
inventory defects. This may be as simple as extrapolating across weeks in which the item was
out of stock, or as complex as dynamically adjusting sales when daily stock values fell below
presentation or size count thresholds. For the second adjustment, you need a way to back out the
effects of market stimuli on your observed sales. You can use the market response model, not to
forecast the future, but to estimate what unconstrained historical sales would have been if price
and other stimuli were held constant over the period of history under examination. This process
is sometimes referred to as normalization. You can then apply appropriate time series methods to
that history, as shown in Figure 2. The forecast predicts the true or unconstrained demand at
regular price, assuming no promotional tactics are employed for each period in the future.

Figure 2: Time series forecast of normalized demand

Shaping Demand

Thus far, you have predicted unconstrained demand (as separate from sales) and have looked at
the impact of time and market influences on that demand. With this information in hand, you
can effectively shape and respond to demand. Here are some of the ways retailers use this
information to manipulate demand for products.

• Reassemble the pieces. Knowing how pricing and promotional tactics affect demand
allows you to make better decisions regarding pricing levels and markdowns, which
products to promote when, and what promotional tactics to employ—all in the service of
achieving your business objectives—whether they are increasing profits, market share, or
revenue.

• Predict promotional sales lifts. Merging the response knowledge with forward-looking
promotional and pricing plans allows you to make better buying, allocation, and
replenishment decisions, thereby reducing the cost of over-stocks and minimizing the
frequency of out-of-stocks.
On both the demand and supply side of the profit equation, understanding the constituents of
demand provides tangible financial benefits.

Demand Driven Execution

What happens once demand is understood? Having an accurate prediction of future demand
might be interesting, but is relatively worthless unless you put it to practical use. To benefit retail
organizations, demand intelligence should now become an integral component of planning and
execution. As shown in Figure 3, demand is transformed into achievable sales by applying
business rules and events, available inventory, pricing strategies, and product market viability.

Figure 3: Apply demand intelligence to planning and execution

Plans based on historical sales only perpetuate mistakes made in the past, because demand
intelligence is unconstrained and not influenced by events and inventory. It is more accurate than
isolated point-of-sale data at representing the voice of the consumer. In this way, demand
intelligence provides an additional point of view that quantifies the real potential of various
categories, locations, and products (see Figure 4).

You can derive achievable sales by integrating the demand forecast into each of the planning and
execution processes, as shown in Figure 4. In each step of the diagram, the retailer mixes the
“arts” of market trend analysis and merchandising with the “science” of demand forecasting.
Once you understand anticipated sales, you can finalize your plan by incorporating the product
mix; required weekly inventory levels, corresponding receipt flow, and exit strategies. You
should repeat this process at each planning stage—from merchandise financial planning to
assortment and item planning.

Figure 4: Demand d rives planning and execution

Finally, you will execute your demand driven plan—executing pricing decisions, generating
orders, and notifying suppliers. You incorporate marketing plans, determine in-store product
positioning, and allocate and replenish individual items. However, at the start of all of these
executables was a consumer driven forecast that was transformed into an intelligent sales plan.

Demand forecasting allows retailers to make better decisions about which prices to adjust and
when, which products to promote, and what promotional tactics to deploy, in order to achieve
objectives. The benefits are significantly more profound and productive than a simple sales
forecast. The best informed decisions will help you increase profits, sales or market share—
whatever your goal. By combining your knowledge of past performance under similar
circumstances with forward-looking promotional pricing plans, you can make better buying,
allocation, and replenishment decisions. In turn, you will reduce the cost of over-stocks and
minimize the frequency of out-of-stocks. Understanding consumer expectations at given times
and under different market conditions delivers tangible benefits—both on the demand side and
supply side of your business.

Inventory

To obtain inventory control, one must first have records. Secondly, one must have some way to
activate these records so that intelligent use can be made of them. The burden of record keeping
should not be allowed to become paramount. The important thing is the action taken on the
records, not the records. Thirdly, one person should be given the authority to control inventories
for a given number of items. He, of course, will work within the frame-work set up by top
management as to the desired inventories to be carried, but within this frame-work there is a
great deal of leeway and, by smart requisitioning, he can do much to obtain lower inventories.
Achieving lower inventories means the saving of dollars. And, after all, profits are what people
are after in business. By keeping inventories in balance, he not only reduces the amounts carried
but puts the company in a much more flexible position. In modern industry ability to change is
important. The inventory control group has the responsibility to see that for its part the company
is always ready to meet this ever-changing sales picture.

Skill in controlling inventories is one of the hardest tests of business management.

Government reports show that this is one of the most common causes of business
failures. Both big and small companies are vulnerable. Inventory control has a special
importance to soap companies as a large portion of the cost of soap is dependent on the
price of fats and oils.

