Thursday, January 31, 2013
The class discussion of how the emerging trend of environmentally conscious products has influenced product design and SCM like in the Herman Miller case, has reminded me of the UK based cosmetic retailer, Lush. It is interesting how Lush, founded by a husband and wife team from Poole in Dorset in 1995 now has 650 stores and many factories in over 40 countries and also a buying power to bring a positive change in the world.
Lush as a cosmetic retailer chose a totally unconventional route to success. Since its establishment Lush has been inventing and designing its own products to reduce usage of packaging, water, energy and also to reduce carbon emission and waste.100% of Lush's products are vegetarian,65% of them are preservative free and 58% of them are free from unnecessary packaging. The products in the retail store are displayed similar to how fruits and vegetables are displayed in a grocery store without extra packaging.
Lush created solid shampoo bars, massage bars and Bath Bombs that do not need packaging. Lush says liquid soaps and shampoos need to be bottled and that one can prevent over 30 plastic bottles from entering the landfills by switching to solid bars from Lush.[i] Also, solid bars need less water compared to their liquid counterparts. From making shampoo bars in solid form, rather than bottled, over 450,000 liters (118,800 gallons) of water is saved every year.[ii]
When packaging is unavoidable Lush uses 100% recyclable and biodegradable bags.
Lush’s bottles and bags are made from BPA-Free, 100% post-consumer recycled (PCR) plastic. Lush works hard with all its suppliers to minimize environmental impact. Lush encourages its customers to return the bottles by giving them a free treat when they return those.
Another interesting facet of Lush's supply chain is that Lush is not just careful careful about what goes into its products but also about where the material comes from.While designing the products Lush goes for natural ingredients that are produced in a sustainable way. Lush calls its way of buying from its suppliers as creative buying. Lush has a creative buying team which visits the places across the world from Ghana to the co-op mountain plantations in Papua,New Guinea to trace the ingredients they get from the suppliers.Lush has strict policies for its suppliers. It does not buy raw materials from suppliers who indulge in animal testing or use preservatives.
Lush has been working diligently to develop a supply chain that makes good business sense without compromising any of its beliefs. Also by focusing strongly on 'doing the right thing' Lush is saving money and realizing an ROI, building a great brand and winning trust of its customers.
Wednesday, January 30, 2013
Unlike the electronics industry, the fashion industry has recently moved away from Chinese manufacturers in favor of Bangladesh, a country with a cheaper workforce that can often beat out the pricing of rival Chinese suppliers. One of the drawbacks to this cost cutting is that Bangladesh has very low safety standards for its factories, which has resulted in several catastrophic events. As of 2005, over 700 works have died in Bangladeshi factories, mainly due to fires and poor safety protocols.
Clothing companies such as H&M have broken the traditional production model by decreasing manufacturing lead time and producing clothing according to "at-the-moment" trends, regardless of seasonality. This breaks with the conventional "seasonal ordering" by most designers, but has resulted in many negative results as well. Factories are now producing much greater variety, which can lead to overworking and increased manufacturing errors. This desire for increased flexibility can lead to a "bullwhip" effect, as explained by Glatzel, Helmcke and Wine in their Mckinsey Quarterly article "Building a Flexible Supply Chain for Uncertain Times". When suppliers are unable to maintain flexibility for their clients, orders are often duplicated and include "safety-stock" built into the order that result in excess waste.
Bain Consultants Pratap Mukharji and Sam Israelit expressed to Wall Street Journal Editor Ronald Fink that the establishment of "cross-functional teams" is also a crucial component to better understanding the true inventory needs of a company, and should include not only designers but also supply-chain specialists and market researchers. These teams should also be kept aware of how many other orders have already been placed with their suppliers (to avoid capacity issues), and should be kept aware not only of how much inventory is on the store shelves, but also remaining in the backrooms, central warehouses, and in transit (Ten Ways to Improve Your Inventory Management).
