UMSL Presentation February 19, 2002

1. UMSL Presentation February 19, 2002 by: Allen Paschke (636) 405-0375 AJPaschke@aol.com

2. Integrated Logistics Introduction to Insight

3. INSIGHT – Who We Are • INSIGHT Started 1978 • Extensive Supply Chain Design Experience • Professional Staff • 35 employees • Average tenure – over 17 years experience • Various Honors and Awards • CLM Distinguished Service Award • US Offices • Manassas, VA • Bend, OR • Emphasis on Research and Application

4. Supply Chain Software • Supply Chain Design • SAILS • Tactical Modules • Transportation Planning – SHIPCONS II • International Trade – GSCM • Components • Labor Scheduling, Master Production Planning, Supply Planning, Service Resource Scheduling, Dynamic Sourcing

5. Abbott Laboratories Allegiance Healthcare Bristol-Myers Squibb Exxon Mobil (5 continents) Exxon Mobil Chemical Pfizer Johnson & Johnson Ross Laboratories Monsanto (Flexsys NV) Oil/Chemical/Medical Food & Beverage/CPG BP Amoco Cytec BASF Pennzoil PPG Industries Ipiranga IMC Agrico McKesson HBOC Solutia Ameriserv, Inc. CSI Frito Lay Frito Lay Int’l Colgate Perrier Dr. Pepper - 7Up Procter & Gamble ConAgra Walker Gillette Borden Foods Mars Pepsi-Cola Pepsi-Cola Int’l Pepsi Bottling Ralston Purina Avon Products Nabisco Clorox Unilever Kraft Foods Dean Foods Manufacturing/Parts Distribution Ferguson Enterprises Toyota Motor Sales Toyota Parts Goodyear Tire & Rubber Co Case New Holland Case Parts Georgia Pacific Sears Ingram Books Purolator Potlatch R.R. Donnelly Toyo Engineering GE Service Parts GE Appliances Consultants/3PL’s Accenture KPMG Peat Marwick Frigoscandia Norfolk Southern Pricewaterhouse Coopers Defense Logistics Agency APL CSC Mark VII SABRE Technology Compaq IBM Global Services Motorola

6. Integrated Logistics The Concept

7. CLM Definition 1995 Logistics is the process of planning, implementing,and controlling the efficient, effective flow and storage of goods, services, and related information from point of origin to point of consumption for the purpose of conforming to customer requirements.

8. Integrated Logistics System Design Model Potential Network Schematic Raw Materials Finished Products FW1 CZ1 P1 FW2 CZ2 PW1 P2 CZ3 S1 FW3 PW2 CZ4 FW4 P3 S2 CZ5 PW3 FW5 CZ6 Inbound Replenishment Transfer Outbound

9. Evolution of Thought and Practice • Individual Dispersed Functions

10. Conflictingobjectiveswithin thelogisticsfunction TRANSPORTATION WAREHOUSING INVENTORY

11. Evolution of Thought and Practice • Individual Dispersed Functions • Integration Within Distribution

12. Conflictingobjectiveswithin thefirm Logistics Manufacturing Purchasing

13. Evolution of Thought and Practice • Individual Dispersed Functions • Integration Within Distribution • Integration Across CorporateFunctions

14. Evolution of Thought and Practice • Individual Dispersed Functions • Integration Within Distribution • Integration Across CorporateFunctions • Integration Across Supply Chain, finding win-wins with Suppliers and Customers

15. Network Redesign Business Questions • How many distribution centers (D.C.s) should we have? • Where should the D.C.s be located? • Which customers should be served by each D.C.? • How do you best balance inventories against customer service needs and distribution costs? • Should we contract for warehousing services or operate our own D.C.s? • Should pool points be used and where should they be located? • What do you gain by plant direct shipping? • Should all D.C.s carry all products or should they be specialized by product line? • Where should my plants be located? • Which product lines should be produced at each plant and how much? • Which suppliers should be used?

16. Do you need a Network Redesign? • You would like answers to some of the 11 “business questions” • You have never redesigned your network(s) or it has been many years since the last redesign was completed • Multiple divisions exist within the parent company and you are not leveraging Warehousing and/or Transportation. • You are acquiring a company

17. Integrated Logistics Process to Redesign Supply Chains

18. Introduction • Redesigning a Supply Chain is a PROCESS • The SAILS software is a TOOL used in this process • When you’re redesigning a Supply Chain, a good process is beneficial. • This is the process that I’ve used many times, with good results, to redesign Supply Chains.

19. The Process • Establish Project Management • Define Objectives and Scope • Design Model • Data Collection • Model Validation • Optimization • “What If” and Sensitivity Analysis • Recommendation • Implementation • Post-Implementation Review

20. Project Management • Establish Project Sponsor • Best experiences with CFO or CEO • Why has the project been initiated? • What is the “compelling event”? • What needs improving? • Too much Inventory • Customer Service lead times need tightened • Logistics Costs too high

21. Project Management • Executive ("Steering") Committee required? • Establish cross-functional team (MIS, Logistics, Sales, Manufacturing, Customer Service, Purchasing, R&D, Finance, etc.), usually VP or Director level: • Break down organization "silos" • Create a better solution • Improve the probability that the solution will be accepted by the entire organization • Meet every 6 - 8 weeks

22. Project Management • Establish full-time Project Manager • Establish Working Committee • Establish team, usually Manager level, with "hands on" responsibility to spend 25 to 50 percent working on this project • Meet "formally" every 2 - 3 weeks • Utilize Steering Committee to create “Task Forces”: • Customer Service • Product Compatibility and R&D Requirements (temperature, etc.) • Inventory Carrying Cost Methodology • Accounting Issues, such as Fixed vs. Variable Warehousing Costs

23. Objectives and Scope • Objectives (and Goals) • Why has the project been initiated? (What needs improving)? • What business question(s) do you need answered? • Define as many "What If" and Sensitivity Analysis questions to be answered, as possible • STAY STRATEGIC • Scope • Which Business Units included? • Due to product incompatibilities, do multiple Supply Chains need to be designed? How many? • Outbound (and Inbound(?))? • U.S. (and Canada(?) and Mexico(?))? • Include/exclude import/export (port)?

24. Model Design • To design the model correctly, the objectives, the scope, and as many "What If" and Sensitivity Analysis questions, as possible, should be defined. Failure to do this, will increase the risk that the model will not be designed correctly, requiring extensive efforts to redesign the model later in the project. • First step, sketch the current flows of the existing supply chain(s), defining all the “links”. Discuss what future flows should be allowed • How many supply chains need to be designed? Sketch them.

25. Model Design • For each supply chain (model): • How many echelons? • Current and candidate D.C.s, cross-docks, etc. • How do you ship products (Small Package, LTL, TL, Pool, Pick-up, Rail, etc.) • D.C., cross-dock, etc. missions • Customer Service guidelines, current, proposed and “what if” • Etc., etc. • Roles and responsibilities of each member of the Working Committee. Assign tasks and due dates.

26. Data Collection • Collect: • Network Description • Locations (Customers, D.C.s, Plants, Suppliers) • Transportation Costs • Inbound, Replenishment, Transfer, Outbound • Demand Data • Every Line Item from Every Order for a year • Facility Data (Suppliers, Plant and D.C.) • Fixed & Variable Costs • Capacities • Eligibility • D.C.s • Product Master with Production Source(s) Identified • Suppliers • VERIFY all data to ensure that it is valid

27. Model Validation • First, replicate flows (volumes) • MY GOAL --- 99.75+% accurate • Second, replicate costs. (This is an iterative process, until the variance between actual and the model reach an acceptable level). • MY GOAL: • Nationally, within 1 to 2 percent of“unexplained” variance. • By facility, within 5 percent of “unexplained” variance.

28. Model Validation • (If the “unexplained” variance is at the 5 - 10 percent range, no confidence exists when an optimization run shows a 10 percent cost reduction. It is not until the “unexplained” variance is in the 1 to 2 percent range that an optimization run showing a 10 percent cost reduction can be believed). • Develop spreadsheet, starting with the model (validation) costs, adjusting for known (“explained”) variances, and comparing to actual costs

29. Model Validation • “Explained” Variances (examples): • Transportation Costs • Returns/Product Recall • Damaged • Accessorial (Fuel, Delay, Lumpers, etc.) • Expedited Transportation • Accounting Anomalies • Warehousing Costs • Different Inventory Turns • Overflow Warehousing • Accessorial (Special Services, extra shifts, overtime, etc). • Accounting Anomalies • Plant Costs

30. Optimization • Optimize the Supply Chain, meeting the customer service Requirements. (This should occur very quickly, a majority of the analysis should be "What If" and Sensitivity analysis).

