New Product Introduction & Supply Chain Needs

Business strategy can be based on varied objectives.But common to them is to increase revenue and improve margins.To meet this end,companies introduce various growth strategies and identify the opportunities that may produce results in future.The growth strategy of companies varies considerably based on a number of factors such as:

• Operating Industry
• Competitive Landscape
• Capabilities
• Business Strategy

Often companies tries to differentiate themselves on the basis of certain offering or the derived value.The goal of the firms is to carve out a niche from the existing market segment so as to avoid direct competition.But over a period of time competitors encroach into that niche and it becomes increasingly difficult to maintain the niche any longer.The most obvious response to the competitors' move is either to compete on the basis of cost or create a new differential.Such improvements in existing products is what is called incremental innovation.But, for how long can a company sustain with these improvements without actually introducing a fresh product concept.This makes us think about the need for disruptive innovation.One that actually nullifies the competition and is more aligned to the basic of extracting value from capturing newer insights and opportunities not explored by any competitor as of now.This concept is what is explained by Prof. Mauborgne in Blue Ocean Strategy.Though it is difficult to pinpoint exact offering that demarcate between incremental and disruptive innovation,one can probably identify it as the offering that can not be imitated easily by the competitor in a short span of time and that it provides the innovator first mover advantage for a considerable period.This can be an untapped market or a product feature that nobody thought of before.

Firms that possess these abilities and capabilities usually sustain the tides of time.Example of this can be P&G which introduced diapers for the babies,a product which was not conceptualized by anyone before, but it was an obvious need.The Pampers brand is still a billion dollar brand.This example brings another important fact about new product development and its about how you capture customer needs.One of the preferred method is tapping customer verbatims i.e. understand the voice of customer and convert that into product.Another is emphathic design i.e. understanding the latent needs of customer without they being explicitly mentioned.Its this design approach that provides companies with exponential growth and exorbitant value.Not to forget, it is not easy to hit the right spot every time with this design philosophy,hence patience and endurance is required in making iterations over a period to bring the product closest to what the customer require, but is unable to communicate that need.This design thinking led to products like iPods, iPads etc. which transformed fortune of Apple.

Though there is lot to discuss how products can be designed to capture needs and how to position them where one's capabilities are bigger constraints relative to competitor move,we will take forward this discussion with the needs and complexities of supply chain when a company goes into an expansion drive.In case of non-durable consumer goods,its marketing that guides most of the new product development initiatives while supply chain is merely asked to make arrangements for the follow up production & distribution plans.Now that is where the catch lies,one can create wonderful products but without proper assessment of manufacturing and distribution capabilities it may be a failure.As said by Paul Polman of Unilever,"we have wonderful products and we have wonderful customers,the problem is us".It is the criticality of the supply chain in making those innovations work that brings out such concern.

Companies while developing growth strategy fail to identify supply chain capabilities as a possible constraint.Growth can be organic or it can be through acquisitions.But in both the cases it becomes imperative to consider the design and capabilities of supply chain.This has been proved in number of failed mergers and acquisitions.How many times we have came across a new successful product that is not available? Quite a many.Latest being Apple iPhone 5S. One can argue that it is a strategy to maintain the niche positioning of the product and manage the demand according to supply in order to safeguard margins.But this is not always the case.Let us discuss the new product introduction from perspective of both the growth strategy i.e. organic and artificial.

In case of organic growth the company may resort to:

• Expansion of Product Line
• Expansion of Product Type
• Upward/Downward Stretch

and many more.In such cases two situations may arise.If the product is similar to the already existing line of products in terms of supply chain needs, then we are putting more stress on the supply chain to deliver more products to even larger customer base while maintaining the desired costs and service level.If the product is significantly different in terms of supply chain need and we intend to push it through the same,then we are probably creating a mismatch.In both the cases,distribution might fail a successful new product idea.Consider the case of any successful FMCG company,mostly they operate their supply chains at full capacity.Due to competitions and higher revenues they constantly upgrade their product lines and introduce new items.Now the products are similar in nature and they need to be pushed through the same pipeline.Capacity being a constraint,one has to sacrifice the other in order to find itself in the shelves.Now,if we do not exploit the new product to the fullest, we are losing on a probable market winner and if we sacrifice the old product we are losing one of the brand that takes a lot of money and time to build.In case of acquisitions,often supply chain is a neglected field of negotiation.There is a different approach altogether in which the firms might be working and trying to bring them under the same umbrella supply chain might create unforeseeable problems.That is why we do not mix Tata and Jaguar-Land Rover.Supply chain capabilities thus should be viewed as strategic consideration before embarking on a growth plan.In terms of careful supply chain planning and implementation,there are few examples which shows the way to do it. Marico is known for its continuous up-gradation of supply chain capabilities and considering them before implementing any growth plan.That is the reason why they at any time have surplus capabilities and are able to manage any emergency way better.

