Daily Plan-Day 1

Supply Chain Management for Competitive Advantage Reference study: SCM Overview -2

Background of Supply Chain Management The supply chain network – a new business model? Competitive advantage from the supply chain SCM Maturity and Business Performance Supply Chain Visibility and its impacts Developing Supply Chain Management Key Performance Indicators mapped to business strategy. (SCOR Card)

1

Case Study or in class exercise 1

Form groups and complete a team exercise

Day 1 - AM

Designing Supply Chain Process and Organizations Reference study: Supply Chain Planning-14

The SCOR Model – Class Exercise Aligning the SC design with business strategies. Supplier Selection – A Strategic Decision Supplier Development – Building Capabilities SCM Organization Models and how they align to the supply chain strategy

Day 1 - PM

2

Review the Maturity Assessment

Team Exercises in Supply Chain Management Maturity. A review of the assessment results.

End of the day

Module Overview

• Background of Supply Chain Management

• The Supply Chain Network

• Competitive Advantage from the supply chain – SCM Maturity and Business Performance

• Supply Chain Visibility and its impacts

• SCM KPIs mapped to Business Strategy

Background of Supply Chain Management

“It's no longer about competing products. It's about competing supply chains. The company with the most streamlined, cost-effective, collaborative supply chain wins”.

SAP

History of Supply Chain Initiatives

60’s 1970 1985 1990 1995 2000 2004

MRP MR

P II

S&

OP

, JI

T

Clo

sed

Loop

MR

P

ER

P

TQM

Man

ufac

turi

ng E

xcel

lenc

e

Con

tinuo

us Im

prov

emen

t

ReorderPoints

1980

1981

1979

Lean

, Six

-sig

ma

BP

R

1996 - Supply ChainCouncil Formed

2000

- Sup

ply

Cha

in

Net

wor

ks E

mer

geS

uppl

y C

hain

Ris

k M

anag

emen

t

Supply Chain DEFINITIONS

Supply Chain: The global network used to deliver products and services from raw materials to end customers through an engineered flow of information, physical distribution, and cash. APICS

Supply Chain: The integrated processes of Plan, Source, Make, Deliver, and Return…spanning your suppliers’ supplier to your customers’ customer, aligned with Operational Strategy, Material, Work & Information Flows. Supply Chain Council

Suppliers Make/Maintain CustomersDistribution Depot

• The five distinct management processes link together (the chain in supply-chain) seamlessly from supplier to customer

Supplier

Plan

Customer Customer’sCustomer

Suppliers’Supplier

Make DeliverSource Make DeliverMakeSourceDeliver SourceDeliver

Internal or External Internal or External

Your Company

Source

Return Return ReturnReturn Return Return Return Return

SCOR Model

Supply Chain Execution Processes

Latin AmericanLatin AmericanSuppliersSuppliers

WarehouseWarehouse

Other SuppliersOther Suppliers

ManufacturingManufacturing

European SupplierEuropean SupplierC ustom er

C ustom er

C ustom er

C ustom erWarehouseWarehouse

WarehouseWarehouse

WarehouseWarehouse

Outgoing material

Incoming from supplier

Returns

CustomersCustomers

CustomersCustomers

Customers’Customers’

CustomersCustomers

A Global Supply Chain

Supply Chain Management DEFINITIONS

Supply Chain Management: The design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand, and measuring performance globally. APICS

Supply Chain Optimization: the activities (such as planning, work flow and process improvements, trade-offs) that provide the goods to the consumer in an “optimal” manner – the best trade-off between the lowest cost, lowest inventory, and best due-date performance.

SCS

SCDSS

PM

SRM

Business Strategy

DM

Core SC Processes

SC ManagementProcesses (operational)

CM

PSRMRP

Orders

RP

MDM

Signal

SCPln

CI RM

PTCA

SC Supporting Processes

ENQM

AP

SC ManagementProcesses (Strategic)

