Logistics in Supply Chain

In the previous weeks of our SCM course we have discussed themes such as customers’ demand and achievement of strategic-fit, products’ design and development, and inventory management. All these topics are related to the subject examined last week: logistics.

This topic is critical for companies, and it drastically influences their supply chain for several reasons. Let’s analyze them focusing on transportation.

First of all, companies’ main goal is to satisfy demand and do it profitably. In order to do that, companies have to meet demand by providing desired products, but they also need to deliver them as quickly as possible, so that customers will appreciate the service and build loyalty towards the company. We may recall the example of the high fashion dress seen on TV on day 0, bought on day 1 and received on day 2. This was possible thanks to an efficient production line, but also to effective logistics.

Second, some companies set up the product design and development phases precisely thinking of how the product will be shipped. For example, [1] Ikea’s designers create all their products in such a way that all the necessary pieces to assemble the object fit in a certain box with pre-specified dimensions. This is because Ikea doesn’t want “to ship air”, maximizing the number of products shipped and limiting the cost of transportation. On the same line of Ikea is [2] Tata with its Nano, the most inexpensive car in the world. Since assembly is outsourced, Tata realized Nano with a modular design and a revolutionary building procedure, so that all its components are shipped and can be efficiently assembled by different entrepreneurs. 

Sometimes, companies prefer to use low cost transportation (on rails or water) and place more frequent orders. This may be done specifically to reduce inventory costs, or also for other reasons, as is the case, for instance, with food products, in order to avoid that they expire.

More and more often companies outsource partially or entirely the management of their supply chain to specialized firms. [3] Brooksint and [4] Essintial are two examples of business firms which externalized several services, such as the management of the inventory or the entire logistics. Sometimes transportation companies themselves propose to take care of different services. This is the example of UPS:  initially UPS was involved in distributing Toshiba’s products and recovering all the products which need assistance. Now, UPS has an own assistance department which is in charge of repairing Toshiba’s products. So, UPS recovers, repairs and brings back to the customers products that must be repaired.

What is the future of logistics? How can technology help in increasing its efficiency? RFID tagging, which allows for better tracking of shipments and assets, is a useful way to manage logistics, but it may raise privacy or security concerns, especially if the transported products are sensitive or particularly valuable. In order to meet customers’ needs at best, companies will need to find a practical, profitable solution to guarantee a timely but at the same time secure shipment. So what’s next for logistics management?

[1] http://karlulrich.pbworks.com/f/IKEA-cost-article.pdf

[2] http://www.businessweek.com/stories/2008-02-27/learning-from-tatas-nanobusinessweek-business-news-stock-market-and-financial-advice

[3] http://www.brooksint.com/inventory-a-logistics-management

[4] http://essintial.com/field-technical-services/logistics-and-inventory-management/

Walmart: technology and inventory.

Theme of the week of our Supply Chain Management course is “Inventory.” Inventory management is a crucial step for the entire SC of a company. Its goal is to fulfil suitable levels of customer service while keeping inventory costs within reasonable boundaries.

Focusing on the inventory, Walmart has been able to stand out among similar stores, becoming “the world’s largest and arguably most powerful retailer with the highest sales per square foot, inventory turnover, and operating profit of any discount retailer (see here).”

A considerable percentage of its success is based on technology, starting back in 1975, with the first utilization of an electronic cash register, which was able to keep track of each purchase, providing a constant update of the inventory. In 1983 came the bar code for scanning POS (point-of-sale) data. After almost 20 years, RFID (radio frequency identification) technology literally revolutionized Walmart’s inventory management.

Let’s start with the introduction of bar codes. With the utilization of barcodes, Walmart was able to track “what is being sold … [and] what prices are popular” (see here) obtaining competitive advantage and leverage over its suppliers. As pointed out in the article mentioned above, Walmart’s strategy was quite powerful: 'We want to sell this at a certain price. You make it at a certain price, or we're not going to work with you.' This approach affected Walmart’s SC in two ways: it allowed them to buy products at a lower price and to revise the inventory based on customers’ demand (stocking up on products loved by customers while reducing the not-so-loved ones).

Then, in the early 2000s, RFID technology burst into the scene and immediately had a strong effect on Walmart’s inventory management. The technology was able to identify and track any object, transferring its information from the tag directly to the biggest and most powerful computer in the world involved in inventory management. In this way, there was a substantial  cut of “the volume of excess inventory in Walmart’s massive supply chain,” “by almost one-third,” according to this article, thus decreasing the inventory costs. 

                                                                                                      

What other technology will Walmart embrace in the next future in order to maximize the result of its SC? Walmart knows the products that its customers buy now, so it might focus on what its customers would like to buy tomorrow.