Hence companies should understand that is not marketing alone that is responsible for a successful new product launch and it is not supply chain alone that is responsible for a failed product launch.The concept of concurrent engineering applies to such management issues as well where everyone in the development team understands the opportunities as well as the constraints.    

The Indian Supply Chain:Perspective and Insights

Practice is different from theory.Heard this many a times and it seems apt for the Indian FMCG supply chain scenario.Still, the value chain is marred with inefficiencies and change is a dreaded word.Though some unique characteristics of Indian supply chain has allowed them to deliver what could not be achieved by emulating successful supply chain strategies from other parts of the world.But the inherent inefficiencies and the fragmented operating approach is a call for concern.Indian supply chains have been different in quite a few aspect:

1) Large number of intermediaries

2) Restricted use of technology

3) Dependence on manual systems

4) Less drafted and standard procedures

Large number of intermediaries have allowed penetration into the farthest pockets of country.Its easier to get a Pepsi bottle than a paracetamol in rural India.What is remarkable about these companies is the manner in which they achieved it.The bottle costs the same in a metro and in a cluster of few huts in Jharkhand where roads are a rare sight.The product passes downstream from level to level with a decreasing trend in technology usage and increase in manual intervention.The greatest challenge to the supply chain is available support infrastructure.As a new company enters into the market its goal is to attain a market share before breaking even.The strategy is to delay break even and scale up to be reckoned as a new force in market.This forces firms to accept the ways and manners that might not be most cost efficient.This especially becomes a problem in country like India where there is little infrastructure support outside the city limits.Lean supply chain is what the doctor orders. But the pill is not there to be taken.Companies in North America and Europe have leveraged their supply chain through the use of IT and advanced infrastructure available.Its easier to implement ECR, CPFR or any such information sharing approach in those parts of the world.Here it is a daunting task.Consider a firm which sets up an IT support system with demand driven replenishment.The next step is to determine the level at which the demand is to be captured.More than 70 % of the retailers are small with sales of  less than 4 lacs/month.They do not possess necessary skills to operate an IT system, along with that they do not want to incur any additional operating cost.Up one level are the distributors with the same level of educational background.They generally use some basic standalone accounting softwares for day to day need.The furthest these sophisticated system can be implemented is at C/FA level.The number of hands through which the product passes before being delivered to the consumer makes it a futile exercise to setup such costly support infrastructure.The demand can never be captured at SKU level at POS. All the serious affects of bullwhip,demand distortion and inefficient information transfer will still remain.That explains the reasons why P&G, a pioneer in CPFR movement worldwide has still not launched it in entirety in India.Many Indian giants like ITC have experimented with these approaches but implementation is still to see the day.

So there are limited options left with the companies to improve their bottomline. The obvious one is to squeeze margins from other echelons.There are fierce negotiations and neck in neck competition within the supply chain.And the most obvious definition of supply chain to serve the customer well suffers a setback. HUL, considered as the benchmark for supply chains in India for the level of market penetration, too suffers stockouts of major SKUs. The strategy seems quite obvious when concerned with serving the customers.Having understood the internal constraints to achieving a high level of customer service level, firms prefer to expand their markets to improve revenues.Hence the challenges for Indian FMCG comapnies are two fold, external and internal.

Apart from the macroeconomic scenario, the factor that weighs heavily on firms is the available infrastructure.Poor transport infrastructure causes larger lead times.Large lead times causes higher implied demand uncertainty, more stockouts, damage to perishable items, higher inventory levels and suboptimal scheduling.The balance sheet becomes evident to these inefficiencies with squeezed margins.The profits may not reflect the true picture but profiltability does.The working capital locked with inventories disrupt the cash flows.And when we consider contribution of FMCG sector which is about 2% to the GDP it means a lot of money.Apart from this larger picture,consumer is the one who suffers most with higher prices and less product availability.At the same time, companies have to resort to discounts to clear off the inventory pile and thus sacrificing profits.The unavailability of IT infrastructure causes duplication,delays and distortion in the information transmitted.

All these factors are further aggravated by the internal inconsistencies of the supply chain.The supply chain partners engage in measures to achieve local optimization without considering the impact on the entire value chain.Inconsistencies surmount and supply chain suffers as a whole.The manufacturer tries to push down the inventories by offering discounts and records it as sales.As the demand is not there for such a quantity, the retailer incurs large inventory holding costs and the benefits calculated through discounted goods may not be realized actually.Furthermore, may be the product does not remain in demand for coming period and the retailer may have to incur huge write down costs.Due to these tendencies there is less support and trust between supply chain partners and more competition while all of them are working for the same cause.This reduced trust does not allow retailers and supplier to pass on the important information.Consider a retailer who is planning a promotion in coming week and hence he starts hoarding goods.The supplier unaware of this fact, forecasts that the demand for the product has increased and plans the production accordingly.But once retailer receive the desired quantity he stops putting up the orders.The result is huge inventory pile at supplier.Such trends are common and pervasive.

