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TheEightEffectivePrinciplesofSupplyChainManagement01999AndersenConsultingTheEightEffectivePrinciplesof0nWhat are the cost and margin implications of integration for the supply chain participants?nWhat level of integration is optimal?nShould integration be pursued physically or virtually?nWhat pieces of the supply chain are candidates for outsourcing?nWhat key information is required to integrate?nHow will the information be sourced?nHow should information be managed across the supply chain?nHow do you drive value from Year 2000 systems investments?nTo what degree are the supply chain participants ready to integrate?Operational excellence?Information management?Economic incentive?Financial wherewithal?Capability to manage change?ArchitectureInformationReadinessMany questions should be asked before taking any concrete SCM initiatives.1 1999 Andersen ConsultingWhat are the cost and margin iEight fundamental principles provide the levers to balance customer service and profitable growth.Supply ChainSupply ChainSynchronizationSynchronizationCustomer-DrivenManufacturingCustomize theLogistics NetworkSupply Chain-WidePerformanceMeasurementsStrategically Sourceand Procure Supply Chain-WideTechnology StrategyDesign and DifferentiateProduct Closerto the CustomerPlan According toMarket DemandSignalsSegment CustomersBased on Needs2 1999 Andersen ConsultingEight fundamental principles pnOne-size-fits-all approach to servicenCosts and profitability averaged across segmentsnUnable to gauge likely profitability of customersnNeeds-based segmentation of customersnUnderstand the cost to serve,predict marginal profitability for each customer segmentnIdentify segment-specific service packages which maximize profitabilitynIdentify which customers will generate the highest long-term profitability Traditional Opportunities“We dont fully understand therelative value customers place on ourservice offerings”Service balanced with profitability Segment Customers Based on NeedsSegmentation typically groups customers by industry,product,or trade channel.Segmentation based on service needs allows a company to develop service portfolios tailored to various segments.3 1999 Andersen ConsultingOne-size-fits-all approach to Sales&Merchandising NeedsLowLowHighHighOrder Fulfillment RequirementsInnovatorsGraingerHome DepotWal-MartLogistics OptimizersChryslerWestinghouseMaytagDevelopingAuto ZoneStaplesTraditionalistsSmall Retail StoresSmall Industrial Wholesale DistributorsNeeds Based SegmentationAn Example of one way in which service needs may be segmented is to consider order fulfillment requirements and sales and merchandising needs.Segment Customers Based on Needs-Example:Need Based Segmentation4 1999 Andersen ConsultingSales&Merchandising NeedsLownPoor on-time delivery performance nMultiple plans functionally“optimized”nLong product delivery lead timesnFixed planning cycles and dated technologynPlanning independent of supply and demand chain partnersnLimited decision support capabilitynFast and accurate order promisingnDevelop single shared plan across the enterprisenLead time is a competitive weaponnRapid response to changes in demandnCollaboration and synchronization with business partners on supply chain activitiesnUse of simulation technologies to support business decisions Traditional Opportunities Many organizations have identified customer-driven planning processes built around creating the“perfect order”,hitting the delivery date on time in one complete damage-free shipment,supported by timely communication flows.Plan According to Market Demand Signals5 1999 Andersen ConsultingPoor on-time delivery performaCollaborative Planning and Execution in the PC industry has emerged as a method to improve alignment of supply and demand.Exacerbated by.Short product life cyclesProduct shortages Independent planning and execution decisionsPromoted by.Shared forecasting and demand Synchronized order fulfillmentJoint capacity planningCollaborativePlanningandExecutionSupply-Demand MismatchSupply-Demand AlignmentLaunch dateEnd of LifeTrue End Consumer DemandChannel OrdersSupplyUnitsUnitsTimeTimeTrue End Consumer DemandChannel OrdersSupplyLaunch dateEnd of LifePlan According to Market Demand Signals-Example6Collaborative Planning and ExenStandard product and service delivered to all customersnMake to stocknLong development lead timesnFunctionally based development processesnSegment based services with products configured to needs of customernTimely delivery of“shelf ready”product(package to order)nRapid development cycle timesnTeam-based development processesnWeb enabled design integrationnIntellectual