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An insightful presentation by VCG focusing on the 'Theory of Constraints’ philosophy to leverage the potential in its target industry clusters.
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www.vectorconsulting.inwww.vectorconsulting.in
VCG employs the 'Theory of Constraints’ philosophy to bring about quantum jump in performance of organizations in its target industry clusters.
LEVERAGING THE POTENTIAL
RetailConsumerGoods
EquipmentManufacturing
Engineering& Construction
Automobile &Auto Components
202, Orion Business Park, Kapurwadi Naka, Ghodbunder Road, Thane (West) – 400601
Phone: +91 22 2589 5896 Fax: +91 22 2589 5897
Email: [email protected]: www.vectorconsulting.in
2
TOC SolutionsFor performance improvements in the downstream supply chain - a case study of FMCG firm
Agenda3
The Case Study Firm’s Overview
Downstream supply chain and sales force
Shortages & Surpluses: Causes & Impacts
Theory of Constraints
TOC Project Schedule
Opportunity for reducing Shortages & Surpluses
Stock Buffers with Uncertainty and variability
01.
02.
03.
04.
05.
06.
07.
The Case Study Firm - Key Facts
©2012 Vector Consulting Group. All Rights Reserved. 03
The FirmThe Firm
MarketPositionMarketPosition
DownstreamSupply Chain
Members
DownstreamSupply Chain
Members
Sells &Distributes
• Household insecticides• Shoe care products• Male hair care products
Sells &Distributes
Sales ForceMembers
Sales ForceMembers
Market Leader in IndiaMarket Leader in India
House CFA : 31Distributors : 980House CFA : 31Distributors : 980
Sales Officers : 470Salesmen : 1698Sales Officers : 470Salesmen : 1698
Focus Area - Downstream Supply Chain
©2012 Vector Consulting Group. All Rights Reserved. 04
Retailers
Upstream Supply Chain
DistributorsFirmIntermediariesSupplier
Buy-Side Supply Chain
Inbound Logistics Applications
Downstream Supply Chain
FOCUS AREA
Sell-Side Supply Chain
Outbound Logistics Applications
Sales OfficerSalesmen
Shortages & Surpluses: Impacts
©2012 Vector Consulting Group. All Rights Reserved. 05
Impact of Shortages and Surpluses
ShortagesThe shortages were found to be common in firm’s downstream supply chain
SurplusesThe surpluses were also found to be common in firm’s downstream supply chain
Impact on the Firm
• 1% Lost Sales = 10% reduction in Profits (due to shortages)
• 1% Discount in Price = 20% reduction in Profits (due to surpluses)
Impact on the Distributors
• Lost Sales, reduction in Profits and reduction in ROI (due to shortages)
• Volume discounts, undercutting leading to reduction in Profits (due to surpluses)
Impact on the Sales Force
• Lost orders, reduction in PC, TLSD and value achievements (due to shortages)
• Volume discounts, undercutting leading to problems of market hygiene (due to surpluses)
Impact on Retailers
• Loss of sales, loss of loyalty, less ROI
• Shelf Space constraints, high investment, less ROI
These impacts determine not only the success of retailer, but also the success of the distributor, firm and the firm’s sales force performance.
SupplyLT
OrderLT
Cause(s) of Shortages and Surpluses
©2012 Vector Consulting Group. All Rights Reserved. 06
100
25
Month01
Month02
Month03
ActualDemand
Stock Level based on customers ordering large batches typically monthly (based on inaccurate F/Cast)
Stock Level based on customers ordering daily or weekly based on with actual consumptionShortages
Surpluses
OrderLT
SupplyLT
ROP
The KEY to achieve “profitable availability of more SKU’s” is to geteach link to ORDER LESS MORE FREQUENTLY (START)… rather than the traditional practice of ORDER MORE, LESS FREQUENTLY (STOP)
Yes, BUT… the Cause and Solution has been known for long time, so why don’t we see MORE Supply Chains adopting this… especially FMCG Industry
TOC’s 3 Focusing Steps
©2012 Vector Consulting Group. All Rights Reserved. 07
As per Dr. Goldratt, “Until the consumer has bought, nobody has really sold…
The System Constraint found is in market demand or the No. of Consumers willing to buy
“Exploiting the System Constraint” means “Having the Right SKU, at the right place (in the downstream supply chain) and right time (when consumer is willing to buy).
What conditions block better exploitation?• Shortages of Products already stocked
by the downstream supply chain members
• Unavailability of Products that sell elsewhere but which is not stocked due to shelf-space constraints (occupied by Surpluses).
Change any Policy, Measurement and or Behavior that contribute to current high level of both Shortages and Surpluses
Step 01
IDENTIFY the System’s Constraint
Step 02
Decide how to EXPLOIT the System’s Constraint
Step 03
SUBORDINATE everything to the above decision
YES! BUT, how to find these and will it really be a win:win to change these…
TOC Project Schedule
©2012 Vector Consulting Group. All Rights Reserved. 08
Month / Activity 1 2 3 4 5 6
Project kick Off: Call to share real damage & extent of Surpluses & Shortages
TOC Evaluation: Share generic TOC analysis & solution to shortages & surpluses
Simulation: Develop simulation to validate damage of PUSH and benefits of PULL
Customized S&T: Construct customized S&T and plan Test
Test: Test impact of “Less more Frequently” with 100 Test retail outlets in various beats
Analyze Test Results: Analyze Test Results for 100Test vs. Control Shops and agree on next steps
Reducing Shortages & Surpluses using DSR Beat cards
©2012 Vector Consulting Group. All Rights Reserved. 09
NameMax Daily Sales
Min Order
Qty.
Day 1 Day 2 Day 3 Day 4 Day 5 Day 6 Day 7 Day 8 Day 9 Day 10 Day 11 Day 12 Day 13 Day 14
OH Sold OH Sold OH Sold OH Sold OH Sold OH Sold OH Sold OH Sold OH Sold OH Sold OH Sold OH Sold OH Sold OH Sold
SKU1 15 10 45 4 41 13 28 8 20 0 20 4 16 8 8 8 37 14 23 7 16 2 14 6 8 9 -1 -1 0 0
SKU2 12 10 40 2 38 5 33 6 27 6 21 2 19 1 18 5 35 7 28 2 26 6 20 6 14 6 8 7 1 5
SKU3 8 5 30 2 28 3 25 2 23 3 20 1 19 3 16 6 24 4 20 3 17 4 13 5 8 1 7 3 4 4
SKU4 6 5 25 1 24 1 23 3 20 3 17 2 15 1 14 3 22 2 20 1 19 4 15 3 12 2 10 3 7 3
SKU5 6 6 25 2 23 2 21 3 18 3 15 2 13 3 10 2 23 1 22 2 20 2 18 4 14 3 11 1 10 1
SKU6 5 5 10 2 8 2 6 2 4 2 2 2 0 1 -1 3 7 4 3 3 0 2 -2 0 -2 2 -4 1 -5 1
SKU7 5 5 10 1 9 0 9 2 7 2 5 1 4 2 2 3 7 4 3 2 1 2 -1 2 -3 3 -6 2 -8 1
SKU8 4 3 10 0 10 0 10 2 8 3 5 0 5 0 5 1 9 1 8 1 7 2 5 2 3 2 1 2 -1 2
SKU9 3 3 5 0 5 1 4 2 2 1 1 2 -1 1 -2 1 4 2 2 1 1 1 0 1 -1 1 -2 1 -3 1
SKU10 3 3 5 0 5 1 4 1 3 1 2 1 1 0 1 2 3 0 3 1 2 2 0 0 0 2 -2 1 -3 1
SKU11 3 3 5 1 4 1 3 1 2 1 1 2 -1 1 -2 1 4 1 3 1 2 0 2 2 0 1 -1 2 -3 1
SKU12 2 3 5 1 4 1 3 1 2 0 2 0 2 0 2 1 4 1 3 1 2 0 2 1 1 1 0 0 0 1
SKU13 2 3 3 1 2 1 1 1 0 1 -1 1 -2 0 -2 1 2 1 1 1 0 1 -1 1 -2 0 -2 0 -2 0
SKU14 2 2 3 0 3 0 3 1 2 1 1 1 0 0 0 0 3 0 3 1 2 0 2 1 1 1 0 1 -1 1
SKU15 1 1 2 0 2 0 2 0 2 0 2 1 1 1 0 0 2 0 2 0 2 1 1 0 1 0 1 0 1 0
SKU16 1 1 2 1 1 0 1 0 1 0 1 0 1 1 0 0 2 0 2 0 2 0 2 0 2 0 2 0 2 0
SKU17 1 1 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 1 0 1 -1 0
SKU18 1 1 1 0 1 1 0 0 0 0 0 1 -1 0 -1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0
SKU19 1 1 1 0 1 1 0 0 -1 0 -1 0 -1 1 -2 0 1 0 1 0 1 0 1 1 0 0 0 0 0 0
SKU20 1 1 1 0 1 0 1 1 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 1 0 0 0 1
SKU21 1 1 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 1 0 0 0 1 -1 0
SKU22 1 1 1 0 1 0 1 0 1 0 1 0 1 0 1 0 1 1 0 0 0 0 0 0 0 0 0 1 -1 0
SKU23 1 1 1 0 1 1 0 0 0 0 0 0 0 0 0 0 1 1 0 0 0 0 0 1 -1 1 -2 0 -2 0