Supply Chain Management Processes

Supply Chain Flows

The ‘Chain’ is a series of connected activities and physical processes

Product

Information

Cash

Product Returns

Suppliers Make/Maintain CustomersDistribution Depot

Supply Chain Classifications

The Supply Chain Network

Supply Management Evolution

Time

Su

pp

ly B

as

e P

erf

orm

an

ce/C

ap

abil

ity

Higher

TOTAL QUALITY

MANAGEMENT

SUPPLY BASE ASSESSMENT

SUPPLY BASEREDUCTION

REACTIVE SUPPLIER

DEVELOPMENT

STRATEGIC SUPPLIER

DEVELOPMENT

Lower

Evolutionary Strategies

SUPPLYNETWORK

MANAGEMENT

CustomersSuppliers(And outsourceManufacturing)

Suppliers’ Environment

Customers’ Environment

Organization

Organization’s Environment

Customer Facing

Supplier Facing

Internal Facing

Global Environment

Perspectives

Perspective is Important

Supply Network

s

s

s

s

s

s

s

SC Network

Organizer

Commodity Category

Interactions and Relationship

Supplier Attributes

Supplier Environment

Supply Chain Network:A complex adaptive supply network is a collection of firms that seek to maximize their individual profit and livelihood by exchanging information, products, and services with one another’’ (Choi et al., 2001).Choi, T.Y., Dooley, K.J., Rungtusanatham, M., 2001. Supply networks and complex adaptive systems: Control versus emergence. Journal of Operations Management 19 (3), 351–366.

Competitive Advantage from the supply chain – SCM Maturity and Business

Performance

Supply Chain Excellence Objective

Achieving and maintaining a competitive edge in supply chain…

ReliabilityResponsivenessFlexibilityCostAsset ManagementQuality

“Delivery of Cash is the ultimate supply chain management metric.” S.Mozaffar,Gp.VP-ICI Chemicals, 2003

Where are the “Leaders” focusing their efforts? Where are the “Leaders” focusing their efforts?

• Global SAP Implementation• Enterprise Cost Efficiency Program Office (PMO)• Aggressive SKU Rationalization / Simplification• Expanded Sourcing strategy & Cash focus• Customer Direct Ship Program

• Global SAP Implementation• Enterprise Cost Efficiency Program Office (PMO)• Aggressive SKU Rationalization / Simplification• Expanded Sourcing strategy & Cash focus• Customer Direct Ship Program

• Centralizing Supply Chain Management• Focus on Basics – S&OP and APS tools• Dramatic working capital improvement• Strategic-level Customer Relationships• RFID leadership

• Centralizing Supply Chain Management• Focus on Basics – S&OP and APS tools• Dramatic working capital improvement• Strategic-level Customer Relationships• RFID leadership

• Global “Funding the Growth” program (PMO)• Cross functional “Go-to-Market” teams for NPI• Leveraging global SAP platform for SC Optimization • Demand Pull Focus & Disciplined S&OP• Regional Mfg - Global sourcing & SC coordination

• Global “Funding the Growth” program (PMO)• Cross functional “Go-to-Market” teams for NPI• Leveraging global SAP platform for SC Optimization • Demand Pull Focus & Disciplined S&OP• Regional Mfg - Global sourcing & SC coordination

• Targeting 10 inventory turns by 2005• “Agent-enabled Supply Network” by 2008• Plant and DC Network Optimization • Rolling out `Produce-to-Demand` Capability• CPFR and Scan-based trading

• Targeting 10 inventory turns by 2005• “Agent-enabled Supply Network” by 2008• Plant and DC Network Optimization • Rolling out `Produce-to-Demand` Capability• CPFR and Scan-based trading

Where are the “Leaders” focusing their efforts? Where are the “Leaders” focusing their efforts?

Process Maturity Definition

Process Maturity postulates that:

• Organizations of higher maturity are more productive and that

• Processes, in order to mature and improve, have to go through Evolutionary Phases defined as Ad-hoc, Defined, Managed, Leveraged, and Optimized

Components of Process Maturity

• Leadership - that actively supports & believes in the process value proposition and

participates in the process.

• Strategy – that aligns with the process (customer focused) values between

company, customers, and suppliers.

• Structure – informal and formal cross functional (horizontal) team based

organization structures with broad process ownership with authority (and

investments) clearly assigned.

• Process – the process is defined, documented and understood by a majority of the

company (not just the people directly involved). People speak in the process

“language”.

• People – that are skilled, trained and capable with multi-dimensional jobs and

authority. Also a “learning” and continuous improvement philosophy.