31. “What If” and Sensitivity Analysis • Most common Analysis: • Sensitivity Analysis: • Distribution cost vs. number of D.C.s • Distribution cost vs. Customer Service • Cost for improved service • As service is improved, are current D.C.s still being utilized

32. “What If” and Sensitivity Analysis • Most Common Analysis (continued) • “What If” Analysis: • Impact of inflation (D.C. vs transportation costs) • Growth Analysis (can handle forecasted growth) • Impact of plant capacity expansion (new plants) • Impact of new product introduction • Which plant • 1 vs. 2 plants • D.C. capacity expansion • Alternative echelon networks • Plant direct • Cross-Docks / UPS Zone Skipping • Implementation priority analysis

33. Recommendation • A recommendation should be made, including: • Supply Chain ("flow" and costs), AS IS • Supply Chain ("flow" and costs), TO BE • Expected benefits • What was analyzed but didn't produce benefits • Implementation plan, including • Priorities • Technology • Organizational impact

34. Implementation • Additional time should be planned for further "What If" and Sensitivity Analysis to assist the implementation team. (For example, the model recommends a D.C. in Omaha. The implementation team can not find the space in Omaha at a reasonable price. What is the additional transportation cost if the D.C. were in Kansas City or Des Moines)? • Now is the time to support the implementation with tactical analysis.

35. Post-Implementation Review • I’m a strong believer that 6 to 12 months after the implementation, the project should be evaluated and the actual benefits quantified. • Most of my recommendations have reduced the number of D.C.s, so more volume was going through fewer locations. Due to increased leverage (transportation and warehousing), the actual benefits usually exceed what the software predicted. • All projects 5 to 15 percent Logistics savings • Majority in 8 to 12 percent range

36. Integrated Logistics The Optimizer

37. Too often users don’t ask enough questions about what the solver does and how. They seem to assume that if a program can make pretty pictures, it must also be able to get good answers. In short, THEY BUY THE PICTURES, NOT THE SOLUTIONS!

38. SAMPLE PROBLEM DC1 CZ1 50,000 PLANT 1 3 0 3 5 Capacity:  4 CZ2 100,000 DC2 4 2 PLANT 2 2 0 1 Capacity: 60,000 CZ3 50,000

39. HEURISTIC SOLUTION 1 “LEAST OUTBOUND COST” DC1 CZ1 50,000 PLANT 1 3 0 3 140,000 5 4 CZ2 100,000 DC2 4 2 PLANT 2 2 0 60,000 1 CZ3 50,000 Inbound cost $820,000 Outbound cost $150,000 Total $970,000

40. HEURISTIC SOLUTION 2 “LEAST TOTAL FLOW COST” DC1 CZ1 50,000 PLANT 1 3 0 3 50,000 5 4 CZ2 100,000 DC2 4 2 PLANT 2 90,000 2 0 60,000 1 CZ3 50,000 Inbound cost $570,000 Outbound cost $200,000 Total $770,000

41. The key to good analysis is the range and quality of alternatives generated for evaluation.

42. Solver Technology: Heuristics • Characteristics • common sense consideration of limited alternatives • not guaranteed to find best solution • solution dependent upon quality of decision rules • run-to-run comparisons unreliable • Applications • crew scheduling • vehicle routing • shipment planning

43. Solver Technology: Simulation • Characteristics • imitates sequence of events/conditions over time • no attempt to find best solution • limited to process evaluation • difficult to validate • expensive to develop, maintain, and run • run-to-run comparisons very difficult • Applications • queuing problems • inventory control • plant/DC operations

44. OPTIMIZATION generates and considers all alternatives in a given scenario -- with heuristics and expert systems alone, many alternatives are never envisioned, much less evaluated!

45. Solver Technology: Optimization • Characteristics • evaluates all possible alternatives • guaranteed to find best solution • run-to-run comparisons reliable • not widely available • Applications • network design • production planning • cash flow planning

46. SOLVER TECHNOLOGY *SAILS is TRUE OPTIMIZATION USING MIXED INTEGER LINEAR PROGRAMMING (*RESEARCH PUBLISHED IN REFEREED ACADEMIC JOURNALS)

47. OPTIMAL SOLUTION “TRUE LEAST COST” DC1 CZ1 50,000 PLANT 1 3 0 3 140,000 40,000 5 4 CZ2 100,000 DC2 4 2 PLANT 2 60,000 2 0 60,000 1 CZ3 50,000 Inbound cost $120,000 Outbound cost $470,000 Total $590,000

48. Good models are like bright lights focused on dark corners. Conventional wisdom is frequently wrong -- Management Science has shown this time and time again.

49. Integrated Logistics SAILS Model

50. Multiple Stages of Manufacture STAGE 1 STAGE 2 Line 1 Line 1 Raw materials in Finished products out Line 2 Line 2 Line 3 Line 3 Raw materials Intermediate products Finished products