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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 Research’s 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 ½ 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

© 2008 AMR Research, Inc. | Page 2

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.

© 2008 AMR Research, Inc. | Page 3

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. maintain customer profitability by controlling cost to serve • While reducing capacity. restructure your value chain to be more efficient. Will the changes you make just help you survive or will you emerge stronger than before? © 2008 AMR Research. | Page 4 . Inc. 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. 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. 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.

| Page 5 .Traditional Supply Chains Demand Supply Traditional Definition of Supply Chain Management customer supplier Product design partner © 2008 AMR Research. Inc.

| Page 6 .Demand-driven Processes Demand Demand Insights Sense Demand Shape Demand Supply Supply Risk Management Drive a Profitable Demand Response Product Technology Opportunities © 2008 AMR Research. Inc.

Agenda • Supplier relationship and risk management • Managing commodities • Customer profitability through cost to serve • Agility . Inc.become more efficient. | Page 7 . scalable and responsive • Product portfolio management © 2008 AMR Research.

35 days) and have an eight point better perfect order performance © 2008 AMR Research. | Page 8 .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. Inc.

| Page 9 . Inc. A is receiving finished goods from contract manufacturers) Can contribute to High Purchasing Op Cost (where Co.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 raw materials from direct material suppliers) © 2008 AMR Research.

Inc. | Page 10 . © 2008 AMR Research.The risks have increased….

| Page 11 . Inc.How financially viable are your suppliers? © 2008 AMR Research.

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. Inc. B2B and Portals © 2008 AMR Research. | Page 12 .

| Page 13 . Inc.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 x 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 © 2008 AMR Research.

Inc. | Page 14 .A&D Case Study: Supplier Segmentation Major Subsystems Aligned metrics (tied to executive level metrics) Strategic Performance Measurement Teams (SPMT’s) 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 © 2008 AMR Research.

| Page 15 . Inc.Agenda • Supplier relationship and risk management • Managing commodities • Customer profitability through cost to serve • Agility . scalable and responsive • Product portfolio management © 2008 AMR Research.become more efficient.

Improve cost analysis capabilities to redefine the value network 4. | Page 16 . Build demand-driven multi-tier supply management capabilities 2. Break down those internal silo’s and get aligned 6. Six factors to consider: 1. Consolidate suppliers and get a handle on master data 3. Design for supply and postponement © 2008 AMR Research. Get good at contract management 5. Inc.Beyond the scope of the Commodity Manager….

Agenda • Supplier relationship and risk management • Managing commodities • Customer profitability through cost to serve • Agility . | Page 17 . scalable and responsive • Product portfolio management © 2008 AMR Research. Inc.become more efficient.

| Page 18 .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 © 2008 AMR Research. Inc.

Inc. | Page 19 .and to give a fact-based focus for decision making -. 19 © 2008 AMR Research.Definition Cost-to-serve analysis calculates the profitability of products. customers and routes to market .on service mix and operational changes for each customer.

What data do you use as part of your cost-to-serve analysis? Sample Size = 150 companies who engage in cost-to-serve analysis © 2008 AMR Research.Da t a u s e d i n a n a l y s i s Q. | Page 20 . Inc.

| Page 21 . What challenges do you face when collecting and harmonizing data for cost-to-serve analysis? Q.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. Which do you consider your top challenge? Sample Size = 150 companies who engage in cost-to-serve analysis © 2008 AMR Research. Inc.

Inc. | Page 22 .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 © 2008 AMR Research.

Agenda • Supplier relationship and risk management • Managing commodities • Customer profitability through cost to serve • Agility .become more efficient. scalable and responsive • Product portfolio management © 2008 AMR Research. Inc. | Page 23 .

To get balance….Organizations need to be BALANCED. Inc. | Page 24 . 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 © 2008 AMR Research.

Inc. | Page 25 .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 9 Technology Agility 16 Lifecycle Technology 15 Responsiveness 11 12 Short Long Specialized Low Short Low Long Specialized Lifecycle High Demand Predictability © 2008 AMR Research.

Inc.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 9 Lifecycle High Demand Predictability © 2008 AMR Research. | Page 26 .

Metrics Alignment Responsive Demand Forecast Perfect Order SCM Cost The ability to respond to unforeseen changes in market demand (+/. Inc. | Page 27 .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 © 2008 AMR Research.

| Page 28 .Agenda • Supplier relationship and risk management • Managing commodities • Customer profitability through cost to serve • Agility . Inc. scalable and responsive • Product portfolio management © 2008 AMR Research.become more efficient.

Inc.Item Proliferation 86% of SKUs 46% of Sales Revenue 0.7 Replenishment Control Frequency = Daily © 2008 AMR Research. | Page 29 .

Inc. | Page 30 . CPG © 2008 AMR Research.Forecast Error and Item Complexity 60% 40% Demand Forecast Error 20% 0% 0 2000 4000 6000 8000 Number of Items Source: AMR Benchmark Analytix.

Perfect Order and Item Complexity 100% 80% Perfect Order 60% 40% 0 2000 4000 6000 8000 Number of Items Source: AMR Benchmark Analytix. | Page 31 . CPG © 2008 AMR Research. Inc.

Inc. | Page 32 .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 trade’s ability to execute • End of life/product phase out planning • Include this on your S&OP agenda © 2008 AMR Research.

Will the changes you make just help you survive or will you emerge stronger than before? © 2008 AMR Research. maintain customer profitability by controlling cost to serve • While reducing capacity.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. | Page 33 . Inc. 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. restructure your value chain to be more efficient.