Thursday, February 28, 2013

Innovation and Sustainability in the Supply Chain of Natura, a Cosmetic Compay

Founded in 1969, Natura is a Brazilian company operating in the cosmetic, toiletry and fragrance industry. The company has used local outsourcing to expand its operations outside Brazil; as of 2011, Natura also had operations in France, Argentina, Chile, Columbia, Mexico and Peru.
Natura has traditionally adopted direct sales as a commercial model, except in France. They have also obtained  much  recognition in Brazil and abroad for their behavior toward the sustainable use of Brazilian biodiversity, having displayed a culture that values its relations and the insertion of sustainability in its business model.
Expansion to regions outside Brazil has inevitably brought with it increased supply chain complexities. This imposes challenges not only in supply chain management, but also in the reduction of the social and environmental impacts of its business model. Natura’s investment in innovation is distributed to science and technology, innovation management and partnerships, product development and marketing, regulatory affairs management, and product safety. In 2010, innovation totaled 2.8% of the company’s net revenues at R$139.7 million.
Since 2005, Natura has tended to operate through open innovation in order to develop new products, processes and tools. Emphasis has been placed on partnerships with science and research centers in Brazil and abroad. This is in keeping with Chesbrough’s (2003; p. 24) assertion that open innovation is a paradigm that assumes that firms should and can use external as well as internal ideas. Natura has also made an effort to take internal ideas to market through external channels beyond the company’s usual operations. One such example of this is found in the company’s efforts to qualify 27 employees in innovation management in 2010. Accredited by the Global Innovation Management Institute, the program sought to train employees in the development of innovation competencies, including matters like technological convergence and sustainability; thus empowering them to bring real value to the company’s SCM efforts.
In 2010, Natura’s supply chain consisted of approximately 5,000 organizations, of which 5% supplied inputs necessary for the company’s production lines. The rest of the suppliers were service providers or providers of biodiversity assets, as well as indirect materials needed for business processes. The company uses satisfaction and loyalty indexes to monitor its suppliers in Brazil, with ratings at 81% in 2010. Its 28% loyalty rate in 2010 consists of overall supplier satisfaction, intention to continue a relationship with Natura, and willingness to recommend the brand to other organizations. Natura’s innovations in SCM have always been undertake with a firm eye on the company’s underlying principle of promoting sustainable use of biodiversity and green technology. This is reflected in the supplier development strategy Natura has adopted in other Latin American countries using outsourced partnerships. This model reduces costs and environmental impacts related to greenhouse gas emissions by shortening transportation distances, while also reinforcing crucial relationship values for Natura, such as partnership and cooperation. Further, it enables Natura to leverage the expertise of local companies with local knowledge and good social and environmental practices. This model, also implemented in Argentina in 2010 with perfume-bottling activities, is projected to see a 70% decrease in greenhouse gas emissions.

Natura has clearly made a concerted effort to align their SCM innovation techniques with their underlying commitment to sustainable use of Brazilian diversity and green technology. The innovations detailed here have proven to be effective to a large degree, but further expansion would only complicate the supply chain further. Can Natura continue to innovate and foster efficient supply chain management using the techniques that have served them well so far while also retaining their focus on sustainable green technology?

Future of Healthcare Supply Chain

Medical device and pharmaceutical companies are continuously expanding their portfolios in order to support the rapidly changing global markets which leads to increasing complexity in production and supply chain. Economic growth in emerging markets is creating new demand for effective, affordable healthcare products. All of this will result in increasing regulatory, quality and compliance issues further creating risk in supply chain.

McKinsey and Company recently released a white paper, “Building New Strength in he Healthcare Supply Chain”, in which they suggest few supply chain capabilities that hold the key to the increasing demand in the future.

1.     Segmentation: Most healthcare manufacturing companies today use one-size-fits-all supply chains. But profitability, value density, demand variability and the cost and service expectations of customers vary significantly. These differences have a profound effect on optimum planning, production and general logistics.  The key is to have four to seven separate segments according to the volume and variability of demand, then separate planning and production schedules for each segment.

2.     Agility: Manufacturing is spreading across the world, markets are becoming global and volatile, and supply chains are getting longer. To improve the responsiveness of their supply chains and keep costs under tight control, companies need to accelerate key processes, and improve stability in production and replenishment and visibility.

3.     Collaboration: Different players in the supply chain need to find ways to collaborate together on the basis of the available data to greatly improve production efficiency. The paper suggests six steps for an effective collaboration: companies should collaborate in areas with high strengths, draft agreements that enable benefit-sharing, select partners based on their capabilities and willingness to collaborate, dedicate resources to the collaboration initiative and include senior leadership, jointly manage performance to avoid misaligned incentives and finally, enter the collaboration with a long-term goal by laying groundwork for a strong ongoing relationship.  
Improvement in supply chain efficiency can improve healthcare sector’s margin by up to $130 billion as estimated by McKinsey and Company in the figure above.  Apart from the financial benefit, improvement in supply chain can help provider safer and affordable access to products across the world and free up billions for R&D.  

