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- Feb. 25, 2011 -


Supply Chain Graphic of the Week: Segmenting the Supply Chain

Segmenting SKUs by Sales Volumes and Variability can help Optimize Manufacturing Strategies


By SCDigest Editorial Staff



For readers of these pages, the benefits of detailed SKU velocities and variabilty will come as no surprise, but we were still interested in a recent article in the McKinsey Quarterly that described the benefits of looking at a real company's total SKUs by sales volumes and demand volatility.

The data showed in the chart below are from a US-based consumer durables manufacturer that had moved most of its production to China over the past decade, and according to McKinsey wound up in a position where all of its plants used a unified production-planning process in which each factory "essentially manufactured the full range of its thousands of products and their many components."



Source: McKinsey Quarterly


After analyzing its portfolio of products and components along two dimensions - the volatility of demand for each SKU it sold and the overall volume of SKUs produced per week - the company began rethinking its supply chain configuration.

"Ultimately, the company decided to split its one-size-fits-all supply chain into four distinct splinters. For high-volume products with relatively stable demand (less than 10 percent of SKUs but representing the majority of revenues), the company kept the sourcing and production in China," McKinsey says.

At the same time, the company made changes so that the facilities in North America were responsible for producing the rest of the company’s SKUs, including high- and low-volume ones with volatile demand (assigned to the United States) and low-volume, low-demand-volatility SKUs (divided between the United States and Mexico).

Perhaps even more interestingly, McKinsey says that "For the portfolio’s most volatile SKUs (the ones now produced in the United States), the company no longer tried to predict customer demand at all, choosing instead to manufacture directly to customer orders. Meanwhile, managers at these US plants created a radically simplified forecasting process to account for the remaining products—those with low production runs but more stable demand."

This kind of very basic analysis across the suppy chain can often produce important supply chain insights - more companies ought to do it more often.


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Simple and meaningful. This approach is quite similar to the thought developed by John Gattorna in his last book "Dynamic Supply Chains", although Gattorna`s work is shown in the book in much more depth and conceptually much stronger allowing the practitioners to further develop these kind of implementations than the work we have seen in the article.
Xavier Farrés
International Supply Chain Consultant


SKU analysis is the first part of a challenging issue when it comes to optimising the supply chain. More specifically and as McKinsey has pointed out, the supply chain can now be viewed as a production-inventory network where certain SKUs can be Make-To-Stock (MTS), Make-To-Order (MTO) or a hybrid of both. Each of these production mode serves to attain a different manufacturing objective. With MTS, customer lead times are almost certainly guaranteed but at the expense of finished goods/semi-finished goods holding costs; with MTO, flexibility in reacting to market changes but at the expense of longer lead times especially when capacity becomes a constraint; finally, with the hybrid, a trade-off between the two main production strategies.

SKU analysis is the beginning of a very complex problem but the returns, from a supply chain productiveness viewpoint, is indeed rewarding.

KOH Niak Wu, Ph.D.
Singapore Institute of Manufacturing Technology, A*Star


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