SCM 2020 the new differentiator

Knut AlickeMaster Expert SCM Practice, McKinsey & CompanyProfessor for SCM, Karlsruhe Institute for Technology

October 28, 2014

CONFIDENTIAL AND PROPRIETARYAny use of this material without specific permission of McKinsey & Company is strictly prohibited

Den Danske LogistikkonferenceSUPPLY CHAIN MANAGEMENT 2014

1

Typical challenges of todays SC Managers

Shorter and more volatile business cycles

More demanding consumer base

Converging wages and increasing costs

Shortage on talent

Organization does not understand value of SC

2

3

4

5

What makes the difference of champions and followers champions in E2E SC

excel in 12 key elements

Best-practice elements of end-to-end business models

World-class planning (Advanced S&OP)

and working capital management 2

End-to-end Lean creating efficiency,

effectiveness and speed in planning and

execution

3

CSR/sustainability in operations (green

operations)4

Streamlined plant and logistics network

including standardized assets and

CAPEX optimization

5

Launch excellence as a core capability

(e.g., innovation, new product ramp-up,

greenfields)

6

Complexity management (e.g., segmen-

tation harmonization, late differentiation)7

Design to value / logistics (DtV)

involving SC early on8

Supplier collaboration / development

entering real partnership for value creation9

Full leverage of customer collaboration,

including demand management /

shaping

1010

Risk management beyond commodity

price volatility reaching the n-tier1111

Accelerated value from SCM IT

investment IT as the enabler of

business

1212

Business model integrated supply

chain supply as strategy applied to the SC

operating model

1

SOURCE: McKinsey

6

Excellent supply chain management can deliver significant impact

1 OTIF On-time in-full deliveries against committed delivery date

2 Includes cost of transportation and warehousing

CapitalCost

Service

CapitalCost

Service

Customer

service

(OTIF1)

Supply

chain

cost2

Inventory

10 15

20 40

5 15

Typical impact from best practice SC

Percent

1.4

2.9

Percent points

ROIC impact

Potential impact

of 1.4% to 3%

points on ROIC

SOURCE: McKinsey Supply Chain Practice

max

avg

7SOURCE: McKinsey

Do you remember?

From world without containers to a world with containers & fast supply chains

A world before internet and today in the digital era

What is the next BIG innovation in SCM?

8

Be ready to change and innovate your supply chain

Smart and segmented

Sustainable and agile

Offering Supply Chain as a Service

Relevant and capable (talent)

9

9 potentially economically disruptive technologies impacting SCM

SOURCE: McKinsey Global Institute analysis

SUPPLY CHAIN MANAGEMENT

Mobile Internet Automation of knowledge work

The Internet of Things Cloud technology Advanced robotics

Autonomous and nearly autonomous vehicles

3D printing Advanced materials Advanced oil and gas exploration and recovery

Smart and segmented

10

11

295 exabytes

If you stacked a pile of CD-ROMs

on top of one another until you reach

the current global storage capacity

for digital information

it would stretch

8o,ooo km

beyond the moon

12

7,ooo,ooo14,ooo,ooo21,ooo,ooo28,ooo,ooo35,ooo,ooo42,ooo,ooo49,ooo,ooo56,ooo,ooo63,ooo,ooo

84o,56o m

Every hour,

enough information

is consumed

by Internet traffic

to fill 7 million DVDs

Side by side,

they'd scale

Mount Everest

95 times

13

to fill 5,955 football fields

5oo,ooo+data centers are large enough ...

The world's

14

35,ooo,ooo,ooo,ooo,ooo,ooo,ooo

By 2020 one third of all

data will be stored or have

passed through the cloud

and we will have created

bytes of data

15

10x more servers

75x more files

50x more data

By 2020,IT departments

will be looking after

16

than in all of history prior to that

3,5oo,ooo,ooo,ooo,ooo,ooo,ooo2010 2012

o Bang

We have produced more data

in the last 2 years

17

2003 10 15 2020

6.3

6.8

7.2

7.6

~ 2008More connected

devices than people

More devices will be equipped with sensors

and provide information

SOURCE: Cisco IBSG, 2011

World population and connected devices

Billions

Today

0.5

12.5

50

25

Smart and segmented

18

"By 2020 we will have

a computer the size of

a laptop as powerful

as a human brain"Ray Kurzweil,

The Age of Spiritual Machines (1999)

SOURCE: Ray Kurzweil

Computers will be superfast in 2020

do we still need planners?

Smart and segmented

19

Crowd forecasting will significantly improve planning accuracy

Crowd forecasting will be standard

Real-time forecasting and planning

Multi-tier regression in supply chain

Forecasting cycles will go to weeks

Forecast accuracy will improve to

85+% on a weekly basis

Smart and segmented

20

Example of Kaggle competition Heritage Health Prize

The task: predict hospital stays

Method Number of single models

16

6

6

8

10

19

34

Logistic regression

Neuronal nets

Other

Regression tree

Random forest

Generalized boosted

regression models

Regression

1,300 teams participated in competitionMcKinsey team within the Top25Application of a blend of 99 different forecasting methods

SOURCE: McKinsey

Smart and segmented

Provided data

70.000 patients

3 years of medical records

Hospital stays, diagnoses,

procedures, prescriptions,

Question

How many days will each patient

stay in a hospital in year 4?

