Most businesses have to embrace variety as they aspire to grow. Variety expands as they foray into new spaces to grow their top lines. As variety expands they consolidate operations to increase the bottom lines. Shared Management and other Resource Pools are used to drive lower costs.
In this article we will talk about how Businesses and Supply Chains struggle with increasing variety and cost pressures and how Supply Chains can deal with them to simultaneously deliver efficiency and growth. Variety increases as the number of Products or Locations increase, as shown below.
Let’s start with an example of a small online food delivery business based out of a growing city in India to simplify and understand the fundamentals. We can then extrapolate this for larger businesses.
The founders of the business saw an opportunity in providing hot online Snacks to customers through food delivery websites. The initial idea was to keep a restricted menu of Sandwiches, Wraps and Rolls. There was a market in a large population of young IT engineers who were bachelors, away from their families, and had some disposable income. And the business took off. Soon however, they started facing growth challenges for two reasons. One, they had only one kitchen and could only address a limited area where they could deliver hot items in time. And second, the menu items were limited and Indian customers having a varied ethnic taste would often switch. Adding more kitchens as well as more Menu items would add a lot more complexity to the business.
More Kitchens would mean more infrastructure, more places to stock inventory, more inventory, more trained staff etc. More menu Items would mean more skill sets, more Inventory in all forms and more cost of Servicing. As the variety increases the return on Asset becomes that much lesser. Business straightaway becomes a lot more complex. And then there is a risk that the investment in Infrastructure and Working Capital may not yield significant returns. Following picture gives an idea of how the various business parameters will change with increasing variety.
Let’s analyse exactly what it means in terms of new complexity added :
- Demand Management – Knowing what will sell where is a key challenge. Only a Kitchen close enough to the Demand Point can supply and manage to keep the food hot and fresh. Capacities to be installed for producing food of different types at different locations depend on the demand mix around the Location. Also the staff required, Inventories to be carried, Order Management etc. will all depend upon the variety of Demand that has to be serviced. The complexity of business grows manifold here.
- Inventory – Now the business has to stock many more Ready to Deliver Finished Goods Items, many intermediates like fillings, toppings, sausages, semi-cooked gravies etc., many more Raw Materials consisting of a variety of Vegetables, Oils, grains, Spices, Meats etc. How much quantity of each Item to stock is a challenging Question. How much to Order at a time is another difficult question. Wrong Inventories will lead to a twin Problem – Excess Stocks which will block the Working Capital and may lead to wastages; and shortage of the right Materials leading to delay or Order loss.
- Storage – Many of these items cannot be stored together (you don’t want your food odours to mix up). Separate storage spaces (Refrigerated, Chilled and Room Temperature) need to be created in line with the storage requirements of different items at each kitchen.
- Suppliers – Many new sourcing points or suppliers have to be identified and their product quality tested. Timely collection of these items from a variety of sources is also a challenge.
- Sourcing for Customers as well as for Kitchens –Customer orders will now come from a variety of locations. Who to service from which kitchen is a decision that needs to be taken with every order to keep the logistics costs under control. Also, which kitchen needs to be sourced from which supplier needs to be decided to minimize the inbound costs and sourcing time.
- Logistics – Outbound as well as inbound shipments need to be managed better. Clubbing of multiple customers while servicing, and clubbing of suppliers while sourcing, will become important.
- Production – How many Gas stoves, ovens and other cooking utilities to keep at which kitchen is a key strategic decision that needs to be taken to ensure that the assets are gainfully deployed. Also, how to load the Orders on different cooking equipment, managing the sequence of the Orders and Optimizing the lot or batch size for many intermediates becomes a key challenge.
- Location of the Kitchens – Location of every Kitchen is key to the business. It’s so critical that it can make or break the business. If you are not close enough to the Demand Pockets or Clusters you lose business. If you are too close you need larger number of Kitchens which adds to fixed and variable Costs and Complexity. You need more Infrastructure, Equipment, Rentals, Inventory and provide for increased Operational Cost of the Staff and running Cost. It may also lead to poor utilization of the assets procured. Another key factor here is to also stay close enough to sourcing points so that Fresh Material is available on time and at a lower cost.
- Location of Other Stocking Points – In case the business chooses to put up some Customer facing Kiosks for ready to eat items from the Kitchens or some stocking points for storing Raw Materials or Intermediates, it will add to the complexity. Locations of these kiosks and storage points need to be rightly determined to keep the food fresh and close to the other linked locations.
How will a small business deal with this level of complexity and costs and at the same time grow? These businesses will have to choose the right Supply Chain practices to be able to cope with this variety.
- It will have to do some Demand Analytics and understand the patterns ( readily available with food delivery websites) to get the locations and capacities right.
- Get its Order Management System in place.
- Keep higher stocks of the running items and lower for the slow moving items.
- Create a separate kitchen for cooking some intermediates and ship it to other kitchens to get economies of scale.
- Use common intermediates across more finished goods to reduce the number of Intermediates and thus variety.
- Use an online system to consolidate Customer Orders
How does a large business deal with a larger variety and scale of problem? Depending upon the Industry they belong to their number of products may vary between a few hundreds to many thousands and their scope of operation could be the entire Globe. Different Industries may see complexity manifesting in different areas of Supply Chain. Large FMCG companies eventually deliver to a huge number of Consumers. Their maximum variety or complexity is in number of distribution points. Auto companies integrate a large number of parts for producing vehicles and their complexity lies in the area of sourcing their parts. Steel companies produce to specification over many processes. Their complexity lies inside their factories in being able to produce a large variety of specifications.
These large companies may deal with their Supply Chain complexities differently compared to a small food delivery business. We will discuss regarding how these large companies across different sectors deal with their problem of variety and Supply Chain Complexities in the Next Set of Articles – Dealing with Your Supply Chain Complexities. Till then please leave your comments below regarding what you think about this article and which Supply Chain subject would be an interesting read for you.