''''' ''''''''''' ''''''''' '''''' ''''''' '''' '''' ''' '''' ''' ''' '' '' ''' ''' '''' '''''' '''' '''' ''''' '''''' '''' ''''' ''''' ''''' '''' ''''' ''''' ''''' ''''' ''''
SKU25 1 1 1 1 0 0 0 0 0 0 0 1 -1 0 -1 0 1 0 1 0 1 0 1 0 1 1 0 0 0 1
SUM 234 19 215 34 181 36 145 27 118 24 94 24 70 37 197 44 153 27 126 29 97 37 60 38 22 27 -5 24
Sizing Buffers: for Uncertainty/Demand & Supply variability
©2012 Vector Consulting Group. All Rights Reserved. 10
Too muchToo little
Good Enough
Goa
l Uni
ts
Time / Stock Buffer
Planning Rule: “Be Paranoid but not Hysterical”Target Stock Level for each SKU at each Stocking point = Maximum Demand within Reliable Replenishment Time
Execution Rules: Replenish up to Target level in sequence of buffer status more frequently (e.g. daily)
Feedback Rules: Adjust Target Level (Buffer Size) based on Level of Buffer Penetration
ActualDemand
400
300
200
100
Month01
Month02
Month03
Month04
Month05
Month06
Auto Upsize Buffer based on level of Red-zone penetration
Auto Downsize Buffer based on lack of Yellow zone penetration
©2012 Vector Consulting Group. All Rights Reserved. 11
BEFORE AFTER
Impact on Shortages Test Shop - Before Vs AfterName
Inventory Inventory
12Oct
19Oct
26Oct
02Nov
09Nov
16Oct
23Nov
30Nov
06Dec
13Dec
20Dec
27Dec
03Jan
12Oct
19Oct
26Oct
02Nov
09Nov
16Oct
23Nov
30Nov
06Dec
13Dec
20Dec
27Dec
03Jan
SKU1 41 28 20 20 16 8 37 23 16 14 8 -1 0 13 14 17 15 16 8 18 18 12 14 12 14 18
SKU2 38 33 27 21 19 18 35 28 26 20 14 8 1 22 13 17 21 19 18 15 18 23 20 14 16 14
SKU3 28 25 23 20 19 16 24 20 17 13 8 7 4 18 21 21 20 19 16 24 20 17 13 18 17 18
SKU4 24 23 20 17 15 14 22 20 19 15 12 10 7 17 23 20 17 15 14 22 20 19 15 12 10 17
SKU5 23 21 18 15 13 10 23 22 20 18 14 11 10 23 21 18 15 13 10 23 22 20 18 14 11 10
SKU6 8 6 4 2 0 -1 7 3 0 -2 -2 -4 -5 8 6 4 8 8 7 7 8 7 8 9 8 7
SKU7 9 9 7 5 4 2 7 3 1 -1 -3 -6 -8 16 12 9 15 12 14 13 11 9 10 11 12 11
SKU8 10 10 8 5 5 5 9 8 7 5 3 1 -1 10 10 8 15 5 5 9 8 7 5 3 1 6
SKU9 5 4 2 1 -1 -2 4 2 1 0 -1 -2 -3 15 14 12 16 7 8 4 2 1 4 8 6 4
SKU10 5 4 3 2 1 1 3 3 2 0 0 -2 -3 15 4 3 2 1 1 3 3 2 3 4 4 3
SKU11 4 3 2 1 -1 -2 4 3 2 2 0 -1 -3 4 3 2 1 3 4 4 3 2 2 4 5 5
SKU12 4 3 2 2 2 2 4 3 2 2 1 0 0 4 3 2 2 2 2 4 3 2 2 1 3 4
SKU13 2 1 0 -1 -2 -2 2 1 0 -1 -2 -2 -2 2 3 4 6 6 4 2 1 4 5 4 4 3
SKU14 3 3 2 1 0 0 3 3 2 2 1 0 -1 3 3 2 1 5 4 3 3 2 2 1 4 3
SKU15 2 2 2 2 1 0 2 2 2 1 1 1 1 2 2 2 2 1 5 2 2 2 1 1 1 1
SKU16 1 1 1 1 1 0 2 2 2 2 2 2 2 1 1 1 1 1 4 2 2 2 2 2 2 2
SKU17 1 1 1 1 1 1 1 1 1 1 1 0 -1 1 1 1 1 1 1 1 1 1 1 1 4 4
SKU18 1 0 0 0 -1 -1 1 1 1 1 1 1 1 1 4 5 3 5 6 7 8 4 6 7 1 1
SKU19 1 0 -1 -1 -1 -2 1 1 1 1 0 0 0 1 4 3 4 3 5 4 3 2 5 5 6 8
SKU20 1 1 1 1 1 1 1 1 1 1 1 0 0 1 1 1 1 1 1 1 1 1 1 1 4 4
SKU21 1 1 1 1 1 1 1 1 1 1 0 0 -1 1 1 1 1 1 1 1 1 1 1 5 5 5
SKU22 1 1 1 1 1 1 1 0 0 0 0 0 -1 1 1 1 1 1 1 1 3 4 4 4 3 4
SKU23 1 0 0 0 0 0 1 0 0 0 -1 -2 -2 1 4 4 3 4 3 3 5 6 3 5 4 6
SKU24 1 1 1 1 1 1 1 1 1 1 1 1 0 1 1 1 1 1 1 1 4 1 1 1 1 4
SKU25 0 0 0 0 -1 -1 1 1 1 1 1 0 0 3 4 3 4 3 3 1 1 1 1 1 4 5
©2012 Vector Consulting Group. All Rights Reserved.
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