21

Leveraging life streaming video to improve on shelf availability

SOURCE: McKinsey, Yinzcam

Improvements

Shelf availability increases

Wrong placed products/broken

package can be detected

immediately

Information on which aisles are

visited leveraged to improve

planogram

Branch manager receives information about out of shelf and visited aisles

Camera at shopping cart scans shelfs on customers tour

Smart and segmented

22

The traditional top-down planning is overSmart and segmented

23

Make sure to understand the real decision makers in the flowPart of Vaccines GIO

Part of Vaccines Commercial

Part of Supply Chain Hub

Part of LOC

email exchange

email exchange in parallel

to main communication

Participation in TC

Smart and segmented

24

We will see much more social media like planning with massive increase of

information sharing

Bill of Material (BOM) will be complemented

by the bill of decision makers

Real-time communication even in big groups

Distributed and human-oriented

optimization of supply chain plans

Classic S&OP meetings will converge into

strategic planning meetings

Smart and segmented

25

In 2020 we will be able to google our supply chain for proactive bottleneck

management

SOURCE: McKinsey SC Executive Academy

BOSTON INC: SUPPLY CHAIN

BOSTON INC.

Inventory

Service

Quality

Inventory

Service

Quality

Sustainable and agile

26

Agile supply chains will be build on proactive risk management

and mitigation strategies

SOURCE: Nassim Taleb, New York Times, April 22, 2007.

2013

Another black swan event? An outlier that lies outside the realm of

regular expectations because nothing in

the past can convincingly point to its

possibility

It carries an extreme impact

In spite of its outlier status, human nature

makes us find explanations for its

occurrence after the fact making it

explainable and predictable

2020Select suppliers based on supply chain risk

profile/codex

Transparency requirements mandatory in

new contracts

Risk-cost trade-off analysis and mitigation

strategies

Ongoing monitoring for critical components

Proactive supply chain risk management

Sustainable and agile

27

New business model in 2020 Supply Chain as a Service (SCaaS)

IT (SaaS)

Transport/warehousing Planning1

Featu

res

Standardized offering

Data format aligned

Payment models based on service

delivered

Companies don't see it as core

competencies

Third-party companies offer service

1 Forecasting, production planning, supply planning, inventory management

2020

SOURCE: HBR; McKinsey

Offering Supply Chain as a Service

28

In 2020, we will see new business models like SC as a Service (SCaaS)

Transparent and accurate data

Trust of customer

Capabilities of own people

Clear SLAs and new payment models (pay by service)

SCaaS

Payment

based on "on-

time" delivery

Delivery of

goods

Payment

based on "on-

time" delivery

Information Information

Supplier Production

SOURCE: McKinsey

Offering Supply Chain as a Service

29

The "traditional" vs. the holistic school of supply chain costing considering all

cost elements from customer to supplier

19

17

24

16

20

100

4

60

40

5 - 25

10 - 30

20 - 50

20 - 80

1 Assumption WACC = 12%

SOURCE: McKinsey analysis

Traditional focus

More important and not adequately

addressed

5 - 10

Typical improve-ment potentialPercent of baseline

Relevant and capable

Current cost

Indexed

Total supply chain cost

Indirect supply chain cost

Lost margin

Obsolescence

Inventory holding1

Direct supply chain cost

SCM admin, IT, overhead

Transportation

Warehousing

30

How does the board communicate?

SOURCE: McKinsey

RevenueEBITDA

Happy

customers

Bottom-line

impact

Growth

Shareholder

value

Relevant and capable

31

How does sales communicate?

SOURCE: McKinsey

RevenueEBITDA

Happy

customers

Growth

Relevant and capable show impact

32

How does supply chain communicate?

Number of truck shipments Inventory > 6 months (finished

products, intermediates, raw

materials)

Vehicle utilization

Number of supply chain

management FTEs

AJJMAMFJ2011

12.4

12.1

-3%

2012DNOS

58.0-4%

2012DNOSAJJMAMFJ2011

60.2

0.1% p.a.

74.8 +1%

2012DNOSAJJMAMFJ2011

74.1

227.3

-0.4% p.a.-5%

2012DNOSAJJMAMFJ2011

240.0

EUR millions

Per EUR million

A lot of pain, no gain

WH contract for central Rotterdam hub prolonged

Cost reduction on sea freight by ~ 3% for next year, against industry trend

All truck drivers had environmental driving lessons, saving5% fuel

SCM administrative cost ~ EUR 2 million

SOURCE: McKinsey

Other

achievements

Relevant and capable show impact

33

Find the best people for your business and make them even better

Only 26%of companies have a

function in the board

representing the end-

to-end supply chain

A Supply Chain executive in every company

Supply Chain as a home to grow talent anddevelop senior management

Universities teach practical SCM(and not only OR algorithms)

Companies have implemented SC academies, SC change agents and a continuousimprovement process for all SC processes

Experiential learning in combination withadvanced e-learning is standard

SCM

2013

SCM

2020

Relevant and capable show impact

SOURCE: McKinsey

34