References:

http://www.usanfranonline.com/wal-mart-successful-supply-chain-management/

http://www.usanfranonline.com/rfid-technology-boosts-walmarts-supply-chain-management/

http://www.pbs.org/wgbh/pages/frontline/shows/walmart/secrets/barcode.html

http://www.cio.com/article/147005/45_Years_of_Wal_Mart_History_A_Technology_Time_Line

Unleashing analytics collaboratively to optimize inventory

This week's reading show us the importance of matching supply with demand and optimizing your inventory levels to maximize competitive advantage. Often organizations are faced with problem of determining the right levels of inventory and the getting the right mix among raw material, work in progress and finished goods inventories. Predictive analytics, a powerful mechanism, comes to the rescue. 

As highlighted in the readings, the production, finance, sourcing and marketing teams need to work together; a good analytics solution takes in raw data from all these departmental systems/ERPs and predicts demand. This collaborative approach provides a single source of truth for users (forecasters) to base their numbers and rules out any chances of data inconsistency. The predictive model looks at historical data, seasonal conditions and other factors to adjust the predicted demand. The below video describes how IBM implemented an analytics solution for Columbus Foods, a company dealing with perishable goods, to increase their revenue and optimize inventory:

http://www.youtube.com/watch?v=yRIMm5WLn7s

The complete case study can be found here: http://public.dhe.ibm.com/common/ssi/ecm/en/ytc03438usen/YTC03438USEN.PDF

The performance of the analytics platform and the frequency of data update depends on the industry. For example, a cement company may not worry about real time data; however, for a garment company real time updates are more significant. The latter may also source its data from social media and other public forum to understand the customers' sentiments. 

Recently, Guess worked with HP Vertica to empower its designers, store manager, buyers and planners to serve their customers better. Click here, to see how analytics played a key role in inventory management.

Procter & Gamble (P&G), often rated as the company having one of the best five supply chains, seems to have mastered the art of leveraging analytics. Their analytics platform factors in an optimized distribution network while setting the targeted inventory levels across various touch-points in the network (distribution centers). This is improving P&G's bottom line by multi-million dollars since 2006.

Many more case studies where companies have implemented an analytics solution for better inventory management can be found at IBM's website

Reference: https://www.informs.org/Sites/Getting-Started-With-Analytics/Analytics-Success-Stories/Case-Studies/Procter-Gamble

Target wrongly estimates demand forecast

This blog is based on the article that I had come across relating to weekly readings, inventory management and demand forecasting.

In the year 2011, Target decided to launch Missoni products at their store and online. Missoni, an Italian fashion brand is well known for its knitwear design and it is a much sought after brand among customers. But, when Target released Missoni’s products online and in-store, the demand for the product immediately skyrocketed and Target was left with very limited inventory to tackle this sudden rise in demand for Missoni products.

The reason for this debacle is very simple: Target did not forecast demand well enough for Missoni products. As Target couldn't meet the demand, scalpers made use of this opportunity of by selling products at a much higher rate. In one such case, a Missoni bicycle priced at $399 was sold on eBay at a ‘buy it now’ price of $1600. Another case was that an enterprising seller was willing to pay $31,000 for a pair of Missoni Venetian Rain boots, size 10.The second largest discount retailer in the United States, faced strong criticism for failing to fulfill orders it accepted online. Some cases of severs crashing were also reported. Customers even had the tracking number of their packages when UPS did not have any record of such packages. 

The problems faced by Target were due to miscalculation of forecasting demand by a great margin and poor execution of their product launch. Target could have had some of the Missoni products in excess as a buffer in their storage to better tackle this situation and optimize their profits. Even though errors in demand forecasting is inherent and in very rare cases could one make an exact prediction of demand for their products, Target could have done a better job in minimizing errors by getting close to customers and estimate the demand for Missoni products. Being close to consumers rather being farther up the supply chain could have eliminated the large distortion of demand related information it had received. Another method the demand forecasters could have done is to compare how other big retailers such as Walmart have handled such a situation and steps could have been taken in a similar manner to avoid this problem.

Due to the Missoni launch fiasco, Target would have difficulties wooing other big designers to their product line. What measures could Target undertake to estimate the demand for a product they are about to launch (for instance: other big designers or any other much sought after brands) to their product lineup?

Source:

[1] http://www.forbes.com/sites/retailwire/2011/09/26/missoni-scalpers-beat-target-at-demand-forecasting/

[2] http://www.missoni.com/

[3] https://corporate.target.com/about/

Survey Article: Supply Chains in Health Care

In my search for resources to help me begin to gain an appreciation of how order and inventory management are addressed in health care (particularly on the level of large systems) I stumbled on a working paper by Manuel D.Rossetti, Ph.D., P.E., Professor of Industrial Engineering at The University of Arkansas. Inventory Management Issues in Health Care Supply Chains [1] is a concise and approachable article that describes the current state of the health care value chain, problems with the current model (where opportunities for streamlining to the benefit of the health system might exist) and ways in which these problems might be mitigated.