However whether the business is making soap, autos, or safety pins, inventory control
means dollars saved. It is not hard to visualize how high inventories tie up capital with
heavy carrying cost and expensive warehousing. Also you run the risk of possible

Obsolescence due to changes in method or products, deterioration due to age, and of

price reductions. On the other hand, if inventories are too low, costs are raised through
uneconomical buying on a rush order basis, inefficient production scheduling, and
possibly even a loss of business due to not being able to deliver goods on time.

Finished Goods Control : In considering how to control inventories, problems peculiar to

the business concerned must be analyzed. Finished goods inventories depend on six main
factors.

1. Methods of Sales. Companies such as mail order houses which sell directly to a retailer
or to the consumer must have large stocks of finished goods ready for immediate
delivery upon receipt of order. Companies, such as machine tool manufacturers, which
work on a contract or job-lot basis, on the other hand, need not carry such a heavy
inventory of finished goods. The large soap companies sell directly to the retail stores. They
have their salesmen going to thousands of grocery stores throughout the nation taking
orders. When these orders are sent in to the plant or branch warehouses, there must be
sufficient soap on hand to fill the order. This order probably consists of at least four or five
different types of soap. If any of these soaps are not on hand when the order arrives, it
means the order must be held or shipped short. As an average branch warehouse handles
several hundred orders a day, it is very important that there be an uninterrupted flow. The
billing systems are designed for shipment and not for revisions. It has been estimated that
revisions cost anywhere from 50 to 75c for each order revised. Thus if you are out of
stock of a particular soap for four or five days and it was included on the several
hundred orders each day, the cost of revising the billing would be considerable, to say
nothing of the loss of business and customer good will.
2. Cost of Manufacturing Compared to the Original :Cost of the Raw and Packaging
Materials. If your manufacturing costs are high in relation to your material cost, it means
that greater emphasis should be put on reducing the finished goods inventory than when
the materials' cost is the greatest proportion of the total cost. For soap the greatest cost is
for the oils and fats. Packaging and the manufacturing costs run only 5 to 10%. Therefore it
makes little difference whether you convert the materials into finished goods or store
them as raw materials, providing other factors are equal.

3. Manufacturing in Economical Lots: When sales of an item are small, it is often best to
manufacture several months' supply rather than to make separate runs for each month. The
smaller the quantity of production, the greater the weight that should be put to carrying
higher inventories.

4. Consideration of Even Labor: It is easy to see where you might desire to have steady
work for a certain number of employees throughout the year rather than to have peak
periods of employment and then heavy lay-offs a few months later. In the soap industry
sales vary considerably month by month even though the consumer's probable usage of
soap is fairly constant. Obviously, it is desirable to have level production throughout the
year in order to hold the labor force at an even number. This is very difficult because of
sales fluctuations and the great physical volume of soap that is moved. When you build
up a two-month inventory of finished goods, you are not only tying up a large quantity
of money but also are involved in a tremendous warehousing problem.

5. Price Variation: As previously mentioned, price variation of raw materials can have
drastic effect on profits.

6. Obsolescence. When you build up too large an inventory on a slow-moving item, you
are running the risk of being stuck if sales plans should be revised and this item dropped
or the product changed.

Raw and Packing Materials Control : When you consider the factors that affect decisions
on raw materials, you see that they are quite similar to those which affect finished goods
inventories. These factors are :

1. Market Conditions. There are several purchasing conditions that affect the quantity of
inventories that should be carried. First is the length of time necessary to obtain
deliveries. Unless the usage is constant, it usually is a good idea to carry inventories that
are large enough to bridge the gap between the time an order is placed and delivery is
made. Second, the quantity to be carried is affected by economical purchasing lots.
Buying in large quantities usually means cheaper unit prices. However off- setting this
saving, you have to calculate the costs of storage and extra handling that may be
required. Third, a number of items are seasonal. This means that when the production season is
on you must make your material commitments for the year or else pay premium prices to
obtain materials out of season.

2. Storage Capacity: Obviously, you cannot store more goods than you have storage
capacity for unless you can develop outside storage facilities. This storage capacity
problem is not quite as simple as it first may seem, especially on items such as packing
materials, where materials for many different products share the same warehouse space.
The floor area must be apportioned between the various types of materials that are stored,
and then intelligent coordination of purchase orders and production scheduling is needed
to keep the space utilized to the best advantage. Packing materials for any one product
must not hog all the available space.

3. Handling Problems: It is also important to consider the storage capacity in areas that
are convenient to the point of use. Thus it is often best to buy in smaller lot quantities
and have the goods delivered directly to the point of use rather than in large quantities
if a portion of these have to be stored in distant area.

