Reflexive Supply Chains

Supply chains have continuously evolved over a period of time, in line with changing consumer preferences and expectations. The two axes guiding this evolution have been uncertainty in consumer demand on one side and tolerance time of consumers on the other.

The first generation of supply chains, SC 1.0, were in vogue about 4 decades back when consumers in India were willing to wait for months and years together to get their choice of cars and scooters. The choices were also quite limited due to presence of only a handful of manufacturers. Consumers had to pay advance money to book their vehicle and wait for a long time. Demand in this case was deterministic with enough reaction time available for manufacturers to source, manufacture and deliver. This was the era of Reactive Supply Chains. The primary KPI for supply chains was Delivery Lead Time.

With increasing competition and choices available to consumers, order queue disappeared and consumers got more demanding in terms of faster delivery, unleashing SC 2.0 called Responsive Supply Chains. Some industries like Packaged Consumer Goods in fact started here. Since consumer tolerance time was much smaller than the lead time to manufacture and deliver the product, it was necessary to guess future consumer demand for smooth running of supply chains. Forecasting developed as a useful tool and evolved rapidly with a multitude of models to cater to various demand patterns. Supply Chains learnt to plan, source, make and deliver based on the sales forecast. Primary KPI shifted to Availability Against Forecast.

Manufacturers, however, continued to face stockouts and obsolescence despite being efficient in meeting the sales forecast. This was because actual consumer demand deviated considerably from the sales forecast. Industries responded by improving forecast accuracy on one hand and making their operations more flexible on the other hand, to catch up with such deviations on an ongoing basis, thereby unleashing SC 3.0 called Agile Supply Chains, which are able to meet demand upto 15-25% variance from forecast. Primary measure of effectiveness switched to Availability Against Demand. Most well run supply chains are currently in this phase. Empirical studies indicate that stock-outs have indeed come down, however, it still continues at about 8% in retail, 10% for promo items and 15% in online retail.

Time is ripe for yet another paradigm shift to launch the next generation SC 4.0 called Reflexive Supply Chains, which run the entire supply chain, from vendors to consumers, without the need for demand forecasting. Supply Chains can now gear themselves up to meet whatever be the consumer demand. This is achieved by improving flexibility and response time across the entire supply chain using the principles behind reflex action in human body, widely recognised as the most agile system in nature. Pilots run in CPG industry have shown that stock-outs come down to as low as 1-2% on a sustained basis. Primary KPI should now shift to Freshness of products at the time of consumer purchase while ensuring high levels of availability.

Reflexive Supply Chains resolve the conflict between product availability and freshness so that both these consumer objectives can be improved simultaneously. Companies operating at 98%+ availability against demand and supplying fresh stocks to consumers will surely have a much better chance to win at the marketplace.

Are you ready?