Supply Chain Best Practices

1. Supply ChainBest Practices Joe Fantasia Supply Chain Strategy Deloitte Consulting LLP September, 2005

2. Welcome to Framingham! Dare to be Innovative; Dare to be Different!

3. Continuous Routing RFID And the nominees are… Lean Low Cost Country Sourcing This year’s nominees for “best practice” are… Collaboration

4. And the winner is… Differentiation!

5. As a practice becomes more widely adopted, it transitions from an emerging to a best practice, then to a standard, and finally to a basic practice Stage IV Emerging Stage III Best Stage II Standard Stage I Basic Usage Time …Sooner or later, the competition catches up

6. Why Differentiate Supply Chains? • Supply chains play a critical role in creating enterprise value • Differentiating your supply chain can provide sustainable competitive advantage (within reasonable opportunity windows)

7. Ultimately, our role is to increase shareholder value Shareholder Value Asset Efficiency Margin Improvement Revenue Growth • Improved in-stocks • Increased sales from new products • Improved customer loyalty • Reduced markdowns • Lowered operating expenses • Optimized product flow • Improved inventory performance

8. We have entered an era of complexity that we’ve never seen before • The pressure to continually drive down supply chain and engineering costs • The pursuit of new lucrative markets and channels around the world • The quickening pace of product innovation Result Increased complexity in the Value Chain as manufacturers expand their global presence

9. At the same time, we are challenged by our own organizations, practices and performance measures “ Optimize (fill in the blank) , and we will be efficient” “Our brand is strong enough and margins high enough to cover our inefficiencies” “With interest rates so low, why focus on inventory?” “We have an S&OP meeting every month… not too many people show up though” “Don’t take volume out of my warehouse!” “I know what I should do, but I know what I’m going to do…”

10. It’s not just about cost reduction anymore • In a world of rising costs and shrinking profits, supply chain differentiation may be the best opportunity for a company’s survival Profits Costs

11. Strategies to Addressthe ChallengesIncreased Complexity

12. Master SC Complexity Case Example: What differentiates a complexity master? The Goal: Profitable Growth CUSTOMER PRODUCT SUPPLY CHAIN New Markets What is the path to profitable growth? New Products LowGlobal Value Chain ComplexityHigh Lower Cost/New Markets Loyalty, Collaboration, Forecast, Service Level Innovation, Product Launch Time-to-Market Cost, Quality, Product Intro. Flexibility, Productivity LowValue Chain CapabilitiesHigh

13. Master SC Complexity • Factors to consider: • Are you optimizing locally, but not globally? • Is customer service a priority, but there’s not enough commitment to it? • Is product innovation a leading contributor to revenues, but the lowest supply chain priority? • Have you diminished your supply chain flexibility owing to cost reduction measures? • Are you making radical changes to your supply chain that are impacting product quality?

14. Master SC Complexity Case Example: What differentiates a complexity master?

15. Strategies to Addressthe ChallengesReduce Cost

16. Free up Working Capital The Wall Street Journal estimates that nearly $600 billion in working capital is available to U.S. companies through improved supply chain management “A cash cow of nearly $600 billion grazes in plain sight of U.S. companies, but still eludes many of them.” “That cash…could in many cases be put to better use for, say, paying off debt or creating new products.” Source: The Wall Street Journal, 8/30/04, “Ignored Money Waiting to be Spent”

17. Year 2 Performance (Mar – June) Apr Apr May Mar Mar June June Many companies have been unsuccessful in improving inventory performance. Reductions in inventory have come at the expense of lower customer service Inventory DOS vs. Customer Service 100% 98% 96% Customer Service 94% Year 1 Performance 92% 90% 20 20 25 25 30 30 35 35 40 40 45 45 50 50 55 55 60 60 65 65 Days of Supply Real improvements require shifting the performance curve

18. The companies that have been successful were able to isolate, prioritize and improve the critical capabilities which drive inventory and customer service improvements SUPPLY CHAIN CAPABILITIES CUSTOMER SERVICE INVENTORY Supply Planning Inventory Planning Raw/WIP Management S&OP Product Lifecycle Mgmt Mfg Flexibility Demand Planning Performance Measures Note: Supply chain capabilities shown above are representative of a broader list of capabilities. Comprehensive list includes additional capabilities such as: promotions planning/execution, customer service strategies, etc.