4. Deterioration of Materials Due to Age: When supplies are kept for a length of time,
you run the risk of losing quality due to aging.

5. Obsolescence: We have the same problem of obsolescence with raw and packing
materials as we have with the finished goods. When changes are made in the sales plans,
you are likely to be left holding supplies which are no longer required.

6. Meeting Sales Demands: This is the most important consideration of all. The purpose of
carrying inventories is so that you will be able to supply production at a rate to meet
sales. Nothing is worse than to lose sales on account of a lack of supplies. Each time
sales jump up or down, the inventory control group must jump with them. Good inventory
control means good balance. You must never be caught off balance and must be ready to
go in any way that sales require.

The weight that should apply to each of the above factors constantly changes. You
cannot establish a definite set of rules, but for each purchase made all the factors have to
be considered in the light of the moment. The heart of control lies with the men
requisitioning materials. They must review all the factors and place their requisitions
using judgment backed up by experience and prayers.

Development of the Budget : Having now attempted to clarify the aims, how are you to
best bring these about ? Not having a crystal ball handy, you have to do some
guesstimating. Of primary importance in inventory control is the sales forecast. A good
sales forecast eliminates 90% of the inventory control headaches. In order to prepare a
good sales forecast, work must be done in coordinating sales hopes and advertising
plans, fitting those in with anticipated profits, financial considerations, production capacity,
and purchasing ability. In most companies, at least four to six months before the start of
the year, an annual budget is prepared. This states the sales expectations for the coming
year, based on all the factors that can be anticipated. Usually this annual budget is
prepared by a separate budget department, which sits in on and coordinates the
consultations between sales, advertising, market research, etc. The annual budget is the
basis for monthly sales and production budgets. Colgate is using a three month revolving
budget which has given good results. This budget is made out each month with a
projected budget for the following two months, thus forcing during each month a review
of the next three months. The three-month budget is first prepared in terms of dollar
sales and is later converted to units of dozen or gross. It is checked with the annual
budget for any variances which would throw the profit pictures of the annual budget out
of line.

Having decided what is to be sold, the next question comes up as to how much
finished goods inventories can be carried. This is a problem for the top executives. Once
it has been decided to carry, say, a one-month finished goods inventory on one type of
item, three weeks on another, two weeks on a third, etc., it then remains for the
inventory control groups to handle the details, product by product. They compare the
expected sales figures with quantities on hand and the desired inventory to be carried.
The difference is the amount that must be made. This is the production budget. If more
than one plant is involved, it must be decided what and how much each plant will
produce. This normally is a problem for the home office manufacturing, who consider the
economics of transportation costs to the sale area,

plant capacity, etc. The budget is then passed to the individual plants and they, in turn,
make a rebuttal in detail based on available labor and economical runs on the machines.
Next the rebutted budget is broken down into the various raw and packing material com-
ponent parts. This gives the requirement figures on which the material coordinator bases
his purchase requisitions. The purchasing department places orders according to the
requisitions or asks for a review if the requisition violates good purchasing policy. Finally
the materials arrive, production is effected, and the product shipped to the customer.

Responsibility and Organizational Set-Up : The fixing of responsibility for these various
steps in the development of the budget is a vital question. The sales department certainly
is in the best position to furnish sales forecasts and should be held responsible for its
accuracy. It is also important to fix responsibility for the purchase of items needed to
meet the budget. Without control the purchasing department tends to buy all the materials
needed in large quantities so as not to be bothered with reordering and to take advantage
of volume price reductions. To counteract this tendency, responsibility for quantity should
be vested in an independent group. This might well be the plant material control
department. This department is the one faced with the storage and' handling problems as
well as the responsibility of seeing that there is no shut- down due to lack of materials.
As such, this is the logical place for controlling all materials except fats and oils. Fats
and oils, as previously pointed out, are in a different category. Knowing who would be
responsible first for sales forecasts and second for material controls, you now approach
the problem of setting up the detailed organization to carry out these responsibilities.

1. A Budget Department. This central control group prepares the annual budget based on
the information supplied by the sales, advertising, and financial departments. It is their
duty to check the detail budgets monthly to see that sales and estimated sales are in line
with the original annual budget. Should there be any serious deviations, it brings this to
the attention of top management for action. This budget department might well report to
the comptroller of the company as its work is very closely allied with his responsibilities.

2. Home Office Planning. In firms with more than one plant it is necessary to have a
home office planning group with the responsibility of deciding in which plant production
should be carried out. They are usually called on to prepare the production budget, using
the sales budget and the inventory levels as predetermined by the budget department.

