Assessing the value of the supply chain

Assessing the value of the supply chain

Overview of the methodology

Contents

The goals of Supply Chain Management (SCM) 1

The scope of SCM 2

Why now? 3

Key questions 4

Value for shareholders 4

Summary 5

Functional scope 5

Activity scope 6

Methodology 6

Performance bridge 7

Components 8

Outcomes 8

Collinson Grant 9

1Assesing the value of the supply chain

The goals of Supply Chain Management (SCM)

Leading companies are exploiting their supply chains to outperform

competitors:

to achieve performance that creates more value for shareholders ¡

to re-defi ne processes and structures to eliminate costs ¡

to harmonise systems and technologies to exploit synergies and reduce ¡

costs

to generate transformational and iterative change ¡

to establish collaborative relationships to support e-commerce ¡

to maintain the prices and margins of products, despite severe ¡

pressure

to promote high performance, end-to-end visibility, customisation and ¡

lower costs

to manage complexity in a network of businesses and achieve ¡

international consistency

to foster a world-class image and uniqueness to protect lagging market ¡

capitalisation.

2

The scope of SCM

Effective SCM should align and control interactions between the buying and selling sides.


Business environmentCurrent market development

Static

S table

Dynamic

Unstable

Traditional Business

Environment

The

Future

n What flexibility do you have to

respond to frequent changes in

the supply chain

n Can you exploit that freedom?

n Can you react to customers’

short-term demands?

Better responsiveness

and use of assets

n Are metrics and processes

aligned to maximise overall

profitability?

n Are tools to support decision-

making used to improve

profitability?

Market / operating conditions

Cost efficiency


Busi

nes

s en

viro

nm

ent

Business environmentCurrent market development

Static

S table

Dynamic

Unstable

Traditional Business

Environment

The

Future

n What flexibility do you have to

respond to frequent changes in

the supply chain

n Can you exploit that freedom?

n Can you react to customers’

short-term demands?

Better responsiveness

and use of assets

n Are metrics and processes

aligned to maximise overall

profitability?

n Are tools to support decision-

making used to improve

profitability?


Cost efficiency


Busi

nes

s en

viro

nm

ent

Why now?

The unstable business environment and dynamic operating conditions require that clients improve responsiveness and

reduce costs.

Current market development

Busi

ness

envi

ronm

ent

Market/operating conditions

4

Key questions

The main aim of the assessment is to work out the fi nancial value to your organisation of the performance of SCM. This

will require answers to the following questions:

What are the current capabilities for managing and planning SCM? ¡

What are the current baseline costs, and the measures of and benchmarks for performance? ¡

What are the current problems and opportunities in SCM? ¡

What improvements could be made and how would these affect the measures of performance and benchmarks? ¡

What is the fi nancial value of improving performance? ¡

What is the high-level implementation plan, showing the tasks necessary to achieve the improvements and realize ¡

the benefi ts?

Value for shareholders

The supply chain has a big effect on value for shareholders.

Revenue

Costs

Working

capital

Fixed capital

Value for

shareholders

Profitability

Invested

capital

The shareholder value tree

Cost of goods sold (COGS)

Productivity of assets

Cost of business operations

Costs of manufacturing, conversion and

sourcing

10 - 15%

costs

Inventories of raw, part-finished and

finished products

Order-to-cash cycle time

10 - 20%

inventory

Physical assets

- Plants, warehouses, trucks, office

and support locations10 - 20%

assets

Market share

Gross margins

Service to customers

Fewer lost sales

1 - 2%

margin

Typical targeted

benefitsImpact on supply chain

éé

ê

é

ê

êê

ê

ê

ê

é

Revenue

Costs

Working

capital

Fixed capital

Value for

shareholders

Profitability

Invested

capital

The shareholder value tree

Cost of goods sold (COGS)

Productivity of assets

Cost of business operations

Costs of manufacturing, conversion and

sourcing

10 - 15%

costs

Inventories of raw, part-finished and

finished products

Order-to-cash cycle time

10 - 20%

inventory

Physical assets

- Plants, warehouses, trucks, office

and support locations10 - 20%

assets

Market share

Gross margins

Service to customers

Fewer lost sales

1 - 2%

margin

Typical targeted

benefitsImpact on supply chain

éé

ê

é

ê

êê

ê

ê

ê

é


Summary

The Supply Chain Value Assessment (SCVA) sets out the capabilities required of the supply chain for organisations to be

successful.

