The Risks and Rewards of an Adaptive Supply Chain

The Risks and Reward of an Adaptive Supply Chain- Directions for SAPCyd Riede, SCM Solution PrincipalBob Ferrari, Director, mySAP SCM Business DevelopmentOctober 21, 2004

Industry Challenges – Becoming More Adaptive Implications to the Supply Chain Demand Driven Networks The Critical Importance of Integration mySAP SCM Directions 2004-2005 Rewards and Summary

Stock market reactions on days when supply chain glitches are reported: Delays in product development: by -10% Ramp-up/rollout problems: by -11% Production problems:by -10% Quality problems: by -9% Parts shortage in manufacturing: by -7,5% Change Is Constant “In the real world, you have to be ready for the unexpected” Source: Prof. Vinod Singhal, DuPree College of Management, Georgia Institute of Technology

Major Forces Are Driving Adaptability Adaptability is the key to succeed in today’s business environment COMPETITION • Product innovation • Process innovation • Services innovation MARKET • Increased quality requirements • Increased product configurations • Service wrapped into products ECONOMY • Decreased IT budgets • Shareholder expectations • Shrinking margins TECHNOLOGY • System and data consolidation • Mobile computing, RFID • Continuous asset and processinnovation GOVERNMENT REGULATIONS • Environmental • Legal compliance • Industry standards

Create insights based on detailed and timely information throughout the value chain. Sense ExtendedEnterprise ProductLeadership CustomerIntimacy Respond Fast and flexible react to changing market, business and operational conditions. The Adaptive Enterprise Adaptive Enterprise – “Ability to react on realtime changes “

Create insights based on detailed and timely information throughout the value chain Sense ProductLeadership Extended Enterprise Customer Intimacy Respond Fast and flexible to react to changing market, as well as business and operational conditions SAP View of Adaptive Processes • Plan & Execute • Integrated processes across planning & execution • Single planning & execution data model

Create insights based on detailed and timely information throughout the value chain Sense ProductLeadership Extended Enterprise Customer Intimacy Respond Fast and flexible to react to changing market, as well as business and operational conditions SAP View of Adaptive Processes • Sense & Respond • Deep connections to customers and partners • 360-degree view inside and outside the enterprise • Distributed control and exception management

Create insights based on detailed and timely information throughout the value chain Sense ProductLeadership Extended Enterprise Customer Intimacy Respond Fast and flexible to react to changing market, as well as business and operational conditions SAP View of Adaptive Processes • Learn and Adapt • Comprehensive analytical capability • Rapidly change/adapt existing processes • Introduce new processes, or change existing processes

Inventory Levels Stock-Outs Managing the Supply Chain - Conflicting Goals Inventory Levels Stock-Outs Reduced Inventory Levels Fewer Stock-Outs Reduce inventory levels...

Inventory Levels Stock-Outs Managing the Supply Chain is about Conflicting Goals Inventory Levels Stock-Outs Reduced Inventory Levels Fewer Stock-Outs Reduce inventory levels... or reduce stock-outs.

...and It is More than Just Two Opposing Goals Order Leadtimes Production Efficiency Stock-Outs Inventory Levels Number of Products Logistics Costs Reduce order leadtimes... or reduce logistics costs. Increase the number of products... or increase production efficiency.

How Do You Get Off the See-Saw Order Leadtimes Production Efficiency Stock-Outs Inventory Levels Inventory Levels Number of Products Logistics Costs Moving toward any goal... moves you away from every other. How do you move balance all of your goals at the same time?

Reactive Move from Being Reactive to Being Adaptive Order Leadtimes Production Efficiency Adaptive Stock-Outs Inventory Levels Number of Products Logistics Costs

The Goal- An Adaptive Supply Network • A business process framework: • … that incorporates adaptive business practices and enabling technology • … is driven by real-time demand information • … that manages a responsive supply network of customers, suppliers, and other partners

Collaborate and Respond to internal and external deviations across the extended network RESPOND Plan and re-plan resource needs based on business objectives PLAN Sense and alert in real time the deviations caused by internal and external events LEARN Execute plan based on available supply chain network resource capability SENSE Continually learn from exceptions and incorporate knowledge into business processes EXECUTE SAP’s Adaptive Supply Chain Network Framework VISIBILITY

Meeting consumer or customer needs in a much more responsive and timely manner Ability to respond more quickly to changes in demand Focus on the key “moments of truth” On-shelf availability or when customer desires product Supplier Manufacturer Distributor Retailer Consumer • An interlocking of operations and business process capabilities • Ecosystems of supply networks, extending across suppliers, producers, and • distribution partners Moving toward a “single integrated process” of demand driven supply chain process capabilities Demand Driven Networks – What Are They ?

Supplier Manufacturer Distributor Retailer Consumer Demand Driven Networks • Demand Driven Network • A environment where every participant can exchange information, goods, and services with every other. The ultimate source of demand (the consumer or customer) is the channel master. • The ability to synchronize on the ultimate demand signal by sensing and responding to demand with changes to products/ promotions/ production/ distribution. Information Flow Physical Goods Flow

Supplier Manufacturer Distributor Retailer Consumer Transformation Implications • A fundamental rethinking of the inter-relationships between forecasting, planning, and network execution • Reducing overall production setup and network execution cycle times • Combination of continuous demand-pull, and some forms of supply push for long lead time materials • Leveraging lean production, flexible fulfillment, and more adaptive process support capabilities • Bidirectional sharing of information quickly within organizations and across supply networks • Real-time monitoring and interpretation of exceptions- adjustment to existing plans in response to exceptions • More than a supply chain initiative Information Flow Physical Goods Flow

VMI Point of Sale Web Orders Channel Orders Shipment to DC’s Trade Promotions Current Situation for Many Companies Most companies today plan and execute operations in different processes “The moment of truth” Annual Monthly / Quarterly Weekly/Daily Brand Planning Customer Marketing & Sales Planning Product Planning Execution, Replenishment Product Delivery S&OP Process Operations Planning Supply Network Planning Financial Planning EDI Event Demand Generation

VMI Point of Sale Web Orders Channel Orders Shipment to DC’s TPM RFID Events Demand Driven Processes • Divide planning and execution into three interrelated time horizons • Continuous demand (pull), with some push • Comprehensive supply network planning to integrate all time-horizons Long-Term Annual Mid-Term Month/ Quarter Short-Term “The moment of truth” Brand Planning Customer Marketing & Sales Planning S&OP Planning Weekly/Daily/Sub-Daily Operations Planning Financial Planning Continuous Demand Promotional Demand Channel Demand Exception and Plan-based What-Ifs, Scenarios, Network Capacity

DEMAND DRIVEN SUPPLY NETWORK An SAP View- Demand Driven Networks Supplier Manufacturer Distributor Retailer Consumers Sense – Respond - Execute Adaptive Logistics SRM Supply Demand CRM PLM New Product Development & Introduction SAP NetWeaver People – Information – Process – Platform Integration Interlocking the Required Process Capabilities

Supplier Manufacturer Distributor Retailer Consumers Key Enabling Process Establish/maintain global data synchronization, network visibility and analytics Increase rate & volume of new product introductions Sense, Respond & Adapt to demand and supply network needs Customers Suppliers Integrated sales and marketing campaigns driven by demand Plan for and Execute “turn” business focused on costs & efficiency

SAP Initiatives • Began our development activities two years ago • Launched first enabling SCM process at ASUG / Sapphire 2004 : • Responsive Replenishment powered by SAP ICH- gateway between POS driven demand and daily replenishment planning • Multiple SAP additional internal product initiatives underway: • Demand Driven Planning • Adaptive Manufacturing • Demand Driven Supply Chain (DDSN) • New Product Development and Introduction (NPDI) • Trade Promotion Planning and Brand Equity (CRM) • Master Data Management and Data Synchronization (SAP NetWeaver) • Supplier Collaboration • Launching new ASUG Influence Council for further direct customer influence