• Systems – that enable information sharing and collaboration between business

functions and units, organization and suppliers; organization and customer

Maturity Relationships

Pro

cess

Mat

uri

ty

High

High

Low

Low

Process M

aturit

y

Accuracy

/ Contro

l

Stability

Predictabilit

y / C

ertainty

Efficiency

Effecti

veness

Capability

Business

Perfo

rmance

Esprit

d’ Corps P

roce

ss F

ocu

s

Internal - withinfunctions

Inter-functional

Inter- company

Process Performance

Maturity Relationships

Source: Dorfman, M. and Thayer, R.H. (1997). The Capability Maturity Model for Software. Software Engineering, pp.427-438.

The company, its vendors and suppliers, take cooperation to the process level. Organizational structures and jobs are based on process, and traditional functions, as they relate to the supply chain, begin to disappear altogether. Process measures and management systems are deeply imbedded in the organization. Advanced process management practices take shape.

Ad Hoc

Defined

Managed

Leveraged

Optimized

Pro

cess

Mat

uri

ty

Processes are unstructured and ill-defined. Process measures are not in place and the jobs and organizational structures are based upon the traditional functions, not horizontal processes. Individual heroics and “working around the system” are what makes things happen.

Basic processes are defined and documented. Changes to these processes must now go through a formal procedure. Jobs and organizational structures include a process aspect, but remain basically traditional. Representatives from functions meet regularly to coordinate with each other concerning process activities, but only as representatives of their traditional functions.

The breakthrough level. Managers employ process management with strategic intent. Broad process jobs and structures are put in place outside of traditional functions. Cooperation between intra-company functions, vendors and customers takes the form of teams that share common process measures and goals.

Competition is based upon multi-firm networks. Collaboration between legal entities is routine to the point where advanced process practices that allow transfer of responsibility without legal ownership are in place. Trust and mutual dependency are the glue holding the extended network together. A horizontal, customer-focused, collaborative culture is firmly in place.

The Process Maturity Model: Best Processes, Practices, & Enablers

Total SCM Cost Impacts and Definition

Mature Supply Chains realize savings:

Total Supply Chain Management Costs

3.70% 4.30%

5.10%2.60%

2.60%

1.70%

0.40%

0.30%

0.50%

0.70%

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

Linked andbelow

I ntegrated andabove

% o

f R

even

ue

SC I T Cost

SC Finance & PlanningCostI nventory Carrying Cost

Material Acquisition

Order Management Cost

12.3%

9.6%

Levels 1-2 Levels 3

Source: A Presentation to SCC Members “Supply Chain Practice Maturity Model and Performance Assessment”, The Performance Measurement Group, November 6th, 2001.

Ad Hoc

Defined

Managed(Linked)

Leveraged(Integrated)

1. Source: “Procurement: Current Benchmark Findings.” The Hacket Group, 2004

Optimized

SCM Maturity and Associated Performance

7700No. of SuppliersPer $B Spend

Suncor - 8125

1.0

2.0

3.0

4.01700

No. of SuppliersPer $B Spend

1% of SpendProcurement

Costs

Suncor – 0.96%

0.7% of SpendProcurement

Costs

104No. of FTEs

Per $B Spend

Suncor - 200

54No. of FTEs

Per $B Spend

RM ProcessesLT=1SS=1PO=1

RM ProcessesLT<40%SS<40%PO>40%

2. “The Quit Revolution in Supplier Management.” Aberdeen Group, 2004

1 1 12

Anticipated Performance at the Top Maturity LevelsROI = 20% ROCE = 19.5%

Performance at Lower Maturity Levels ROI = 16.5% ROCE = 16%

3. A Presentation to SCC Members “Supply Chain Practice Maturity Model and Performance Assessment”, The Performance Measurement Group, November 6th, 2001.