The SCVA focuses on fi nding opportunities to increase value in operations. ¡

SCVA connects the organisation’s objectives, supply chain capabilities and key performance indicators together to ¡

produce fact-based, value propositions.

Analysis of leading practices is used to help fi nd opportunities. SCVA does not aim to produce standard ¡

benchmarks.

SCVA is not generic. It is customised to each business’s situation and objectives. ¡

Functional scope

Value assessment can cover:

Procurement ¡

Manufacturing and assembly ¡

The management of inventory and materials ¡

Warehousing ¡

Transportation ¡

Order fulfi lment ¡

Logistics operations that add value ¡

Service and support ¡

Projects. ¡

What affects me? How will the trends

affect my business

operations?

What capabilities

must I have?

What are the

leaders doing?

How much is

changing worth?

Sector

trends

Supply

chain

capabilities

Business

impactsLeading

practices

Value

propositions

What affects me? How will the trends

affect my business

operations?

What capabilities

must I have?

What are the

leaders doing?

How much is

changing worth?

Sector

trends

Supply

chain

capabilities

Business

impactsLeading

practices

Value

propositions

6

Activity scope

SCVA assesses business practices in the supply chain in several different dimensions.

Methodology

SCVA will fi nd the major opportunities to draw up a business case for change.

Sourcing and

procurement

Logistics and

service operations

Demand/supply

planningCustomer

n Segmentation

n Service

n Services/ products

§ Planning, optimization and detailed scheduling of SC functions:

§ Managing demand

§ Managing inventory

§ Managing logistics

§ Managing labour

§ Managing procurement

§ Managing production

§ Improving operational performance

§ Selecting vendors

§ Managing vendors of logistics

§ Managing freight

§ Managing the Rail/Air/Marine fleet

§ Strategic procurement

§ eProcurement

§ Managing suppliers

§ Procurement process

Categories of business process

Information

technology

Performance

measurement

Collaboration/

extend. enter.

§ Use of performance measures

§ Overall IT enablement

§ Supply chain technology

§ Supply chain visibility and event management

§ mCommerce

§ Collaborating with partners

§ Collaborating with suppliers and customers

Supply chain spanning categories

Supply chain

network

§ Physical network -configuration and optimisation

§ Plants

§ Warehouses

§ Service locations

§ Offices

Sourcing and

procurement

Logistics and

service operations

Demand/supply

planningCustomer

n Segmentation

n Service

n Services/ products

§ Planning, optimization and detailed scheduling of SC functions:

§ Managing demand

§ Managing inventory

§ Managing logistics

§ Managing labour

§ Managing procurement

§ Managing production

§ Improving operational performance

§ Selecting vendors

§ Managing vendors of logistics

§ Managing freight

§ Managing the Rail/Air/Marine fleet

§ Strategic procurement

§ eProcurement

§ Managing suppliers

§ Procurement process

Categories of business process

Information

technology

Performance

measurement

Collaboration/

extend. enter.

§ Use of performance measures

§ Overall IT enablement

§ Supply chain technology

§ Supply chain visibility and event management

§ mCommerce

§ Collaborating with partners

§ Collaborating with suppliers and customers

Supply chain spanning categories

Supply chain

network

§ Physical network -configuration and optimisation

§ Plants

§ Warehouses

§ Service locations

§ Offices

The process of SCVA

Assess RecommendPrepare Identify

Mobilize

team

Quantitative

dataPerformance

gaps

Presentation

and review

Current

performance

Levers and

recommen-

dations

Qualitative

data

Value

proposition

Targets and

expectations

Capabilities

Opportunities

Scope and

approach

Executive Review

0 21 3

Steering Review

NB: The timeframe for the value process will vary with the scope (at geographic, functional

and activity levels)

The process of SCVA

Assess RecommendPrepare Identify

Mobilize

team

Quantitative

dataPerformance

gaps

Presentation

and review

Current

performance

Levers and

recommen-

dations

Qualitative

data

Value

proposition

Targets and

expectations

Capabilities

Opportunities

Scope and

approach

Executive Review

0 21 3

Steering Review

NB: The timeframe for the value process will vary with the scope (at geographic, functional

and activity levels)


Performance bridge

We use a performance bridge to clarify the fi ndings about the value chain. This:

is adaptable and straightforward ¡

can be used for static data or time series ¡

can mix negative and positive fi nancials ¡

can be used qualitatively to show positive and negative factors, or where value is created and where it is ¡

destroyed.

The starting point is the top (or bottom) of each bar, moving left to right.

