Enterprise Application Strategies Conference

Welcome to the Supply Chain Tutorial

John Fontanella Research Director Supply Chain Execution
The Phoenician Scottsdale, AZ June 2, 1999

What well cover today

Just What is a Supply Chain?

Why Your Company Should Care about SCM Beer Break

Supply Chain Trends

Supply Chain Technologies The Future of Supply Chain Management

Supply Chain Strategies Research

A Supply Chain
Multitier Supplier s Manufacturer Distributors/ Wholesalers Retailers Consumers

We cover software technology that manages the flow of materials and goods along supply chains

Focus on APS, SC Planning and Execution Focus on cross-functional Focus on inter-enterprise

Just what is a Supply Chain?

The Supply Chain is big business

U.S. Logistics spending is $80 billion dollars a year! And that number doesnt include all of the Supply Chain
Plan Source Make Deliver

What is a supply chain?

Orders

Suppliers

Customers

Products

SimpleRight?

Supply Chain Management

A definition
.. the delivery of enhanced customer and economic value through synchronized management of the flow of physical goods and associated information from sourcing to consumption.

Bernard J. LeLonde, Professor Emeritus of Logistics, Ohio State University

The Supply Chain

All aspects of moving materials and creating products from Earth to the point of consumption
Suppliers Manufacturers Distributors/ Wholesales Retailers Consumers

Supply chains flow information, products and funds

Integrated, coordinated, high velocity, JIT goods, information and funds flows
Information Funds Goods
Suppliers Distributor Wholesalers Consumers

Manufacturers

Retailers Users

Industry trends, issues, acronyms, and buzzwords

Supply Chain Management (SCM) Supply Chain Optimization Global Logistics Supply Chain Collaboration Revenue enhancement/customer service more than cost reduction benefits ( strategic advantage ) Advanced Planning and Scheduling (APS) Vendor Managed Inventory (VMI), Efficient Consumer Response (ECR ), Category Management, and Continuous Replenishment Programs ( CRP) Beyond ERP

Some definitions
Customer Support Collaboration Order Management Order Fulfillment Order Entry Capture

Acquire Contract

Support Retain

Collaboration

Source Distribute

Settle Settle

Capture Validate Source Distribute

Source Distribute

Order Centric Customer Centric

Customer Satisfaction Cycle

Why Your Company Should Care About SCM

Why companies are interested in the Supply Chain

SCM efficiently coordinates the flow of goods from material suppliers to manufacturers to the consumer.

Goods Flows Information Flows Funds Flows

Suppliers

Manufacturer

Distributors/ Wholesalers

Retailers

Consumers

Power is shifting in most verticals

Suppliers Manufacturers

Distributor Wholesalers

Retailers Users

Consumers

Push
Power Shift

Pull

Too much inventory and waste

Distributor Wholesalers Manufacturers Retailers Users

Suppliers

Consumers

Example 1: US grocery pipeline: 84 days, $75 to $100 billion!

Example 2: EHCR $11B of $88B avoidable supply chain costs! Example 3: In textile/apparel/retail chain, potential supply chain savings exceed 60% of total labor costs!

Yet, customers cant get what they want!

Suppliers Manufacturers

Distributor Wholesalers

Retailers Users

Consumers

Example 1: Retailers lose 8% of sales (15% of promotions) to stock-outs Example 2: Average supplier meets its customer request date for 69% of orders; often just 40-50% of the time.

Inefficient Supply Chain means higher prices

Lots of inventory buildup and waste along supply chains
Suppliers Manufacturers Distributors/ Wholesalers Retailers Consumers

Example: Average grocery product takes 84 days to travel from a manufacturer to the retail shelf, resulting in $75 to $100 billion of product in the U.S. grocery pipeline!

Supply Chain Challenges

or

Examples of dysfunctional organizational behavior in the late 20th century

A common phenomena in Supply Chain

Multi-tier Suppliers

Manufacturer

Distributors/ Wholesalers

Retailers

Consumers

Sales

Sales

Time

Sales

Time

Time

Sales Time

Bullwhip Effect Within a Supply Chain

Organizations are functionally aligned

Most companies have functional silos with conflicting goals Accounting practices encourage functional division
Purchasing Manufacturing Distribution Customer Service/ Sales High inventories High service levels Regional stocks

Low purchase price

Few changeovers Stable schedules Long run lengths

Low inventories Low transportation

Multiple vendors

Process orientation addresses supply chain dysfunction

Move from functional silos to cross-functional business processes (e.g., order-to-cash, request-to-promise)
Customer Service/ Sales

Purchasing

Manufacturing

Distribution

Order Fulfillment

Available-to-Promise Capable-to-Promise

Fundamental business questions are going unanswered

What will arrive?

When will it arrive?

What do I have?

What can we ship? What orders should

Where do I put it?

How do I pick it?

we fill?

As if thats not enough.

