Demand Management: Customize Products through the Use of Product Completion Centers

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1 Customize Products through the Use of Product Completion Centers August 2013 Sponsored by: Conducted by: On behalf of:

2 Manufacturers and shippers are facing increasing difficulty in their ability to bring product to market in a speedy and cost-effective manner. Companies are driven to reduce inventory levels as the cost of carrying any excessive finished goods is becoming prohibitive. To aid in their ability to get product to market in a timely, cost-efficient manner, as well as to better leverage demand forecasts, supply chain managers are turning to an array of non-traditional solutions. One such program is product customization which allows for tasks such as light assembly, kitting, as well as other value-added services to be postponed right up until final distribution. This flexibility reduces the risk of carrying surplus inventory and enables manufacturers and product distributors to modify the base product to fully satisfy customer demands. The motivating force behind the demand for these capabilities is to help manufacturers and shippers have better control over inventory, help companies better leverage their supply chains to improve profitability, and be able to meet customer demands in an efficient and expeditious manner. A recent survey conducted by Peerless Research Group validated the overwhelming desire for manufacturers and shippers to reduce supply chain costs, lower inventory levels, build more flexible supply chains, be more responsive to customers, and create more efficient ways of getting product to market. Yet, curiously, while supply chain managers admit that long lead times, rising inventory costs, inventory optimization and operational efficiencies are problematic and are in need of improvement, product customization capabilities (12%), a potential solution to these challenges, ranked near the bottom of the list when respondents were asked about the specific supply chain goals their organizations are looking to address. The following reveals the details of our research. 2

3 Organizations Supply Chain Operations Issues such as greater inventory optimization, reduced lead times and cutting costs associated with inventory management were most often cited as critical aspects of supply chain operations that organizations need to improve. Upgrading overall supply chain efficiencies and creating supply chains with greater flexibility are also high priorities. More specifically, shippers and manufacturers are looking to improve inventory management competencies, initiatives related to improving visibility and communication with suppliers and customers. They are further seeking solutions to better predict customer demand and align those requirements with production, streamline inventory and distribution operational efficiencies, contain costs and operate leaner, eliminate inventory errors and waste, improve inventory turns, and refine planning and demand sensing capabilities. When all these functions can be done under one roof with one system, efficiencies are even greater. Curiously, imperatives such as product customization capabilities and kitting rank low, these are processes likely to improve lead times, lower costs, better optimize on-hand inventory and advance overall supply chain efficiencies! Our greatest frustration in managing our supply chain is forecasting and keeping inventory in balance across our warehouses. Supply Chain Management; Wholesale; $100M - $250M in revenues Matching production cycle lead times with transportation lead times is causing unnecessary delays. Supply Chain Management; Computers; $500M - $1Bin revenues Aspects of the supply chain that organizations are looking to improve Reduce lead times Lower inventory costs Greater inventory optimization Overall supply chain efficiencies Create a more flexible supply chain Become more customer-focused/more responsive Supply chain visibility Leverage supply chain to grow profits Streamline sourcing procedures Shorten production cycles Product customization capabilities Assembly/Kitting procedures 12% 12% 35% 35% 34% 29% 27% 23% 43% 42% 51% 50% 3

4 On the whole, however, these organizations appear divided in their abilities to manage inventory levels. While one-third fully assert their supply chain is highly effective in controlling inventory levels similar percentages feel they are average (39%) or less than effectual (27%) at managing on-hand stock. Company s ability to control inventory levels We are moving toward a collaborative supply chain where each level was set up in a pull environment with materials ready to produce and ship once the pull was triggered. Supply Chain Management; Industrial Machinery; $10M - $50M in revenues Very good 27% Good 39% Excellent 7% Poor 3% Fair 24% 4

5 Inventory Reduction Strategies Reducing inventory levels was a recurring theme among shippers and manufacturers in the survey. More than nine out of ten said it s important to reduce on-hand inventory; in fact, more than half (55%) contend this issue is critical to profitability. Yet, as we just noted, many still need to improve upon this aspect. Importance of reducing inventory We need to identify levels of need and changes in demand and adjust inventory levels necessary to have an effect on the optimum effectiveness levels throughout the organization. VP Procurement, Retail; <$10M in revenues Extremely important 19% Not at all important 2% Very important 36% Not very important 7% Somewhat important 36% Yet, curiously, while shippers claim that reducing their inventory levels is an important goal, less than one-half (44%) say they follow an inventory reduction plan. Shippers and manufacturers did note, however, that they have set various inventory reduction targets for the next 12 months, which range from 5 percent to as much as 70 percent levels in reducing inventory. 5