3

LT = LeadtimeSS = Safety StockPO = Perfect Order

Ad Hoc

Defined

Managed(Linked)

Leveraged(Integrated)

Source: Grosspietcsch, J. and Kupper, J. “Supply Chain Champs” (2004). The McKinsey Quarterly. 2004. No. 1

Optimized

SCM Maturity and Associated PerformanceConsumer Goods Companies

18%Weekly Measurement

Frequency 1.0

2.0

3.0

4.042%

Weekly MeasurementFrequency

5.3% of SalesLogistics

Costs

4.1% of SalesLogistics

Costs

4.0 DaysDelivery

Times

<2.5 DaysDelivery Times

96%PerfectOrder

99%Perfect Order

Performance at the Top Maturity Levels

Performance at Lower Maturity Levels

Ad Hoc

Defined

Managed(Linked)

Leveraged(Integrated)

Source: Grosspietcsch, J. and Kupper, J. “Supply Chain Champs” (2004). The McKinsey Quarterly. 2004. No. 1

Optimized

SCM Maturity and Associated PerformanceConsumer Goods Companies

48 DaysTurnover

1.0

2.0

3.0

4.011 DaysTurnover

2.5SKU per

$1.17 mil. USD

1.4SKU per

$1.17 mil. USD

33%% SKUs with

weekly planning slots

66%% SKUs with

weekly planning slots

1.0Participate in

customer planning

4.0Participate in

customer planning

Performance at the Top Maturity Levels

Performance at Lower Maturity Levels

Note: Higher maturity firms have shorter change-over times and greater upside flexibilityWithout capital investments. Lower maturity firms have 33% of contracts informal while Higher maturity firms have 66%

Ad Hoc

Defined

Managed(Linked)

Leveraged(Integrated)

Source: “Mature Supply Chain Planning”. In Focus, 2003. A PRTM and SAP Study of 60 firms and 75 supply chains in firms from $500Million to $2 billion in Sales across several industries in Europe, US and Asia.

Optimized

SCM Planning Maturity and Performance

1.0Inventory

Levels 1.0

2.0

3.0

4.00.78

InventoryLevels

1.0Delivery

Performance

1.10Delivery

Performance

1.0Order Fulfillment

Lead Times

0.86Order Fulfillment

Lead Times

1.0Inventory

Costs

0.88 Inventory

Costs

Performance at the Top Maturity Levels – Profit =1.38

Performance at Lower Maturity Levels – Profit = 1.00

Note 1: Firms that combine higher maturity planning practices with advanced planning systemsHave 35% lower inventory costs than lower maturity firms.

1

40%

37%

23%

ResultsDistribution

Supply Chain Visibility and its impacts

Performance

201816141210864

SC

M M

atu

rity

400

300

200

100

227

338

112Ad Hoc

Defined

Managed

Leveraged

Borden Total SCM Scoresv. Performance

2001273

1999203

Optimized

•2004 EBIT impacton $1.4 billion in sales

Borden ChemicalSavings from increasing maturity

Improved Service& Quality

Improved Service& Quality

90% reduction inperfect order failure

rate by 2002

90% reduction inperfect order failure

rate by 2002

Cycle TimeReduction

Cycle TimeReduction

20% by 200420% by 2004

OrganizationDevelopment

OrganizationDevelopment

Global Structure,Capable Resources

by 2001

Global Structure,Capable Resources

by 2001

Improved SupplyChain Design & Operations

Improved SupplyChain Design & Operations

$15 MM Savings*$15 MM Savings*

Leveraged GlobalPurchasing

Leveraged GlobalPurchasing

$25 MM Savings*$25 MM Savings*

BASICPP

201816141210864

SO

PT

OT

AL

300

200

100

0 Rsq = 0.6946

S&OP Practices Maturity –

Degussa Engineered Carbons (DEC)

Overall Supply Chain Process Performance

S&

OP

Pra

ctic

e In

stitu

tion

aliz

atio

n

Foundation

AdvancedNon-institutionalized

AdvancedInstitutionalized

Note: Data represents 55 Supply Chain Council firms, from various industries, that were examined using the SCM best practices survey.

150

105

60

DEC – 922004 BM Mean - 91

DEC - 2003

DEC 2004 Results: 20% reduction in inventory with no loss in service. A reduction in SCM costs of 2% of revenue or $4 million annually.

