Managing End-to-End Supply Chain Costs in a Down Economy

Jane Barrett
Research Director, AMR Research jbarrett@amrresearch.com 617 350 1727

2009 AMR Research, Inc. | Page 1

Jane Barrett
Research Director, Supply Chain AMR Research
As an analyst with AMR Researchs Research and Advisory Group, Jane Barrett specializes in supply chain research for manufacturers. Jane covers trends and best practices in Sales & Operations Planning, Supply Management and Collaborative Commerce. Jane brings over 20 years of experience in business consulting and ERP to her role as a research director. She has helped global organizations and midmarket manufacturers plan, design, and implement solutions that achieve their business objectives, involving globalization, standardization and change management. She has led the development of tools and methodologies to enable project management, process design, lean initiatives, and performance metrics. Jane earned her Bachelor of Arts from the University of Natal, South Africa. 20+ years in IT, manufacturing, technology, ERP and consulting industries: 2 years at AMR Research focusing on core supply chain for Manufacturing organizations 5 years in the US helping industrial and medical device manufacturers and automotive suppliers reorganize, improve processes and deploy ERP 9 years in South Africa working with multi-nationals and large South African organizations in industrial, auto, CPG and pharma (own business) 7 years with Hewlett Packard and Unilever in South Africa

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AMR Research is an advisory and research firm focused on manufacturing and retail supply chains, enterprise applications and software strategies. Since 1986, we have focused on the intersection of business process with supply chain, and enterprise technologies. We help clients through retained advisory services and peer networking forums.

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Managing End-to-End Supply Chain Costs in a Down Economy

Leaders are focusing on surviving the recession in a way that prepares them for the recovery. The only thing worse than not scaling down fast enough in a downturn is being caught flat footed at the recovery and losing share to competitors. While survival is the name of the game, there are steps you can take to cut costs in the short term and position yourself to detect and profit from the recovery when it comes. This session will help you think about these five areas while you focus on short term survival as well as longer term opportunity: Supplier relationship and risk management has become a strategic priority Managing commodities in an economy with extreme commodity price volatility In the desperate pursuit of revenue, maintain customer profitability by controlling cost to serve While reducing capacity, restructure your value chain to be more efficient, scaleable and responsive to uncertain demand Get the most for your scarce R&D dollars by tightening your product portfolio management and stage gate process

Bottom Line: Companies change during a recession. Will the changes you make just help you survive or will you emerge stronger than before?

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Traditional Supply Chains

Demand

Supply
Traditional Definition of Supply Chain Management

customer

supplier

Product
design partner
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Demand-driven Processes

Demand Demand Insights

Sense Demand Shape Demand

Supply

Supply Risk Management

Drive a Profitable Demand Response

Product

Technology Opportunities

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Agenda
Supplier relationship and risk management Managing commodities Customer profitability through cost to serve Agility - become more efficient, scalable and responsive Product portfolio management

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Understand the Metric Interdependencies

Source: AMR Benchmark Analytix

Demand Forecast Perfect Order SCM Cost

Assess

Cash-to-Cash

AP
Supplier Quality Cost Detail

Inventory Total
Supplier OnTime RM Inv

Diagnose
AR
Dir Mtl Costs Perfect Order Detail

Purchase Costs WIP & Fin. Gds Inventory

Production Schedule Variance

Plant Utilization

Order Cycle Time

Correct

Companies with better supplier on-time delivery performance.

Hold half the inventory (17 vs. 35 days) and have an eight point better perfect order performance
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Company A: Supplier Performance --- Potential Impacts

High Raw Material Inventory Low Plant Utilization Low Supplier Performance and Long payment time to suppliers High Inaccurate Ships Poor Quality of Finished Goods Higher Finished Goods Inventory (where Co. A is receiving finished goods from contract manufacturers) Can contribute to High Purchasing Op Cost (where Co. A is receiving raw materials from direct material suppliers)

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The risks have increased.

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How financially viable are your suppliers?

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Are you Building Collaborative Relationships or Implementing Collaborative Practices?