6 Managing Demand Shippers and manufacturers varied in the assessment of their supply chain s ability to predict customer demand. Overall, roughly one out of three rated their supply chain either very good to excellent or, conversely, fair to poor on its ability to recognize customer buying patterns, evaluate demand at pointof-purchase locales, or to forecast buying trends by product category. Supply chain s ability to manage customer demand Understanding distribution channel Understand market potential Ability to recognize customer buying patterns Understand demand at point-of-purchase Product category buying patterns/market shifts 40% 41% 19% 38% 38% 24% 34% 36% 30% 31% 39% 30% 30% 41% 29% Excellent/Very good Good Fair/Poor 6

7 In particular, the demand management issue rated as most important is the ability to provide more timely alerts of demand changes that subsequently impact operations (60%). In addition, integration of line of business supply chain needs with their overall supply chain planning and logistics execution (47%), collaboration within the enterprise and with trading partners (44%), and the ability to predict the impact of marketing promotions or other irregular activities (42%) sales activity are also considered important aspects. We ship factory direct to the consumer with the only middle stop being for postponement activities, packaging, customization, etc. Director, Warehousing Operations; Food & Beverage; $1B - $2.5B in revenues Key demand management capabilities Providing more timely alerts of demand changes impacting operations 60% Integrating line of business supply chain needs with my overall supply chain planning and logistics execution 47% Enabling collaboration within the enterprise and with trading partners 44% Predicting sales impact of marketing promotions, or othe irregular activities 42% Slightly fewer than one out of five (18%) said they have a postponement strategy in place to help manage demand. Reducing fulfillment errors, minimizing risk across the supply chain and enabling greater control over inventory levels are seen as favorable results. Those who are not operating this type of program cited cost as the main barrier for adoption. 7

8 Product Customization In describing what they consider as the ideal supply chain, shippers cited improved inventory management and fulfillment processes, streamlined operations, better integration across systems and platforms, greater levels of automation and increased visibility across suppliers and customers. Clearly what shippers want is what product customization services can provide. With that, a product customization capability is perceived as a highly important function for many. Almost one-half (46%) expressed the need to make changes to a product just prior to sending it off to distributors or channel partners; one in four (27%) don t require this capability. Having a need for product customization Often 19% Almost always 6% Sometimes 28% We put demand forecasting in close alignment with production, inventory, and distribution operations capable of efficient low cost customization of customer requests. Director/Manager of Distribution; Food & Beverage; $2.5B+ in revenues We repackage current inventory to meet the situation. We are wasting labor and packaging materials. Director/Manager of Logistics; Chemicals; $100M - $250M in revenues Never 13% Not very often 33% Product Completion Centers Desires for having the right product at the right time at the right place at the right cost all point to increased use of a product completion center concept or model. Shippers and manufacturers are reaching for leaner supply chains, yet need the ability to be flexible to support demand as it ebbs and flows. This requires a coordinated product manufacturing and distribution network that assures that some product is always at the supplier, some in the warehouse, and some in manufacturing centers, all flowing seamlessly. The concept of a product completion center was described to respondents as... 8

9 A unique distribution solution to postpone final product customization closer to the point-of-sale. This approach consolidates multiple vendors and services into a single facility from break-bulk to packaging to retail delivery. This concept, as described, was foreign to many of those we surveyed. While roughly one out of five (21%) said they are quite familiar with this concept, one-half (50%) claim they are unfamiliar with this strategy. Familiarity with the concept of a product completion center Very familiar 15% Extremely familiar 6% Somewhat familiar 29% Not at all familiar 19% Not very familiar 31% 9

