Supply chain management and the executive agenda

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Supply Chain Management and the E ti A dExecutive Agenda

David Simchi-LeviE-mail: [email protected]

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@

Professor, Massachusetts Institute of Technology

What We’ll Cover …

• Research Motivation and Background • Key Research Insights and Rules

Summary• Summary

2©Copyright 2010 D. Simchi-Levi

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Today’s Supply Chain Challenges

• Global supply chain with long lead times• Rising and shifting customer expectations• Increase in labor costs in developing countriesIncrease in labor costs in developing countries• Increase in logistics costs• Increase in risks• Importance of sustainability• Unprecedented Volatility Senior management faces competition in an


Senior management faces competition in an environment that is uncertain, dynamic and chaotic.

Identify links between supply chain strategies and the executive agendaCh t i th i t f ll i l h i t Characterize the impact of excellence in supply chain management on business and financial performance

1. Review the existing supply chain literature

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g pp y2. Interview executives from 14 companies3. Online survey of CEO, CFO and CSCO

©Copyright 2010 D. Simchi-Levi

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Participating Companies

• 196 companies have participated 173 SCM sections complete106 CEO sections complete91 CFO sections complete

• 82 companies completed all three sections

SCM• 30 Best-in-Class Supply Chains were identified

CostInventory Turn

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CFOCEO 82


Inventory TurnService LevelsLead Time

Industry Characteristics

Flexible response

0 10 20 30 40 50 60

Cost efficient

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Insight #1: Increasing drive towards flexibility and responsiveness.


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• Research Motivation and Background • Key Research Insights and Rules

Summary• Summary


Top 5 Focus areas for Best-in-Class Supply Chains

Reduction of customer lead times

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Reduction of total costs

Reduction of stock outs

Sales and Operations planning

Improvement of product or service quality

Reduction of customer lead times

Focu

s A

reas

©Copyright 2010 D. Simchi-Levi8

Percentage of Companies

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Top 30 Best-in-Class Supply Chain Performance

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Insight #2: Significant difference between Cost-Efficient and Responsive supply chain strategies


Cost-Efficient vs. Responsive Supply Chains

Cost-Efficiency Responsiveness

Primary goal Cost TimePrimary goal Cost Time

Supply Chain Innovation Process focus Product focus

Strategy High utilization High flexibility

Inventory Maximize turns Position inventory

Lead time strategy Reduce but not at expense of increasing cost

Reduce even if costs are significant

Supplier selection strategy Total Landed Cost quality Speed qualitySupplier selection strategy Total Landed Cost, quality Speed, quality

Transportation strategy Low cost transportation modes Fast modes of transportation


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Supply Chain Flexibility: Definition

• The ability to respond, or to react, to change:Demand volume and mixCommodity pricesLabor costsExchange rates……

• The objective is to Reduce cost


Reduce the amount of unsatisfied demand Improve capacity utilization

• With no, or little, penalty on response time

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Achieving Flexibility through….

• Product designModular product architecture, Standardization, Postponement, Substitution

• Process designFlexible work force, Cross-Training, Lean, Organization & Management structure, Flexible contracts, Dual sourcing, Outsourcing

• System design Capacity redundancy Manufacturing strategy Distribution


Capacity redundancy, Manufacturing strategy, Distribution strategy

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Flexibility through System Design

• Balance transportation and manufacturing costs• Cope with high forecast error• Better utilize resources

1 A

2 B

3 C

4 D

No Flexibility1 A

2 B

3 C

4 D

2 Flexibility1 A

2 B

3 C

4 D

Total Flexibility

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ProductPlant

5 E

ProductPlant

5 E

ProductPlant

5 E

Case Study: Optimizing S&OP at Pepsi Bottling Group

Make Sell Deliver Service

Operates 57 Plants in the U.S. and 103 Plants Worldwide

7 Business units in the U.S. each responsible for local demand

240,000 Miles are Logged Every Day to Meet the Needs of Our Customers

Strong Customer Service Culture

The Challenge: • Shifting consumer preference

•From carbonated to non-carbonated drinks •From cans to bottles

• Produced these products in limited plants• Service problems during periods of peak demand

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Implementation: A Three-Step Process

• Step 1: Focus on Central Business Unit (3 plants, 22 warehouses in MI, MN, WI)

Start small to understand the intricacies of the processBuild confidence in model assumptions

• Step 2: Move on to more complicated regions (East Coast – 20 plants, 125 warehouses)

• Step 3: Implement across all business units

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The Impact of Sourcing Flexibility

• Creation of regular meetings bringing together Supply chain, Transport, Finance, Sales and Manufacturing functions to discuss sourcing and pre-build strategiesReduction in raw material and supplies inventory from $201 to $195 • Reduction in raw material and supplies inventory from $201 to $195 million

• A 2 percentage point decline in in growth of transport miles even as revenue grew

• An additional 12.3 million cases available to be sold due to reduction in warehouse out-of-stock levels

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To put the last result in perspective, the reduction in warehouse out-of-stock levelseffectively added one and a half production lines worth of capacity to the firm’ssupply chain without any capital expenditure.


Rule #1: A small investment in flexibility can make a significant impact on supply chain performance.

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When to focus on Cost-Efficiency? Responsiveness?


Insight #3: Companies that focus on Market share and Revenue growth emphasize responsiveness, in particular reducing stock outs and lead times

When to focus on Cost-Efficiency? Responsiveness?