Another issue is that clothing companies are weary of establishing long-term contracts with their suppliers. This leads to a "at all costs" mentality among manufactures in the Supply Chain, who are more likely to skirt worker safety laws in order to avoid loosing a client. Establishing more formal, long-term relationships with suppliers will actually lead to greater flexibility. In James Freeland and Robert Landel's whitepaper entitled "Managing Inventories: What is the Appropriate Order Quantity", they explain that by establishing relationships with suppliers (and guaranteeing future orders to lock up supplier capacity) may allow for the production of smaller, seasonal order batches instead of the larger "cyclical-batch" orders. This is optimal for suppliers such as H&M, as it will allow them to produce small batches of "at-the-moment" trend clothing with less turn-around time, lower chances of errors (both in production and worker safety), as well as keeping inventory low which actually increases customer demand and pricing within the fashion marketplace.
Tuesday, January 29, 2013
Efficient inventory management: the new mantra in Supply Chain Management
Inventory management has become a critical part of the supply chain given the improvements in technology to monitor and minimize its levels as well as due to greater volatility of demand for goods and services. According to PricewaterhouseCoopers (PwC), more companies are taking additional steps to deliver fast customer response while diminishing the inventory levels across all parts of the supply chain. This arises from the fact that different components of the supply chain have proven to be too exposed to uncertainty (see my blog entry on Semiconductors overstock due to low demand of finished goods). The traditional methods based on historical patterns of demand, for determining production levels, procurement, transport and logistics amongst others are no longer the most reliable and useful for managing the supply chain (Glatzel, Helmcke & Wine 2009).
The PwC report points to the fact that the growing use of the internet as a mechanism to purchase goods and services is forcing companies to reduce the response time, which requires supply chains that maximize flexibility. The report found that there is a stark difference between companies that invest in efficient use of inventory and the rest, with 15.3 inventory turns for the latter while companies who do not invest in this type of technology achieve only 3.8 turns. In this regard the use of integrated real-time demand and- supply planning with suppliers and customers has provided some companies with a decisive advantage over its competitors.
This trend, far from being a product of economic instability, may constitute the future given the potential to expand the control over inventory. A recent study by Bain and Company and The World Bank points to the fact that trade barriers have a significant impact on the inventory management of the supply chains. Given uncertainty in the time frame and cost associated with trade tariffs and other barriers, companies respond by holding additional inventory. Using the example in the report, a rubber company holds 120 days of inventory instead of 30 as a result of trade barriers. However with increases in international economic integration many of these barriers are disappearing, thus increasing the opportunity for small and medium companies to manage inventory levels according to their needs. A clear example of this economic integration is provided by 3D Robotics a San Diego-based drone startup company that took advantage of the economic integration with Mexico to shorten its supply chain by reducing inventory levels. The company was able to reduce its procurement plan, which depended on Chinese manufacturers, from 6 months to a week thanks to increased economic integration between Mexico and US.
The efficient use of inventory is no longer the privilege of giants like Toyota or Dell, thus allowing small and medium companies to take advantage of the cost reduction advantages of efficient use of inventories. Far from a mode this may become indeed mantra.
Anderson, Chris (2013), “Mexico: The New China”, The New York Times, January 26th, available at: http://www.nytimes.com/2013/01/27/opinion/sunday/the-tijuana-connection-a-template-for-growth.html?_r=0
Glatzel, Christoph; Helmcke, Stefan; Wine, Joshua (2009) “Building a Flexible Supply Chain for Uncertain Times”, McKinsey Quarterly, No. 3 March.
PricewaterhouseCoopers (2013), 2013 US CEO Survey Creating Value in Uncertain times, PricewaterhouseCoopers, available at: http://www.pwc.com/gx/en/consulting-services/supply-chain/global-supply-chain-survey/assets/pwc-global-supply-chain-survey-2013.pdf
The World Bank; Bain and Company (2013), Enabling Trade: Valuing Growth Opportunities, The World Bank, available at: http://www3.weforum.org/docs/WEF_SCT_EnablingTrade_Report_2013.pdf
What is the Kanban system?