BASICPP

201816141210864

SO

PT

OT

AL

300

200

100

0 Rsq = 0.6946

<70%

>89%

Delivery performance v. commit date>89%

60%

>75%

Forecast Accuracy Benchmarks (SKU/ Location/ 30 days / Weekly)

60%

S&OP Practices Statistically Related to Performance

(Regression Analysis)

S&

OP

Pra

ctic

e In

stitu

tion

aliz

atio

n

Overall Supply Chain Process Performance

SOPTOTAL

280.0

270.0

260.0

250.0

240.0

230.0

220.0

210.0

200.0

190.0

180.0

170.0

160.0

150.0

140.0

130.0

120.0

110.0

100.0

8

6

4

2

0

Std. Dev = 39.72

Mean = 184.6

N = 55.00

S&OP Foundation

OF BM

79.7%

OF BIC

98.4%

BM = Benchmark

BIC = Best-in-class

OF BM

Median

88.6%

Order Fill Rate (Customer Service) and S&OP

Advance S&OP Practices

# of

Com

pani

es

SOPTOTAL

280.0

270.0

260.0

250.0

240.0

230.0

220.0

210.0

200.0

190.0

180.0

170.0

160.0

150.0

140.0

130.0

120.0

110.0

100.0

8

6

4

2

0

Std. Dev = 39.72

Mean = 184.6

N = 55.00

Forecast Accuracy

Median

67 %

Forecast

Accuracy

BIC

>75 %

Forecast Accuracy (SKU/Location 30 Days) and S&OP

BM = Benchmark

BIC = Best-in-class

S&OP Foundation Advance S&OP Practices

# of

Com

pani

es

SOPTOTAL

280.0

270.0

260.0

250.0

240.0

230.0

220.0

210.0

200.0

190.0

180.0

170.0

160.0

150.0

140.0

130.0

120.0

110.0

100.0

8

6

4

2

0

Std. Dev = 39.72

Mean = 184.6

N = 55.00

Total SCM Costs BM

Median 8.7%

Total SCM Costs BM

BIC

3.1%

Total SCM Costs (% of Sales) and S&OP

S&OP Foundation Advance S&OP Practices

# of

Com

pani

es

SCM KPIs mapped to Business Strategy

Performance Expectations: SCOR-card & Gap Analysis

Performance Vs CompetitionHigh Level Metrics Actual Parity Superior

Value from Improvements

Delivery Perf to Commit Date

Fill Rates

EX

TE

RN

AL

Perf Ordr Fulfillment

Order Fulfillment LT

FlexibilityFlexibility

ResponsiveResponsive

Production Flexibility

Total SCM Mgmt Cost 19%

INT

ER

NA

L

CostCostWarranty Cost

NA

Value Added Employee Productivity NA

Inven. Days of Supply 119 da

AssetsAssets Cash-to-Cash Cycle 196 da

Net Asset Turns (Working Capital)

2.2 turns

SC Response Time

85% 90% 95%

94% 96% 98%

80% 85% 90%

7 days 5 days 3 days

30 days 25 days 20 days

13% 8% 3%

NA NA NA

$156K $306K $460K

55 days 38 days 22 days

80 days 46 days 28 days

8 turns 12 turns 19 turns

82 days 55 days 13 days

SupplySupplyChainChainReliabilityReliability

50%

63%

0%

37 da

97 da

45 da

Advantage

$9 M Capital Charge

$80 M Indirect Cost

Key enabler to cost and asset improvements

Team Exercise

Pick a supply chain for your group and..

1. Build a SCOR card.

2. Access the maturity of your SCS and PM processes.

SCOR-card & Gap Analysis

Performance Vs CompetitionHigh Level Metrics Actual Parity Superior

Value from Improvements

Delivery Perf to Commit Date

Fill Rates

EX

TE

RN

AL

Perf Ordr Fulfillment

Order Fulfillment LT

FlexibilityFlexibility

ResponsiveResponsive

Production Flexibility

Total SCM Mgmt Cost 19%

INT

ER

NA

L

CostCostWarranty Cost

NA

Value Added Employee Productivity NA

Inven. Days of Supply 119 da

AssetsAssets Cash-to-Cash Cycle 196 da

Net Asset Turns (Working Capital)

2.2 turns

SC Response Time

SupplySupplyChainChainReliabilityReliability

50%

63%

0%

37 da

97 da

45 da

Advantage

Processes to be Accessed

• Supply Chain Strategy (SCS)– aligns the Supply Chain with the business goals.

• Performance Management (PM) – aligns, structures and manages the performance measurement and management system.