3. Plant Planning Group. In this group you have your real controls over raw and
packaging material inventories. They rebut the monthly production budgets, leveling out
labor and seeing to it that generally the plant is run without sharp volume variations.
Having the duty of setting up daily machine schedules for the month, they are best
acquainted with the production capacity and storage and material problems. Theirs is the
responsibility for the breakdown of the budgets into the various raw material and
packaging material component parts. From this they prepare purchase requisitions based on
their knowledge of production rates, finished goods inventory, storage capacity, and
production schedules. These purchase requisitions should be coordinated with the
purchasing department problems of purchasing in economical lots and with the lead time
necessary to obtain materials.

4. Purchasing Department. The purchasing department decides who is to be the supplier

and what the price should be. They make all outside contact with the suppliers, and any
complaints as to quality, delivery, etc., should be put through this department. In the case
of inventory control for fats and oils, where the cost of storage and handling are
relatively insignificant, the important point is buying at low prices. This responsibility
should then be directly that of the purchasing department.

Methods

Having considered problems and the fixing of the responsibilities and organizational set-
up, you can get down to actual operating practice. A problem of no small magnitude is
the keeping of accurate inventory records. The problem of inventory control is largely a
problem of obtaining and acting on figures. Colgate finds it necessary to take an actual
physical inventory of finished goods at least once a month. Many companies have
perfected their book inventory methods so that they are accurate enough for figuring
inventory control. However periodic physical inventories are advisable to uncover
pilferage, etc. In order to ease the problem of recording you should try to standardize.
Instead of counting production by the case, it can be counted by pallet or skid loads.
This will reduce the quantities to be considered. Colgate has devised a system which has
proved successful in keeping records. When a pallet load is produced, a transfer slip is
made out by the producing department, transferring this to the shipping department. There
are four copies of this transfer. One goes immediately to the accounting department, the
second is sent to the shipping department for their records, the third stays with the
producing department for their records, and the fourth is attached to the load itself with
colored Scotch tape. The load is then transferred to the shipping department, where if it
is loaded directly in the ears, the transfers are immediately taken off by the checker,
giving him an account of the number of cases going into the ear, or if it goes into the
warehouse, the transfer stays on until it is brought down from the warehouse to the
actual shipping floor at which time it is removed and sent back to the accounting
department. The accounting department then has a record of the original transfer to the
warehouse and a record of shipment out of the warehouse. From this it is possible to
have a daily book inventory of finished goods. These transfers can also be used to cheek
against the quantity of cases invoiced by the billing department. The Scotch tape used to
attach the transfer to the load is made of various colors. A different color is used for
each month. This is to aid the shipping department in readily identifying the date of
production so that the oldest stock can be shipped first.

In keeping raw and packing material inventories it is not necessary to take such a
frequent physical inventory. However, in actual practice, due to spoilage and waste it has
been found that at least a three month physical inventory is necessary. More weight is then
put on the book figure. To prepare your book records it is neeessary to have the
following:

1. An inventory of what is on hand.

2. A copy of the purchase order to see what is coming.

3. A copy of the receiving ticket to see what is actually delivered.

4. Usage figures for past production and projected usage figures for future production.

The first three of these are relatively simple to obtain. However figuring the usage is
complicated by the fact that many items are used in making soap.

There are all types of chemicals, boxes, cartons, labels, banners, bottles, caps, etc. These
have to be ordered anywhere from one week to six months in advance. Not only must
you know the requirements for the coming month, but for several months in advance.
Colgate's revolving three-month budget is of particular value in determining future needs.
Originally, the production budget was broken down by hand and the requirement figures
posted in the purchasing department books. This was a full week's job for six people.

A mechanized system has been installed utilizing International Business Machines. With this
the work of these six people has been completely eliminated, and the whole breakdown
only takes a few hours. This system can be applied to a number of companies that use I.B.M.
machines for payroll and accounting purposes. It can also be used by small companies without
I.B.M. equipment through the use of I.B.M. branch offices which have the machines and
are willing to run them for a very small fee. Here is how it works: A list of materials is
made out for each product.

This shows, for example, on Super Suds, that for every large size case produced, there
are 24 cartons, Symbol No. 2-1569, one corrugated case, Symbol No. 2-1533, and 35 plus,
pounds of Super Suds, Base No. 20-650. Another list of materials specifies all raw
materials and chemicals used in preparation of this soap, Base No. 20-650. An I.B.M.
card is made out for each of these packing and raw material items. Each card shows its
own symbol number and the stock number or formula base number for which it is used.
Also punched in each card is the quantity needed for one case or one pound of base.
When there is a budget of, say, 125,000 cases of Super Suds, Stock No. 72734, this is
sent to the tabulating department, which multiplies each of the cards under No. 72734 by
125,000 times the factor marked on the card. This multiplication is all done automatically
on an I.B.M. machine and punched on each card. The base cards for the various sizes
are totaled separately, and the pound totals are used to multiply against all the
components making up the base. All cards are then accumulated and put through a
tabulating machine which prints on sheets of paper the quantities indicated by the
punched holes on the cards. The original copy is given to the production planning department.
The second copy of this printed sheet is sent to the purchasing department so that they
can use this to check against the purchase requisitions issued by the production planning
department. Thus, in spite of the great number of items, the complete budget for the
following month and projected budget for the next two months can all be broken down
into all the component parts within the course of several hours.