The Toyota Production System (TPS) is the manufacturing management system, which was developed around 1970 by Toyota Motor Corporation, in order to produce a car efficiently in the shortest time and deliver it to customers faster. One of the famous methodologies of TPS is the Kanban system for optimizing component procurement timing. The Kanban system adopts an approach of receiving the information from the demand. That is to say, a post-process gives the information (what kinds of parts, when and how many parts a post-process needs) to a pre-process, using an instruction-card called Kanban.
The problem of the Kanban system
A negative aspect of the Kanban system is that a supply chain based on the Kanban system does not include subcontractors, auto parts manufacturers, because it is the build-to-order system restricted to inside own factories. This provides subcontractors with the following disadvantages.
- Adopt make-to-stock production system
- Carry a vast inventory of products
- Increase the cost to deliver products in a moment
The improved Kanban system, Global Demand Visibility of Apple
Apple improved the Kanban system and created its own supply chain system called Global Demand Visibility (GDV), which manages the number of sales and inventory in all the retail shops including online ones. The scope of GDV is very wide, including sales and manufacturing terminals. In GDV, subcontractors participate in the supply chain. This means that GDV overcame the aforementioned disadvantages in the Kanban system. In addition, there are other merits in GDV. In real time, Apple knows the exact number of products in inventory, that in delivery and that of work-in-process in factories. Furthermore, the products in GDV range from main products to accessories like cases and cables. Recently, Apple has kept the top position in supply chain ranking in Gartner, which comprises two main components; financial and opinion. This seems to result from the fact that the positive factors of GDV enable Apple to forecast production, sales and inventory (PSI) accurately.
The different scope between Toyota Kanban and Apple GDV
1. Toyota Motor Corporation. (n.d.). Toyota Production System.
Retrieved January 29, 2013, from http://www.toyota.co.jp/jpn/company/vision/production_system/index.html
2. Gartner Announces Rankings of Its 2012 Supply Chain Top 25 . (2012, May 22).Technology Research | Gartner Inc..
Retrieved January 29, 2013, from http://www.gartner.com/newsroom/id/2023116
3. Report on the book, "The Future of Apple". (2012, April 10). Miyamae Laboratory.
Retrieved January 29, 2013, from http://m-saburou.cocolog-nifty.com/blog/2012/05/1-d036.html
4. Cool Business Knowledge by systems research. (2011, January 20). Global Demand Visibility.
Retrieved January 29, 2013, from http://www.cool-knowledge.com/2011/01/20/277/
A New Framework for Safety Stock Management
Safety stock has always posed a challenging dilemma for supply chain managers. There are two primary decisions in determining safety stock: Whether to keep any safety stock at all; and How much stock should be kept to reduce inventory costs and reduce potential lost sales[i].
Traditional inventory management techniques, such as the Economic Order Quantity, have been used by inventory professionals to determine the optimal reordering points to minimize inventory costs, ordering costs and stock out costs. Often times professionals use a minimum order quantity in stocking which is tied to the EOQ level. When the demand and lead times are known the optimal reorder point, ROP, can be calculated as: ROP = d*l, where d is demand and l is the lead time. Sometimes it is useful to build into that equation the optimal buffer or safety stock. Safety stock levels can be calculated as a fixed safety stock, a time-based calculation or a statistical calculation[ii].
In calculation of the statistical safety stock it is convenient to approximate the demand side service level factor called Z. However it becomes necessary to further convert the lead time, into a factor of the forecast period used in Z. L then becomes √l/t, and the equation for safety stock becomes Z*d*√l/t. The optimal reorder point then become d*l + Z*d*√l/t. Currently inventory managers have begun to incorporate demand-side variations, however it is important for managers to start incorporating supply-side variations into their statistical calculations[iii].
Currently Lynne Pastor teaches a class as the Heinz College called Spreadsheet Modeling and Analysis that goes over some of these techniques and calculations. Question: Do you know of other statistical analysis tools, such as ARIMA, auto-regressive integrative moving averages, to help supply chain managers accurately forecast demand and set optimal reorder points?
