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Overcoming Routine Challenges and

Planning for Expansion to new cities

Table of Contents
Particulars

Slide no.

Objectives and current market scenario

Inventory management

Proposed supply chain transformation

Benefits of the transformed supply chain

Expansion into new cities

Exhibit 1 Newsvendor Model

Exhibit 2 Inventory Profile

Exhibit 3 Sample Forecasting Model

10

Objectives and Current Scenario


Key Issue Facing New
Company
Designing a responsive supply chain for

New Company

New Company started business in Feb


2013 with designer notebooks

Focus on demand fulfillment

Target consumer segment 15-22 years

Achieve scalability, growth and profitability

Break even within 2 years. Present in 14


south Indian cities

Current Market Size INR 9000 Cr.


ITC is the market leader followed by
Navneet, Camlin etc. However, market
dominated by unorganized players.
Huge market potential and demand for
designer notebooks.

High Lead
Time

Seasonalit
y

Long term agreement with a converter


having capacity of 5 lakh notebooks per
month

Perishabilit
y

Warehouse capacity of 2.5 lakh units


19 Distributors in 22 cities
Lead time of 20-25 days from order to
receipt of notebooks in warehouse

No
Inventory
managem
ent

Inventory Management
Demand Profile

Strategy for Inventory Management

Months

Demand (in Lakh)*

Apr to June & Oct to Dec

= 2.8 = 0.5

Jan to Mar & Jul to Sep

= 7.1 = 0.5

Required Inventory Management*


Inventory Metric (in lakh)

Peak
Qtr.

Off Peak
Qtr.

Safety Stock (95% SL)

0.43

0.43

Lead Time Demand

1.96

0.78

Reorder Point

2.39

1.22

Reorder Qnty. each month MTS

2.5

2.5

Reorder Qnty. each month MTO

0.5

* Refer appendix for detailed calculations

To determine profit maximizing order quantity we


have used the Newsvendor model, since notebooks have
to be discounted beyond 6 months. We have combined the 2
normal curves for which we found the Critical Ratio 0.25
We assume a normal curve for demand in various quarters
Safety stock is calculated for 95% service level
Reorder Point is calculated as sum of expected demand
during lead time and safety stock
Re-order quantity is based on profit maximizing quantity
and warehouse capacity

Assumptions

The demand is assumed to be normal within the quarters.


MRP of the New Company is taken to be Rs 45 (Source:
Amazon.in) the margin is assumed to be 15% (Source:
Business Standard article on notebook industry).

Supply Chain Transformation


Procurement Strategy for lead time reduction by 5 days.
Existing: Procurement of raw materials is done after receipt of order.
Proposed: Advance raw material procurement by supplier by securing future order volumes.
Reducing inventory holding cost and Lead time reduction
Existing: Delivery starts after completion of boxing.
Proposed: Delivery should be started along with boxing for Made to Order notebooks to minimize the lead time from 5 days and reduce holding
cost of those orders.
Postponement: Cost savings by removing perishability constraint
Existing: Manufacture coupon page as part of notebook which results in 60% discount after 6 months.
Proposed: Coupons should be manufactured separately and used as posted note in copy which can be changed after expiry. Another alternative is
to print coupon codes on copies which can be redeemed online or by SMS.
Buy Back Contract: Increasing service level and revenue
Existing: Distributors orders according to their demand forecast to avoid wastage resulting in low service level during high demand period.
Proposed: Increase service level by entering into buyback contracts with the distributors.
Even Demand Distribution: Sales promotion during off peak season
Existing: No sales promotion during off peak season.
Proposed: A part of the amount saved in holding cost can be used in promotion during off peak season to shift some of the peak season demand
and reduce variability.

Scalable & Agile Supply Chain


Model

Creating a Scalable Supply Chain Model


Procurement and Ordering Cycle- MTO and
MTS based delivery. Order up to level type
ordering instead of fixed interval ordering.
Reorder Point- 0.81 Lakh (off peak) 1.51 Lakh
(peak)
Order Quantity- MTO- 0.5 L MTS- 2.5 L (peak)
Procurement Lead Time- 0 days. Mfg. Lead
Inventory
Management- Inventory Based
Time- 15 days
model with buy back contracts for cities < 300
km to increase demand.
Safety Stock- 0.34 lakh. Annual Cycle Service
Warehouse
Level75% and Transportation- Central
Warehouse at Chennai and third party logistics to
supply smaller quantity.
Analytics and Forecasting- Demand is
seasonal with variation in peak and normal
seasons, New Company needs forecasting models
that can take care of such complexities. Past
demand data can be decomposed to seasonal,
trend and error component using Loess method.
A forecasting model is selected from a set of 30
State Space models which come from the fact
that the seasonality is 3 types (none, additive,
multiplicative), trend component is 5 types (none,
additive, additive damped, multiplicative,
Alternate Sales
ChannelPreventing
stock outs
multiplicative
damped);
errors
can be additive
at Online
Sales channel. Office Stationary to be
and
multiplicative.
expanded to mitigate cyclical demand.