Requisitioning: The heart of inventory control should be in the requisitioning of materials.

To requisition intelligently you must have accurate records as to where you stand today
and projections of future requirements. Not being able to predict the future exactly,
requisitions must be planned with the assumption that they may be increased, decreased,
or cancelled entirely. The materials controller making the requisitions must always keep
this fact in mind and not let himself or the purchasing department go overboard in
ordering items even though they seem to be a sure thing at the time.
Requirements : When the three-month production budget is issued, the product card is
posted with the budgeted number of cases; and the component cards are also posted, using
the I.B.M. breakdown. The signals are revised accordingly, and, if necessary, a purchase
requisition made out. Expected deliveries are posted in the boxes indicating weeks at the
bottom of the requirement card. In preparing a requisition, the materials controller looks
at his stock record card for the inventory on hand and looks at the requirement card for
the future usage and what is to be delivered. With this information he places the purchase
requisition. The purchase requisition is sent to the purchasing department where the
purchase order is made out and a copy sent back to the materials controller, who con-
firms this on his requirement card. By using the visual system, the materials controller is
able to keep supplies in balance product by product and will not over-order cases if he
cannot get cartons. The purchasing department is usually split up with buyers of single
items such as cases, another buyer for cartons, another buyer for certain chemicals, and
another buyer for other types, etc. The materials controller, by requisitioning for the end-
product as a whole, acts as a coordinator for the various purchasing agents. Thus if one
item cannot be obtained until a certain date, there is no sense in bringing in the others
before that time. The materials controller acts as a coordinator not only for purchasing
but also for sales. He is in charge of supplies for a group of related products. He should
know the production schedule and rate, how much finished goods are on hand, what the
sales have been of finished goods in the past, and also when and how much supplies
will be received. He participates in the laying out of the machine schedules for the items
he controls, evening out labor, and coordinating the delivery of supplies. Knowing the
production and purchasing problems, he is in a position to revise intelligently the
production budget for the benefit of both sales and production. This revised or rebutted
budget is sent back to the sales department along with machine schedules so that the
whole company may know when an item will be ready for shipment.

For production decision the manufacturer must know the volume of the product to be produced. The
stock taking function usually starts with the retailer/distributors placing orders for the products.
Depending on the total volume of orders, the manufacturer will then take a production decision. This
function is very important because the supply of the products should be equivalent to the demand
otherwise there is the risk of bull-whip effect. In addition to the orders place by the distributors, the
manufacturer itself also takes its own periodic forecasting.
Raw Materials

The raw materials in bar soaps are fats, fatty acids and inorganic water-soluble bases. Fats are
extracted from mutton tallow, beef, coconut, palm and palm kernel oils. After extracting the raw
material it goes to a treatment plant to make it pure.

A continuous process makes it into a liquid form of soap. During the process glycerin is
produced as a by-product. The neat liquid soap then goes through a process called vacuum spray
drying, to form dry soap palette.

In the final phase the dry palettes go to the finishing line. An amalgamator blends soap palettes
with all other ingredients, colorants and fragrance. In a rolling mill and refining plodder the soap
palettes are then homogenized and refined. In this section the soaps palettes get the desired
texture. Then the palettes are cut into the bar size and in a press unit the stamping process is
done.

The raw materials for a soap bar are:

1. Fats

2. Fatty Acids

3. Inorganic water-soluble bases

The fats for the soap are extracted from:

1. Mutton Tallow

2. Beef

3. Coconut

4. Palm and

5. Palm Kernel Oil

Oil (from the above sources) for the fats are procured from suppliers. Oil/fat has to be purified before the
production begins. There are two strategies for doing the same

Strategy A - The suppliers will purify the oil and then deliver. In this case, the cost of
production increases but the time duration decreases.

Strategy B - The manufacturer will purify the oil by itself. In this case the cost of production reduces but
the overall time taken for production will increase.
The lead time for the supply of raw material is usually 3 - 6 weeks.

