Welcome back, so now we are moving into the
eighth lecture of this course and recently we discussed about the role of drivers in
making a supply chain strategic. So now moving further into the discussion
of supply chain strategy. We will see that how the first process of
the supply chain strategy management that we need to understand the demand and supply
uncertainties. And you see the demand and supply uncertainties
are related to variety of things. Now some of the uncertainties which are there
from the demand side in a supply chain. Let us see a customer can vary the quantities
demanded. Now we see in the last discussion that how
during a particular time of the day that demand of food products may increase, demand of seats
in restaurant may increase. How the demand of cinema tickets on a weekend
show may increase. So quantity of products required at particular
time may increase or decrease. So you have uncertainty related to range of
quantity increases. And as this range of quantity is increased
or decreased by the customer, the implied demand uncertainty as a result of that is
that wide range of quantity implies that greater variance in demand. Means if you have large number of SKUs, so
in that case this range of quantity will create further higher variance in the demand uncertainty. So that is one very important thing. And now a days you can see a lot of product
categories the uncertainty related to quantities are there and particularly if I take you to
the side of humanitarian supply chain in that particular supply chain you have huge amount
of uncertainty with respect to quantities. So quantity changes and this quantity changes
is even more severe when you have wide variety of products to be offered in your supply chain. Then you, customer need is also with respect
to lead time. Now customers are continuously expecting that
lead time, when I order the product and what I received. That difference, that time gap is known as
lead time. The time between you order and you receive
the product, that time is known as lead time. Now there was a time 20 years-30 years back
when I used to book a Bajaj scooter. And I used to get deliveries after 4 years
or 5 years or 6 years of that time. But nowadays what is expected I should have
money in my pocket and I should walk to a retailer shop and immediately I must get the
product. So now we are continuously expecting reduced
lead times. I am not interested in waiting for my product
and this particular aspect created a landmark change in the supply chain management of Dell
computers. Before that, Dell was taking sufficient lead
time of around 2 to 3 weeks to deliver their products, but as Dell could understand it
at a very appropriate time that now customers are not going to wait for the product and
immediately they change their supply chain and went to the retail market. So lead time is continuously decreasing and
now as a result of that when customers are expecting low lead times there is less time
to react for the orders. Today I am giving the order and you have one
day or even less than one day to fulfill my requirement. So you do not have much time and you need
to develop the capabilities in your supply chain. We all are looking, a certain degree of responsiveness
in my supply chain. And therefore this is creating another kind
of, you can say a stress in the supply chain that you do not have enough time to react
or to understand or to satisfy the customer requirement you have to do every requirement
fulfilment on war footage. Then variety of products required are continuously
increasing. You can feel in your last 10 years of period
or 15 years of period that how the variants of products are increasing. Because we all are living in marketing era. This is the era of marketing and in the era
of marketing we say the customer is king and we are going to fulfill each minor requirements
of the customer. And therefore we are creating continuously
more and more variants of the products. So the variety of products are increasing
and this increased variety of products are creating another kind of pressure because
when you have more number of SKUs, the stock keeping unit, you have so many varieties of
soaps, you have so many varieties, flavours, pack sizes of biscuits, you have so many varieties
of namkeens. So all these things are variety of products
that is increasing and then you need to understand the demand per product is becoming more disaggregated. So that is also a challenge to the supply
chain and you need to when I am talking in strategic manner, you need to understand that
how to fulfill this disaggregated demand. Because for each small product you need to
develop the supply chain solutions. Then numbers of channels are also. Earlier we used to have simple brick and mortar
type of supply chain. But nowadays you have small Kirana shops,
you have big malls and then you have E-supply chains also. So there are different types of channels through
which producer, through which companies are reaching to the customer. They are following the conventional wholesaler,
retailer and customer model. They are following directly from manufacturer
to big retailers those who are the organised retailers and then to the customer. And then there are companies directly from
manufacturer to customer. So numbers of channels are continuously increasing
and customers have option all the customers can go for different types of channels. So these are also creating a type of pressure