Considering all these facts and information, the growth that Indian FMCG industry has achieved is remarkable.But according to the theory of marginal utility every further improvement will be lot difficult and come at a higher cost.The way forward is to create integrated supply chains with global optimized goals that benefits the entire supply chain.But for that trust and collaboration is imperative.The companies should invest in this before going for VMI, ECR, CPFR kind of initiatives.This collaboration might bring the next big change in the Indian retail industry and benefit the consumer most.      

Pull Based Replenishment

Replenishment has undergone a swift change in the past 20 years or so with the focus now shifting to replenishing only what is actually consumed or the off-take from POS.Supply chain strategies are being re-engineered and business processes re-molded to have strategic alignment.Not surprisingly, P&G is the leader of such a movement in Indian FMCG sector with more than 90% of the total sales committed through such a system.Though others have also followed the suit but with less success.

FMCG is one of those sectors which is highly consumer centric and the nature of demand is independent.The demand is in fact dependent on a lot of factors other than what the replenishment managers or the business forecaster can predict.Typically the replenishment in a push based supply chain is on the basis of past sales and sales target along with the inputs of supply constraints.But all these do not take into account subjective factors which marketers highly recommend such as taking consumer psychology and shifts in preferences over a period of time.Also the competitive factors,product life cycle and introduction of variants and new SKUs influence the actual demand.The introduction of a competitive product may skew the entire rationale behind the forecast.The result of such a replenishment system is excessive inventory of slow moving goods and stock-outs for the fast moving.The excessive inventory forces the firm to provide discounts and higher margins to distributors and retailers in order to push sales.Such discounting leads to loss in profitability.The stock-outs which obviously count as monetary loss but more than that it can be detrimental to the brand image and the consumer loyalty may shift towards the more easily available substitute.In order to compensate for the lost sales in the previous period the forecaster may increase the forecast for the coming period but in actual the demand is substituted by another product thus this time leading to excessive inventory.This can be a cascading effect with the forecaster actually having no sense of the actual demand.Hence it is very difficult to quantify the actual demand that a product has.Few companies have tried to improve the forecast by involving more and more factors while forecasting.Most of these efforts leads to complex mathematical models which over a period of time becomes unmanageable.

Few other firms have tried to move their replenishment system closer to the customer and have tried to capture the actual demand and consider that as a baseline for future sales rather than sales target.The first step towards this approach is to capture the POS data.The Indian Supply Chain presents its complexity at this very first step.With the Indian Distribution System of small Mom & Pop stores,its a challenge to get the data from each of these store,for many of these have turnover less than the money required for setting up such an infrastructure.Hence most of the firms capture data at AW level.For a typical FMCG number of distributors are in excess of 5000 but the retailers may run into tens of million.  

With the POS data available and future growth pattern identified the forecast is statistically more correct.The statistical forecast is then improved by taking into consideration the promotions and brand marketing initiatives to be launched in future.Generally the short term forecast is done for a period of three months which is a rolling forecast and is updated as the actual sales happen.The rolling forecast provides some flexibility in terms of correcting for the actual trends emerging from POS data.This is the first step towards the pull based supply chain.The backbone of such a system is a robust,dedicated and real time IT infrastructure so that the information reaches the required person at right time.With the value added forecast available it becomes necessary to plan the production accordingly.Most of the companies plants that are outsourced are located across the country hence it becomes imperative to decide which SKU needs to be produced at which plant in what quantity to be supplied to which market.Here comes the role of the planning department.After this planning even the production schedule is mapped as the demand moves and fulfills just the quantity needed while taking into account safety stocks and other constraints.Finally the dispatch plan is prepared according to the sales trend.Thus we see everything gets interconnected and the product is pulled through and it travels through the entire value chain as per the trend and demand of the market.Demand induces forecast which gets transformed into the production plan in accordance to the market dynamics and not sales target.The Production plan decides the dispatch plan and finally the product is delivered.

In my view above product flow presents two important facts to be considered.One is that the setup requires integrated or collaborative supply chain approach and the other is flexible factory operations for successful implementation of this pull based approach.Until the supply chain members do not understand the correlation and interdependence of operations it will be difficult to operate such a supply chain smoothly.Identification of bottlenecks and improvement of the same should be a continuous process as the business expands and few nodes become critical.The outsourced plants presents even a higher challenge to match such a replenishment system because of the contract clause and agreed terms and conditions.Flexibility both in terms of product variety and batch size is important with minimum changeover time and cost.The quantum of success will depend on degree of compliance of these two factors.

It will not be wrong on my part to presume that by crashing the planning horizon within which we can extract the demand information, prepare a forecast, develop the production and dispatch plan and deliver the goods will move us closer to the actual demand fulfillment.This needs to be corroborated further but reducing the time uncertainty will certainly improve the results.