• SKU ProliferationInnovative vs. Functional Products

• Different types of CustomersypIndividual consumers vs Corporate

• Multiple channels Stores vs. Online


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Product Type: Functional vs. Innovative

Low High

Functional Innovative

Product varietyLow High

Product life cycle Long Short

Forecast accuracy High Low


Obsolescence Risk Low High

Cost of lost sale Low High

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Channel Type: Retail vs. Online

L Hi h

Retail Online

Product VarietyLow High

Customization Limited High

Forecast Accuracy High Low

Volume by Product High Low


y g

PC-DirectPC-Retail

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Functional Products Innovative Products

Strategies for Innovative vs. Functional Products

Effic

ient

Supp

ly

Cha

in(P

ush)

onsi

vepp

ly

hain

Pull)

Match

MatchMismatch

Mismatch


Res

pSu C

h (P Mismatch

Marshall L. Fisher, Harvard Business Review, March-April 1997

Retail Channel Online Channel

Strategies for Online vs. Retail Channels

Effic

ient

Supp

ly

Cha

in(P

ush)

onsi

vepp

ly

hain

Pull)

Match

MatchMismatch

Mismatch


Res

po Sup

Ch (P

Mismatch

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A Portfolio of Supply Chains: The PC Industry

Fulfillment Supply ChainPrivate Consumers

Retailers

Public Sector

EnterpriseAssemble-To-Order

No-Touch

Low-Touch

Planning

Order Fulfillm

ent

Procurem

ent

Logistics

Manufacturing

pp yPCs

Notebooks

Servers

Portfolio of ProductsPortfolio of Customers


A Portfolio of Supply Chains: The Gap Inc.

Banana Republic

Gap

Old NavyLow Cost

Fashion

Casual

Planning

Order Fulfillm

ent

Procurem

ent

Logistics

Manufacturing

Rule #2: Different brands channels andPortfolio of Brands


Customer Value Proposition

Rule #2: Different brands, channels, and product characteristics may require different supply chain strategies.

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How does CSR affect supply chain strategy?

Internal standard operating …

Environmental policy

Corporate Social Responsibility (CSR)

Product or service design for supply chain

Product or Service lifecycle management

Network redesign to support faster time to market

Forecast accuracy

Supply Chain Innovation

0% 20% 40% 60% 80%

Responsibility for social needs

Brand image benefits

Customer value

Shareholder value

Compliance to regulatory …

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©Copyright 2010 D. Simchi-Levi25

250% 10% 20% 30% 40% 50% 60% 70% 80%

Launch of new products or services

Introducing new channels of distribution

Sustainability and CO2 footprint initiatives

Insight #4: Strong correlation between CSR and innovations in the supply chain

The Nestlé Story

• Nestlé entered India in 1961• It set up its first milk processing facility at Moga in the

State of Punjab jProvided technical assistance and education to improve milk productivity and qualityEstablished milk collection points and chilling centers, Installed farm cooling tanks, Provided the transportation to pick-up milk at the farms and d li th t th ilk i f ilit


deliver them to the milk processing facility. Delivered veterinary medicines and helped the village women learn good dairy practices.

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The Nestlé Story – The Impact

• This program grew from 180 farmers in 1961 to 95,000 in 2005 and from 4 milk collection centres to 1700 during the same time period.

• It provided employment, higher income, and a higher standard of living not only to the farmers but to the entire rural community.

• This business model was not a “charity” – it allowed Nestlé to establish a unique supply chain and generated Rule #3: Corporate Social Responsibility can

create tangible business opportunity and


a new stream of revenue in a challenging market.

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create tangible business opportunity and value.

Links between SC Strategy, Business & Financial Performance

• Business Performance Indicator (BPI)Revenue, Market Share, Customer Satisfaction and Return on Equity

• Financial Performance Indicator (FPI)Return on Equity, Return on Assets, Total Assets Turnover, Inventory Turnover, Operating Cash Flow, Net Working Capital to Assets, Operating Margin, Debt to Equity Ratio, and Total Debt RatioDebt Ratio


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Links between SC Strategy, Business & Financial Performance

• 62% of the BIC supply chain companies


achieved above average BPI compared with 43% of the remaining companies

• 40% of the BIC supply chain companies achieved above average FPI compared with 24% of the remaining companies

Insight #5: Strong link between supply chain strategies and business and financial performance.

Different Ways to Compete in Retail

Customer Value Proposition Example Operations Strategy

High Fashion content at a

bl P iZara Speed to Market

reasonable Price

Customer Experience Dell Direct Responsiveness through

Configure-to-Order

Product Innovation Apple Efficiency through outsourced manufacturing and logistics Rule #4: The operations strategy that a company

d l t b t d th l iti


Everyday Low Pricing Wal-Mart Cost Efficiency

Product Selection and Availability Amazon Efficient and reliable Order

Fulfillment

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deploys must be centered on the value proposition that the firm provides to its customers.

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• Research Motivation and Background • Key Research Insights and Rules • Summary• Summary


Key insights and Rules

• Increasing drive towards flexibilitySi ifi t diff b t

• A small investment in flexibility can make a significant impact on

l h i f

Insights Rules

• Significant difference between Cost-Efficient and Responsive supply chain strategies

• Companies that focus on Market share and Revenue Growth emphasize responsiveness

• Strong correlation between CSR

supply chain performance• Different brands, channels, and

product characteristics may require different supply chains

• Corporate Social Responsibility can create tangible business opportunity and valueStrong correlation between CSR

and innovations in the supply chain

• Strong link between supply chain strategies and business and financial performance.

opportunity and value• Operations strategy must be

centered on the value proposition the firm provides its customers.

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Your Turn!

For information about my latest book, see

www.operationsrules.com 33

Supply chain management and the executive agenda

Business

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