Supply Chain Best Practices Joe Fantasia Supply Chain

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Supply Chain Best Practices Joe Fantasia Supply Chain Strategy Deloitte Consulting LLP September, 2005

Supply Chain Best Practices Joe Fantasia Supply Chain Strategy Deloitte Consulting LLP September, 2005

Welcome to Framingham! Dare to be Innovative; Dare to be Different! Copyright © 2005

Welcome to Framingham! Dare to be Innovative; Dare to be Different! Copyright © 2005 Deloitte Development LLC. All rights reserved. 2

This year’s nominees for “best practice” are… Collaboration Continuous Routing RFID And the nominees

This year’s nominees for “best practice” are… Collaboration Continuous Routing RFID And the nominees are… Lean Copyright © 2005 Deloitte Development LLC. All rights reserved. Low Cost Country Sourcing 3

And the winner is… Differentiation! Copyright © 2005 Deloitte Development LLC. All rights reserved.

And the winner is… Differentiation! Copyright © 2005 Deloitte Development LLC. All rights reserved. 4

As a practice becomes more widely adopted, it transitions from an emerging to a

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 Stage III Stage I Emerging Best Standard Basic Usage Stage IV Time …Sooner or later, the competition catches up Copyright © 2005 Deloitte Development LLC. All rights reserved. 5

Why Differentiate Supply Chains? • Supply chains play a critical role in creating enterprise

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) Copyright © 2005 Deloitte Development LLC. All rights reserved. 6

Ultimately, our role is to increase shareholder value Shareholder Value Margin Improvement Revenue Growth

Ultimately, our role is to increase shareholder value Shareholder Value Margin Improvement Revenue Growth • Improved instocks • Reduced markdowns • Increased sales from new products • Lowered operating expenses • Improved customer loyalty • Optimized product flow Copyright © 2005 Deloitte Development LLC. All rights reserved. Asset Efficiency • Improved inventory performance 7

We have entered an era of complexity that we’ve never seen before • The

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 Copyright © 2005 Deloitte Development LLC. All rights reserved. 8

At the same time, we are challenged by our own organizations, practices and performance

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…” Copyright © 2005 Deloitte Development LLC. All rights reserved. 9

It’s not just about cost reduction anymore • In a world of rising costs

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 Copyright © 2005 Deloitte Development LLC. All rights reserved. 10

Strategies to Address the Challenges Increased Complexity

Strategies to Address the Challenges Increased Complexity

Master SC Complexity The Goal: Profitable Growth New Markets New Products Lower Cost/ New

Master SC Complexity The Goal: Profitable Growth New Markets New Products Lower Cost/ New Markets Low Global Value Chain Complexity High Case Example: What differentiates a complexity master? What is the path to profitable growth? Loyalty, Collaboration, Forecast, Service Level CUSTOMER Innovation, Product Launch Time-to-Market PRODUCT Cost, Quality, Product Intro. Flexibility, Productivity SUPPLY CHAIN Low Value Chain Capabilities Copyright © 2005 Deloitte Development LLC. All rights reserved. High 12

Master SC Complexity • Factors to consider: – Are you optimizing locally, but not

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? Copyright © 2005 Deloitte Development LLC. All rights reserved. 13

Master SC Complexity Case Example: What differentiates a complexity master? Qualifier (Average) Customer Product

Master SC Complexity Case Example: What differentiates a complexity master? Qualifier (Average) Customer Product • Customer segmentation • Customer strategic planning • Collaboration – demand planning • Collaboration – new products • Customer service levels – fulfillment • Collaboration – cost reduction • Customer collaboration – quality • Customer/channel profitability • Cross-functional design teams • Product Lifecycle Management • SKU rationalization • Design for Quality/Manufacturing • Supplier collaboration • Common parts/common platform • Product quality • Vertically Integrated • Integrated Sales & Operations Planning • SCM organization • Outsourced/low-cost manufacturing Supply Chain Differentiator (High performing) • Demand planning • Lean Manufacturing • Continuous Improvement • ISO Quality Certification Copyright © 2005 Deloitte Development LLC. All rights reserved. • Supply Chain Network Optimization • Flexible capacity/quick changeover • Production Schedule Optimization • Transportation Optimization • Organizationally Aligned Performance Measures 14

Strategies to Address the Challenges Reduce Cost Copyright © 2005 Deloitte Development LLC. All

Strategies to Address the Challenges Reduce Cost Copyright © 2005 Deloitte Development LLC. All rights reserved. 15

Free up Working Capital The Wall Street Journal estimates that nearly $600 billion in