Processing
Soap and detergent manufacturing consists of a broad range of processing and packaging
operations. The size and complexity of these operations vary from small plants employing a few
people to those with several hundred workers. Products range from large-volume types like
laundry detergents that are used on a regular basis to lower-volume specialties for less frequent
cleaning needs.

Cleaning products come in three principal forms: bars, powders and liquids. Some liquid
products are so viscous that they are gels. The first step in manufacturing all three forms is the
selection of raw materials. Raw materials are chosen according to many criteria, including their
human and environmental safety, cost, compatibility with other ingredients, and the form and
performance characteristics of the finished product. While actual production processes may vary
from manufacturer to manufacturer, there are steps which are common to all products of a
similar form.

Let's start by looking at bar soap manufacturing.

Traditional bar soaps are made from fats and oils or their fatty acids which are reacted with
inorganic water-soluble bases. The main sources of fats are beef and mutton tallow, while palm,
coconut and palm kernel oils are the principal oils used in soap making. The raw materials may
be pretreated to remove impurities and to achieve the color, odor and performance features
desired in the finished bar. The chemical processes for making soap, i.e., saponification of fats
and oils and neutralization of fatty acids.

Soap was made by the batch kettle boiling method until shortly after World War II, when
continuous processes were developed. Continuous processes are preferred today because of their
flexibility, speed and economics.

Both continuous and batch processes produce soap in liquid form, called neat soap, and a
valuable by-product, glycerin (1). The glycerin is recovered by chemical treatment, followed by
evaporation and refining. Refined glycerin is an important industrial material used in foods,
cosmetics, drugs and many other products.

The next processing step after saponification or neutralization is drying. Vacuum spray drying is
used to convert the neat soap into dry soap pellets (2). The moisture content of the pellets will
vary depending on the desired properties of the soap bar.

In the final processing step, the dry soap pellets pass through a bar soap finishing line. The first
unit in the line is a mixer, called an amalgamator, in which the soap pellets are blended together
with fragrance, colorants and all other ingredients (3). The mixture is then homogenized and
refined through rolling mills and refining plodders to achieve thorough blending and a uniform
texture (4). Finally, the mixture is continuously extruded from the plodder, cut into bar-size units
and stamped into its final shape in a soap press (5).

Some of today's bar soaps are called "combo bars," because they get their cleansing action from
a combination of soap and synthetic surfactants. Others, called "syndet bars, “feature surfactants
as the main cleansing ingredients. The processing methods for manufacturing the synthetic base
materials for these bars are very different from those used in traditional soap making. However,
with some minor modifications, the finishing line equipment is the same.

The processing of the soap involves a step by step addition of standardized concentrate and many raw
materials and with so many ingredients in place, it usually takes 2 days to complete

Packaging, Storage and Dispatch

In order to woo customers, the packaging of the soap must be attractive. Great care should be taken hence
for package designing and package processing. Since the soaps are sent in batches, the soaps will be
inventoried in the factory.

For final packaging individual soaps are put in a box of 72 each. The boxes will then be sent to the
different warehouses depending on the demand.

Packaged and Store

The final step in the manufacture of soaps and detergents is packaging. Bar soaps are either
wrapped or cartooned in single packs or multipacks. Detergents, including household cleaners,
are packaged in cartons, bottles, pouches, bags or cans. The selection of packaging materials and
containers involves considerations of product compatibility and stability, cost, package safety,
solid waste impact, shelf appeal and ease of us

Warehouses

A warehouse is a commercial building for storage of goods. Warehouses are used by

manufacturers, importers, exporters, wholesalers, transport businesses, customs, etc. They are
usually large plain buildings in industrial areas of cities and towns. They usually have loading
docks to load and unload goods from trucks. Sometimes warehouses load and unload goods
directly from railways, airports, or seaports. They often have cranes and forklifts for moving
goods, which are usually placed on ISO standard pallets loaded into pallet racks.
Distributors

Individuals or businesses that purchase the right to sell ABC Corp.'s products but not the right to
use ABC's trade name

One of the most common types of business opportunity ventures, a distributor or dealer is an
independent agent who's entered into an agreement to offer and sell the product of another
company but isn't entitled to use the manufacturer's name as part of its business name.
Depending on the agreement, the distributor may be limited to selling only that company's goods
or it may have the freedom to market several different product lines or services from various
firms.

Here's an example: An authorized dealer of Minolta products might have a Minolta sign in his
window, but he can't call his business Minolta. Often, the words "dealers" and "distributors" are
used interchangeably, but there is a difference: A distributor may sell to several dealers, while a
dealer usually sells directly to retailers or consumers.
 DISTRIBUTION- CHANNEL STRATEGY
The following table describes the factors that influence the choice of distribution channel by a
business:

Influence Comments

Market factors An important market factor is "buyer behavior"; how do buyers want to purchase the product?
Do they prefer to buy from retailers, locally, via mail order or perhaps over the Internet? Another
important factor is buyer needs for product information, installation and servicing. Which
channels are best served to provide the customer with the information they need before buying?
Does the product need specific technical assistance either to install or service a product?
Intermediaries are often best placed to provide servicing rather than the original producer - for
example in the case of motor cars.

