Most businesses have to embrace variety as they aspire to grow. Variety expands as they foray into new spaces to grow their top lines. As variety expands they consolidate operations to increase the bottom lines. Shared Management and other Resource Pools are used to drive lower costs.
In this article we will talk about how Businesses and Supply Chains struggle with increasing variety and cost pressures and how Supply Chains can deal with them to simultaneously deliver efficiency and growth. Variety increases as the number of Products or Locations increase, as shown below.
Let's start with an example of a small online food delivery business based out of a growing city in India to simplify and understand the fundamentals. We can then extrapolate this for larger businesses.
The founders of the business saw an opportunity in providing hot online Snacks to customers through food delivery websites. The initial idea was to keep a restricted menu of Sandwiches, Wraps and Rolls. There was a market in a large population of young IT engineers who were bachelors, away from their families, and had some disposable income. And the business took off. Soon however, they started facing growth challenges for two reasons. One, they had only one kitchen and could only address a limited area where they could deliver hot items in time. And second, the menu items were limited and Indian customers having a varied ethnic taste would often switch. Adding more kitchens as well as more Menu items would add a lot more complexity to the business.
More Kitchens would mean more infrastructure, more places to stock inventory, more inventory, more trained staff etc. More menu Items would mean more skill sets, more Inventory in all forms and more cost of Servicing. As the variety increases the return on Asset becomes that much lesser. Business straightaway becomes a lot more complex. And then there is a risk that the investment in Infrastructure and Working Capital may not yield significant returns. Following picture gives an idea of how the various business parameters will change with increasing variety.
How will a small business deal with this level of complexity and costs and at the same time grow? These businesses will have to choose the right Supply Chain practices to be able to cope with this variety.
How does a large business deal with a larger variety and scale of problem? Depending upon the Industry they belong to their number of products may vary between a few hundreds to many thousands and their scope of operation could be the entire Globe. Different Industries may see complexity manifesting in different areas of Supply Chain. Large FMCG companies eventually deliver to a huge number of Consumers. Their maximum variety or complexity is in number of distribution points. Auto companies integrate a large number of parts for producing vehicles and their complexity lies in the area of sourcing their parts. Steel companies produce to specification over many processes. Their complexity lies inside their factories in being able to produce a large variety of specifications.
These large companies may deal with their Supply Chain complexities differently compared to a small food delivery business. We will discuss regarding how these large companies across different sectors deal with their problem of variety and Supply Chain Complexities in the Next Set of Articles – Dealing with Your Supply Chain Complexities. Till then please leave your comments below regarding what you think about this article and which Supply Chain subject would be an interesting read for you.