10 Shippers and manufacturers were also equally split on how a product completion center would benefit their supply chain operation. Just over half (52%) contend that a product completion center strategy would be of great value to their supply chain while those who don t believe this approach would be as useful attribute this to either a perceived lack of need or a low level of awareness. Value of a product completion center Very useful 14% Extremely useful 5% Not at all useful 15% Somewhat useful 33% Not very useful 32% It would be difficult because of federal regulations and approvals need to be procured prior to any alterations (Pharma Products). Lead times would be an issue, impacting our speed to market. Director, Manager Warehouse/Distribution; Chemicals; $2.5B+ in revenues It is not on the packaging side we have customization issues, it s more of the product configuration side of things. Supply Chain Manager; Chemicals; $2.5B+ in revenues 10

11 A multitude of benefits are acknowledged as a result of employing a product completion center strategy. Critical factors such as improving customer service (41%), having the ability to quickly customize orders per client specifications (36%), increased supply chain flexibility (34%), greater responsiveness to variable customer demands (34%), and speed to market (33%) were all features that supply chain managers are looking to improve and were listed among the top advantages. Benefits of a product completion center Improves overall customer service Reduced order cycle times Can quickly customize orders per client specifications Increased supply chain flexibility for special orders Increased responsiveness to unstable customer demand Increased speed to market Greater inventory optimization Optimize inventory/lower inventory costs Improved cash flow Improve product customization capabilities Kitting customization flexibility Streamlined assembly processes Streamline sourcing procedures 19% 17% 41% 37% 36% 34% 34% 33% 32% 31% 26% 26% 25% 11

12 Outsourcing Roughly four out of 10 (41%) indicated they now outsource functions associated with product completion centers. Among the tasks being outsourced or are most likely to be outsourced are packaging and repackaging (34%), build to order (20%), light assembly (18%), kitting (17%), product customization and testing (11%), and bundling/unbundling (10%). In addition, one in four (27%) either currently or plan to near-shore supply chain assignments. We outsource some of the in-house assembly work and fabrication as well as shortening the lead times in order to turn inventory over more quickly. VP, Procurement and Sourcing; Automotives; <$10M in revenues Outsourcing: Tasks being outsourced Outsource supply chain tasks 41% Packaging, re-packaging, re-boxing 34% Build-to-order Material supply management Light assembly Inventory management Kitting Reverse logistics and return management Labeling Sort and recycle Product customization and testing Bundling/Unbundling Sequencing and line-side delivery Configuration and management 20% 20% 18% 18% 17% 17% 14% 13% 11% 10% 7% 5% Do not outsource supply chain tasks 59% Conclusions The results to our study reveal that respondents clearly consider the ability to sense and respond to demand as one of the more critical challenges they face today. Yet, in most cases they are not fully leveraging the tools and techniques to develop that capability. Postponement and product customization is a case in point. While more than one-half acknowledge that a product completion center, for example, would help them develop these capabilities, only a small percentage is now using such services. The obvious message is that there s a need for product customization services to accomplish better control inventory, manage fulfillment processes, cut expenses and provide proficient customer service. Yet, organizations appear slow to recognize its benefits. 12

13 Methodology This research was conducted by Peerless Research Group on behalf of Logistics Management magazine for Ryder Supply Chain Solutions. This study was executed in December 2012, and was administered over the Internet among subscribers of Logistics Management. Respondents were qualified for being involved in decisions related to supply chain operations and applications such as demand management, risk management, product development, network optimization, etc. The findings are based on information collected among 366 top managers holding job titles in logistics and operations (25%), supply chain management (20%), and executive management (13%). A range of manufacturing industries are represented and include food and beverage, chemicals and pharmaceuticals, computers and electronics, and automotive and transportation. Wholesalers and retailers are also included in the study. Companies of all sizes are also well-covered. About Ryder Supply Chain Solutions Ryder Supply Chain Solutions is an end-to-end supply chain partner with nearly 80 years of experience helping companies in North America, the UK and Asia transform their supply chains. Ryder provides a full range of services, from optimizing day-to-day logistics operations to synchronizing the supply of parts and finished goods with customer demand. As supply chains become more complex, Ryder leverages five strengths to deliver the best in supply chain execution: know-how, lean methodologies, a proven track record, deep expertise in key industries and a breadth of resources. At Ryder, we understand that when it comes to logistics, Execution is Everything. To learn more about Ryder s state-of-the-art Product Completion Centers, visit us at or call us at Ryder Supply Chain Solutions RSC466 13