Collaborative Relationships
Relationship and process driven Continuous improvement for joint value creation Performance-driven business networks
10 9 8 7 6 Enablers: Value driven business strategy Performance-based Logistics ( A&D) Jointly executed kaizen events Joint ventures Network redesign

Collaborative Practices
Individual role driven IT project centric Silo metrics

5 4 3 2 1 Enablers: Commerce Networks/Integration Hubs CPFR VMI programs Supplier performance management EDI, B2B and Portals

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Case study 1: Supplier Segmentation

1
Strategic positioning
High

2
Scope positioning
Region

3
Relationship attractiveness
High

Bottleneck
Supplier market complexity

Strategic

Regional

Non critical
Low Low

x
Leverage
High

Market offer

Regional multi divisional Local multi divisional

>1 division

Supplier power
Value to
Company

High mutual interest Company power

High

Local
Local 1 division

Low

Low mutual interest

Low

Business Impact

Divisional scope

Value to Supplier

Integrated suppliers Collaborative suppliers Transactional suppliers

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A&D Case Study: Supplier Segmentation

Major Subsystems

Aligned metrics (tied to executive level metrics)

Strategic Performance Measurement Teams (SPMTs) Supplier Performance Management Pr o d u c t c o s t

(scorecards and trend tool)

Supplier Manufacturing Capabilities

(Design for Supply)

Manufactured Parts

Supplier Surveillance
(early detection of defects)

Commodities

Managed at a group level

Supplier performance risk

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Agenda
Supplier relationship and risk management Managing commodities Customer profitability through cost to serve Agility - become more efficient, scalable and responsive Product portfolio management

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Beyond the scope of the Commodity Manager.

Six factors to consider: 1. Build demand-driven multi-tier supply management capabilities 2. Consolidate suppliers and get a handle on master data 3. Improve cost analysis capabilities to redefine the value network 4. Get good at contract management 5. Break down those internal silos and get aligned 6. Design for supply and postponement

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Agenda
Supplier relationship and risk management Managing commodities Customer profitability through cost to serve Agility - become more efficient, scalable and responsive Product portfolio management

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Cost to Serve Practices are Evolving

Cost to Serve
Sell Deliver Make Source

Cost to Deliver
Sell Deliver Make Source

3% of Supply Chains Make Decisions Based on Cost to Serve 20% of Supply Chains Make Decisions on Total Supply Chain Costs

Sell

Deliver

Make

Source

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Definition

Cost-to-serve analysis calculates the profitability of products, customers and routes to market - and to give a fact-based focus for decision making -- on service mix and operational changes for each customer.

19

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Da t a u s e d i n a n a l y s i s
Q. What data do you use as part of your cost-to-serve analysis?

Sample Size = 150 companies who engage in cost-to-serve analysis

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Ch a l l e n g e s b e h i n d h a r m o n i zi n g d a t a : T OP CH A L L EN GE
Q. What challenges do you face when collecting and harmonizing data for cost-to-serve analysis? Q. Which do you consider your top challenge?

Sample Size = 150 companies who engage in cost-to-serve analysis

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How does cost-to-serve analysis help?

Identify cost savings based on activity based analysis Prioritize areas for process improvements Develop pricing and estimating models based on true costs Helps define strategies for profitable and unprofitable customer segments Support sales negotiation Provide actionable information to help product management with product strategies

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Agenda
Supplier relationship and risk management Managing commodities Customer profitability through cost to serve Agility - become more efficient, scalable and responsive Product portfolio management

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Organizations need to be BALANCED. To get balance.

7 Demand-Shaping Levers
Marketing programs New product introductions Promotions Trade deals Sales incentives Price management Supply shaping/run out strategies

7 Levers of Agility
Postponement/late-stage differentiation Drive transparency through VMI and SMI Design for supply and reuse Logistics policies Adaptive networks Flexible manufacturing strategies

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Case Study: How many Supply Chains do you have?

