The Power of Supply Chains

Dr. George HarrisCalyptus Consulting Group, Inc.

222 Third Street, Suite 2242Cambridge, MA. 02142

617.577.0041 (office)gharris@calyptusgroup.com

Objectives

Participants will gain knowledge about:Basic components of supply chain

managementHow to assess your organization’s supply

chainBenchmarked measures and targetsKey tasks for on-going supply chain

management

What % of items are out of stock at any one time?What is the impact of these shortages on sales?

8.3%4%

Toyota leased a cargo ship as a floating parking garage for 2,500 unsold cars.

Harvard Business Review, March 2011The Chief Supply Chain Management Officer (SCMO)

End-to-end Supply Chain UnderstandingCost-conscious outsourcing and internal solutionsAbility to partner with the CIOExperience running a business unitCollaborate across business units and global functions

Wall Street Journal Headline – March 4, 2011

Asian electronics companies announce tablet computer offeringsSame 3 companies also provide electronics (chips) to Apple

Conclusion: Your competitors are also your suppliers.

“New iPad is Two-Edged Sword for Suppliers”

Defining a Supply Chain

A chain of activities that creates and delivers the products and services to customers.

Examples of supply chain definitionsMotorola – From approval of engineering concept to delivery to first customers

Pratt & Whitney – From need for engine parts (pull system) to raw material ordering by supplier

Bank of America – From customer application to decision on mortgage application

Aim of SCM: Lowering Total CostsLower delivery, installation, or financing costLower the required rate of usage of the productLower the direct cost of using the product, such as labor,

fuel, maintenance, required spaceLower the indirect cost of using the product, or the

impact of the product on other value activities. For example, a light component may reduce the transport costs of the end product

Lower the buyer cost in other value activities unconnected with the physical product

Lower the risk of product failure and thus the buyer's expected cost of failure

Product engineering

New products only

Vendor costs • Safety stock • Flexibility • Accounts receivable

Raw material • Price • Variances • Finishing • Inspection • Safety stock

Procurement • Purchasing overhead • Transpor- tation

Process • Equipment • Direct labor • Energy • Inspection • Maintenance • Process engineering • WIP

Overhead • Planning • Scheduling • inspection • Material handling

Order fulfillment • Order entry • Order processing • Transpor- tation • Warehousing • Finished goods

Customer costs • Repair • Safety stock • Warranty • Purchasing • Inspection

Customer view

Added Value Supply Chain

Chains of activities that create and deliver the goods and services of a firm’s value chain

SuppliersSuppliers

FirmFirm CustomersCustomers

End UsersEnd Users

1st Tier1st Tier

2nd Tier2nd Tier

3rd Tier3rd Tier

Customers: • Corporate • Individuals • On-Site

Suppliers: • Travel Related • Direct Providers • Software Suppliers

Market: • Dynamic • Cost Drivers • Buyers Market • Time Sensitive • Regulated

Order Acknowledgement

and Billing

Order Management

Options

Orders

CorporateCorporate Individual On-Site

Order Quality

Order Fulfillment

Travel Services

Injection MoldingResinsSupplier

Mold/Die Maker

Capital Equipment

Manufacturer

In-bound Logistics

In-bound Logistics

Plant(Plastics

Manufacturer)

InterplantMovement

AssemblyOperations

Supplier(Plastics

Manufacturer)

Transport

ContractorTransport

Distribution Centers

Customer/Integrator

Dealer

End User

End User

Outbound Logistics

Packing and

Packaging

DistributionOperations

Customer need

Supplier and sub-suppliers capability

Information and communications systems

Market trends

Ensure organization’s interests

Delivery

What Does Managing the Supply Chain Mean?

(Median % Per Industry)

95%

92%

93%

95%

90%

95%

93%

0% 20% 40% 60% 80% 100%

Other

High Tech

Consumer Products Durables

Consumer Packaged Goods

Industrial Equipment/Machinery

Automotive

All

Measures Respondents in excellent

or very good chains Respondents in

poor chains All

respondents

Order-to-shipment Lead-time 15 days 21 days 20 days

On-time Delivery Rate 95% 90% 93%

Cash-to-cash Cycle 60 days 95 days 70 days

New Product Development Cycle 180 days 340 days 180 days

Annual Inventory Turn Rate 10 turns 6 turns 8 turns

Days of Raw Material on Hand 30 days 30 days 30 days

Days of WIP Inventory on Hand 15 days 14 days 14 days

Days of Finished Goods on Hand 15 days 25 days 15 days

Forecast / Demand

Management

Forecast / Demand

ManagementSupplySupply

ProductTransformation

and Service Execution

ProductTransformation

and Service Execution

Distribution and SupportDistribution and Support

• Source of Demand

• Forecasting Process

• Adjustment to Forecast

• Production Scheduling

• MRP Compliance

• Continuity

• Feasibility

• Improvement

• Cost Reduction

• Lead-time

• Lowest Costs

• Inter-company Transfers

• Transformation Process

• Equipment

• People

• Utilities

• Maintenance

• Process Engineering

• Warehousing

• Transportation

• Inventory Management

• Packaging

• Shipment

• Documentation

Major Barriers to Supply Chain Optimization

Forecast/Demand Management

Customer Service Poor line item availability Low percent of orders shipped

complete Large number of backorders Poor on-time shipment performance Customer complaints

