Supply Chain

Restructuring

Enhancing Supply Chain Performance

Inefficient Practices

SC Optimization

SC Integration

Cost

Existing Position

SC Reconfiguration

100%
Service Level

Supply Chain Restructuring

Restructuring Supply Chain Processes
Supply chain mapping

Restructuring Supply Chain

Architecture
Restructuring flow in chain
Restructuring placement of inventory in
chain

Restructuring the supply chain

The characteristics of vertical integration, vertical disintegration and virtual

integration

Supply Chain Mapping: Current Position

Supply chain mapping is

characterized by three
dimensions

1. Shape of value addition

curve
2. Point of differentiation
3. Customer ordering point

Impact of Supply Chain

Integration/ Optimization

Dimensions of Supply Chain Processes

Value addition curve Alter the shape: All
processes are mapped on time and cost
dimension. This dimension capture the rate at
which cost gets added because of waiting
inventory in chain - Truck Manufacturer
Point of differentiation- Postpone: Point at which
variety explosion takes place in chain
Painting booth in car, Packaging station in Packaged tea
company

Customer entry point in chain- Advance : Based on

the customer entry point in chain , chain can be
charcterised as:
MTS, MTO, CTO

Restructuring: Some Case Studies

Move from MTO to CTO by change in value
offering ( Customer offering bundle)
Dell, National Panasonic (Focus on customer ordering
point and post differentiation)
Dalmia Cement

Postpone the point of differentiation (DC)

Asian paints to manage variety, HP Printer, Benetton
by resequencing process
Bicycle assembling to reduce transportation cost.
Problem Transferring critical operation can lead to
dilution of product quality

Change the value addition curve

Reliance Telecom

Changing the Shape of Value-addition Curve:

The Telecom Industry

Reliance Infocom changed the shape curve by introducing conduit

(with several openings where cable can be inserted at later stage)
while trenching so that procuring the cable could be postponed.
The cable was procured after entire trenching operations was
completed.

Characteristics of Supply Chain Mapping :

Shape of the Curve
Area under the curve is equal to inventory in
chain: Chain should be reconfigured so that
area under the curve is minimized
Higher the value added in initial part of chain,
higher the risk: Chain should be reconfigured
so as to re sequence activities so that time
intensive activities are scheduled at the initial
stage and cost-intensive activities are
schedule at later stage
Map all activities on time and cost dimension
Schedule time intensive activities first and cost
intensive activities as late as possible
Change the shape of curve from concave to
convex

Characteristics of Supply Chain Mapping: Customer Ordering Point

Before customer ordering point firm has to plan activities based

on forecast. After customer entry point firm , planning is based
on actual orders.
Forecast is always wrong

Firm can redesign customer offering bundle with a longer

delivery time

Customer offering consists of a bundle of product and services and can be

characterized using following five attributes:

Cost: Cost incurred by customer to own and experience

the product service bundle. Eg. Big Bazar, Mobile
Delivery time: Time taken from customer order to
delivery eg. Jewellery, Fast Food, Spectacles
Product variety: Range of choices offered to the
customer. Customisation is the highest form a variety
where product and services are tailored as per customer
requirements eg. Automobile, P&G
Quality: Quality attribute captures product features,
performance and reliability.
Supplementary services: Set of supplementary
services that surround core product offering to enhance
the value to customers

Shift customer point as early as possible by redesigning customer

offering bundle

Impact of Supply Chain Restructuring

Order placed
by customer

COST

Point of Differentiation

Point of Differentiation

TIME
Alter the shape of value addition curve
Postpone the point of differentiation
Advance the customer ordering point

Process Redesign: Benetton

Traditional process

Dyeing

Assembli
ng
garments

Assembling
garments

Dyeing

Redesigned
process

Moving from the MTS to CTO Model: The

Role of Innovations and Experimentations

Firm can simultaneously work on advancing customer order and postponing

point of differentiation so that combined effect would help firm in getting
desired result.
It is possible that both ideas individually may not help firm in moving from MTS to
CTO model but the combination of both movements that is leftward movement of
customer entry point and rightward movement of point of differentiation jointly
might ensure that modified customer entry point is ahead of modified point of
differentiation.
Redesigning customer offering bundle involves deep understanding of
customer segment: Firm chooses a bundle of product and service by making
appropriate choices on above five attributes. Depending on the market segment
one has to understand utility functions of the customer set and chose appropriate
bundle. There is a trade off involved in choices of attributes and understanding of
the relative importance given by customers to various attributes would help firm in
making appropriate choices.
Each of these attributes has multiple dimensions and understanding of
customer segment would help in choosing appropriate dimensions within each
attribute.
Choice of attributes set and with in that choice of relevant dimensions has
implication for supply chain design and operations.
Innovations
Dalmia Cements : Move from MTS to Pack to order
Titan : Offering prototypes in Jewellery line of products at retail outlets
Heavy Commercial vehicle manufacture

