“Supply chains cannot tolerate even 24 hours of disruption. So if you lose your place in the supply chain because of wild behavior you could lose a lot. It would be like pouring cement down one of your oil wells.” – Thomas Friendman
Before a few days, my newspaper was not lying in my porch, and it happened the next day and even the next day. And at last, I realized that that I should take this to the newspaper distributor about the cavalier treatment of the “newspaper boy”, but when I went on to the distributor I realized that it is not the problem of customer centricity, but the problem of supply chain. Yes, the newsvendor was not able to predict the demand and hold supply of the product at his shop and it had resulted in the chaos which I was a part off. Yes, supply chain plays the central role in the whole business and it has the capability to change a small business into an enterprise and also an enterprise into a “Kirana” store!
Whatever said and done, the concept of supply chain is simple; if you have something more, then it means that you are having something that you really don’t want more for yourself. At the same time, if you have doesn’t have something enough then it means you are slowly killing yourself!
From time immemorable, people have tried to master this vertical called Supply Chain and the process is still on. In this evolving space, the latest in route is “Flexibility”.
Flex gives top management respond more quickly to demand and opportunities. And moreover, the overall pace of change and the level of dynamics in everything from commodity and oil prices to consumer demand and competitive threats are at all-time highs. Add in the continued reduction in product lifecycles, and the need for greater flexibility is vivid.
For a second, let us all get into a world where each one of us is a newspaper vendor. Though it might be a little less money earning job when done in small volume, but still involves a lot of effort in prediction and optimization. Yes, in case of a newspaper, if you can’t sell what you have for the day then it is obsolete the next day. And moreover if don’t have enough of what your customers are asking for then you are missing a potential opportunity of earning. Therefore, a newspaper vendor should buy the newspaper at a right quantity otherwise he will end up losing a lot of money.
Now, how many newspapers would you buy if you are the news vendor and if you know the demand is close to 1000 newspaper? Here, the trick would be to balance out there won’t be a huge loss if incurred and there is always a chance to gain.
Let us work it out.
- Buying Cost of a Newspaper: Rs. 5 per unit
- Selling Cost of a Newspaper: Rs.10 per unit
- If not sold, he would return it at Rs 3 per piece, so salvage cost is Rs 2
- Daily Demand being 1000 units and also adding randomness of 50 units
So, this means that we should assume normal samples from normal distribution with mean as 1000 and standard distribution at 50.
Given below are some scenarios:
And when you plot it, it looks like the following chart.
So the optimum number would be 1018 and the total cost would be 155 and the total cost when 1000 paper carried would be 166 with the cost reduced to 11. And when the standard deviation is 100 then the optimum number of paper would be 1037, the total cost would be 311 and cost reduced would be 21.
Now, the good news is, the concept that you just read is called us Supply Chain Flexibility.
We worked for a Fortune 100 technology company where we worked to understand the Flex for each of their products. The challenge ranged from data to finding the right optimization technique. And now the organization has been enabled with capability of understanding the flex for each of its component.
Flexibility is one of the concepts that seem to be universally be at the top of every supply chain executive’s wish list. Organizations that are enabled with the concept of Flexibility are much more powerful to survive in this business world where supply chain is the oxygen.
This blog is authored by Alagiri Samy, Analytics Consultant at BRIDGEi2i
About BRIDGEi2i: BRIDGEi2i provides Business Analytics Solutions to enterprises globally, enabling them to achieve accelerated business impact harnessing the power of data. Our analytics services and technology solutions enable business managers to consume more meaningful information from big data, generate actionable insights from complex business problems and make data driven decisions across pan-enterprise processes to create sustainable business impact. To know more visit www.bridgei2i.com
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official position or viewpoint of BRIDGEi2i.