on the supply chain that you need to maintain, you need to manage the multiple channels which
are available in the market. So what is happening E-channel, E-channel
like E-supply chain, the big malls and small kirana shops. The overall demand of the product, overall
demand of the supply chain is now distributed over these different channels. So you need to handle all these channels because
your overall demand is now disaggregated over more number of channels. So as you evolve more number of channels you
loose economies of scale. So that is another challenge, because you
have X number of customers total and now X number of customers are distributed over 3
different type of channels. So each channel will take care of if it is
uniform distribution X by 3, X by 3 and X by 3 number of customer. So that total customer demand is now disaggregated
to more number of channels. So obviously you lose some of the efficiency
in managing the different number of channels. Then you have another important area from
the customer that is innovation. Customers continuously expect the innovative
products and as we all can observe the rate of innovation is continuously increasing. The new products are coming at a much faster
rate and we had a time when we used to have black and white TVs and black and white TVs
remain into the market for more than 3 decades in Indian market I am talking. But after 1980's, when colour television came
to Indian market we are seeing in last 35-36 years a very fast change in the colour TV
Technology. You had variety of colour TVs where CRTs were
there, then after that we have LCDs, LEDs, High Definition, full HD, then TV with Wi-Fi,
smart TVs. So in last 35-36 years you can see the rate
of innovation in colour TV technology. And it is not only limited to colour TV technology
you can see in the information technology, in the area of your mobile communication,
in the area of automobile, in the area of your household appliances, everywhere you
talk you will see that rate of innovation is continuously increase and this rate of
innovation is putting another pressure because the life of the product is not much and as
a result of that new products tend to have more uncertain demand. When a product has passed or when product
has a longer maturity cycle. This is not a class of marketing so I will
not go in much detail. But you can understand or you should know
that this is a generic kind of product life cycle. We normally abbreviate it as PLC, Project
Life Cycle. On x-axis we have Time and on y axis we have
Volume. Earlier in previous time we used to have a
sufficiently long maturity period, where during this period demand was almost very certain,
it was almost static kind of demand. But nowadays because of this innovation you
will not find a longer maturity period, a product comes and reaches to a particular
level and immediately declines. Because a new product comes into the market. So in graph, this is the earlier time and
this is the present time. And as a result of that you have more uncertainties
in handling the demand of new products. That how a new product will feature into the
market. You have the example of iPhone 5, iPhone 6
and iPhone 7. So Apple is continuously introducing new iPhones
into the market. But we all know the response of the market
towards iPhone 7 is not as good as it was for iPhone 5 and iPhone 6. So you cannot take decisions on the basis
of past data. You need to see that each new product will
come with its own uncertainties. And this is happening because of rate of innovation
and customers are becoming lover of innovative products, but more innovative products are
putting it different type of pressure on the supply chain uncertainties that you have uncertainties
related to demand of the new innovative products. Then you have expectations from the customer
about increased service level. We want as soon as products demand come to
my mind, as soon as I walked into a shop retailers place I must get the product immediately. So I want a very high level of service for
my expectation. Now because of this high level of service
requirement the companies supply chain now has to handle unusual increase in demand. There is all of a sudden a very high increase
in demand and all the customers are expecting same high level of service level. And therefore it again becomes a challenge
for the supply chain that how do we handle that sudden increase in demand and all the
customers are expecting same level of service. Because they all are ready to pay extra premium,
they all are ready to pay the additional cost for getting the higher service levels. But you have limitation of supply chain. So all these things, all these customer needs
ranging from quantities to the service level. All these things are creating different type
of implied demand uncertainty and these implied demand uncertainty is to be handled for developing
a proper supply chain strategy. So now moving further into this because of
this implied demand uncertainty now you can understand from the spectrum of this implied
demand uncertainty. That on this side you have a very predictable
supply and demand. And this is like my earlier PLC, the previous
PLCs. Some of the products like I take the example
of salt, the common salt it is still like earlier PLC. So you have a very certain demand and supply
of this type of product. So it is coming on predictable supply and
demand side of this implied demand uncertainty where the implied demand uncertainty is very
