Integration toward lean distribution in archipelago
Integration toward lean distribution in archipelago
Totok Sugiharto , Contributor, Jakarta | Wed, 07/23/2008 10:53 AM | Management
The rule of competition in the fast-moving consumer goods industry will experience major changes. Innovations in the industry have brought some changes to the structure of the industry and the strategies adopted by players. One of them is the integration strategy that is aimed at anticipating external changes.
To become a successful player in this environment, a company should be able to answer (1) what preparations to make to anticipate external changes (2) what is the most effective strategy and how to effectively communicate and deploy it, and (3) what is the best way to align the business processes and create value for it.
To develop a strong position in the market, the most important things to understand are the needs and behavior of customers. Channel management is one of the powerful tools to identify the most profitable segment and to develop an efficient supply line to satisfy consumers’ needs. Market analysis and overview; geography, demography and channel are factors that affect the behavior of customers. Today, these factors are often used to classify potential customers. The modern channel has become more demanding, particularly in terms of business and impact on manufacturers’ and distributors’ profitability.
There has been a shift in the concept of supply chain from traditional to demand driven. The concept has brought major changes to management paradigm and operational activities. In the past, supply was pushed through the supply chain network to the end user before a demand was created. What to push through the supply chain was estimated by the forecast of future demands based on past trends, with the main objective being to maximize production efficiencies and reduce unit cost by producing in large volumes.
Today, in the demand-driven concept, companies decide what to produce in manufacturing plants based on information on market demand collected from the supply chain network. The main objective of the manufacturer is to be able to give a fast response to changing and fluctuating demand (i.e. by shortening the production lead time). When the behavior of customers becomes a more remarkable concept in developing the market, many practitioners in this area believe that this concept is one of the answers to providing better service, reducing excessive inventories and working capital, as well as the key driver to improve market growth, productivity and asset utilization.
Since the market has changed and competition has become tight, distribution methods cannot be the same as in the past. The role of distribution has changed and the focus is not solely on selling products but also on integrating the flow of information, keeping the right inventory and the supply of products. Activities in central warehouses have changed from building up stock to managing the flow of stock. This shift is necessary as retailers now tend to develop their own distribution centers and manage their own stock.
Currently, as an archipelagic country, distribution to remote areas requires small warehouses and a transportation fleet. Having this type of set up in the future will be costly and a distributor will find it impossible to maintain its role as a sole operator. Outsourcing will be the logical choice.
The objective in a supply chain is to achieve operational excellence. Operational excellence is achieved when it can generate more revenue than competitors get and a higher market share with the right amount of stock at the right place and at the right time with moderate working capital. The focus of a supply chain is not only to achieve sales growth but also the bottom line.
The main concern in the entire supply chain network is that the increasing competition, inventory turnover, forecasts and the cost of operation may be mitigated through the system development and process realignment.
Each supply chain process has made vast improvements to ensure deliveries as expected by manufacturers. To ensure timely deliveries to retailers, a distributor has to keep a particular amount of stock in its warehouses, especially if the warehouses are regionally scattered. The most difficult thing is to ensure that the supply from the manufacturer is sufficient to cover customer demand. On the other hand, a distributor has to meet the manufacturer’s target.
An aggressive product launch and the expansion of the distribution network increases the cost of supply. Nowadays, integrated information technology and its applications, such as an online ordering system, are essential to enable an online transaction and to reduce low-value transactions.
Alignment done by optimizing the supply chain pipeline results in manufacturers and distributors being able to minimize their costs, especially those regarding transportation, warehousing, inventory and product handling. By using a substantial costing system such as the Activity Based Costing, they can control their costs based on the process to achieve optimum productivity. The objectives are to eliminate or to minimize low-value costs, the cost of poor quality and to introduce efficiency and effectiveness. This will streamline the value-added activities executed in the business process to improve yield.
In accordance with the aforementioned, following are challenges that can be determined: 1. There are many realignments of the business process in the industry 2. Since the retailer becomes more demanding and customers have wider choices in products on the shelf, changes in their needs and behavior are very important 3. In order to maximize supply chain performance, several business concepts would be able to strengthen its market structure and ensure opportunities are not missed. To anticipate external changes, the supply chain company must play a role in both selling and doing lean activities as well implementing its directive strategic to align end-to-end processes.
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