capital leveraged for competitive advantage Traditional Opportunities Mass production manufacturing efficiencies no longer provide competitive advantage.The ability to design flexibility into products and production processes will allow companies to give their customers exactly what they want faster and with less cost.Design&Differentiate Closer to CustomerPostponement is one practice of this principle.7 1999 Andersen ConsultingStandard product and service dHigh performing global electronics companies change their demand forecasts much closer to production than low and medium performers-75%of them within a week of production.Source:Marketing and Manufacturing Managers(4/2/97 data)-How Close to Production Can Marketing Formally Change the Demand Forecast-0%25%50%75%100%LowPerformersHigherPerformers60%20%20%55%27%18%25%45%30%MediumPerformersDesign&Differentiate Closer to Customer-Example:Change Demand Forecast8 1999 Andersen ConsultingHigh performing global electronBuild to a mix of orders and forecastnComplex planning process supported by MRP/ERP softwarenLot sizes based on procurement and economies of scalenJust In Time delivery from vendor warehousesnSophisticated shop floor control systemsnQuality inspected into product according to part specificationnCustomer demand linked directly to manufacturingnQuick response or vendor managed replenishment(or VMI)nWeb-based integration to suppliers and customers for point of consumption datanTeam based focused factory work organization with flexible multi-skilled operators and few indirect staffnQuality engineered in the product and manufacturing process through joint development Traditional Opportunities Production strategies are evolving rapidly and provide a sustainable source of competitive advantage.Customer-driven manufacturing is designed to improve manufacturing operations,but the concepts apply across the supply chain.Customer-Driven Manufacturing9 1999 Andersen ConsultingBuild to a mix of orders and fHigh performing global electronics companies score higher on traditional internal manufacturing metrics.Andersen Consultings 1997 Global Electronics StudyCompleted Order Fill Rate0%25%50%75%100%LowPerformersHigherPerformers18%Cycle Time(PC and Other Companies)01Weeks 2LowPerformersHigherPerformers67%-Internal Manufacturing Metrics-Customer-Driven Manufacturing-Example:Performance Metrics10 1999 Andersen ConsultingHigh performing global electroOld ParadigmEngineering problemControl$“Crisis planning”Best of Breed toolsComponent teams“Mfg will fix it”Were done at Job 1“Firefighter”New ParadigmProduct developmentHours,quality,$Common methodologyIntegrated toolsPlatform teamsConcurrent viewProcess metrics“By the book”-A Cultural Change-The introduction of a new“manufacturing”culture focused on material flow and control,quality,and a team-based approach has produced significant improvements.Factory metricFactory metricResultsResultsSpace reductionSpace reduction40-60%40-60%Inventory reductionInventory reductionWIPWIP75-90%75-90%F/GF/G25-50%25-50%Lead-time reductionLead-time reduction75-90%75-90%Quality improvementQuality improvement 75-90%75-90%Direct labor productivityDirect labor productivity 10-15%10-15%Indirect labor productivityIndirect labor productivity 50-90%50-90%-Benefits-Customer-Driven Manufacturing-Example:Manufacturing Culture Change11 1999 Andersen ConsultingOld ParadigmNew Paradigm-A CunPrice focusednReduced number of vendorsnEDI links to vendorsnMinimal focus on non-production purchasesnVendors viewed as resources not assets(only contact is through purchasing-negotiate price,place order)nSupplier based inspection and quality reviewsnTotal lifecycle cost and value focusnGrouping commodities to leverage buying powernTotal cost of ownershipnVendor integration into supply chainnFact-based negotiationnLeverage suppliers knowledge in product designnWeb-based planning and consumption nAutomated compliance to contractnJoint cost and time reduction through robust design and process capabilities Traditional Opportunities Traditionally,manufacturers have had a short term“best pricing”focus.However,leading edge manufacturers realize“our suppliers costs are in effect our costs.”Strategically Source and Produce12 1999 Andersen ConsultingPrice focusedTotal lifecycle c5-20%cost reductionFact-Based NegotiationTotal cost approacheProcurements value proposition is high because it reduces operating costs for both buyers and suppliers.How can we save so much?Savings for BuyerVolume LeverageProductivityInventorySavings for SupplierSales&Order Mgt.Time to CollectInventoryStrategically Source and Produce-Example:Ariba Alliance135-20%cost reductionFact-BasedProfit Impact%of total spendCriticalityImportance of quality(Will unsatisfied supply lead to shut down?drop in productivity?disqualified products or services?Lost opportunities for growth?)Impact of shortageValue added provided by vendorSupply RiskNumber of vendors capable of delivering quantity&quality requiredIntensity of competition among suppliersExistence of competitive demandPrice fluctuation/Price riskLead time/Delivery riskSubstitution possibilityTo differentiate among items purchased,two dimensions stand out in the Item Management Matrix.Strategically Source and Produce-Example:CAPCO Strategic Soucing14 1999 Andersen ConsultingProfit ImpactSupply RiskTo difStrategically Source and Produce-Example:CAPCO Strategic SoucingWithin the Item Management Matrix,Items purchased can be further grouped into 4 quadrants.Materials ManagementSupply ManagementPurchasing ManagementSourcing ManagementLowHighLowHighLeverageItemsStrategic ItemsNon-critical ItemsBottleneck ItemsProfit ImpactSupply RiskItem Management Matrix15 1999 Andersen ConsultingStrategically Source and ProduLevels of SophisticationLevels of SophisticationNon-critical items:Decision Level-Lower management levelDecision Authority-Delegated to end-users,and audited afterwards;PA initiated intervention,when formal contracting and vendor consolidation is justified Procurement Focus-Convenient for businessMain Tasks-Convenient transaction modes(e.g.B/O with EDI hookup);Vendor consolidation;Product standardization;Inventory optimization;Sources-Local suppliers with alternative ones identifiedTime horizon-up to 12 monthsLeverage items:Decision Level-Medium management levelDecision Authority-Category teamProcurement Focus-Reduce profit impactMain Tasks-Exploitation of purchasing power;Monitoring possibility of solution substitution;Requests for more value-added services;Sources-Chiefly suppliers with local presence;alternative ones qualifiedTime horizon-1-3 yearsBottleneck items:Decision Level-Senior management levelDecision Authority-Category teamProcurement Focus-Reduce supply risksMain Tasks-Volume and quality insurance;Security of inventory;Exploration of alternatives;Sources-Mostly highly dependent on the resources necessary for de-bottleneck;alternative ones exploredTime horizon-Variable,dependent on the nature of supply risksStrategic items:Decision Level-Top management levelDecision Authority-Category team consists of senior managementProcurement Focus-Make conscious decisions to balance profit impact and supply risksMain Tasks-Formulation of supply management strategies explicitly linked to the corporate strategy;Partnering with suppliers to identify joint-cost reduction opportunities;Active exploration of opportunities of alliance with members in the value chain or even with complementor in other industries(e.g.purchasing group)Sources-Global suppliersTime horizon-Over 3 yearsDifferent quadrants imply different procurement management approaches.Strategically Source and Produce-Example:CAPCO Strategic Soucing16 1999 Andersen ConsultingLevels of SophisticationNon-crAll purchase items are put into 4 quadrants and different soucing strategies and purchasing processes are defined to optimize procurement cost.HighLowHighSupply RiskLowProfit ImpactPXHACSmall-Scale ProjectLarge-Scale ProjectSpecialtyChemicalsGasTankageTransportationGeneralServiceGeneralInsuranceUtilityCommonSpare PartsCapital Equipment&Specialized Spare PartsItem Management MatrixStrategically Source and Produce-Example:CAPCO Strategic SoucingExpected to release benefits at least US$10 Million annually.17 1999 Andersen ConsultingAll purchase items are put intCustomize the logistics network to the service requirements and profitability of customer segments.nLogistics network designed to meet a single standardnTypically either:nAverage or Toughestservice requirementsnCross-dockingnLogistics independent of manufacturingnCompany owned warehousing and dedicated fleetsnMulti-level logistics network to provide segment-specific servicesnRobust logistics planning enabled by“real-time”decision support toolsnOutsource some or all elements of the supply chainnInclusion of value added logistics provider or Fourth Party Logistics providernIntegrate the manufacturing and logistics processesnConfigure the network to reduce cost and replenishment lead time Traditional Opportunities.of course,customer needs and preferences do not tell the whole story,the service packages must turn a profit.Customize the Logistics Network18 1999 Andersen ConsultingCustomize the logistics networ1,2001,0008006004002000$8,470$7,700$10,010$8,000BaselineOption 1Option 3Option 2Customer FreightInterfacility FreightTotal