very low or almost absent. On this side of the spectrum the implied demand
uncertainty is almost absent. Now coming to this side of the spectrum to
the right side of the spectrum, hear you have very high level of uncertainty in the supply
and demand like as I mentioned about i7, iPhone 7 and it is a new phone just launched into
the market and this product has a very high level of uncertainty that how customers will
respond to this type of new product. And therefore I have placed this i7 to the
right side of this is spectrum. So now you have these two extremes where on
the left you have no uncertainty, suppliers are also having a very routine kind of demand
and they are habitual, they have developed a good infrastructure to meet that kind of
demand. Here you don't know what type of demand it
will be. So all the suppliers are in a state of confusion
that should we produce large volume, should we produce low volumes. If we produce large volume and customers do
not respond that, you have huge inventories. If you do not produce in large volumes and
customers are also expecting high service level, they want product immediately i7 is
launched today and I want today the product. But since I am very much cost conscious so
I have not stored enough inventory of i7 so most of the customers will not be happy because
I am not able to provide the required service level. So you have lot of challenges on highly uncertain
supply and demand side of this spectrum where you see that all these products will have
to face and therefore we will talk of flexible supply chain that how initially you need to
have a very responsive supply chain, a flexible supply chain. So that you can make changes as per the requirement
of your uncertainties. Then somewhere in the centre, not exactly
in the centre but somewhere in the centre place of this spectrum. You have somewhat sudden, it is somewhat uncertainty,
you have a balance type of place where you have some kind of predictable supply and uncertain
in demand or uncertain supply and predictable demand or somewhat uncertain supply and demand. So you have possible combination of uncertainties
and predictabilities of supplies and demand. And therefore some routine kind of models
like you take the example of Scorpio. You take the example of Alto, you take the
example of WagonR, and these types of you take the example of CD 100 motorcycle of Hero. These types of examples can fit in at this
type of place where you have some existing routine kind of model which is already popular
in the market. So that product will fit into this place. So where you have a very predictable supply
and demand obviously you cannot make huge profits. Where you have very unpredictable situations
either you can make huge profits or you will go down. Because of not able to achieve the desired
level or because not able to answer the desired level of uncertainties. But here in this case in the central location
where you have some uncertainty is in your supply chain may be either because of supply
side or because of demand side. But this is a position which is very hard
on position. Because in current environment of innovation
where PLCs are continuously shrinking even in this stage you are able to maintain a longer
PLC for these products and then only this type of positioning is possible for your product. So it requires a very integrated effort from
all the functional area, not only from the supply chain. But from the product development team, from
the marketing team, from the distributors point of view, from the after sale service
point of view. All those who are involve in delivering value
to the customer their important role is there to get this position on this implied demand
uncertainty spectrum. After understanding the concept of this implied
demand uncertainty you can see that as a result of some of the researchers. When you have low implied demand uncertainty,
your product margins are low as we saw just now in the case of salt, you have low product
margin because it was position on the left side of the this implied demand uncertainty
spectrum. When you have high implied demand uncertainty
your product margins can be very high as evident in the case of i7, which is position on the
extreme right side of the implied demand uncertainty spectrum. The average forecasting error is very low
as low as of 10%, in case of low implied demand uncertainty. But if you are positioned on the right side
of this is spectrum your answer forecasting errors can be as high as 40% to 100%. So that is very unfortunate just to quote
you some data. When in Bombay now Mumbai, this Bandra Worli
Sea Link was conceived. So the initial forecast for that Bandra Worli
Sea Link was about 12 lakh cars per day 1200000 hours per day. But if I give you the present uses it is just
45000 cars per day. So that is the type of errors which are possible
in case of high implied uncertainty product. So this is a kind of I can say blunder in
calculation or in the forecasting. But it is always possible when you are dealing
with a product having very high implied uncertainty. Then stock outs, the number of times products
goes out of stock and a customer wants that product. So in case of low implied demand uncertainty
products it is just 1-2% very low. Most of the time means the opposite of this
is you are able to achieve 98 to 99% of service level, a very high service level you are achieving
in case of low implied uncertainty products. But in case of high implied uncertainty products