Greater customer demands, competitive pressures, and the global economy
Mass customization Shorter product life cycles Product proliferation Pricing pressures/cost reductions Global remote operations

Time for a beer..

.game that is
brought to you by

System Dynamics Society SUNY, Albany, NY

Functional fortresses misalign goals

Conflicting, Mis-Aligned Goals

Low purchase price Many vendors Few changeovers Stable schedules Long run lengths Low inventories Low transport costs High inventories High service levels Regional stocks

Four types of inventory have distinct purposes, drivers and metrics

Purpose Drivers
Production and logistics capacity Demand lift factors Warehouse constraints Hurdle rate Supplier trade programs Anticipated price moves Demand Order frequency Supply and logistics lot size economics Spoilage & obsolescence Demand Variability in demand, supply and lead times Service level objectives

Key Metric(s)
Excess inventory

Build Inventory

Meet demand spikes (season, promotion, new product, etc)

Investment Inventory

Provide return on $ invested

ROI

Cycle Stock

Provide inventory to fill expected customer orders

Turns Cost

Safety Stock

Buffer uncertainty

Fill Rates Cost

All four types have to be managed across a supply chain network.

Supplier Distributor
BI CS SS RDC
Moves Return Receipt

Customer

Customer

CS SS

Supply BI CS SS

Moves Transfer Order

CDC BI II CS SS
Moves PO Receipt Production Receipt

Moves Transfer Order

RDC BI CS SS

Moves VMI Order

Customer

VMI

Moves Customer Order

Variability and service expectations drive need for inventory

Service Expectations
Service

Time

Supply Variability
Supply
Inventory Time Inventory

Demand Variability
Demand
Inventory

Time

Inventory

Time

Time

Time

Inventory Needs

Time

Current systems support

Systems designed on 30 year old functional model Not focused on key aspects of supply chain Integration -- Are you kidding?

SCM Technology
..especially globally!

International Trade Logistics (ITL) is the new big bang for supply chain
Global Supply Chain Management
Supplier

Manufacturer

Warehouse

Customer

Supplier BORDER Supplier Supplier

Manufacturer

Distributor BORDER

BORDER Customer

Manufacturer

Warehouse

Customer

...

Its messy, unorganized, and seething with opportunity

Content Orders & Shipments Regulation Compliance License s Data Management Compliance Partner Government Export Management Data Policy Determination Resource Documentation Data Letters of Screening Credit Validation

Consolidation

The Challenges Are Numerous

More products Mass customization of products and services Shorter product cycles Reduced cycle and lead times More knowledgeable, demanding customers Longer, tighter global supply chains Pricing pressures/cost reductions The constant quest for ROA

Supply Chain Trends

Supply Chain initiatives

SCM has led to a variety of corporate initiatives and trends
Push to pull Process orientation Focus on forecasting Sales and Operations Planning Integrated Supply and Demand Planning Use of downstream information Co-management of inventory Collaboration Optimization Postponement Performance Measurement (KPIs)

Listen to the consumer

Use of downstream information, like POS, in forecasting and planning
Manufacturer
Sales Sales

Consumer

Distribution Pipeline

Manufacturer Order Forecast

Distribution Pipeline Information ( inventory and sales)

Consumer Demand Information ( POS )

Pay for it when you use it

Greater participation of suppliers in the management of customer inventories
Vendor Managed Inventory (VMI) Continuous Replenishment Process (CRP)
Customer sets inventory rules Supplier monitors withdrawals and replenishes in JIT fashion

More than just an enterprise

Interest in supply chain collaboration
Retailers

Suppliers

Synchronized Production Scheduling Collaborative Product Development

Manufacturer

Collaborative Demand Planning

Distributors/ Wholesalers

Collaborative Logistics Planning Transportation services Distribution center services

The supply chain is one process driving many enterprises

Greater ability to optimize the whole supply chain
Synchronized, Sequential Planning Procurement Planning Manufacturing Planning Distribution Planning Forecasting

Synchronized, Concurrent Planning Supply Chain Optimization Procurement Planning Manufacturing Planning Distribution Planning Demand Planning

React to demand rather than anticipate it

Postponement of final assembly to reduce inventories

Make

Assemble

Store

Make

Store

Assemble

Buyers and sellers are collaborating

New interest in collaborative planning, forecasting and replenishment (CPFR)

Supplier

Customer

Anything measured gets better

Measurement of supply chain performance
Process-Based Measures Help Reduce Conflicting Goals/Functional Silos
Perfect Order Process Percent of Orders Flawlessly Filled Purchasing Materials availability Materials quality Manufacturing Adherence to schedule Product quality Product availability Logistics Warehouse picking accuracy Inventory accuracy Customer Service/ Sales Order entry accuracy Invoice accuracy Payment accuracy Function-Based, Diagnostic Measures Cross- Function, Process-Based Measures

