Theory of Constraints Implementation in FMCG Industry : A Case Study

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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

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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


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


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


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


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


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


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


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


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

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