EXECUTE PLAN SENSE RESPOND Consumer Driven SAP Inventory Collaboration Hub SAP Event Management SAP Advanced Planning & Optimization SAP ERP SAP Netweaver Business processes supporting DDSN • Case Level Order Tracking • Electronic Pedigree RFID Infrastructure • Order Track & Trace • Alert Management Event Management • Collaborative Plng • Vendor Managed Inv. • Supplier Managed Inv. • Consensus Fcstg • Sales & Ops Plng • Responsive Replenishment Sense & Respond • Product ID • Location ID • Product ID • Location ID • Product ID • Location ID Master Data Mgmt. • Consensus Fcstg • Sales & Ops Plng • Capable to Promise • Collaborative Plng • Vendor Managed Inv. • Supplier Managed Inv. • Co-Mfg Scheduling Advanced Planning • Attainment to Plan • Asset Utilization • Forecast Accuracy • Inventory Position • Cust. Out-of-Stocks • Supplier Score Card • POS Data Mgmt. Analytics • Sales Clerk Role • Procurement Role • Demand Planner Role • Supply Planner Role • Replenishment Role • Plant Mgr. Role • Customer Svc Role • VMI Planner Role Portal Middle-ware • Receive Orders • Transmit ASN’s • Retrieve Sales History • Snapshot of Inventory • Inventory Movement • Order Status • Capture POS Data • Forecast Sales • Estimate Capacity • Plan Production • Distribute Inventory • Procure to Pay • Order to Cash • Pick/Pack/Ship • Load Tendering • Lean / JIT • Vendor Managed Inv. ERP

Continual Evolution to Meet Customer Requirements Enterprise Services Architecture SAP NetWeaver mySAP Business Suite SAP xApps Web services 3-tier client/server SAP R/3 Basis SAP R/3 Mainframe architecture SAPR/2

Supply Chain Processes Across Platform Components and Applications Example – The Current Integration Dilemma Platform • New trading partner or new process = new integration project • High number of integration points limits visibility and the ability to change • Very complex to add new technologies such as RFID • Multiple vendors and technologies • High TCO C-Room … Portal EAI Business Intelligence Bus. ProcessMgmt APS Partners SAPR/3 Legacy CRM Components

SAP SCM: Leveraging SAP NetWeaver Components SAPR/3 Example – The Current Integration Dilemma Platform • Reduction in cost through integration • Enable new supply chain strategies through flexibility • Add new capabilities and composites based on business needs • Leverage new innovations, such as mobile • Extensibility via Java developments SAP SCM SAP NetWeaver Enterprise Portal, Business Intelligence, Master Data Management, … Other APO Partners EM CRM Legacy ICH Components

Foundation of the Adaptive Enterprise SAP NetWeaver – The Open Integration and Application Platform Powers the Adaptive Enterprise Enterprise Portal for customer and supplier access PEOPLE INTEGRATION PEOPLE INTEGRATION PEOPLE INTEGRATION Multi channel access Multi channel access Multichannel access Business Analyticswith predefined content Portal Portal Portal Collaboration Collaboration Collaboration INFORMATION INTEGRATION INFORMATION INTEGRATION INFORMATION INTEGRATION Master Data Managementfor harmonized product/customer data Bus. Intelligence Bus. Intelligence Bus. Intelligence Knowledge Mgmt Knowledge Mgmt Knowl. Mgmt Master Data Management Master Data Management Master Data Management LIFE CYCLE MANAGEMENT LIFE CYCLE MANAGEMENT LIFE -CYCLE MANAGEMENT COMPOSITE APPLICATION FRAMEWORK COMPOSITE APPLICATION FRAMEWORK COMPOSITE APPLICATION FRAMEWORK Exchange Infrastructurefor hub-and-spoke integration PROCESS INTEGRATION PROCESS INTEGRATION PROCESS INTEGRATION Integration Integration Integration Bus. Process Bus. Process Bus. Process Broker Broker Broker Mgmt Mgmt Mgmt Business Process Management to drive cross-enterprise processes APPLICATION PLATFORM APPLICATION PLATFORM APPLICATION PLATFORM J2EE J2EE J2EE ABAP ABAP ABAP ... ... DB and OS Abstraction DB and OS Abstraction DB and OS Abstraction Web Application Server forextensibility with Java applications Lowest TCO and maximum flexibility