Free up Working Capital The 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” Copyright © 2005 Deloitte Development LLC. All rights reserved. 16

Many companies have been unsuccessful in improving inventory performance. Reductions in inventory have come

Many companies have been unsuccessful in improving inventory performance. Reductions in inventory have come at the expense of lower customer service Inventory DOS vs. Customer Service 100% Year 2 Performance (Mar – June) May 98% Apr Mar June 96% 94% Year 1 Performance 92% 90% 20 25 30 35 40 45 50 55 60 65 Days of Supply Real improvements require shifting the performance curve Copyright © 2005 Deloitte Development LLC. All rights reserved. 17

The companies that have been successful were able to isolate, prioritize and improve the

The companies that have been successful were able to isolate, prioritize and improve the critical capabilities which drive inventory and customer service improvements SUPPLY CHAIN CAPABILITIES CUSTOMER SERVICE Supply Planning Inventory Planning Mfg Flexibility S&OP Demand Planning INVENTORY Raw/WIP Management Product Lifecycle Mgmt Performance Measures 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. Copyright © 2005 Deloitte Development LLC. All rights reserved. 18

The benefits of doing this correctly are significant Case Study 1: $9 B Global

The benefits of doing this correctly are significant Case Study 1: $9 B Global CPG Manufacturer 1, 600 Year 1 Company’s best inventory performance in over 20 years (Millions of Dollars) Inventory 1, 500 Year 2 1, 400 $1, 390 (Year 0) 1, 300 $230 MM Year 3 1, 200 $1, 160 (Year 1) 1, 100 $1, 010 $150 MM (Year 2) 1, 000 $930 (Year 3) 900 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec $80 MM $460 million inventory reduction in three years Customer service levels improved significantly during this time period Copyright © 2005 Deloitte Development LLC. All rights reserved. 19

Strategies to Address the Challenges New Markets & Channels Copyright © 2005 Deloitte Development

Strategies to Address the Challenges New Markets & Channels Copyright © 2005 Deloitte Development LLC. All rights reserved. 20

Design Multiple Supply Chains • Create multiple supply chains tailored to your product and

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 Copyright © 2005 Deloitte Development LLC. All rights reserved. 21

Design Multiple Supply Chains – Factors to consider: • Look at the products that

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? Copyright © 2005 Deloitte Development LLC. All rights reserved. 22

Design Multiple Supply Chains – Case Example • Situation: – A company producing multiple

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 Copyright © 2005 Deloitte Development LLC. All rights reserved. 23

Some retailers have been customizing their supply chains to maximize profitability Example Optimal Source

Some retailers have been customizing their supply chains to maximize profitability Example Optimal Source and Flow Alternative Vendor-Store Vendor-DCStore (Pick) Predominant Attributes Focusing Approach • 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 • Fast moving • Consistent seller • Low value • Variable cube • Predictable sales pattern • Short lead time • Superior first cost capability • More efficient material handling • Better marketing intelligence • Inventory complexity Some Examples • Jewelry • Dairy • All categories • Seasonal • HBC • GM • Tobacco • Specialty Foods Copyright © 2005 Deloitte Development LLC. All rights reserved. Vendor-DCStore (Flow) Wholesale Distribution 24

Share your Supply Chain • Share your supply chain – Sharing supply chains among

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 Copyright © 2005 Deloitte Development LLC. All rights reserved. 25

Share your Supply Chain – Case Example • Situation: – Companies A and B,

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 Copyright © 2005 Deloitte Development LLC. All rights reserved. 26

Strategies to Address the Challenges Product Introductions Copyright © 2005 Deloitte Development LLC. All

Strategies to Address the Challenges Product Introductions Copyright © 2005 Deloitte Development LLC. All rights reserved. 27

Synchronize Concept to Market • Speed to Market is the latest buzzword particularly for

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 Copyright © 2005 Deloitte Development LLC. All rights reserved. 28

Synchronize Concept to Market • Postponement still works – Increasing product proliferation and changing

Synchronize Concept to Market • Postponement still works – Increasing product proliferation and changing customer demands make postponement an attractive and often necessary strategy Copyright © 2005 Deloitte Development LLC. All rights reserved. 29

Synchronize Concept to Market Product Development Production Replenishment Sourcing Supply Chain Copyright © 2005

Synchronize Concept to Market Product Development Production Replenishment Sourcing Supply Chain Copyright © 2005 Deloitte Development LLC. All rights reserved. 30

Synchronize Concept to Market One company has found a way: Copyright © 2005 Deloitte

Synchronize Concept to Market One company has found a way: Copyright © 2005 Deloitte Development LLC. All rights reserved. 31