On-time shipments
Paperwork accuracy Damaged shipments

The Supply Chain is constantly morphing

Enterprises discovering new value in Execution

Speed & Granularity

Product Strategies Customer Strategies Time Strategies

Reach & Execution

New Channels Transportation Logistics Strategies

Legacy SCE apps cant deliver the goods

Businesses are looking at New SCE Solutions

Integration to Ops Planning

Demand Management Supply Management Value-added Services

The Internet will change everything we know about Supply Chain Management Buy anywhere, anytime, cheap and fast

Total Customer Focus

Performance Standards Systems architecture Customer expectations Procurement and supply processes Channel management Selling and licensing software

Supply Chain Technology

Everyone is doing Supply Chain

SCM has generated a lot of interest from software vendors

Electronic Commerce
Demand Planning/Forecasting

Order and Inventory Management

Transportation Management

Deployment Planning/ Distribution Planning

ERP
Advanced Planning and Scheduling
Warehouse Management

Technology Assisted Selling

SCM still has a lot of upside potential

The SCM application technology market is exploding
SCM Application Vendor Software License Revenues ($ Million)

8000 6000 4000

$6.8B

$3.5B

2000 0

$0.9B 1996 1997 1998 1999 2000 2001 2002

Key technologies: message and activity brokers

Intra and inter-enterprise electronic communications will be a key enabler towards SCM..
Product movement transactions like purchase orders, load tenders, and ASNs Information like demand plans, production schedules, shipping plans, and order and shipment status Funds movements like invoices and payments

ERP vendors want to be big players

While ERP vendors are moving towards it ...
Fixed Assets Accounts Receivable General Ledger Accounts Payable Cost Accounting

Inventory

CRP

Project Accounting

Purchasing

Integrated Database

MRP

Project Management Sales & Marketing

BOM

MPS

Order Entry

Shop Floor Control

Quality Assurance

Forecasting

DRP

Warehouse Managemen t

Service & Maintenance

Plant Maintenance

Decision Support

Product Configurator

But arent there yet...

..pieces are missing
Fixed Assets Accounts Receivable General Ledger Accounts Payable Cost Accounting

Inventory

Whats Missing:

CRP

Project Accounting

Integrate Process Orientation d Inter/Intra-Company Database BOM Collaboration Supply Chain Planning Shop Floor Quality Order Entry
Purchasing Control Assurance Warehouse Managemen t Service & Maintenance Plant Maintenance

MRP

Project Management Sales & Marketing

MPS

Forecasting

DRP

Decision Support

Product Configurator

SCP is flirting with the x-action stream

APS and supply chain planning vendors are moving towards it..
Strategic Planning
Enterprise Supply Chain Planning

Demand Planning

Mfg Plng. & Sched.

Tactical Planning

Procurement Planning

Distribution Planning

Operational Scheduling

ERP System

Better integration is needed

..but they too are missing pieces
Strategic Planning
Enterprise Supply Chain Planning

Tactical Planning

Distribution Planning

Demand Planning

Operational Scheduling

Whats Missing: Integration With Transaction Systems Inter/Intra-Company Collaboration End-To-End Suites

ERP System

The Future of Supply Chain

The Next Generation

Market Wants an Integrated System Spanning, Planning, Execution, and Optimization Provides Greater Visibility Re: Orders, Forecasts, Material/Capacity/Carrier Availability ... Offers a Broad Footprint Supports Complementary Components Delivers Measurable, Business Value -- Fast!

New Directions
Embedded Planning Engines Inside ...
Inventory Management (Real-Time DRP) Order Management (Pre-Configured ATP) WMS (Slotting, Wave Planning, Re-warehousing) Sales Configuration (ATP)

Specialized Views
Financial: Activity Based Costing Data Executive: Performance Metrics Procurement: Buyers Workbench Sales and Marketing: Yield Management Partners: Collaborative Planning

Integrated supply and demand planning in SOP

Manufacturing inputs Distribution inputs Transportation inputs Supplier inputs Historical sales data Sales/Marketing inputs Customer inputs

SOP Process

Supply Planning Purchasing Manufacturing Inventory Transportation Warehousing

Demand Planning Product marketing Consumer marketing Trade marketing Pricing Selling

Constrained demand forecast Operational plans Sales/Marketing plans Planned profitability/Financial plans

Other trends
Yield Management Enters Distribution Collaboration With Embedded Decision Support The Internet Drives Pervasive Computing
From Seats to Devices

From Supply Chains To Supply Hands/Deals/Rounds Cross-sector Service Expectations

Conclusions

SCM is generating a lot of interest Technology is available and is being further developed to support it The Internet will change how we think about supply chain Companies will win..
3% to 5% of revenue savings for best SCM companies* 50% reduction in cash-to-cash cycle* 17% improvement in meeting customer delivery dates*
*Source: PRTM Integrated Supply Chain Benchmarking Study, 1997