Improving Collaboration Through Leveraged Utilization of SAP NetWeaver FROM TO Point-to-Point Integration Centralized Integration BP 1 BP 1 XI SCM ICH BP 2 BP 2 BP 3 BP 3 • Collaborative Businesses processes need to be integrated both inside (EAI) and outside (B2B). • With SAP NetWeaver Exchange Technology (SAP XI), SAP ensures that applications, systems, processes, and people are exchanging data effectively. • SAP XI is the application integration technology for SAP ICH which allows a centralized integration of processes, application and data. BP=Business Partner

Extended SCM Processes, Applications, Enabling Technology mySAPSCM CRM ERP SAP NetWeaver People Integration Order Mgt Multi-Channel AccessPortalCollaboration Information Integration Knowledge MgmtBusiness IntelligenceMaster Data Mgmt Process Integration Integration Broker,Business Process Mgmt Order Capture Inventory Availability Application Platform ERP Backbone SCMBackbone CRMBackbone J2EEABAP,DB and OS Abstraction 3rd partySolution

SAP SCM Vision OUR VISION • Adaptive Supply Chain Networks are communities of companies who: • Thrive by sharing knowledge • Are fast and adaptive to changing market conditions • Can proactively respond to shorter, less predictable product lifecycles • Intelligently adjust to changing market conditions OUR MISSION • To help customers become more flexible and adaptive by providing: • Best-in-class mySAP SCM Business Suite applications and infrastructure • A complete ERP solution that incorporates comprehensive SCM • Innovative technologies, partners and implementation services To manage manufacturing, logistics, and supply network capabilities as an integrated part of one or many supply chain networks

mySAP SCM • Responding to Customer Business Needs for: • Supporting the transformation to demand-driven, more adaptive supply networks • Helping to fuse the physical and digital aspects of supply chain processes through leveraged use of sense and respond technologies (Auto ID and Mobile Technologies) • Enabling more efficient, less resource intensive supply chain operating costs • Managing more adaptive, network-wide logistics • Lowering overall total cost of ownership for SCM applications • Integrating SAP and non-SAP systems across the extended supply chain

mySAP SCM – Key Competitive Differentiators • A holistic and complete SCM solution leveraging SAP NetWeaver capabilities • Integration by design coupling mySAP ERP and mySAP Business Suite applications to support cross-functional SCM business process with the lowest overall Total Cost of Ownership (TCO) • Deep, industry-focused functionality leveraging 30 years of business process experience • RFID-enabled supply chain execution process support • The market leading SCM Solution(AMR Research, ARC Advisory Group, Gartner)

mySAP SCM – Increased Recognition • Wall Street Journal Europe Annual European Innovation Award (integration of RFID through SAP Auto ID Infrastructure) • Frost & Sullivan Global Customer Leadership Award (dominant SCM vendor to Global Pharmaceutical Industry) • 2003 IDC ranking of worldwide SCM services providers positions SAP in the top 10 • SAP SCM 4.1 has been certified in supporting the VICS (Voluntary Inter-industry Commerce Standards) Association CPFR interoperability

mySAP SCM Providing Value for All Sizes of Companies • Providing value to all sizes of companies • The ability to easily add key customers or suppliers to your extended supply chain process needs • Supporting collaboration in key areas such as demand-chain, inventory, and responsive replenishment processes • Providing the most adaptive and scalable planning and transactional capabilities for logistics, warehousing, distribution and transportation needs • Providing more flexible choices and best practices in accommodating SCM deployment and implementation services needs Nearly 60% of all SAP Installations are in companies or divisions with annual revenues of less than $500M USD