[i] Luthra Nitesh, Roshan Ravi. A New Framework for Safety Stock Management. Cognizant. December 2011. Cognizant 20-20 Insights. http://www.cognizant.com/recenthighlights/a-new-framework-for-safety-stock-management.pdf
[ii] Luthra Nitesh, Roshan Ravi. A New Framework for Safety Stock Management. Cognizant. December 2011. Cognizant 20-20 Insights. http://www.cognizant.com/recenthighlights/a-new-framework-for-safety-stock-management.pdf
[iii] Luthra Nitesh, Roshan Ravi. A New Framework for Safety Stock Management. Cognizant. December 2011. Cognizant 20-20 Insights. http://www.cognizant.com/recenthighlights/a-new-framework-for-safety-stock-management.pdf
Newsweek’s 2012 survey listed Coca-Cola Co. as the second greenest and Coca-Cola Enterprises as the greenest food company in the U.S. Coke has incorporated some innovative changes in its supply chain to help conserve resources despite seeing a 12% increase production. It has established a sustainable supply chain that not only conserves natural resources and energy in production, but also incorporates green values in packaging and manufacturing. Some strategies they have used to improve their carbon foot print are:
Investing in green energy -- In 2011, the U.S. Environmental Protection Agency recognized Coke as one of the third largest green energy users in the U.S. It recently installed a landfill-gas-to-energy system in Atlanta, GA. The energy generated by this plant every year is equal to almost 48 million kilowatt-hours, which is equivalent to eliminating carbon dioxide emissions from almost 6,000 passenger vehicles. This system satisfies all the energy needs of the plant, including electricity, water and even steam. In addition to this, the entire facility has also been LEED Gold certified for using recycled raw materials, conserving energy, reducing water usage and for building a plant keeping green design in mind.
Using hydrogen fueling system -- Coca-Cola Enterprises also instituted a new method for transporting products within their warehouses. Coke joined hands with a major alternative fuel technology company called Linde and switched to hydrogen powered fork-lifts for their warehouses. This helps the company achieve two key objectives; it helps Coke improve its environmental impact and also bring efficiency in their supply chain process. When compared to propane fuelled fork-lifts, which take 10-15 minutes to get refueled, hydrogen fueled ones only take 2-3 minutes.
Managing water systems efficiently -- Coke has put a unique spin on the 4Rs and integrated it with their water management system. They have REDUCED their water-use ratio from 20% in 2011 to 16.3% in 2012. They also RECYCLE almost 100% of the water used in their plants and return it back to the environment. They are working to REPLENISH a significant portion of water used in their production facilities. Lastly, there is a strong focus on RISK MANAGEMENT and ensuring that Coke’s water usage does not encroach on/limit other users’ access to water.
Producing recyclable beverage containers – Few years ago, Coke introduced the “PlantBottle”-- it replaced its original plastic beverage containers with recyclable bottles that are partially made from sugarcane and molasses. Although these bottles feel like regular PET plastic bottles, they are biodegradable. Coke also opened the world’s largest bottle recycling plant which cost them $80 million. The plant recycles almost 40 million kilograms of bottles every year and reduces carbon footprint by 25%.
In the same “green” survey, Newsweek listed companies like Chipotle, Kellogs, Smuckers and Tyson Foods as “free passers.” Despite being multi-national companies with large R&D budgets and expert sustainability teams, these companies have failed to achieve their environmental goals. Also, these companies continue to be widely popular among customers (especially Tyson, which is one of the largest manufacturers of meat products in the country). How can we, as consumers, push these companies to adopt sustainable supply chain strategies?
