Supply Chain comprises of multiple functions like Planning, Procurement, Logistics and Customer Service, including Manufacturing in an integrated Supply Chain
By: Animesh Kumar*
Supply Chain is the global network of suppliers and Logistics partners to facilitate the flow of input materials for processing into value added products, and distributing the finished products from the Manufacturing Unit to the Channels of Distribution and finally to the end users. In other words, Supply Chain involves all the activities, starting with raw materials and ending with a satisfied customer, i.e., “from farm to the fork”.
Primary activities are directly related to the production and distribution of the firm’s products and services, which create value for the customer. These include inbound logistics, operations, outbound logistics, Sales and Marketing, and Service (maintenance and repair of the firm’s goods and services). Support activities support the delivery of primary activities and consist of organisation infrastructure, human resource, and technology.
Supply Chain for FMCG Industry is very dynamic due to multiple reasons, like the presence of a wide range of product categories and product lines, seasonal demands, seasonal availability of some raw materials, different shelf-life (input materials and finished products), different storage conditions (temperature and relative humidity), varied degrees of demand and supply variability, growing competition, changes in consumer preferences, IT enabled services, innovations in product offerings and packaging, dynamic federal laws for product labelling and other parameters (FSSAI’s ongoing initiatives and guidelines which must be complied with), and so on.
Supply Chain Strategy in the FMCG Industry
When we see Quick Service Restaurants (QSRs) like McDonalds, Subway, and Haldiram, they need to ensure close controls on incoming raw materials receipts, and put in place accurate forecasting of all finished product demands for the coming days and months in order to ensure that there is an optimum quantity of supplies. Here comes the real challenge in forecasting using statistical tools and also applying human intelligence to tweak the demand according to seasonality and the requirements of sales promotion, and accordingly monitor the forecast accuracy and improve it further. Inventory holding costs and risk of write offs (due to expiry, if not used within shelf-life) increases if we target higher Sales Service Level and, therefore, the firm needs to decide at what Service Level they need to operate with, which is a trade off between Business Opportunity Lost and Write Off Risk.
Here, the backend supply chain has to be robust to get input materials at short notice in case of demand surge. The Supply Chain Agility metric has to be measured and improved with the required resources and business process support.
Confectionery and Biscuit:
Products like confectionery goods, candy, lolly pops, chocolates, etc. have a shelf-life ranging from 6-9 months to as high as one year, and products like biscuits, rusk and cakes have a shelf-life of 6 months, 4 months and 3 months, respectively. Therefore, we require different strategies to manage inventory for products under each of these categories. We have less flexibility with products with less shelf-life and thus need better and accurate forecasting, quick and rational decision making, quick and reliable information flow, strict implementation of FIFO (First In First Out) during product stock movement and billing, accurate evaluation of Inventory Ageing with different Ageing Buckets, and alarm to the stakeholders like Sales and Supply Chain teams to focus liquidation quickly.
This is easier said than done and, therefore, it is prudent to figure out the demand forecast as a first step so that supplies will not be grossly miscalculated. However, it is sometimes difficult to project sales/demand accurately. In such cases, e.g. a new product category launch, one needs to supply in phases and wait for the evaluation of the Primary and Secondary Sales trend before further replenishment, in case there is a huge write off risk involved for unique input materials.
Dairy products which have limited shelf-life, like Pasteurized Packaged Milk (2 days shelf-life), Curd (Shelf-life of 5-7 days), Lassi, Yoghurt, and Paneer needs Cold Chain to be maintained (refrigerated conditions, i.e., I have discussed few of the sectors within FMCG just for illustration. We can find other segments within FMCG like Beverages (Juices, Carbonated, Alcoholic, etc.), Toiletries, Cosmetics, Soaps, Detergents, Perfume, Deodorant and many more.
Let us now discuss the various functions of the Supply Chain.
Aggregate Planning and S&OP:
Demand forecasting is done to take care of Long, Medium and Short-range decisions.
Long Range (Over 1 Year) business Planning is done by top executives. This helps in Long-term Capacity Planning (LTCP) of Manufacturing capacity, and align with the firm’s business strategy.