Inventory Management Low turns High obsolescence

Transportation Large volumes of transferred product Heavy use of premium freight

Manufacturing Production schedule breaks Need for outsourcing Increased overtime

Warehousing Excess space / storage cost Damaged product

Finance Excess inventory carrying cost

Marketing Excess packaging material

Excessive forecast errors results in performance problems in many key business functions

Product Design

Optimize product offers and options Adjust finished goods safety stock

Design for localization Change transportation mode

Standardize to generic products over time

Implement better data systems

Customize products in software Introduce improved forecasting techniques

Manage delivery expectations (service requirements

Subcontract distribution operations

Share information with strategic partners Reward good performance (based on ship date, not delivery date)

Measure transportation performance separately

Strategically source locally (to shorten lead-times and build closer teamwork)

Review stocks more frequently

SupplyStrategic Sourcing is a structured methodology and

process which utilizes cross-functional teams and analytical tools to make buying decisions

Built on simple premise that the purpose of each buying decision is to create value

Value = Savings and Improved Customer Service

ExamplesLeverage Buying — aggregate spend across the business unit or company with fewer suppliers reducing costs: (volumediscounts, reduced inventory and process costs)

Total Cost of Operations — includes purchase price, processing costs, inventory carrying costs, logistics costs, installation and maintenance costs.

Each quadrant has its own strategy

LeverageExamples:Staff Augmentation, Fittings, Wireless Hardware

BottleneckExamples:Plant Auxiliary Systems, Turbine Generators and Control Systems

StrategicExamples:Professional and Plant Core Services, Valves, Radiation Waste Services

RoutineExamples:Office Supplies, MRO Items, Lubricants

High

HighLow

Difficulty in Finding Suppliers

Value LeversSpend Categories Result

Process Efficiency

Purchase Power

• Reduced transaction costs• Reduced purchase priceRoutineRoutine

Process Efficiency

Purchase Power

• Reduced transaction costs• Reduced purchase priceLeverageLeverage

• Reduced transaction costs• Reduced purchase price• Reduced inventory cost, cycle time, etc. • Improved visibility• Improved reach

Process Efficiency

Purchase Power

Supply Chain

Market Efficiency

BottleneckBottleneck

• Reduced transaction costs• Improved reach • Reduced inventory cost, cycle time, logistics cost• Improved visibility• Improved coordination

Process Efficiency

Purchase Power

Supply Chain

Aggregated Content

StrategicStrategic

Define Specifications Define Suppliers Define StrategyObtain Business Unit Buy-In

Implement Strategy

Objectives: Identify and profile

opportunity

Tasks: Customer Requirements

Executive Mandate Spend Analysis

Historic Future Long-Range Projects

Supply/Demand analysis Strategic Bottleneck Routine Leverage

Business Case Development

Identify key stakeholdersDeliverables: Opportunity Profiles Initial Business Case

Define special requirements and issues

Safety/Non-safety Focus on standard, then

custom

Strategy Issues Action Plan

Identify issues in the marketplace

Market Analysis Obsolescence Approved Suppliers

List Preferred Vendors Common Contract

Final Business Case Schedule Action Plan

Develop strategy to maximize outcome

Cross-functional teams

Identify opportunities to improve TCO

Identify opportunities to improve current process

Approved Business Case

Presentations One-on-ones

Strategy Document Validated Action Plan

Business Unit adoption

Blanket PO Site Specific Multiple BU

Auction One-off Buy Supplier Alliance Consignment/Vendor

Managed Inventory Reverse Engineering Change Standards Performance Incentive

based Contract

Signed contract Validated Action

Plan

Execute strategy

Supplier Selection Material

Standardization Contract

Implementation Performance

Management Savings Reporting

Right part, right place, right time, right price

Define CategorySpend

Analyze Decide Implement

• Leverage volumes

• Standardize requirements

• Eliminate sole source supply relationships

• Use value analysis

• Look for global best-in-class sources

PRODUCT/SERVICE PROCESS

• Collect spend data

• Complete category plans

• Develop sourcing strategies

• Evaluate Total Costs

• Ensure Effective Implementation

• Develop supplier performance management system

Transformation

Key Elements of StrategyCapacityFacilitiesTechnologyVertical IntegrationWorkforceQualityProduction Planning / Materials ControlOrganization

25

Influences on Transformation

26

Quality, time, and cost competitionEnvironmental controlNew product developmentGlobalization and restructuringHuman resources and empowermentTechnology and innovationStrategic alliancesOperations improvement

27

Bottleneck Analysis

Bottleneck A resource whose capacity is less than or equal to the

demand placed upon itIt is the evaluation of the capacity of resources and

demand placed upon those resources and

It is a comparison of the demand for a resource to the capacity of a resource

28

DemandDemand CapacityCapacityVs.