400 -450

Net

revenue

Cost of

goods

sold

Capital

sale

Loss before

interest and tax

Overheads

-60 -110 40

Interest

Income

100 -10 20

TaxesNet

profit

400 -450

Net

revenue

Cost of

goods

sold

Capital

sale

Loss before

interest and tax

Overheads

-60 -110 40

Interest

Income

100 -10 20

TaxesNet

profit

400 -450

Net

revenue

Cost of

goods

sold

400 -450

Net

revenue

Cost of

goods

sold

Capital

sale

Loss before

interest and tax

Overheads

-60 -110 40

Interest

Income

100 -10 20

TaxesNet

profit

Capital

sale

Loss before

interest and tax

Overheads

-60 -110 40

Interest

Income

100 -10 20

TaxesNet

profit

8

Components

Components of the value assessment are:

Qualitative surveys – to defi ne the relevant problems and opportunities ¡

Diagnostic tools – to help understand the problems and defi ne the opportunity ¡

Quantitative assessment – to defi ne the fi nancial value ¡

Sector benchmarks – to evaluate the impact of improvements in performance ¡

High-level roadmap for implementation - option. ¡

Outcomes

A qualitative assessment questionnaire can be employed to provide a top-down analysis to create a view of current

capabilities.

Capability Radar

0102030

405060708090

100Supply Chain Alignment

Customer Connectivity

Efficient Distribution

Demand Driven Planning

Lean Manufacturing

Supplier Management

Integrated SystemsAdvanced Information Technologies

Integrated Product Development

Outcome-Focused Performance Measurement

Teamwork

Aligned Organisation Structure

Execution of Change Plans

0102030

405060708090

100Supply Chain Alignment

Customer Connectivity

Efficient Distribution

Demand Driven Planning

Lean Manufacturing

Supplier Management

Integrated SystemsAdvanced Information Technologies

Integrated Product Development

Outcome-Focused Performance Measurement

Teamwork

Aligned Organisation Structure

Execution of Change Plans

Management

Operations

Opportunity matrix

Expected Benefit Low High

Easy

Complex

Ea

se

of

imp

lem

en

tatio

n • Consignment stock

• Monitor X% reserve

requirement

• Capture stock out

information

• Manage service level

• Forecast lifting for terminal

• Optimize boned stock

• Monitor Product Profitability

• Joint venture (purchase

inventory from the joint

venture partner

• Rationalize terminal

• Schedule discharging at

terminal

• B/L and swap

arrangement

• Disposition strategy

• Monitor product profitability

• Increase supply sale

• Capture in-transit volume

Illustrative


The aggregated benefi ts will form the basis of an integrated plan for implementation and a business case. For example:

Legislated reserve x.x x.x

In-transit volume x.x x.x

Optimize bonded stock at refinery x.x x.x

Optimize Replenishment Cycle x.x x.x

Reduce demand variability by customer segmentation x.x x.x

Improve customer service level x.x x.x

Monitor Product Profitability x.x x.x

B/L & Swap Arrangement x.x x.x

List of Opportunities Potential Value

Note :

1) Estimate benefit are based on average inventroy level in 1998 assuming that refinery has

avaliable capacity to keep as a bonded stock

2) Assume that the contraint on vessel avalibility can be managed and forecast accuracy are

improved by 50 %

3) Safety stock reduction is limited to the 3% reserve level if inventory is at 3% reserve level benefit

of the opportunity may be be realised

4) Opportunity identified during the course of analyses

First year Annual

OpportunityArea

Inventory

Shipping costs

Trucking costs

Contribution Margin

How to realise the benefits

Managing to safety stock targets, which are statistically set to reflect

actual, uncontrollable variability in demand and supply; releasing tank

heels of excess tanks

Changing drop routes and vessel sizes to optimise per unit costs

(accounting for impacts on average inventory); eliminating spot

vessel costs incurred as supplementary to replenishment by time-

chartered vessel

Using larger trucks and enabling ease of operations through efficient

scheduling to achieve better haulage rates (may require some

renegotiation of contracts)

Reallocating resources within customer segments to match customer

value; margin management imperatives in stock allocation and times

of critical supply; retaining/ acquiring more customers through supply

chain efficiency, guaranteeing service levels and managing customer

relationships; better price-related trading vs marketing decisions

Value(% of baseline)

17 - 21%

8 - 12%

2 - 5%

0.6 - 2%

Q3’99 Q4’99 Q1’00 Q2’00

Benefit Capture

Q3’00 Q4’00

Roll out InitiativeBenefit Capture Q2’99

- -

0.23

0.88 0.88

0.45

0.24

Supply Planning Performance

1)

2)

3)

.