your stock out rate is 10% to 40%. It means your service level can decrease as
low as up to 60% in case of high implied uncertainty. And if the service level is 60% you can correspondingly
understand the customer satisfaction level, means out of hundred times only 60 times customers
get the products, 40 times they are not able to get the product when they are visiting
the retailer or retailer is visiting the wholesaler or wholesaler revisiting the manufacturer. So that is the reason of low customer satisfaction
in case of a new product because of this low service levels. Then because of forecasting error and because
you are piling up the inventories you need to clear those inventories and end of season
marking down pricing is now a days we see very often. So in case of low implied uncertainty you
hardly see this type of activity. So it is almost zero, you never find any kind
of end of season sale on product like salt or grocery items or wheat items. There is no such concept. But you find lot of end of season sale for
garments, for shoes and for so many other product, because of forecasting errors and
because of these reasons you are piling up inventory. So 10 to 15%, 25% of the time you have this
type of marking down of the prices. So you can see the only thing which is favouring
the high implied uncertainty is the high product margin. But you have correspondingly very high risk
of forecasting error, you have very low service level of 60%. And you also can go up to 25% of end of season
marking down. So all these things are big challenge for
high implied uncertainty. But it is almost unavoidable. The reason is because whenever you are launching
a new product, the implied uncertainty is always very high and since it is the time
of innovation, it is the time of shrinking PLCs. So to remain in to the market, to remain competitive
into the market you have to be launching new product. But you have to be very careful and now it
is very important to understand that the data analytics. The data analytics can help us to change these
figures. These figures of forecasting error can be
reduced from 40% to 10% or 15% if I use proper forecasting methods. The more adaptive forecasting methods, more
adaptive forecasting methods if I use probably I can reduce the forecasting errors. If I can reduce the forecasting errors both
these things, the stock out rates and the marking down will also be reduced. Because when I am able to correctly forecast,
so I will stock only that much product with me and this correspondingly will help me to
achieve higher service levels and to reduce by marking. So both these things are actually related
with the forecasting errors and with the help of data analytics with the help of adaptive
forecasting. I will be able to somehow reduce this value
of 40% to 15 or 20% so that is one big advantage which I am going to have with the help of
data analytics into the supply chain management. Now once we understood the uncertainties related
to demand and supply in my supply chain the next important point is to understand the
supply chain. That how my supply chain is going to answer
these uncertainty, how I am going to full fill the gaps which are there in my supply
chain. And that is the second step in developing
the supply chain strategy canvas. So now let us see that how does the firm best
meet the demand. What are the different typical you can say
coping mechanism available with the firm through which firm is able to meet its demand, like
in the class of drivers we discuss that pricing is one such mechanism through which firm can
meet the demand and supply, when the dimensions which are describing the supply chain and
how it is responsive supply chain, those dimensions whether it is through pricing, whether it
is through facilities, whether it is through a distribution, whether it is through the
inventory etc. And supply chain responsibility to respond
wide range of quantities the number of products, the how much you are demanding, so how my
supply chain is responsive to that. When reduce lead time, then variety of products,
then ability to innovate new product continuously and to meet a very high service level. So I need to see that how my supply chain
is able to answer all these abilities which we require from the step one of our strategy
development process. Now it is also very important to understand
that to achieve a particular level of responsiveness there is a cost associated to that. When you want to achieve a particular level
of responsive you need to invest into developing the supply chain capability. So there is a cost associated to develop the
particular level of responsiveness. Efficiency we have already discussed that
it is inversely proportional to the cost of making or delivering the product to the customer. And as we just discuss that increasing responsiveness
results in higher cost and it lowers the efficiency of the supply chain. So efficiency and responsiveness are somehow
inversely related to each other and now we will see that to develop a strategic fit of
the supply chain, we need to put the supply chain capabilities on the spectrum of implied
demand uncertainty. So today we close our discussion at this point. And in our next lecture we will see that how
do we map the supply chain on the responsiveness spectrum that and later on we will see that
how this responsiveness spectrum is embedded in that imply demand uncertainty. So thank you very much for this eighth session
of our supply chain analytic course.