Rossetti looks briefly at the two ends of the spectrum, e.g. Mercy Health System in St. Louis, comprised of 31 hospitals across 4 states [2] which manages its warehousing and in-system shipping entirely in-house thereby cutting overhead from distributors, and the Nebraska Medical Center, a single hospital which outsources its inventory management entirely to Cardinal Health, a very large ($103 billion) healthcare supply chain company. [3] He then goes on to survey the literature from the past decade or so, and finally suggests topics for future investigation.

This paper is a nice survey of current thinking in the field of health care supply chain management and is an excellent introduction for anyone wondering what kind of infrastructure is behind their physician or nurse’s ability to reach into a cabinet for a needed item at any given time.

As an aside, it is worth taking a look at the 2011 Healthcare Supply Chain Top 25, wherein Gartner “strives to identify organizations that use their supply chains to improve the patient care experience.”[4]

Question:

Hospitals need to stock consumable items across a broad cost-range, e.g. alcohol prep pads costing pennies or less per unit to teeny-tiny drug-eluting stents for your plugged coronary arteries costing more than $1000 each. How do they optimize ordering and inventory so that the overhead for items across the cost range is optimized? Remember that a “stock-out” condition for a stent could be devastating or lethal for a patient who presents acutely with a heart attack. Delivery the next morning before 8 a.m. won’t cut it.

References:

[1] Rossetti, M.D., (June 5 2008). Inventory Management Issues in Health Care Supply Chains http://www.uark.edu/~rossetti/reports/healthcare_supply_chain_rep.pdf accessed 10 September, 2012.

[2] Mercy Health System website, http://www.mercy.net/newsroom-mercy-quick-facts accessed 10 September 2012.

[3] Cardinal Health website http://ir.cardinalhealth.com/ accessed 10 September 2012.

[4] Blake, B., O’Daffer, E., et al. 9 (30 November 2011). The Healthcare Supply Chain Top 25 for 2011 http://www.gartner.com/resources/227200/227253/the_healthcare_supply_chain__227253.pdf accessed 10 September 2011

What is the best way to manage your inventories?

iPad 2 line Wednesday at Apple's Fifth Avenue store.

Photos from reader Ric S. [1]

This week our topic is about inventory management in supply chain. It is well known that the inventory strategy is a key element to determine a company’s overall performance. For example, in the financial analysis, the inventory turnover ratio is vital to a potential investor to look at. Also, let’s take a look at the above picture. Does it look familiar to you? Have you ever stayed up at night in the freezing street only wishing to buy any Apple products before it sold out quickly? Have you ever made any complain and wish your Apply store to get more storage? Has it ever occurred to you that maybe Apple is using a special market strategy and limit its supply on purpose? Or, maybe Apple is facing some problem in their inventory control?

As we learned, a company can control its inventory in many ways, considering the location and distance from its customer, factory, or warehouse, the time period and speed of supplying and supplement, and the amount of supplement for each time, etc. Should I take more care of my key custom and assure their need? Should I take a just-in-time method to reduce cost or a just-in-case philosophy on the opposite? Where should I build my assemble center? How much is my cost for shipments? Those are all part of the questions for a manufacture to consider in order to making a right decision on their supply chain management.

What could go wrong if you applied a wrong strategy? How to identify the more important factor and make your decision? What are your benchmarks? Well, I guess it is not easy to answer these questions. However, we should always remember that in the market, on the other side of supply, there is another key factor— the demand, which unfortunately is changeable from time to time, though could be predict.

Back to Apple’s case, Apple is successful for its high amount of sales and quick inventory turnover rate. It used several ticks to keep their actual inventory and supply chain management as a myth.

For example, it changed its Web order number generating method to a random number so online order numbers have no relation to how many units have been sold. In this way, customers have no idea of the actual amount left and will be more desired to buy as quickly as possible. Thus, their bargaining power becomes low and Apple suppliers take the advantage to name their prices at the maximum profit. However, the popularity of its product is a two-side sword. Apple is now known (sometimes rumored) for facing supply chain bottlenecks. They find trouble keeping up with the high demand which causes too many complaints from its customer that some of them have already lost their loyalty.

Beside the influence of the market, the inventory strategy is also influence by polices in local assemble center. The law issues can particular influence a company’s situation in an extreme way.

As Apple is engaged in a number of patent battles globally against Samsung Electronics and HTC, including the markets in US, Germany and Australia, it is sweat to see that the final judgments are so far mostly been decided in favor of Apple. However, the recently China trademark lawsuit will certainly give Apple a hard time and make their inventory and supply problems even worse.