Intermediate range planning (3 to 18 Months) is done as part of Sales and Operations Planning (S&OP), Budgeting, Production Planning and Materials Planning, Inventory Decisions, Subcontracting, Operational Plans, etc.
Short range planning (up to 3 Months) is done which is the basis of production scheduling, materials ordering, dispatching, job scheduling, etc.
Sales and Operations Planning (S&OP):
S&OP determines which plans are feasible with available capacity and other resources; any limitation, both within the firm and supply chain, must BE discussed and highlighted to the Top Management with contingency plan options to meet business value targets. For example, supply shortfall of one product category/SKU must be mitigated with additional supply of alternate products to complete the Business Value Target. S&OP uses rolling forecast as input which is generally updated every month, and the output of S&OP is known as the Aggregate Plan which determines quantity and timing of production for the immediate months (3-18 months).
As a result of S&OP, demand is finalised and translated into a Sales Plan which becomes an eventual monthly target for the firm. This Sales Plan becomes the basis for supply planning and execution.
Supply Planning (Supply Network Planning, Production Planning and Distribution Planning)
Basis SKU-wise Sales Plan and Inventory Norm is decided which comprises of Cycle Stock and Safety Stock. Cycle stock is the function of the frequency at which supply is given to a particular destination or channel of distribution (which depends on Truck Load, Sales Velocity, and Storage Space, etc.). Safety Stock is to address demand variability (to prevent sales loss due to sudden spikes in demand) and supply variability (e.g. any breakdown at supplier’s end which restricts supply of input raw materials/packaging materials which will disrupt production of the firm). Higher safety stock has risk of higher working capital, expiry of raw materials, and even packaging materials can become obsolete if there is a change in FSSAI labelling or safety requirements (together with high MOQ of certain materials like laminate, just in case a SKU is slow moving). Thus, the inventory norm for both Finished Goods and Materials need to be decided keeping in mind all of these factors, and needs to be monitored in lieu of changing business dynamics. An ABC/Pareto analysis needs to be reviewed quarterly and the Safety Stock needs to be amended accordingly. FG Inventory Norm is also driven by the Sales Service Level and trade-off between Service Level and Inventory Carrying cost.
Production Scheduling: Production Levelling Min. Change Over & Down-Time
Basis SKU-wise Sales Plan, Opening Inventory and Inventory Norm (pre-decided Days Inventory) Production Plan is determined and is a function of multiple factors like Factory Capacity, Production Cost, Distribution Cost (Logistics Cost), and factory storage capacity. Supply network planning is done to cater to a particular depot, or carrying and forwarding agency from factories. There are multiple factories and channels of distribution/C&F Agents with which a big FMCG firm operates and, thus, in order to optimise Cost of Production & Distribution and improve SCM agility with respect to how quickly they can respond to market demand, the firm needs to do a Factory SKU Depot Mapping and optimise the decision of which product SKU should be produced at which factory and be distributed to which destination factory.
Month Production Plan needs to be split at Daily Schedule/ Weekly Schedule with schedule of priority SKUs in the beginning of the week made depending on which SKU is critical for market demand. The rolling weekly schedule needs to be amended before the actual week commences as per business needs and, accordingly, input materials (including Just in Time materials) scheduling needs to be aligned.
SKU wise Production Plan achievement is critical for Production Planning. The Planning also needs to ensure minimum change over losses, cleaning cycle, allocation of R&D trials, and Production Levelling so that the firm can avoid an over-loaded product line or having extremely idle capacities which enhance production overhead costs. If not taken care of, these become difficult to align once there is a surge in demand; e.g., if due to earlier poor demand, casual labour is laid off, then it may prove difficult to get enough labour that possesses the required skill-set for catering to a sudden increase in demand).
There are different requirements for modern retailers (e.g., freshness norm of min. 75% balance shelf-life), Defence Canteen Stores (MFD being of either the current or previous month), Exporters (different compliance requirements as per destination country’s Food Laws and Customs Specifications).
*Deputy General Manager – Head of Supply Chain