Towards a Consumer-Oriented Supply Chain

Editor’s Note: Every year, 40 or so students in the MIT Center for Transportation & Logistics' (MIT CTL) Master of Supply Chain Management (SCM) program complete one-year thesis research projects. The students are early-career business professionals from multiple countries with 2 to 10 years of experience in the industry. The research projects are sponsored by and carried out in collaboration with multinational corporations. Joint teams of company people, MIT SCM students, and MIT CTL faculty work on real-world problems chosen by the sponsoring companies. In this monthly, series we summarize a selection of the latest SCM research. The researchers for the project described below, Panagiotis Andrianopoulos and Hector Rafael Perez, analyzed a supply chain in the retail business to determine how it could become more consumer-oriented. The work was carried out for a multinational retailer that operates supermarkets on three continents, and a multinational consumer packaged goods company. The project was supervised by MIT CTL Research Associate Dr. Alexis H. Bateman. For more information on the program, visit http://scm.mit.edu/program.

Retailers often emphasize the importance of being in tune with consumers. In reality, however, it can be difficult to align a complex retail supply chain with consumer demand.

A major roadblock is a lack of meaningful communication between retailer and vendor on how and when products should be replenished. The research team wanted to find out how these parties can collaborate to build a more effective replenishment system.

The proposed solution is based on three scenarios for fostering future collaboration, and a high-level roadmap that helps retailing and consumer packaged goods organizations to move towards the creation of a consumer-oriented supply chain.

Three-step approach

The research was carried out in three steps. First, a value stream mapping exercise defined existing replenishment practices through a visualization of the product and information flows involved.

Next, these practices were analyzed using quantitative (forecasting, replenishment and POS) data, as well as qualitative (interviews with key stakeholders, industry experts and visits to the retailer's premises) data. It was then possible to evaluate the forecasting performance of both the vendor and retailer by comparing specific products in one category.

Lastly, the team developed a future vision of a supply chain that is in synch with consumer demand. The recommendations target people, processes, and technologies.

Mapping a unified path

The stakeholders commonly use vendor managed inventory (VMI) to replenish stores. Everything begins with a consumer purchase, which is registered as POS data. From there, various tools and ERP systems slice and dice the data to forecast demand and ultimately to stock store shelves.

However, the accuracy of these forecasts can differ significantly. For example, an analysis of one SKU showed that the forecast with the lowest mean average percentage error (MAPE) came from the vendor, with a MAPE of 0.55. The store- and DC-level forecasts of the retailer had MAPE scores of 0.64 and 0.74 respectively.

Based on the analysis, the team developed a six-step road map for developing a consumer-oriented supply chain starting with the “as-is” or current state (see Figure 1). The map is divided into short-term and long-term steps, and incorporates three possible demand forecast processes: at the retail or vendor levels, and a hybrid process. The six steps are:

1. Create the goals for the improved process, including relevant KPIs.
2. Initiate collaboration. VMI is a good collaborative vehicle, but the participants should review the compatibility of their respective IT systems
3. Carry out a study to ascertain whether the use of POS data improves forecast accuracy.
4. Perform a study to find out whether the store replenishment system is sufficiently flexible (such as accommodating truck schedule changes).
5. Perform a study to identify the company that achieves the most accurate forecasts per product category.
6. Perform a study to identify whether preparing store orders in vendor mixing centers is cost effective for the vendor and provides benefits for the retailer.

A consumer-oriented supply chain consists of two basic elements: POS data that triggers replenishment and strong collaboration between retailer and vendor. Following the road map can help organizations to attune their supply chains to consumer demand.

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