Source: http://www.gizchina.com [2]

Since late last year, Apple has been fighting a trademark infringement case against Proview Technology. It is claimed that Apple is infringing Proview’s trademark by using the iPad name in China. Apple thought it owned the trademark, but Proview Taiwan, a separate entity, sold the trademark for use of the name in China without permission. Apple has now lost the trademark case in China, and Chinese government officials have started seizing iPads from retailers as they are no longer allowed to be sold. [3]

As China is Apple’s main manufacture place for iPad, this could lead a worldwide shortage for Apple. It would also mean the expected launch of the iPad 3 next month couldn’t happen unless Apple already has a mass of stock outside of China. How should Apple survive from this? Despite there is still a chance for Apple to pay a large amount of money and settle the problem out of court, the current storage and the myth strategy of inventory for iPad3 worldwide seems to be more worthy to know.

Do you have any idea to assist Apple? Let's wait and see how Apple would response.

References:

[1] Hughes, Neil. "Apple Rethinks Inventory Management for IPad 2." AppleInsider | Apple News and Rumors since 1997. AppleInsider, 16 Mar. 2011. Web. 14 Feb. 2012. <http://www.appleinsider.com/articles/11/03/16/apple_rethinks_inventory_management_for_ipad_2.html>.

[2] "IPad Now Banned in China! | Gizchina.com." Giz China, Chinese Gadget Guide. Technology in China. IFeng, 13 Feb. 2012. Web. 14 Feb. 2012. <http://www.gizchina.com/2012/02/13/ipad-banned-china/>.

[3] Matthew Humphries. "Apple Facing IPad Export Ban in China, Could Lead to Worldwide Shortage – New Tech Gadgets & Electronic Devices." Geek.com. Financial Times, 14 Feb. 2012. Web. 14 Feb. 2012. <http://www.geek.com/articles/gadgets/apple-facing-ipad-export-ban-in-china-could-lead-to-worldwide-shortage-20120214/>.

HP's Touchpad Fiasco

One of the articles in the reading pack was related to Inventory Driven Costs and how HP was facing problems with its inventory costs during the 1990s. The costs included Component Devaluation Costs, Price Protection Costs, Product Returns Costs and Obsolescence Costs. These costs were due to a lack of a more streamlined supply chain
network.

Last year around August HP released its much anticipated tablet Touchpad with WebOS.
Due to competition from other tablets such as the IPAD and Galaxy Tab, the Touchpad couldn't garner enough sales in US.To offload its unsold inventory, HP had to slash its prices astronomically from $499 to just $99. At these rock-bottom prices, buyers rushed to snatch up the remaining TouchPads. HP was approximately losing $206 dollars for every 16GB model sold. In total it faced a loss of $200 million dollars on the Touchpads shipped to various retailers in US and all over the world. Retailers in Australia were open to product returns by customers since HP no longer provided support for WebOs platform. Those product returns meant losses incurred by HP.
HP's Touchpad was almost certainly doomed from the start because its design and build quality didn't come close to those of Apple's Ipad or even Samsung's Galaxy Tab.

The decision to scrap the TouchPad came less than two months after it first appeared in shops in the United States, and just over a month after the British launch.Since the Taiwenese part suppliers already had stockpiles of inventory for the 7 inch version of the tablet, HP had to do one final run of production of Touchpads to placate their concerns. The suppliers wanted to negotiate a solution for their remaining inventory and HP was committed to mantain its promise to its partners and suppliers in order to sustain its relationship with them. The inventory level was capable of producing about 100,000 7-inch TouchPads and was originally set to start production at the end of the third quarter, but HP's sudden change of strategy had
completely messed up upstream players' schedules.

Just like in the 90s, HP again faced losses due to its inventory and the demand for Touchpad didnt turn out to be in accordance with their expectations. Retailers had
unsold inventory in excess and HP had to bear price protection costs and product return costs. In this case, however it was more so because of the product quality and price compared to the other competitive products in the market.


One question that i would like to ask is

What could have HP done different, to minimize inventory losses in the case of the Touchpad? They had already shipped a set amount of units. A price cut allowed them to make some money out of their unsold inventory instead of earning zero dollars.

References

http://www.techrepublic.com/blog/itdojo/hp-loses-206-per-touchpad-during-fire-sale/2872

http://www.theaustralian.com.au/australian-it/exec-tech/hps-touchpad-tablet-killed-in-australia/story-e6frgazf-1226118178681

http://www.telegraph.co.uk/technology/news/8732704/HP-to-build-final-batch-of-Touchpads-after-fire-sale-success.html

http://www.theverge.com/2011/08/22/hp-touchpad-99-in-your-words/