The willingness of channel intermediaries to market product is also a factor. Retailers in

particular invest heavily in properties, shop fitting etc. They may decide not to support a
particular product if it requires too much investment (e.g. training, display equipment,
warehousing).

Another important factor is intermediary cost. Intermediaries typically charge a "mark-up" or

"commission" for participating in the channel. This might be deemed unacceptably high for the
ultimate producer business.

Producer factors A key question is whether the producer has the resources to perform the functions of the
channel? For example a producer may not have the resources to recruit, train and equip a sales
team. If so, the only option may be to use agents and/or other distributors.

Producers may also feel that they do not possess the customer-based skills to distribute their
products. Many channel intermediaries focus heavily on the customer interface as a way of
creating competitive advantage and cementing the relationship with their supplying producers.

Another factor is the extent to which producers want to maintain control over how, to whom and
at what price a product is sold. If a manufacturer sells via a retailer, they effective lose control
over the final consumer price, since the retailer sets the price and any relevant discounts or
promotional offers. Similarly, there is no guarantee for a producer that their product/(s) are
actually been stocked by the retailer. Direct distribution gives a producer much more control over
these issues.

Product factors Large complex products are often supplied direct to customers (e.g. complex medical equipment
sold to hospitals). By contrast perishable products (such as frozen food, meat, bread) require
 relatively short distribution channels - ideally suited to using intermediaries such as retailers.

Distribution Intensity

There are three broad options - intensive, selective and exclusive distribution:

Intensive distribution aims to provide saturation coverage of the market by using all available
outlets. For many products, total sales are directly linked to the number of outlets used (e.g.
cigarettes, beer). Intensive distribution is usually required where customers have a range of
acceptable brands to choose from. In other words, if one brand is not available, a customer will
simply choose another. This would be the case applicable for the category of soaps.

Selective distribution involves a producer using a limited number of outlets in a geographical

area to sell products. An advantage of this approach is that the producer can choose the most
appropriate or best-performing outlets and focus effort (e.g. training) on them. Selective
distribution works best when consumers are prepared to "shop around" - in other words - they
have a preference for a particular brand or price and will search out the outlets that supply.

Exclusive distribution is an extreme form of selective distribution in which only one wholesaler,
retailer or distributor is used in a specific geographical area.

Functions of a Distribution Channel

The main function of a distribution channel is to provide a link between production and
consumption. Organizations that form any particular distribution channel perform many key
functions:

Information Gathering and distributing market research and intelligence - important for marketing
planning

Promotion Developing and spreading communications about offers

Contact Finding and communicating with prospective buyers

Matching Adjusting the offer to fit a buyer's needs, including grading, assembling and packaging

Negotiation Reaching agreement on price and other terms of the offer

Physical distribution Transporting and storing goods

Financing Acquiring and using funds to cover the costs of the distribution channel

Risk taking Assuming some commercial risks by operating the channel (e.g. holding stock)
All of the above functions need to be undertaken in any market. The question is - who performs
them and how many levels there need to be in the distribution channel in order to make it cost
effective. An example of a direct marketing channel would be a factory outlet store. Many
holiday companies also market direct to consumers, bypassing a traditional retail intermediary -
the travel agent. A wholesaler typically buys and stores large quantities of several producers’
goods and then breaks into the bulk deliveries to supply retailers with smaller quantities. For
small retailers with limited order quantities, the use of wholesalers makes economic sense. This
arrangement tends to work best where the retail channel is fragmented - i.e. not dominated by a
small number of large, powerful retailers who have an incentive to cut out the wholesaler.

Numbers of Distribution Channel Levels

Each layer of marketing intermediaries that performs some work in bringing the product to its
final buyer is a "channel level".
Results and Conclusion

The entire Supply Chain is a large complex manufacturing process involving many steps from the time
order placed and demand forecasting made. An essential demand forecasting with maximum possible
accuracy is essential and software have to be put in place to maintain safety stock and proper lead times.