Network Cost($000)10,20010,10010,0009,0008,0007,000Total Network Cost($000)5060708090100Option 1Option 4Option 2Option 6Option 3Option 5Percentage of Volume within Target Lead TimeTotal Logistics CostCost Service Trade-off CurveWarehousingInventory CarryingEfficient distribution strategies may require analysis of alternative network scenarios which balance cost and service requirements.Customize the Logistics Network-Example:Cost Service Trade-off Curve19 1999 Andersen Consulting1,200$8,470$7,700$10,010$8,000By moving from a myopic view of individual optimization to a channel-wide view,estimates in the food industry suggest 42%reduction in per case logistics cost and 73%reduction in total days in the systemValue-addedDistributorFoodRetailerDistributionCentresSupplierDistributionCentresIndividual OptimizationChannel-wide OptimizationTransition to Channel-Wide OptimizationAverage cost/case=$2.36#of days to the store=73Average cost/case=$1.37#of days to the store=24Customize the Logistics Network-Example:Channel-wide Optimization20 1999 Andersen ConsultingBy moving from a myopic view onEDInShop floor controlnFunctionally based systems acquisitionsnSeparate or disparate systemsnPoor customer to operations linksnIndependent financial systems(no true purchase-to-pay or order-to-receive model)nLeverage web capabilities to span the entire supply chainnGlobalization of corporate systemsnInformation clearing housesnSupply chain optimization using decision support toolsnBusiness simulation trainingnElectronic links to customer demandnAutomated order generation for POs with trackingnCustomer connectivity(analysis and response to promotions and marketing impact Traditional Opportunities Mass production manufacturing efficiencies no longer provide competitive advantage.The ability to design flexibility into products and production processes will allow companies to give their customers exactly what they want faster and with less cost.Supply Chain-wide Technology Strategy21 1999 Andersen ConsultingEDILeverage web capabilities tSupply Chain-wide Technology Strategy-Example:Lucent TechnologyEnabling technologies are significantly impacting the cost to procure.Customer Interaction TypeHighLowDirect MailContact$0.25-$5.00(1)Self-ServiceVRU/Web Interaction$0.10-$0.40(5)Telephone Customer Service Interaction$2-$5(4)Fax/MailInteraction$3-$6(3)Telemarketing Interaction$8-$24(1)Telephone Product Support Interaction$4-$75(2)Field Sales Interaction$40-$400(1)AutomatedFace-to-FaceCurrentFutureUS Interaction CostsCustomerInteractionCostsSources:(1)Lucent Technologies Marketing Costs(2)Help Desk Institute-Help Desk and Customer Support Practices(946 companies surveyed)(3)Technical Assistance Research Program(TARP)(170 companies surveyed)(4)Purdue University Center for Customer Driven Quality(200 companies surveyed)and TARP(170 companies surveyed)(5)TARP(170 companies surveyed)&Andersen Consulting Analysis22 1999 Andersen ConsultingSupply Chain-wide Technology SnPerformance measured independently by each functional areanMetrics locally optimizednToo many measures-which reduce impactnCommon report cards-set common goals&joint measures-understand how to leverage assets&skills to greatest joint advantage nSupply chain wide bottom line impact metricsnUnit Cost(total delivered)nInventory(days of supply)nLead Time(order to cash)nPerfect Order(fill rate service levels,quality,time)nFunctional metrics must feed or influence one of the four primary measuresnReturn on sales(growth in profitable market segments)nSupply chain cycle time Traditional Opportunities To focus the entire company on achieving the vision,we must rethink the way it measures and rewards behavior.Common Report CardTotal DeliveredUnit CostPerfect OrderPerformanceOrder to CashLead TimeDays supply InventoryIncreasedVolumeIncreasedMarginsJoint MeasuresPromotes win-win environmentIncreasedProfitsReturn on SalesSupply Chain-wide Performance Measurement23 1999 Andersen ConsultingPerformance measured independeRelationship Between Supply Chain Principles and Financial Outcomes1Information technology provide the infrastructure required to capture benefits across the supply chainHighMediumLow1.Segment Customers Based on Needs2.Plan According to Market Demand Signals3.Design and Differentiate Product Closer to Customer 4.Customer-driven Manufacturing5.Strategically Source and Procure6.Customize the Logistics Network7.Develop Supply-Chain Technology Strategy18.Develop Supply-ChainPerformance MeasuresRevenue GrowthAsset UtilizationCost ReductionEight PrinciplesCustomer Service24 1999 Andersen ConsultingRelationship Between Supply Ch
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