Restructuring Supply Chain Architecture

Restructuring Flow in Chain

Usually within a firm all products with in a same business goes through similar flows. But one
can restructure a chain so that different material goes through different kind of flow. Depending
on the nature of item one can design differential flow. We illustrate through example Of

HUL where firm has created different material flow for different
category of items such that all fast moving goods and slow moving
goods and both category of goods.
Firm can offer differential services : gold class service (Service with
in 24 hours), silver class service (Service with in 72 hours).
in service chain depending on the priority of customers stocking
policies (where to stock the items) and mode of transport would be
different for different category of customers. Company provide gold
class service (Service with in 24 hours), silver class service (Service
with in 72 hours).
- Fast moving vs Slow moving (High Volume SKUs vs Low Volume
SKUs)

Restructuring Placement of Inventory in Chain:

Restructuring of placement of inventory questions existing location of inventory and given

current demand structure and time and cost characteristics of process & supply chain structure
.

The HLL Supply Chain

HPC Business:
More than 400 SKUs (110 brands in 950 packs)

Restructuring the HLL Supply Chain

p1

Sourcing

DC1

Distribution

c1
50,000

DC2

c2

p2

100,000
2
1

p3

candidate plants
with fixed costs
shown

DC3

candidate distribution
centers

customers with
demands shown

c3
50,000

3-18

P&G

Project Results & Benefits

Integrated solution called for plant
consolidations: by mid-1996, P&G had closed 12
sites and written off over a billion dollars worth of
assets and people transition costs
Over 6,000 people impacted, but treated fairly
through early retirement, relocation, or retraining
and placement
As of 1997, annual savings were well over $250
million (before tax)
largest portion is due to lower manufacturing expenses,
operating fewer plants with less staff
some savings in packing materials and ingredients
but with fewer DCs delivery expenses actually increased

The Wal-Mart supply chain

Financing

Corporate headquarters
WAL-MART

Video link
organizational
learning

Supplier payment

Satellite
communication

Point-of-sale data

Retail store

Communications support

suppliers

Communications support

Source: Harvard Business review, Vol. 70, No. 2, March-April 1992, pp. 60-61

WM
Distribution centers
21

Inventory Placement in Chain: Illustration

Drop Shipping/ Risk pooling/

Transshipment

0 denotes absence and 1

denotes presence of stock point

Inventory Placement in Chain: Illustration

A decoupling inventory is an inventory that permits the downstream portion
of the supply chain to operate independently from the upstream portion.
The firm works with 98% cycle service level at each stock point.
Coefficient of Variation is Ratio of Standard Deviation to Mean
Safety Stock in units= K L d
Weekly demand mean = 300
Standard deviation = 100
E[ D1 +...+ Dn ] = n E[D] ,
Var( D1 +...+ Dn ) = n Var(D) , and
StdDev( D1 +...+ Dn ) = n StdDev(D)
This is because of pooiling of variability at the sourcing and manufacturing
stages. Aggregation is preferred when number of markets are larger.
Relative Performance Ratio = Total safety stock value for the option/
minimum possible value of total safety ctock across all options

Supply Lead Time and Demand Distributions

at Each Stock Point

Coefficient of variation at DC is .33 whereas at other stock point is .

19245 because of the aggregation of demand phenomenon

Comparison of the Safety Stock for the

Four
Options
Option
SS at SP at the SS at SP at the SS at SP at the Total
Relative
end of sourcing end of sourcing end of

performance
Ratio *

sourcing

(0,0,1) Units
(0.1.1)

(1,0,1)

(1,1,1)

1039.23

1039.23

Value( Rs.)

103923

103923

Units

489.8979

600 1089.898

Value( Rs.)

36742.35

60000 96742.35

Units

346.4102

848.5281 1194.938

Value( Rs.)

17320.51

84852.81 102173.3

Units

346.4102

346.4102

Value( Rs.)

17320.51

25980.76

600

1.074225

1.056139

1292.82

60000 103301.3

1.067798

Sensitivity Analysis

Demand Variability
Number of Markets
Cost distribution in Chain
Time Distribution in Chain
Change in Lead Time
Change in Mode of Transportation
Change in stages of Process