SAP SCM 4.1 – A Suite of Applications • SAP Advanced Planning & Optimization(SAP APO 4.1) SAP Inventory Collaboration Hub(SAP ICH 4.1) SAP Event Management (SAP EM 4.1) Integrated by design with SAPSupply Chain and Manufacturing Execution Applications within mySAP ERP

Enterprise Portal Collaborative Processes (VMI, CPFR, Responsive Replenishment) Supply Chain Process Integration Leveraging SAP NetWeaver Supply Chain Collaboration Supply Chain Visibility Supply Chain Execution Materials Management Manufacturing Supply Chain Event Management Warehouse Management Order Promising & Delivery Business Analytics and BW Transportation Execution Foreign Trade/Legal Services mySAP SCM- Incorporating Adaptive Framework Capabilities Demand Planning Supply Planning Global Available to Promise Distribution Planning Production Planning Transportation Planning Supply Chain Planning PLAN RESPOND LEARN EXECUTE SENSE

Enhanced Scenarios: DDSN (Demand Driven Supply Network) Responsive Replenishment Supplier / Customer Collaboration Project Manufacturing RFID-enabled Logistics Forecasting and Replenishment Adaptive Manufacturing Data Synchronization (MDM) Service Management mySAP SCM 2004 - 2005 Headlines

Sales Data Supply Plans Releases Forecasts Inventory Data InventoryData Alerts PO‘s ASNs Collaborative Supply Chain Processes Responsive Replenishment Supplier Managed Inventory My Company Supplier Customer SAP Inventory Collaboration Hub (SAP ICH 4.1)

Introducing Responsive Replenishment • Process Support Goals and Benefits: • Rather than traditional reorder-point driven VMI, support a process driven by actual demand, including promotional demand • Provide capabilities of receiving POS information from store-level demand vs. DC level • Support a collaborative, joint planning and execution process to manage promotional demand and include last-minute changes • Support a planning process that can be executed in sub-daily buckets • Provide a built-in, automatic statistical demand forecasting engine • Support more intelligent and efficient use of transportation through an amplified intelligent replenishment and load-building process Customer

Objective (1): Moving towards a ‚responsive‘ replenishment cycle:10 days down to 1 day‘ Objective (2): Plan on real Customer Demands to enhance forecast accuracy Responsive Replenishment: Shrinking Time & Moving Closer to the Customer on shelf availability Replenishmentof shelf time horizon Goods issuemanufacturer GI + 1 day GI + 7 days Demand Planning/CPFR horizon Uncertainty- horizon VMI-horizon

Supplier Collaboration Direction One consolidated view on design objects, bids & contracts, forecasts, inventory, procurement documents and shipments Order collaboration Designobjects RFx, auctions &contracts Collaborativereplenshment

Supplier Collaboration – SAP Direction • Leverage the SAP NetWeaver platform • Unified access to collaborative applications and information • Gateway providing suppliers with a single point of access • Requires nothing more than a Web browser on supplier side • One-supplier collaboration solution • Empowers your entire supply base to share relevant information • Enables collaborative processes along the entire supplier relationship life cycle • Provides alerts for implementing exception-based processes • Powered by the buying organization • Completely Web-based hosted solution • Easy, flexible, and fast to implement • Highest security standards

Introducing Adaptive Manufacturing Adaptive manufacturing is the ability of a factory to profitably replenish the supply chain while dynamically responding to unpredictable change Adaptive Manufacturing enables companies and their production personnel to “run Manufacturing at the Speed of their Business” and deliver Superior Performance thru Visibility and Responsiveness.

= Manufacturing Decoupling Point More Adaptive Manufacturing Forecast Driven (Make to Stock) Demand Driven (Make to Order) Push Pull Manufacturing Flexibility Inventory Flexibility 2000+ Push Pull Inventory Flexibility Manufacturing Flexibility 1990’s “The Order is fast becoming the Forecast“ Push Pull Inventory Flexibility Manufacturing Flexibility 1980’s Push Pull Inventory Flexibility Manufacturing Flexibility 1970’s Shift from “Forecast-driven” to “Demand-driven” Manufacturing

The Risks and Rewards of an Adaptive Supply Chain