.

.

.

.

>> Program managementTotal Savings by Quarter

( Million US$)

Internal Man-day

External Man-day

Benefits

Aggregate benefits

Implementation and delivery

IllustrativeLegislated reserve x.x x.x

In-transit volume x.x x.x

Optimize bonded stock at refinery x.x x.x

Optimize Replenishment Cycle x.x x.x

Reduce demand variability by customer segmentation x.x x.x

Improve customer service level x.x x.x

Monitor Product Profitability x.x x.x

B/L & Swap Arrangement x.x x.x

List of Opportunities Potential Value

Note :

1) Estimate benefit are based on average inventroy level in 1998 assuming that refinery has

avaliable capacity to keep as a bonded stock

2) Assume that the contraint on vessel avalibility can be managed and forecast accuracy are

improved by 50 %

3) Safety stock reduction is limited to the 3% reserve level if inventory is at 3% reserve level benefit

of the opportunity may be be realised

4) Opportunity identified during the course of analyses

First year Annual

OpportunityArea

Inventory

Shipping costs

Trucking costs

Contribution Margin

How to realise the benefits

Managing to safety stock targets, which are statistically set to reflect

actual, uncontrollable variability in demand and supply; releasing tank

heels of excess tanks

Changing drop routes and vessel sizes to optimise per unit costs

(accounting for impacts on average inventory); eliminating spot

vessel costs incurred as supplementary to replenishment by time-

chartered vessel

Using larger trucks and enabling ease of operations through efficient

scheduling to achieve better haulage rates (may require some

renegotiation of contracts)

Reallocating resources within customer segments to match customer

value; margin management imperatives in stock allocation and times

of critical supply; retaining/ acquiring more customers through supply

chain efficiency, guaranteeing service levels and managing customer

relationships; better price-related trading vs marketing decisions

Value(% of baseline)

17 - 21%

8 - 12%

2 - 5%

0.6 - 2%

Q3’99 Q4’99 Q1’00 Q2’00

Benefit Capture

Q3’00 Q4’00

Roll out InitiativeBenefit Capture Q2’99

- -

0.23

0.88 0.88

0.45

0.24

Supply Planning Performance

1)

2)

3)

.

.

.

.

.

>> Program managementTotal Savings by Quarter

( Million US$)

Internal Man-day

External Man-day

Benefits

Aggregate benefits

Implementation and delivery

Illustrative

10

Collinson Grant

Collinson Grant is a management consultancy with a history of profi table

growth. We help large organisations all over Europe and in the United States

to restructure, merge acquisitions, cut costs, increase performance and profi t,

and manage people. By building long-term relationships, we have kept some

clients for thirty years.

Our emphasis is on implementation, results and value-for-money. We expect

to give a substantial return on the investment in us. So we do not recommend

action unless we are sure that the outcome will be worth it. We are not afraid

to give bad news, or to champion ideas that may not be welcome.

Most of our work is on three themes – organisation, costs and people. We

use this simple framework to manage complex assignments - often with an

international dimension - and to support managers on smaller, more focused

projects. We help them:

to restructure and integrate - following acquisitions or to improve ¡

profi ts

to improve the supply chain. We examine every process and interface ¡

to improve effi ciency and service

to set up fi nancial and managerial controls. We create robust systems ¡

to improve decision-making and reduce risks

to refi ne business processes and introduce lean manufacturing. We ¡

analyse and improve how work is done, and use new ways to create

change and make it stick

to cut costs. We make systematic analyses of overheads, direct costs, ¡

and the profi tability of customers and products. This helps managers

to understand complexity, and to take fi rm steps to reduce it

to manage people. We draw up pay schemes and put them into effect, ¡

guide managers on employee relations and employment law, get better

performance from people, and manage redundancy.

Collinson Grant Limited

Ryecroft, Aviary Road, Worsley, Manchester, M28 2WF United Kingdom

Telephone (0) 161 703 5600 Facsimile (0) 161 790 9177

33 St James’s Square London SW1Y 4JS

Telephone (0)20 7661 9382 Facsimile (0)20 7661 9400

En France 03 20 65 18 81 Innerhalb Deutschlands 0211 4054 800

In the United States 1 508 358 3400

Web www.collinsongrant.com

Part of Collinson Grant Group Limited

Assessing the value of the supply chain

Leadership & Management

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