Features of the Scalable Model


The lead time from order receiving to printing and supplying to the warehouse is
reduced to a minimum of 15 days by implementing the first two strategies of the supply
chain transformation. This shall help New Company in venturing to locations that are
far from the Chennai warehouse.
The use of cross docking in distributing its Made-to-Order items shall reduce the
inventory holding cost and will result in better utilization of its warehouse to cater to
the peak season demand.
The increase in profit maximizing quantity by implementing the third strategy of
removing the perishability constraint of its notebooks will lead to higher service level
and revenues.

Benefits from Lead


Time Reduction

Benefits from
removing the
perishability
constraint

Decrease in Reorder point by a maximum of 0.88


lakh and 0.41 lakh notebooks in peak and normal
period respectively. (Refer Exhibit 2)
Assuming a holding of 10% p.a., this results in
savings of Rs 0.85 lakh and 0.4 lakh in the entire
peak and normal season respectively.

The discount of 60% is saved on coupon expiry


and the cost for the new system is assumed to be
20%. (Refer Exhibit 1)
Increase in profit maximizing order quantity
generated by Newsvendor model by 0.9 lakh
notebooks (1.8 lakh annually). This results in
increased service level and revenue.

Key Considerations for Expansion into new Cities

Distance

Distribution Network

Capabilities
Make to Order versus
Make to stock
Order Fulfilment
cycle
Inventory
Management

Target ROI on the finance should be achieved based on


demand, fulfilment and operations cost.
New Company warehouse is in Chennai, Distance from
Chennai would determine transport, storage and speed of
fulfilment
Distributor network and willingness to carry New Company
Product
Manufacturing facilities in the proposed city esp. if the
distance is large.
Determining proportion of Make to order and make to stock

Lead time and agility to fulfill orders will take into account
lead time, inventory
Identifying order quantity, safety stock and inventory levels
as well as warehousing versus direct distribution

ng
Deman
d
Determining
the demand
for New
Company
based on
student
profile,
competition

e
Constr
aint
Distance

from Chennai
will
determine
financing,
inventory,
warehouse
needs

Fulfilm
ent

Decisions like
Lead time,
Local
warehousing
versus
existing.
Inventory
profile etc.

Constraint Matrix for New City


Investment- Selection
Investment- High

High

Financing Decision

Sufficient Demand must exist for New Company products. A


city with students demography and educational institute

Demand

Demand and
Demography

Decision Approach for new city


Assessi
Distanc
selection
Order

Low

Operations
Decision

Manufacturing
Decision

Logistics

Entry
Decision

Key Considerations and Constraints for new


city selection

Medium
Sourcing- From
Chennai Warehouse
Inventory LevelLow
Others- Use own
logistics
network
InvestmentLow
Sourcing- From
Chennai using third
party logistics
Inventory Level- Low
Others- Use Buyback
contracts to spur
demand

Low

Sourcing- Local mfg. and


warehousing
Inventory Level- Medium
Other- Expand distributor
network to nearby areas to
have economies of scale

Dont
Enter the Market

Distance

Exhibit 1 (Newsvendor Model)


Newsvendor Model For
Selling Price (in Rs)

Existing Model

Proposed Scalable Model


45.00

45.00

Margin (in %)

15%

15%

Underage Cost (Cu) (in Rs)

6.75

6.75

38.25

38.25

60%

20%

Discounted Selling Price (in Rs)

18.00

36.00

Overage Cost (Co) (in Rs)

20.25

2.25

0.25

0.75

-0.67

0.67

9.43

10.33

Cost Price (in Rs)


Discount (in %)

Critical Ratio
Corresponding Z- value
Profit Maximising Order Quantity

Exhibit 2 (Inventory Profile)

Model

Existing
Model

Proposed
Scalable
Model

Standard
Deviation of
Mean daily daily
Demand (in Demand (in Lead Time
lakhs)
lakhs)
(in days)

Month

Expected
demand
during lead
time (in
lakhs)

Safety Stock
at 95%
Reorder
Service Level Point (in
(in lakhs)
lakhs)

Order Qty by
Newsvendor
Model (in
lakhs)

Jan-Mar

Peak

0.08

0.05

25.00

1.96

0.43

2.39

Apr-Jun

Normal

0.03

0.05

25.00

0.78

0.43

1.22

Jul-Sep

Peak

0.08

0.05

25.00

1.96

0.43

2.39

Oct-Dec

Normal

0.03

0.05

25.00

0.78

0.43

1.22

Jan-Mar

Peak

0.08

0.05

15.00

1.18

0.34

1.51

Apr-Jun

Normal

0.03

0.05

15.00

0.47

0.34

0.81

Jul-Sep

Peak

0.08

0.05

15.00

1.18

0.34

1.51

Oct-Dec

Normal

0.03

0.05

15.00

0.47

0.34

0.81

9.43

9.43

10.33

10.33

Exhibit 3 (Sample Loess STL Decomposition Forecasting


Model)