Does the cost and time associated with implementing new supply chain initiatives for already complex, global and diversified companies make sense when they are already making a hefty profit? Apart from financial benefit, how the companies be convinced to embrace the challenge of supply chain leadership?

Increase Global GDP and Trade by Reducing Supply Chain Barriers

Reducing supply chain barriers could increase global GDP and world trade much more than reducing all import tariffs, according to a study by World Economic Forum. The study shows that if all countries reduce supply chain barriers halfway to global best practice, world trade could increase by 14.5% and world trade by 4.7%. Similarly, if eliminating import tariffs could increase world trade by 10.1% and global GDP by 0.7%. The gain associated with reducing supply chain barriers are more evenly distributed across countries than the gains associated with eliminating tariffs. Such drastic increase in GDP would significantly help in reducing unemployment.

Supply chain barriers can result from inefficient customs and administrative procedures, complex regulation and weaknesses in infrastructure services, among many others. Officially, World Economic Forum categorizes the barriers into four groups:

  • Market access: The degree to which a country’s policy framework facilitates import and export of goods
  • Border administration: The degree to which border administration facilitates the entry and exit of goods
  • Transport and communication infrastructure: The degree to which a country has the neseccary transportation and communication infrastructure to facilitate movement of goods within the country or across the border
  • Business environment: The regulatory and security environment affecting the trade activity within the country

With increasing security concerns due to violent activities across the world, is it safe to reduce the supply chain barriers discussed above? Specially when people are thinking of unique violent techniques to harm people globally.

Will the next Henry Ford cash in on the love for labor?

The Wired article by Chris Anderson describes the potential of micro factories. Local Motors’ and Factor Five Racing’s business model which bring manufacturing to the end of the supply chain. The Rally Fighter is one of the success stories. Crowdsourcing design and involving buyers in the manufacturing is a new concept for the automobile industry.

In Michael Norton’s article about the ‘Ikea Effect’, he outlines the consumer psychology where consumers valuation of their own labor is high. When instant cake mixes were introduced in the early 50s, it met with a lot of resistance from the market. However, when these mixes required an egg to be mixed, adoption of these mixes increased dramatically. IKEA has been doing this for the last couple of decades.

With the rather inexpensive availability of 3D Printers and other micro-factory technologies, businesses like Techshop and Local Motors are trying to flip the traditional supply chain upside down. Personal 3D printing technology is expected to have profound effects on how and by who innovations are created. They are already massively decreasing the capital costs of setting up new manufacturing enterprises. The question however is if this model can be scaled to compete with the mainstream manufacturers who have scale to support their operations.

  1. In The Next Industrial Revolution, Atoms Are The New Bits (Wired Magazine, January 25, 2010)
  3. The Kitchen Table Industrialists (New York Times, May 13, 2011)

Wednesday, February 27, 2013

The NextGen ERP

Relevance of Enterprise Resource Planning( ERP)- 
As per expert, Supply Chain Management  supports –

(1)    Material flow
(2)    Information flow
(3)    Financial flow

 These flows are bolstered by three pillars processes, organizational structures and enabling technologies.Supply Chain Management is not only about specifying customer zone, manufacturer and distribution selection, allocation of products, but also about  the prioritization of capabilities to be developed. With this  effective  supply chain strategies depends on exemplary coordination which can be divided in further 3 parts –

(a)    Information deployment – Point-of-sale(POS) data, Joint forecasting , Schedule sharing
(b)   Channel alignment – Contracts , Vendor-managed inventories (VMI), Collaborative planning forecasting and replenishment (CPFR)
(c)    Operational flexibility – postponement , Assemble-to-order (ATO) , Make-to-order (MTO)

Emergence of IT and SCM transformation collided and created a requirement for solution which can be critical enabler of superior supply chain. Enterprise resource planning (ERP) can be seen as combination of business processes and information technology. ERP converts functional orientated organization into a process oriented one. Hence require change management , cross functional initiatives and may lead to complex structures. ERP is an umbrella term for integrated business software that controls information structure, controlling a broad range of activities from supplier on floor to accounting.  ERP can provide for following functionality:

Transaction processing engine:  integrates management of data throughout the enterprise
Work flow management : controls numerous process flows that exist in enterprise
Decision support: assists in creation of plans or deciding in creation of specific customer orders

Limitation of current ERP -
(1)    Lack of extended enterprise functionality
(2)    Lack of flexibility  in adapting to ever-changing supply chain needs
(3)    Lack of more advanced supporting functionality beyond transaction management
(4)    Lack of open, modular, Internet-like system architecture
(5)    Information exchange

Need of the hour
ERP is going the problem of “ too much information”( TMI)and “too much software” (TMS). The jumble of ERP, CRM , Supply Chain and BI is spread all over the globe. A research suggest that CIO and exec accept that only 64% of enterprise system’s core functions are utilized. Due to company growth, business line change , new facility, consolidation operations, acquisition a lot of changes and upgrades are needed in ERP which makes it hard implement and be successful.

