Research Report on SUPPLY CHAIN MANAGEMENT
Effective supply chain management is the key to track how the raw materials need to be moved for creating products, optimizing the inventory levels in order to reduce the cost. An effective supply chain management also helps organizations to synchronize the inventory with customer demand. In addition, supply chain management also helps the enterprises to gain visibility over the logistics. According to Chen & Guo (2014), supply chain provides a number of business and competitive advantages to the organizations. However, in the continuously evolving business landscape, the conventional supply chain management practices are encountering various issues; keeping pace with rapid changes in the customer demands is one of them. The problem is more prominent in FMCG industry because of the short shelf-life of these products. Hence, the concept of strategic purchasing in this industry is being increasingly important although the area is less researched. In this research report, the implementation of strategic purchasing in the global FMCG industry and its effects are analyzed.
Statement of the problem
As stated by Carlsson (2015), the behavior of consumers is influenced greatly by the social, cultural and personal factors. In addition, the effects of globalization and emergence of modern technology are also playing a pivotal role in shaping the demands of consumers. In this situation, the enterprises are under a constant pressure for quickly responding to the changing preferences of their customers. The situation is more complex in FMCG organizations as the products they handle have little shelf-life and due to rapidly changes in the customer demands, life cycle of these products is being even shorter (Brunswicker & Vanhaverbeke,2015). Identification of the recent trends and acting according to that is critical for the businesses (Wallace et al.2014). However, as the consumers are changing their demands rapidly, no trend is lasting for longer time and it is increasing the need of having a highly flexible supplier network. In addition to the new products, the companies are also in need of improvising their existing products. It also indicates the importance of sourcing strategically and redesigning the supply chain practices.
Continuous innovation in the FMCG sector is another challenge for the enterprises (Brunswicker & Vanhaverbeke,2015). Predicting the demand of customers becomes difficult due to the continuous innovation. Continuous innovation of new products indicates that the enterprises have to anticipate the demand continuously which is increasing complexity of the forecasting methods. The continuous innovation also compels the enterprises to quickly respond to the sudden spike in demand of customers for particular products. Therefore, in this scenario, creating a sound supplier network and making right purchasing decisions is becoming critical nowadays.
Purpose of the research
The purpose of the current research is to understand the role of strategic purchasing to cope up with continuously changing customer demands in the global FMCG sector. The research also identifies how the strategic sourcing practices needs to be reshaped to fit in the FMCG industry.
In the FMCG sector, trends change quite frequently and therefore, sourcing strategically is the key to businesses operating in this sector. The strategic sourcing practices deals with continuous re-evaluation of the vendor matrix and improving it accordingly. As stated by Brunswicker & Vanhaverbeke (2015), vendor matrix indicates a network of vendors who are capable of meeting procurement goals of a business in terms of capacity, cost and sustainability.
Supplier analysis and selection in strategic procurement
Analyzing capacity of the suppliers, selecting and managing them is the basis of an effective strategic purchasing model Aksoy et al.(2014). As stated by Carlsson (2015), Dominick matrix is a helpful technique for the organizations to set the supplier management strategies. Dominick matrix provides a model for procurement that help the professionals to use four supplier strategies. The strategies are developed on basis of two factors -- the sophistication level of suppliers and their materiality to a business.
Dominick matrix uses four approaches for managing the suppliers. Supplier collaboration helps the organizations to make improvements that can be quantified and can have a positive effect for both the organizations. Supplier development indicates that the resources of an organization are being used to develop capabilities and expertise of the suppliers (Chen & Guo, 2014). However, in case of supplier development also, the performance improves in a measurable way. Moreover, due to the investments made on supplier, its expertise upgrades beyond the current level. The organization, which is investing on the suppliers also get the chance to enjoy improved expertise of their vendors. Therefore, because of the investments, both organizations get benefitte.
Supplier management is a process that facilitates the businesses to collect and analyze the performance matrices for suppliers to measure their performance and sharing the information with them to find out ways for improvement and implementing those.
Along with finding out new suppliers and cutting down the supplier network also sometimes becomes necessary to control the cost. Supplier rationalization approach enables the organization to reduce its existing supplier network through consolidation. As the organization becomes able to purchase from fewer suppliers, the procurement becomes more economic.
According to the Dominick model, organizations should use supplier collaboration for strategic and sophisticated suppliers whereas supplier development is necessary for the strategic and unsophisticated suppliers (Wallace et al.2014). Similarly, adapting supplier management practices is necessary for the sophisticated and tactical suppliers. On the other hand, using supplier rationalization techniques is the best way to deal with unsophisticated and tactical suppliers.
As stated by Hawkins et al.(2014), strategic sourcing and supplier relationship management are closely related. However, the organizations often fail to realize integrate these two. The continuous supplier management cycle is a procurement model that helps the businesses to integrate the supplier management techniques with the strategic sourcing at various stages of procurement.
The continuous supplier management cycle begins with the process of moving from unstructured buying and aims to establish a well-defined strategic purchasing process in the organization. Strategic sourcing helps the businesses to shape their cost structure and manage the high volume purchases. Developing a strategic approach for sourcing is important for maintaining long-term relationship with the suppliers also. According to Shao et al(2016), the strategic sourcing practices help businesses to identify a group of suppliers in that is capable to offer quality products in an economic way.