What is Bottleneck Analysis?

Tools for Improving Transformation

Step 1. Identify the following information about resources• Which resources are bottlenecks?• How often do the bottlenecks occur?• The severity of the bottlenecks.• Which resources are non-bottlenecks?• The amount of available non-bottleneck capacity.

Step 2. Use the tool to allow for better decision making• Determine sales or profit gain or loss• Determine bottleneck management policies• Evaluate product mix decisions• Production planning and scheduling (inventory or overtime)• Resource optimization

29

Bottleneck Analysis

Ways to Reduce Cycle TimeExpeditious design cyclesFocused plantsEfficient product flowStreamline and decision-

making processesDependable stream of

supplier furnished product

Pull products through plant

Similar services grouped for volume purchasing

Alignment of service project completion dates

Value-added Indirect Staff effort

30

• Lower tolerances

• Pool engineering change orders

• Use standard processes

• Promote design for manufacturability

• Produce a generic product

PRODUCT PROCESS

• Remove bottlenecks

• Size buffers appropriately

• Reduce set-ups

• Shorten cycle times

• Introduce self-managed work teams

• Install buffer capacity

32

SUPPLIERS AND SOURCES

MANUFACTURING AND

CONVERSION

Plants

Plants

PRIMARY DISTRIBUTION

SECONDARY DISTRIBUTION

Distribution centers

Distribution centers

Dealers OEMs

End users

Field distribution centers

Distributors

CUSTOMERS

Forces Influencing Distribution Activities Today

33

Geographic shifts in production and consumptionIncreasing market segmentationLow capital supply and high cost of borrowingRevolution in manufacturing technologyNew supply sources and constraintsEnergy cost and availabilityRegulatory changesNew labor management considerationsInternationalization of sources and markets

34

Warehousing and

Value-Added Costs

(throughput costs)

Order Processing

and Information

Costs

Order Processing

and Information

Costs

Transportation Costs

Transportation Costs

Inventory Carrying

Costs

Inventory Carrying

Costs

Production Lot

Quantity Costs

Production Lot

Quantity Costs

Cost of Lost Sales

Total Costs = Transportation Costs + Warehousing Costs + Order Processing and Information Costs + Production Lot Quantity

Costs + Inventory Carrying Costs + Cost of Lost Sales

Workload Analysis

Define Activities (Routine)ReceivingPut awayRestockStock IssuesTool issuesProcessing returnsMIS updates

Define Activities (Scheduled)CleaningInspectionsCycle countsSpecial requestsProcessing obsoleteSpecial projects

35

Actions to Improve Performance : Distribution

Supply Chain CollaborationCollaborative Planning, Forecasting and Replenishment

(CPFR) Buyers and sellers share information on demand and product

availability Cross Docking

Move product from receiving dock to shipping dock without placing the product in storage

Merge-in-Transit Orders brought together in hub, then shipped to customers

36

• Use common components and subassemblies in many products (to reduce risk of stockouts)

• Follow industry standards (to increase part availability)

• Share information with strategic partners

• Reward good performance (based on ship date, not delivery date)

• Measure transportation per- formance separately

• Subcontract inbound freight handling

• Strategically source locally (to shorten lead times and build closer teamwork)

• Review stocks more frequently

PRODUCT PROCESS

Examples of Supply Chain TransformationThyssen creates virtually integrated steel operations, linking

workers on three continents by networks and software systems (12/10)

38

Rotterdam TeamMonitors Orders

and Shipments

Rotterdam TeamMonitors Orders

and Shipments

Sepetiba BrazilProvides Steel

Sepetiba BrazilProvides Steel

Raw MaterialIron Ore(Brazil)

Raw MaterialIron Ore(Brazil)

End Customer40% N.A. Automakers

End Customer40% N.A. Automakers

Alabama PlantRolled and Treated for Use inCars, Construction, and Pipes

Alabama PlantRolled and Treated for Use inCars, Construction, and PipesFreighters

(5 Days)

Freighters(5 Days)

Managing Risk in the Supply Chain

39

Using Failure Mode and Effects Analysis (FMEA) can also help in evaluating, mitigating, and eliminating risks

ISM Inside Supply Management Magazine, December 2010 – January 2011

2011 New Thinking for SCMUse of mobile devices to track supplier performanceConsideration of “Near-sourcing’ alternativesResurgence of customer serviceOrganic collaborationLegitimate use of total cost as a decision-making tool

40

Supply Chain Diagnostic Tool

This is a tool you can use to assess your supply chain.

41

Supply Chain Diagnostic Tool

For additional information, please consult the addendum.

SCM Addendum