19. Year 1 Year 2 Year 3 $150MM $1,010 (Year 2) $80MM $930 (Year 3) The benefits of doing this correctly are significant Company’s best inventory performance in over 20 years Case Study 1: $9B Global CPG Manufacturer 1 1 , , 600 600 1 1 , , 500 500 $1,390 1 1 , , 400 400 (Year 0) 1 1 , , 300 300 $230MM Inventory (Millions of Dollars) 1 1 , , 200 200 $1,160 (Year 1) 1 1 , , 100 100 1 1 , , 000 000 900 $460MM J an Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec $460 million inventory reduction in three years Customer service levels improved significantly during this time period

20. Strategies to Addressthe ChallengesNew Markets& Channels

21. Design Multiple Supply Chains • Create multiple supply chains tailored to your product and customer profiles • “One size fits all” supply chains are a thing of the past. They may not always be the best option or be competitive • What is driving companies to this strategy? • Multiple product profiles • Multiple customer segments

22. Design Multiple Supply Chains • Factors to consider: • Look at the products that flow through your supply chain and ask yourself the following questions: • Are they identical, should they flow through the same logistical system? • Do they have the same demand patterns and need similar delivery commitments? • If the answer to any of the questions is “no”, you should rethink the flow of your products and customize your supply chain for the flow of products • Now look at your customer profile: • Should all of your customers have the same delivery mode?

23. Design Multiple Supply Chains • Case Example • Situation: • A company producing multiple products used similar shipping modes to distribute products to its channels. Products that cost several thousands of dollars flowed with products that cost a few hundred dollars or less. This increased delivery lead time, reduced cash conversion cycle, raised the potential for damage of the more expensive product • Solution: • A faster, parcel shipping line for the expensive product linked to the production line, and the traditional truck load shipping for the lower cost products

24. Some retailers have been customizing their supply chains to maximize profitability Example Optimal Source and Flow Alternative Vendor-Store Vendor-DC- Store (Pick) Vendor-DC- Store (Flow) Wholesale Distribution • Low value • High cube • Extremely high value • Short vendor lead time • High volume/ low volume • Shelf life • Slow moving • High value/low cube • Unpredictable sales pattern • Inconsistent vendor lead time • Break-pack • Fast moving • Consistent seller • Low value • Variable cube • Predictable sales pattern • Short lead time • Superior first cost capability • More efficient material handling • Better marketing intelligence • Inventory complexity Predominant Attributes Focusing Approach • Jewelry • Dairy • All categories • All categories • Seasonal • HBC • GM • Tobacco • Specialty Foods Some Examples

25. Share your Supply Chain • Share your supply chain • Sharing supply chains among non-competing companies, customers, or suppliers can be another source of differentiation (different from outsourcing) • What is driving companies to this strategy? • Small size makes it difficult to invest in comprehensive infrastructure • Leverage economies of collaborative supply chain partners

26. Share your Supply Chain • Case Example • Situation: • Companies A and B, both realized their retail locations were generally located at the same mall locations. They had considered the option of a private transportation fleet, but each company realized that having an individual fleet was not economical, despite customer service advantages • Solution: • The companies realized that a collaborative private fleet would give them the advantages of flexibility and still provide economies of scale. They co-located their fleet/transportation personnel to manage their private fleet operations. They were able to better manage both store deliveries and reverse logistics

27. Strategies to Addressthe ChallengesProduct Introductions

28. Synchronize Concept to Market • Speed to Market is the latest buzzword particularly for product produced off-shore • Yet, with long lead times for design, development and production, it is nearly impossible to match supply with demand

29. Synchronize Concept to Market • Postponement still works • Increasing product proliferation and changing customer demands make postponement an attractive and often necessary strategy

30. Synchronize Concept to Market ProductDevelopment Production Replenishment Sourcing Supply Chain

31. Synchronize Concept to Market One company has found a way: