Supply ChainBest Practices
Joe FantasiaSupply Chain StrategyDeloitte Consulting LLP
September, 2005
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Welcome to Framingham!
Dare to be Innovative; Dare to be Different!
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This year’s nominees for “best practice” are…
And the nominees And the nominees are…are…
Collaboration
Low Cost Country Sourcing
Lean
RFIDContinuous Routing
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Differentiation!Differentiation!
And the winner is…
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As a practice becomes more widely adopted, it transitions from an emerging to a best practice, then to a standard, and finally to a basic practice
Time
…Sooner or later, the competition catches up
Usa
ge
Stage IIIBest
Stage IIStandard
Stage IBasic
Stage IVEmerging
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Why Differentiate Supply Chains?
•Supply chains play a critical role in creating enterprise value– Differentiating your supply chain can provide
sustainable competitive advantage (within reasonable opportunity windows)
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Ultimately, our role is to increase shareholder value
• Improved in-stocks• Increased
sales from new products• Improved
customer loyalty
• Reduced markdowns• Lowered
operating expenses • Optimized
product flow
• Improved inventory performance
Shareholder Value
Revenue Growth Margin Improvement Asset Efficiency
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We have entered an era of complexity that we’ve never seen before
•The pressure to continually drive down supply chain and engineering costs
•The pursuit of new lucrative markets and channels around the world
•The quickening pace of product innovation
Result
Increased complexity in the Value Chain as manufacturers expand their global presence
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At the same time, we are challenged by our own organizations, practices and performance measures
“ Optimize (fill in the blank) , and we will be efficient”“Our brand is strong enough and margins high
enough to cover our inefficiencies”“With interest rates so low, why focus on
inventory?”“We have an S&OP meeting every month… not
too many people show up though”“Don’t take volume out of my warehouse!”“I know what I should do, but I know what I’m
going to do…”
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It’s not just about cost reduction anymore
•In a world of rising costs and shrinking profits, supply chain differentiation may be the best opportunity for a company’s survival
Profits
Costs
Strategies to Addressthe Challenges
Increased Complexity
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Master SC Complexity Case Example: What differentiates a complexity master?
CUSTOMER
PRODUCT
SUPPLY CHAIN
What is the path to profitable growth?
Low
Low
G
loba
l Val
ue C
hain
Com
plex
ity
Glo
bal V
alue
Cha
in C
ompl
exit
y
Hig
hH
igh
LowLow Value Chain CapabilitiesValue Chain Capabilities HighHigh
Cost, Quality, Product Intro.Flexibility, Productivity
Innovation, Product LaunchTime-to-Market
Loyalty, Collaboration, Forecast, Service Level
Low
er C
o st /
Ne w
Mar
kets
New
Pro
duct
s
New
Mar
kets
The Goal: Profitable
Growth
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Master SC Complexity
•Factors to consider:– Are you optimizing locally, but not globally?– Is customer service a priority, but there’s not
enough commitment to it?– Is product innovation a leading contributor to
revenues, but the lowest supply chain priority?– Have you diminished your supply chain flexibility
owing to cost reduction measures?– Are you making radical changes to your supply
chain that are impacting product quality?
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Master SC Complexity Case Example: What differentiates a complexity master?
Qualifier (Average) Differentiator (High performing)
Customer
• Customer segmentation• Collaboration – demand planning• Customer service levels – fulfillment• Customer collaboration – quality
• Customer strategic planning• Collaboration – new products• Collaboration – cost reduction• Customer/channel profitability
Product
• Cross-functional design teams• SKU rationalization• Supplier collaboration • Product quality
• Product Lifecycle Management• Design for Quality/Manufacturing• Common parts/common platform• Vertically Integrated
Supply Chain
• Integrated Sales & Operations Planning
• Outsourced/low-cost manufacturing• Demand planning• Lean Manufacturing • Continuous Improvement• ISO Quality Certification
• SCM organization• Supply Chain Network Optimization• Flexible capacity/quick changeover• Production Schedule Optimization• Transportation Optimization• Organizationally Aligned Performance
Measures
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Strategies to Addressthe Challenges
Reduce Cost
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Free up Working CapitalThe Wall Street Journal estimates that nearly $600 billion in working capital is available to U.S. companies through improved supply chain management
“A cash cow of nearly $600 billion grazes in plain sight of U.S. companies, but still eludes many of them.”“That cash…could in many cases be put to better use for, say, paying off debt or creating new products.”Source: The Wall Street Journal, 8/30/04, “Ignored Money Waiting to be Spent”
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Inventory DOS vs. Customer Service
20 25 30 35 40 45 50 55 60 65
Days of Supply
Cust
omer
Ser
vice
Year 1 Performance
20 25 30 35 40 45 50 55 60 65
MarMar
June
May
Year 2 Performance(Mar – June)
June
AprApr
Real improvements require shifting the performance curve
90%
92%
94%
96%
98%
100%
Many companies have been unsuccessful in improving inventory performance. Reductions in inventory have come at the expense of lower customer service
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The companies that have been successful were able to isolate, prioritize and improve the critical capabilities which drive inventory and customer service improvements
Note: Supply chain capabilities shown above are representative of a broader list of capabilities. Comprehensive list includes additional capabilities such as: promotions planning/execution, customer service strategies, etc.
SUPPLY CHAIN CAPABILITIES
Performance Measures
CUSTOMERSERVICE
Supply Planning
InventoryPlanning
Raw/WIPManagement
Product Lifecycle
Mgmt
S&OP
DemandPlanning
Mfg Flexibility
INVENTORY
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Case Study 1: $9B Global CPG Manufacturer
The benefits of doing this correctly are significant
$460 million inventory reduction in three yearsCustomer service levels improved significantly during this time period
Inve
ntor
y(M
illio
ns o
f Dol
lars
)
1,0001,000
1,1001,100
1,2001,200
1,3001,300
1,4001,400
1,5001,500
1,6001,600
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec900
Year 2
$1,010(Year 2)
$150MM
$460MM
Year 3
$930(Year 3)
$80MM
Year 1
$1,390 (Year 0)
$1,160 (Year 1)
$230MM
Company’s best inventory performance
in over 20 years
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Strategies to Addressthe Challenges
New Markets& Channels
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Design Multiple Supply Chains
•Create multiple supply chains tailored to your product and customer profiles– “One size fits all” supply chains are a thing of the
past. They may not always be the best option or be competitive
– What is driving companies to this strategy?• Multiple product profiles• Multiple customer segments
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Design Multiple Supply Chains– Factors to consider:
• Look at the products that flow through your supply chain and ask yourself the following questions:– Are they identical, should they flow through the same
logistical system?– Do they have the same demand patterns and need similar
delivery commitments?• If the answer to any of the questions is “no”, you should
rethink the flow of your products and customize your supply chain for the flow of products
– Now look at your customer profile:• Should all of your customers have the same delivery
mode?
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Design Multiple Supply Chains
– Case Example• Situation:
– A company producing multiple products used similar shipping modes to distribute products to its channels. Products that cost several thousands of dollars flowed with products that cost a few hundred dollars or less. This increased delivery lead time, reduced cash conversion cycle, raised the potential for damage of the more expensive product
• Solution:– A faster, parcel shipping line for the expensive product linked
to the production line, and the traditional truck load shipping for the lower cost products
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Some retailers have been customizing their supply chains to maximize profitability
• Superior first cost capability
• More efficient material handling
• Better marketing intelligence
• Inventory complexity
• Low value• High cube• Extremely high
value • Short vendor
lead time• High volume/
low volume• Shelf life
• Slow moving• High value/low
cube• Unpredictable
sales pattern• Inconsistent
vendor lead time
• Break-pack
Optimal Source and Flow Alternative
Vendor-Store Vendor-DC-Store (Pick)
Vendor-DC-Store (Flow)
WholesaleDistribution
• Fast moving • Consistent seller• Low value• Variable cube• Predictable
sales pattern • Short lead time
• Jewelry• Dairy • All categories • All categories
• Seasonal
• HBC• GM• Tobacco• Specialty Foods
Example
PredominantAttributesFocusing Approach
SomeExamples
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Share your Supply Chain
•Share your supply chain– Sharing supply chains among non-competing
companies, customers, or suppliers can be another source of differentiation (different from outsourcing)
– What is driving companies to this strategy?• Small size makes it difficult to invest in comprehensive
infrastructure• Leverage economies of collaborative supply chain
partners
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Share your Supply Chain– Case Example
• Situation:– Companies A and B, both realized their retail locations were
generally located at the same mall locations. They had considered the option of a private transportation fleet, but each company realized that having an individual fleet was not economical, despite customer service advantages
• Solution:– The companies realized that a collaborative private fleet
would give them the advantages of flexibility and still provide economies of scale. They co-located their fleet/transportation personnel to manage their private fleet operations. They were able to better manage both store deliveries and reverse logistics
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Strategies to Addressthe Challenges
Product Introductions
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Synchronize Concept to Market
•Speed to Market is the latest buzzword particularly for product produced off-shore
•Yet, with long lead times for design, development and production, it is nearly impossible to match supply with demand
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Synchronize Concept to Market
•Postponement still works– Increasing product proliferation and changing
customer demands make postponement an attractive and often necessary strategy
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Replenishment
Sourcing
Production
Synchronize Concept to Market
Supply Chain
ProductDevelopment
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Synchronize Concept to MarketOne company has found a way: