Supply Chain: The Magnitude

1. Supply Chain: The Magnitude • In 1998, American companies spent $898 billion in supply-related activities (or 10.6% of Gross Domestic Product). • Transportation 58% • Inventory 38% • Management 4% • Third party logistics services grew in 1998 by 15% to nearly $40 billion

2. Supply Chain: The Magnitude • It is estimated that the grocery industry could save $30 billion (10% of operating cost) by using effective logistics strategies. • A typical box of cereal spends more than three months getting from factory to supermarket. • A typical new car spends 15 days traveling from the factory to the dealership, although actual travel time is 5 days.

3. Supply Chain: The Magnitude • Compaq computer estimates it lost $500 million to $1 billion in sales in 1995 because its laptops and desktops were not available when and where customers were ready to buy them. • In 1993, IBM lost a major fraction of its potential sales of desktop computers because it could not purchase enough chips that control the computer displays.

4. Supply Chain: The Magnitude • Boeing Aircraft, one of America’s leading capital goods producers, was forced to announce writedowns of $2.6 billion in October 1997.The reason? “Raw material shortages, internal and supplier parts shortages…”. (Wall Street Journal, Oct. 23, 1997)

5. Supply Chain: The Potential • Procter & Gamble estimates that it saved retail customers $65 million through logistics gains over the past 18 months.“According to P&G, the essence of its approach lies in manufacturers and suppliers working closely together …. jointly creating business plans to eliminate the source of wasteful practices across the entire supply chain”. (Journal of Business Strategy, Oct./Nov. 1997)

6. Supply Chain: The Potential • In two years, National Semiconductor reduced distribution costs by 2.5%, delivery time by 47% and increased sales by 34% by - Shutting six warehouses around the globe. - Air-freighting microchips to customers from a new centralized distribution center.

7. Supply Chain: The Potential • In 10 years, Wal-Mart transformed itself by changing its logistics system. It has the highest sales per square foot, inventory turnover and operating profit of any discount retailer. • Laura Ashley turns its inventory 10 times a year, five times faster than three years ago. This is achieved by using - New Information System - Centralized Warehouse

8. Supply Chain: The Potential “For a company with annual sales of $500 million and a 60% cost of sales, the difference between being at median in terms of supply chain performance and in the top 20% is $44 million of additional working capital.” -- PRTM Director Mike Aghajanian

9. Supply Chain: The Complexity National Semiconductors: • Production: • Produces chips in six different locations: four in the US, one in Britain and one in Israel • Chips are shipped to seven assembly locations in Southeast Asia. • Distribution • The final product is shipped to hundreds of facilities all over the world • 20,000 different routes • 12 different airlines are involved • 95% of the products are delivered within 45 days • 5% are delivered within 90 days.

10. Customers, demand centers sinks Field Warehouses: stocking points Sources: plants vendors ports Regional Warehouses: stocking points Supply Inventory & warehousing costs Production/ purchase costs Transportation costs Transportation costs Inventory & warehousing costs

11. Challenges Facing Logistics Management • Information technology emphasis will continue to shift from a general change management and control enabler to a developer of customer satisfaction. • Organizations will be redefined and turmoil will continue as firms shift from functional to process management. • Measurement will significantly increase in scope and importance. • Reward and recognition systems will encourage meaningful work.

12. Supply Chains • Supply Chain • Organizations that successively transform raw materials into intermediate goods, then to final goods, and finally deliver them to customers. • Based on: • Cooperation reducing risk and improving efficiency • Elimination of waste and duplicate effort

13. Understanding Supply Chains • Risk • Power • Leadership

14. Objectives • Rapid response • Minimum variance • Minimum inventory • Movement consolidation • Quality improvement • Life-cycle support

15. Barriers • Organizational structure • Measurement systems • Inventory ownership • Information technology

16. Achieving Functional Integration • Manage the process, not the function • Align measurement systems and incentives with overall goals • Utilize integrating mechanisms such as the sales and operations planning meeting, cross-functional teams, and team problem-solving approaches • Work to develop a culture that encourages teaming and cross-functional collaboration

17. Seven Principles of Supply Chain Management • Begin with the customer by understanding the customer’s values and requirements. • Manage logistic assets across the supply chain. • Organize customer management so it provides “one” face to the customer for information and customer service. • Integrate sales and operations planning as the basis for a more responsive supply chain. • Leverage manufacturing and sourcing for flexible and efficient operations. • Focus on strategic alliances and relationship management across channel partners. • Develop customer-driven performance measures.