Improving current ERP -
ERP does not have a one-size-fits-all approach. It requires a lot of customization or requires organization to change the business processes. Different ERP products offers different degree of specialization towards different verticals. Another emerging trend is SaaS (Software-as-a-Service) or web-based software, which can change the integration and implementation trend. The adoption is still evolving and varies between enterprise application markets and applicability. But this approach is viable option for small/mid-market enterprise and it also provide modular way to expand existing business. This 4th generation computing model represents both an opportunity and challenge. The opportunity is to optimize computing infrastructure, enterprises while evaluating the challenges/perceptions around the security of data on the cloud.

Another trend is social computing, which is helpful in analyzing customer’s proactive and reactive behavior for a firm or product. Social computing technologies  provide easy way to provide consumer feedback. Till this point, social media is limited to business-to-customer(B2C) but leaders are leveraging social networks for better collaboration with customers, suppliers and outsourced manufacturers and  other partners.  This initiative can also provide platform to  improve internal communication and collaboration between co-workers and across functional groups and departments.

Mobile device integration can be utilized in the wake of outstanding network, storage capacity and broadband speed of new handheld devices. The usage of mobile devices can result in improved data
accuracy and increased mobility and convenience, thereby streamlining movement and reducing human errors. This will also improve data validation and reduce latency while dealing with orders.

These factors can bring huge saving, benefits and usability factors. They are significant reasons to revolutionize the ERP with its relevance to supply chain.

 Reference - 
 Paper by INSEAD Business school on  - Impact of ERP on supply chain - a study on European Delphi  


Amazon's Supply Networks Strategy, Inc. is an American multinational electronics commerce company with headquarters in Settle Washington, United States. It is the world's largest online retailer. They started as an online bookstore but have diversified to so many other products like music downloads, furniture, food and basically almost all consumer electronics. Currently, Amazon is a major a provider of cloud computing services. Amazon’s has a separate retail online stores for different countries for example the USA, UK, China, Italy, Germany and others.   

According to a research by Gartner with in a period of 3 years Amazon moves from the 1oth spot in the world ranking in the best top 10 supply chain company to the 2nd in the year 2012 that is just behind the world technology company and smartphone giant Apple. The figure below shows the customers centric approach of Amazons business model.

                                              [1]FIG 1 Customer Centric Model

In the supply system of Amazon, there is a unique approach about how they handle their customers which they describes it as starting with the customer and moving depicted in the diagram above they are customer focus and they are frugal which means, they spend much money on things or items customers really like and lastly they are very innovative in their supplynetworks where they constantly, brings in new technology to assist with their supply chain network.

 The customer centric nature and the success has also been partially dependent and their largeness and corporate image. Amazon from its beginning have acquired some many companies which includes mdb,  Lexcycle,askville,,shelfari,smallparts,woot,cdnow,zappos,alexa,audible, and others.The replenishment strategy of Amazon reflects mostly with understanding customers needs first and formost. They do their stocking and inventory with customer preference than have more variety of goods and than lower cost.  Amazon offers a very wide range of products through the use of wholesale suppliers and independent producers which includes the companies shown like Etsy,ticketmaster,foursquare,ppaya,ftopia,Quora,Flipboard,Netflix,airbub ,Tapjoy,zynga,esa,Dropbox,Unicredit Bank,Nasdaq,yelp,the guardian,Ericsson ,Hitachi Systems, Schneider Electric,reddit and other.

                                             FIG 2 Supply Network

The diagram above illustrates the total supply networks of the global retail giant Amazon. Step 1 shows when the customer places an order in wherever location he may be. The order is than assigned to the closest of the seven major distribution centers in the United States of America  .The next step is as shown in the diagram indicates that the order is been shown red in the person whose item is ordered in the warehouse it than creates ride conveyors through DC, the items is been sorted out by a bar code and than the creates arrives at the central point and bar codes of the products matched with orders, the items sorted are than sorted automatically into ne of the many boxes chutes into a box. As shown in the diagram the bar code identifies customers order and than the customer order is packed taped and weighed. The taped and weighed boxes are shipped by the United Parcel Services and sent to customer between seven days.    

In a nutshell looking at the trend and successes has been able to achieve in this relatively short period as compared to other companies in the industry, do readers belief Amazon can overtake Apple in the list of best supply chain companies in the very new future (5 – 10 years) and to what extent is this saying true “ the Hidden Empire“.