Commoditized High 6 5 Commoditized 2 1

Technology

Responsiveness 7 8
Short Long

Technology

Efficiency
4 3 Long

Specialized

Specialized Short

Volume
Commoditized 14

Lifecycle
Commoditized 13 10

Lifecycle

Technology

Agility 16
Lifecycle

Technology
15

Responsiveness 11 12
Short Long

Specialized Low Short Low Long

Specialized

Lifecycle
High

Demand Predictability
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Tactics and techniques differ by strategy Responsiveness Commoditized

High

Low levels of demand shaping 6 5 Pull-based VMI & SMI Use of downstream data Technology Postponement 8 7 Pooled inventories Specialized Flexible transportation networks Long Short
Lifecycle
Commoditized

Efficiency
2 1 High levels of demand shaping Lean production techniques Technology Use of third-parties for 3 4 Manufacturing Specialized Direct plant shipments Short

Commoditized

Long

Volume

Lifecycle

Agility

14

13

Low

Flexible manufacturing work Technology systems 15 16 Design for supply Specialized Design networks Short Pooled inventories
Lifecycle
Low

Opportunistic demand shaping Technology optimization Stochastic 12 and inventory simulation 11 Specialized Daily calculations of inventory levels
Long Short Long

Responsiveness 10

Commoditized

Lifecycle
High

Demand Predictability

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Metrics Alignment
Responsive
Demand Forecast Perfect Order SCM Cost

The ability to respond to unforeseen changes in market demand (+/- 20%) for existing products Differentiate on Availability

Demand Forecast Perfect Order SCM Cost

Quality
AP Supplier Quality Cost Detail

ne ss

AP Supplier Quality Cost Detail

Cash-to-Cash Inventory Total Supplier On-Time RM Inv

AR

Cash-to-Cash Inventory Total Supplier On-Time

AR Dir Mtl Costs Perfect Order Detail

po ns ive

Purchase Dir Mtl Costs Costs Perfect Order Detail

RM Purchase Costs Inv

Ef f e ici

Order Production FG Plant Schedule Inventory Cycle Utilization Time Variance

Production Order FG Plant Schedule Inventory Cycle Variance Utilization Time

y nc

Re s

Efficient Agility

Time

Cost

The degree to which a system can minimize total delivered cost and waste Differentiate on Total Landed Cost

Demand Forecast

Agile
The ability to adapt to changing market requirements related to commercializing new products and technologies Differentiate on Adaptability
AP Supplier Quality

Perfect Order

SCM Cost

Cash-to-Cash Inventory Total Supplier On-Time RM Inv

AR

Purchase Dir Mtl Costs Costs

Productio Orde Perfect Order Perfect Production FG FG Plant n r Order Cost Schedule Inventor Cycle Order Inventory Utilization Cycle Detail Detail Schedule Time Variance y Detail Variance Time

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Agenda
Supplier relationship and risk management Managing commodities Customer profitability through cost to serve Agility - become more efficient, scalable and responsive Product portfolio management

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Item Proliferation

86% of SKUs 46% of Sales Revenue

0.7

Replenishment Control Frequency = Daily

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Forecast Error and Item Complexity

60%

40%

Demand Forecast Error

20%

0% 0 2000 4000 6000 8000

Number of Items
Source: AMR Benchmark Analytix, CPG

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Perfect Order and Item Complexity

100%

80%

Perfect Order
60%

40% 0 2000 4000 6000 8000

Number of Items
Source: AMR Benchmark Analytix, CPG

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Complexity
SKU rationalization Need to rationalize product attributes against customer attributes Differentiate between good and bad complexity Initiate a process: Product portfolio owner Review and rationalization Ensure trades ability to execute End of life/product phase out planning Include this on your S&OP agenda

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Wrap Up & Questions

Supplier relationship and risk management has become a strategic priority Think about how you manage commodities in an economy with extreme price volatility In the desperate pursuit of revenue, maintain customer profitability by controlling cost to serve While reducing capacity, restructure your value chain to be more efficient, scalable and responsive to uncertain demand Get the most for your scarce R&D dollars by tightening your product portfolio management and stage gate process

Bottom Line: Companies change during a recession. Will the changes you make just help you survive or will you emerge stronger than before?

2008 AMR Research, Inc. | Page 33