Length of supply Chain critically takes about 5 to 13 weeks after the demand forecasting has been
made/orders placed
 A Case Study of HUL and LUX

HUL’s distribution network is recognized as one of its key strengths -- that which helps reach out its
products across the length and breadth of this vast country. The need for a strong distribution network is
imperative, since HUL’s corporate purpose is “to meet the everyday needs of people everywhere.”
At Hindustan Unilever Limited, distribution network is one of the key strengths that help them reach their
products across the length and breadth of this vast country. It has 2000+ suppliers and associates 7,000
stockists and direct coverage in over 1 million retail outlets across India.
To meet the ever-changing needs of the consumer, HUL has set up a distribution network that ensures
availability of all their products, in all outlets, at all times. This includes, maintaining favourable trade
relations, providing innovative incentives to retailers and organizing demand generation activities among a
host of other things. HUL boasts of placing a product across the country in less than 72 hrs.
The first phase of the HUL distribution network had wholesalers placing bulk orders directly with the
company. Large retailers also placed direct orders, which comprised almost 30 per cent of the total orders
collected.
Today, the goods are transferred from the factory to the company warehouses and are sent to the distributor
from there on a daily basis. From the distributor, the stock reaches the market through daily sales.
Typically, these include the salesman registering the order of a retail outlet and delivering the goods the
next day.
Recently HUL has changed its traditional way distribution and came out with a new strategy of distribution.
It‘s because of the change in buying pattern of the consumer due to more disposable income. There are
different channels of distribution like Modern Trade, which covers all chains of super markets like Food
World, who get the stocks directly from the company. Wholesalers and second leg of big retail outlets
called Super Value stores come under the surveillance of the distributor along with the mass retail outlets.
There is also this new concept in the HUL distribution channel called Kiosk. Kiosk is a small shop that sells
only sachets and low priced items (below Rs.10/-). Kiosk also does not come under the surveillance of the
distributor.

In addition to the ongoing commitment to the traditional grocery trade, HUL is building a special
relationship with the small but fast emerging modern trade. HUL's scale enables it to provide superior
customer service including daily servicing, improving their range availability whilst reducing inventories.
HUL is using the opportunity of interfacing more directly with consumers in this retail environment
through specially designed communication and promotions. This is building traffic into the stores while
yielding high growth for the business.

Information Technology for Success of Supply Chain

An IT-powered system has been implemented to supply stocks to redistribution stockists on a continuous
replenishment basis. The objective is to catalyse HUL’s growth by ensuring that the right product is
available at the right place in right quantities, in the most cost-effective manner. For this, stockists have
been connected with the company through an Internet-based network, called RSNet, for online interaction
on orders, dispatches, information sharing and monitoring. RS Net covers about 80% of the company's
turnover. Today, the sales system gets to know every day what HUL stockists have sold to almost a million
outlets across the country. RS Net is part of Project Leap, HUL's end-to-end supply chain, which also
includes a back-end system connecting suppliers, all company sites and stretching right up to stockists.
Powered by the IT tools it has improved customer service, while ensuring superior availability and
impactful visibility at retail points.

For rural India, HUL has established a single distribution channel by consolidating categories. In a
significant move, with long-term benefits, HUL has mounted an initiative, Project Streamline, to further
increase its rural reach with the help of rural sub-stockists. As a result, the distribution network directly
covers about 50,000 villages, reaching about 250 million consumers.

Distribution will acquire a further edge with Project Shakti, HUL's partnership with Self Help Groups of
rural women. The project, started in 2001, already covers over 5000 villages in 52 districts of Andhra
Pradesh, Karnataka Madhya Pradesh and Gujarat, and is being progressively extended. The vision is to
reach over 100,000 villages, thereby touching about 100 million consumers. The SHGs have chosen to
adopt distribution of HUL's products as a business venture, armed with training from HLL and support
from government agencies concerned and NGOs. A typical Shakti entrepreneur conducts business of
around Rs.15000 per month, which gives her an income in excess of Rs.1000 per month on a sustainable
basis. As most of these women are from below the poverty line, and live in extremely small villages (less
than 2000 population), this earning is very significant, and is almost double of their past household income.

For HUL, the project is bringing new villages under direct distribution coverage. Plans are being drawn up
to cover more states, and provide products/services in agriculture, health, insurance and education. This
will both catalyse holistic rural development and also help the SHGs generate even more income. This
model creates a symbiotic partnership between HUL and its consumers, some of whom will also draw on
the company for their livelihood, and helps build a self-sustaining cycle of growth.
References
• Gunasekaran A, Patel C, McGaughey RE (2004) A framework for supply chain
performance measurement.
• Gunasekaran A, Tirtiroglu E (2001) Performance measures and metrics in a supply chain
environment.
• Michael Armstrong (3rd Edition) Performance Management: Key Strategies and
Practical Guidelines
• Peter Meindel, (2007) Supply Chain Management
• Schwarz LB (2004) The stat of practice in supply chain management: a research
perspective, in applications of supply chain management and e-commerce research in
industry.
• HUL www.hul.com