18. The Clockspeed Concept • The evolutionary life cycle as measured by the rate at which it introduces new products. Source: Charles H. Fine, Clockspeed, Reading, MA: Perseus Books, 1998

19. Law of volatility amplification Each tier adds amplification More tiers mean more amplification Lessons: Every company is dependent on others in largesupply chains Corporate strategy is insufficient; capability chain strategy must augment it Law of clockspeed amplification As you move closer to the end customer in the supply chain, the clockspeed increases Laws of Supply Chain Dynamics Source: Charles H. Fine, Clockspeed, Reading, MA: Perseus Books, 1998

20. Supply Chain Maps • Mapping the organizational supply chain • Mapping the technology supply chain • Mapping the business capability supply chain Source: Charles H. Fine, Clockspeed, Reading, MA: Perseus Books, 1998

21. Clockspeed Analysis • What is the clockspeed of this chain element and the industry in which it is embedded? • What factors are driving the clockspeed of this element? • What are the prospects for a change in clockspeed in this chain element as a result of expected changes in competitive intensity or in rates of innovation? • Where is its industry located in the double helix? • What are the current power dynamics for this element in the chain? Source: Charles H. Fine, Clockspeed, Reading, MA: Perseus Books, 1998

22. Concurrent Engineering • Product • Process • Supply chain Source: Charles H. Fine, Clockspeed, Reading, MA: Perseus Books, 1998

23. Classes of Dependency • Why outsource? • Capability • Manufacturing competitiveness • Technology • Why insource? • Competitive knowledge • Customer visibility/market differentation Source: Charles H. Fine, Clockspeed, Reading, MA: Perseus Books, 1998

24. Summary Methodology for Clockspeed-based Strategy • Benchmark the fruit flies of fast-clockspeed industries. • Understand, map, and assess your supply chain. • Apply clockspeed analysis. • Exploit and execute 3-DCE and competency development dynamics. Source: Charles H. Fine, Clockspeed, Reading, MA: Perseus Books, 1998

25. Conflicting Objectives in the Supply Chain 1. Purchasing • Stable volume requirements • Flexible delivery time • Little variation in mix • Large quantities 2. Manufacturing • Long run production • High quality • High productivity • Low production cost

26. Conflicting Objectives in the Supply Chain 3. Warehousing • Low inventory • Reduced transportation costs • Quick replenishment capability 4. Customers • Short order lead time • High in stock • Enormous variety of products • Low prices

27. Domestic vs. Global Supply Chains

28. Obstacles to Global Supply Chains • Organizational • Cross-functional/organizational communication • Cost barriers • Cultural loyalty • Self interest • One product • Long term adaptability

29. Obstacles to Global Supply Chains • Marketing/Competition • Entry • Information • Pricing • Competition

30. Obstacles to Global Supply Chains • Financial • Forecasting • Institution deficiency • Distribution channels • Infrastructure • Trade restraints

31. Creating Real Advantage from Logistics • Low cost • Superior customer service • Value-added services • Flexibility • Innovation

32. Time-based Logistics • Consolidation • Market area • Scheduled delivery • Pooled delivery

33. Time-based Logistics • Postponement • Manufacturing postponement • Logistics postponement

36. Quick Response Elements • Point-of-use data capture • Item-level management • Rapid communication • Partnerships • Discipline and commitment

37. Elements of Supplier Relationships • Trust • Shared long-term objectives • Flexibility • Cultural compatibility • Acknowledged interdependence • Top management support and involvement • Shared risk • Open communication

38. Dimensions of a Supply Strategy • Purchasing organization strategy • Component strategy • Commodity strategy • Technology strategy • Competitive practices strategy • Management information strategy • Supply base strategy • Alliance and relationship strategy

39. Introduction to Sustainability • How has the quality of life in your community changed over the last 20-40 years? • How has your community changed economically? • How has your community changed socially? • How has your community changed environmentally?

40. What is Sustainability? • Sustainability is related to the quality of life in a community • Do the economic, social, and environmental systems of your community provide for a healthy, productive, meaningful life for all community residents?

41. Sustainable Activities • Activities are Sustainable when they: • Use materials in continuous cycles. • Use continuously reliable sources of energy. • Come mainly from the qualities of being human.

42. Non-Sustainable Activities • Activities are Non-Sustainable when they: • Require continual inputs of non-renewable resources. • Use renewable resources faster than their rate of renewal. • Cause cumulative degradation of the environment. • Require resources in quantities that undermine other people’s well-being. • Lead to the extinction of other life forms.

43. Implications for Supply Managers • Sustainable Activities • Recycling • Recovery • Solar, wind power, geothermal energy, hydroelectric • Minimize complexity • Environmentally friendly purchasing

44. Implications for Supply Managers • Non-Sustainable Activities • Improve equipment energy efficiency • Develop alternate materials, energy sources, and designs • Reduce waste • Practice social responsibility when selecting or changing suppliers.

45. Final Thoughts • Fundamental Changes at All Levels • Major Challenges Facing All of Us • Sustainability Drives Decisions • Action is Required - Now