Problems associated with continuously changing demand of customers
Previously, the supply chain management techniques focused on enhancing visibility of the logistics management so that it becomes easier to forecast, manage and plan. Most of the initiatives taken by the supply chain managers were for increasing the extent to which the inventory occupied by the organization itself enhances. The supply chain management initiatives also focused on increasing visibility of the inventories held by the suppliers and the customers. This model of supply chain worked perfectly when the predicting the decisions of customrs were easier and products used to have longer lifecycle (Keith et al.2015). However, nowadays, mere having visibility over the entire supply chain process is not enough to meet customer demands. In the recent days, the products are having dramatically shorter life cycles. In other words, the product which is in trend right now can become obsolete after few days. It is evident that in this scenario, stocking a any product in huge quantity is riskier as its demand a can fall any time and it will result in wastage of the money invested on it. It also indicates that the enterprises need to implement flexible purchasing strategies instead of a rigid one. In case of FMCG products, the situation is even more threatening as the products of this industry cannot be used after a certain time.
Having a flexible supplier relationship is necessary to meet the changing demands of customers of the modern marketplace. Nowadays, predicting the demands of customers has become quite difficult (Sly & Soderbery, 2014). The modern organizations have to review the demands of their products continuously and hence modify their orders to the suppliers accordingly. The suppliers, too, have to adjust with such supply patterns. Otherwise, responding to the demands of customers quickly will not be possible. Discontinuation of products is an integral part of the modern market. Therefore, it may be necessary for the organizations to discard any supplier and restructure their network in a new way. In this case also, having flexible relationship with the existing suppliers is necessary to respond to the customers’ demands.
Role of strategic purchasing to meet customers’ requirements
Strategic purchasing help businesses to develop relationships with their suppliers so that the organization can meet speed-to-market, cost and quality standards in a better way (Nudurupati et al.2014). On the contrary, it helps suppliers, too, for tailoring their services effectively with the intention to meet precise customer demands.
Advanced demand planning is one of the factors which are shaping the modern procurement trends. It helps the businesses to identify trends which are often unnoticed through analyzing the company’s information system. In the latest procurement models, the demand planning is done at the last phase. The modern procurement processes start with collecting information from all aspects of the organization. At the next phase, goals are set to decide what should be purchased. However, the demand is reviewed at every phase to make the forecast more accurate.
Shortened and complex product lifecycle is another factor that compels the businesses to redesign their conventional procurement models. Nowadays, the companies are under constant pressure for developing new and innovative products and launch them to the market more rapidly. Therefore, the companies are in need of more flexibility in terms of product design, manufacturability and infrastructure. It is only possible when the organization adapts an strategic approach for purchasing.
FMCG Supply chain characteristics: The FMCG supply chain is quite different from the other supply chains in other industries. The FMCG industry deals with both standard and specific products (Eltantawy et al. 2014). The industry also relies heavily on batch productions. In FMCG industry the distribution is made in three to four stages and the delivery is done on a dynamic basis.
The current model of supply chain model in strategic sourcing indicates that the several stakeholders including the suppliers, manufacturers, retailers and end users are associated with the process. Not only procurement the, manufacturing and marketing units also take part in the model (Kotula et al. 2015). The discussion on the current model of sourcing in FMCG sector indicates that the supply chain in FMCG is quite complex. Implementing the strategic purchasing concepts is even more important in this industry as the organizations need more flexibility to manage the supply chain network.
Ways to adjust with the changing demand of customers in FMCG sector
Due to the recent shifting the in power in FMCG industry, the organizations who can understand the trend and respond accordingly are getting new opportunities. The organizations operating in this sector can adapt a number of options to find out the new opportunities and utilizing those.
Encouraging suppliers to research the market: As the demand of customers change quite frequently nowadays, it has become necessary for the suppliers too for staying aware of the market demands (Kim et al.2015). When the suppliers put effort to analyze, and monitor the market trends and implement those to their activities, meeting the demand of customers becomes easier for the organizations. In case of the global FMCG markets, the businesses need to stay aware of both the global and local trends. Increasing awareness on the fluctuations in the demands of customers makes it easier for the businesses to respond to their demand quickly.
Supporting innovation: Taking the lead role in innovation provides businesses with many competitive advantages (Cox, 2015). Collaboration from the suppliers is required to to adapt an innovative approach for product development. In the new business scenario, the businesses need to develop their suppliers in such way so that the initiatives to implement innovation can be supported. The suppliers are also expected to generate new ideas and help the businesses to adapt those so that they can remain in an advantageous position.
Forming new partnership outside the industry: As the requirements of the customers are changing frequently and the demand for new products is growing at a rapid rate, businesses are in need to go beyond the industry (Ketchen et al. 2014). Limiting the purchasing network within one industry may not be effective to respond to the market demand effectively in the age of tight competition. Therefore, the organizations need to identify new partnership opportunities in other industries also and utilize those for meeting the customer demands in a better way.
Primary data collection
To find out the role of strategic purchasing for meeting customer demands in FMCG sector, three procurement professionals who are associated with FMCG MNCs were interviewed. Discussion with the professionals helped the researcher to get an insight on how the companies respond to changing demand of customers in real life and change their purchasing strategies. The interviewees were selected using snowball and convenient sampling method. Probability sampling ensures that each one of the sample has equal chance to be selected (Taylor et al.2015).As it was necessary to ensure that only the designated persons are being interviewed, probability sampling was not suitable in this case. Use of snowball sampling helps researcher to find out the interviewees from own network whereas the convenient sampling is effective to select the interviewees on basis of their availability (Taylor et al.2015).
The major findings obtained from the interview are presented below.
Flexible purchasing and Support from suppliers is necessary for FMCG companies: All the three interviewees agreed upon the fact that the purchase models in FMCG industry needs to be more flexible. It is only possible when the organizations will get continuous support from the suppliers. Not only in purchasing, the organizations are aiming for collaborating with suppliers in marketing research and product development also.
Thinking beyond the traditional purchasing is being important: As the customers are in a more influential position and their demands are changing rapidly, the traditional supplier network is no more effective to meet their demands Instead; the organizations have to expand their supplier network beyond the industry also.(Refer to Appendix)
On basis of the findings of the research, following recommendations are made.
Closer collaboration with suppliers: The FMCG companies should work in closer collaboration with their suppliers to predict demand of the customers and respond accordingly.
Purchasing from suppliers from different industries: Limiting the purchasing models to one single industry is not effective for the organizations. The businesses should focus on purchasing from suppliers of different industries.
From the analysis in this research, it is evident that the FMCG companies are now facing severe problems to meet the rapidly changing customers’ demands and hence they need to move to a more flexible strategic sourcing. However, the organizations have to expand their sourcing network beyond the industry also for meeting demand of customers in a better way.
Aksoy, A., Sucky, E., & Öztürk, N. (2014). Dynamic strategic supplier selection system with fuzzy logic. Procedia-Social and Behavioral Sciences, 109, 1059-1063.
Brunswicker, S., & Vanhaverbeke, W. (2015). Open innovation in small and medium?sized enterprises (SMEs): External knowledge sourcing strategies and internal organizational facilitators. Journal of Small Business Management, 53(4), 1241-1263.
Carlsson, M. (2015). Strategic sourcing and category management: Lessons learned at IKEA. Kogan Page Publishers.
Chen, J., & Guo, Z. (2014). Strategic sourcing in the presence of uncertain supply and retail competition. Production and Operations Management, 23(10), 1748-1760.
Cox, A. (2015). Sourcing portfolio analysis and power positioning: towards a “paradigm shift” in category management and strategic sourcing. Supply Chain Management: An International Journal, 20(6), 717-736.
Eltantawy, R., Giunipero, L., & Handfield, R. (2014). Strategic sourcing management’s mindset: strategic sourcing orientation and its implications. International Journal of Physical Distribution & Logistics Management, 44(10), 768-795.
Hawkins, T. G., Nissen, M. E., & Rendon, R. G. (2014). Leveraging strategic sourcing and knowledge management to improve the acquisition of knowledge-based services. Journal of Public Procurement, 14(2), 215.
Keith, B., Vitasek, K., Manrodt, K., & Kling, J. (2015). Strategic Sourcing in the New Economy: Harnessing the potential of sourcing business models for modern procurement. Springer.
Ketchen, D. J., Crook, T. R., & Craighead, C. W. (2014). From supply chains to supply ecosystems: Implications for strategic sourcing research and practice. Journal of Business Logistics, 35(3), 165-171.
Kim, M., Suresh, N. C., & Kocabasoglu-Hillmer, C. (2015). A contextual analysis of the impact of strategic sourcing and E-procurement on performance. Journal of Business & Industrial Marketing, 30(1), 1-16.
Kotula, M., Ho, W., Dey, P. K., & Lee, C. K. M. (2015). Strategic sourcing supplier selection misalignment with critical success factors: Findings from multiple case studies in Germany and the United Kingdom. International Journal of Production Economics, 166, 238-247.
Nudurupati, S. S., Bhattacharya, A., Lascelles, D., & Caton, N. (2015). Strategic sourcing with multi-stakeholders through value co-creation: An evidence from global health care company. International Journal of Production Economics, 166, 248-257.
Shao, L., Wu, X., & Zhang, F. (2016). Strategic Sourcing Under Competition and Asymmetric Cost Information.
Sly, N., & Soderbery, A. (2014). Strategic sourcing and wage bargaining. Journal of Development Economics, 109, 172-187.
Taylor, S. J., Bogdan, R., & DeVault, M. (2015). Introduction to qualitative research methods: A guidebook and resource. John Wiley & Sons.
Wallace, W. L., & Xia, Y. L. (2014). Delivering Customer Value through Procurement and Strategic Sourcing: A Professional Guide to Creating a Sustainable Supply Network. Pearson Education.
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1. What are the impacts of ever changing customer demands on purchasing models in FMCG sector?
2.Is there any need to change the purchasing model?
3.What are the changes you need to bring in the traditional purchasing model?