 Newsweek, Green Rankings 2012: Greenest Food Companies in the U.S., The Daily Beast, October 22, 2012, http://www.thedailybeast.com/newsweek/galleries/2012/10/22/newsweek-green-rankings-2012-greenest-food-companies-in-the-u-s-photos.html#723b001d-f25f-492d-ac96-bb748e00e6ca
 The Coca-Cola Company, EPA Recognizes Coca-Cola Refreshments Among Nation's Top Green Energy Users, August 12, 2012,
Murray, M., Coca Cola Turns Green, About.Com: Logistics/Supply Chain, April 27, 2011, http://logistics.about.com/b/2011/04/27/coca-cola-turns-green.htm.
 Roth, B., Green Supply Chain: Coca-Cola’s Water Management Four Best Practices, Triple Pundit: People, Planet, Profit, http://www.triplepundit.com/2012/02/green-supply-chain-coca-colas-water-management-best-practices/
 The Green Supply Chain Editorial Staff, Green Supply Chain News: Coke Rolls Out New Plastic Bottle made in Part from Plant Material, November 24, 2009, http://www.thegreensupplychain.com/news/09-11-24-1.php.
We saw, in the Herman Miller case, the idea of incorporating the concept of Cradle to Cradle in the design process. Clearly ignoring waste is not a choice anymore since we are at a threshold where gaining competitive advantage in terms of cost by using waste as raw material is a necessity. Primarily because with high levels of consumption and falling reserves of raw materials in the developed and developing nations, we are on the verge of ending up with a pile of waste.
There are companies such as Climatex (textile) and Steelcase (office furniture) that have done that since 1970. Rohner is one such chemical company based in Windua, Switzerland. It was forced by the government to either cut down on its waste emission or move to another location. The areas of concern were the toxic dyes used in coloring the fabric and the management of waste. Michael Braungart - a German chemist and an active Green Peace environmentalist, worked closely along with another company to design 16 primary dyes that can be used to produce any other color that Rohner would need. The Company, with the factory wastes, makes and sells completely biodegradable sheets that are used to cover local strawberry fields in winter. This sort of co-operation in accepting and solving issues for the benefit of the society has proved fruitful than pin pointing and closing businesses.
Inspiration drawn from this success of Michael Braunghat’s led to the development of C2C concept to protect the environment. We know a few companies that have incorporated this idea as a part of their design principal but have you ever heard of a Cradle to Cradle region? Yes you read it right ‘a C2C region’ - Venlo the city council has decided to make the whole region Cradle to Cradle. Historically, Venlo’s youth would leave the city in search of work. Now the city has managed to attract the leading businesses in Cradle to Cradle and has become an incubator for sustainable innovation.
Roy Vercoulen, the Managing Director of Venlo’s Cradle to Cradle Exposition Centre, explained that the city’s procurement criteria stimulates innovation by stating intentions such as a building that produces oxygen, sequesters carbon, purifies water, improves the health of its occupants and promotes local biodiversity – whilst allowing as much room for creativity within that as possible.
Would such Green City incubators facilitate the much expected co-operation between the environmentalists and business makers?
After all, sustainability is not just about being environment friendly but about being lean and efficient by transforming net waste of the business into usable raw material. Prospects of reducing cost by recycling waste would re-invent the way products and supply chains are designed because waste is not a business proposition.
 - Cradle To Cradle. "Cradle To Cradle Products Innovation Institute." Cradle To Cradle Products Innovation Institute. N.p., n.d. Web. 28 Jan. 2013. <http://www.c2ccertified.org/innovation_hub/tools_resources>
 - The Hubble. "Cradle to Cradle | The Hubble." The Hubble | with members & friends of The Hub Community giving people better ways to work and new ways to play. N.p., 13 Oct. 2011. Web. 28 Jan. 2013. <http://www.thehubble.net/2011/10/13/cradle-to-cradle/>.
This weeks article on building flexible supply chains and the bullwhip effect caught my attention. The bullwhip effect refers to distortions that occur in information that flows through a company’s suppliers that can enable small changes to become much larger and less predictable changes in demand. This effect can have a crippling effect on companies from retailers to the raw material suppliers. It can also be a deciding factor in companies considering internal changes such as becoming more flexible and making decisions more quickly.This information led me to look into companies to see which are viewed as more flexible organizations. Walmart’s distribution center is a key example of how supply chains can become more flexible as they utilize demand-driven supply chains, which respond to customer orders. This is accomplished through point of sale data that is sent several times per day, enabling visibility of customer demand. This is one way in which Walmart has many advantages over their competitors including improved in-store variety and selection and highly competitive pricing for consumers.
Another factor that is said to decrease the bullwhip effect includes just in time (JIT) production. Harley Davidson is known for using JIT, which helped process inefficiencies to be identified. Through the implementation of this production system Harley Davidson has been able to increase productivity, decrease inventory levels by 75% and make other positive results. This is just one of the positive examples of how changes to supply chains and production strategies can hinder the bullwhip effect from occurring.
Despite these positive examples of companies implementing programs that help to reduce this effect it is still a problem that plagues organizations. While some companies have the luxury of implementing new processes such as becoming a demand-driven supply chain or using just in time production, others cannot afford to make such significant changes. However other companies can implement potentially less costly opportunities including renegotiate contracts and trying to work as a single team with their retailers and others along the supply chain.
Question: What are other examples of programs or changes that companies have accomplished as a result of experiencing the bullwhip effect?
Amazon: Inventory Costs vs. Sales Tax
Source: Wired, Amazon Sets Up (Really Big) Shop to Get You Your Stuff Faster
Amazon has come to be known as a shopping place were customers have enhanced their buying experience. But Amazon’s strength and competitive advantage doesn’t rely on that aspect only, it also builds upon on a great supply chain model.
Recently, Amazon has built a colossal, million-square-foot distribution center an hour east of San Francisco. For many years Amazon avoided locating one of its warehouses in the state of California, mainly to avoid the requirement to charge customers the state sales tax, which has been an advantage this retail company has over traditional brick-and-mortar competitors. Thanks to a negotiation in 2011 among California’s Governor, Jerry Brown, and Amazon executives, the company was able to postpone until 2012 a new sales tax that affects online purchasing in exchange for a $500 million in investment located in California. Now, the investment has been fulfilled by building this massive warehouse and distribution center which will also bring full-time jobs and seasonal employees. It looks like a win-win situation for Amazon and for the state of California.
But why did Amazon prefer to translate the sales tax to their customers? Wouldn’t this additional cost affect its competitiveness and make Amazon lose market share to brick-and-mortar retailers?
The answer is NO, Amazon started collecting the sales tax in California on September of 2012 and the impact hasn’t been significant. A study from Wingo points out that one of the factors for not seeing an impact is because one third of Amazon’s total sales come from third-party sales which not all of them collect California’s sales tax
What weights more over Amazon’s strategy, having their inventory as close as possible to their clients or reducing the final price of the products through fewer taxes?
Is this Amazon’s strategy of bringing distribution centers closer to customers one which the company will also try to follow as it increases its global approach? Or in a global perspective and while doing business abroad other factors must be considered?
1. Wohlsen, Marcus. Despite Sales Tax Slap, Amazon Could Still Crush Brick-And-Mortar. Wired. [Online] January 18, 2013. [Cited: January 28, 2013.] http://www.wired.com/business/2013/01/amazon-sales-tax-california/.
2. —. California Governor Jerry Brown Approves 'Amazon Tax Compromise'. Huffington Post. [Online] September 23, 2011. [Cited: January 29, 2013.] http://www.huffingtonpost.com/2011/09/23/jerry-brown-amazon-tax-compromise_n_978287.html.
3. —. Amazon Sets Up (Really Big) Shop to Get You Your Stuff Faster. Wired. [Online] January 23, 2013. [Cited: January 28, 2013.] http://www.wired.com/business/2013/01/amazon-distribution-centers/?utm_source=Contextly&utm_medium=RelatedLinks&utm_campaign=Interesting.
4. University of Virginia, Darden School Foundation. Managing Inventories - Reorder Point System. s.l. : Darden Business Publishing, 2000. UVA-OM-0936.