1. January 2011Winning with yourSupply ChainStrategies for creating value,and preparing for the reboundThe past years have been volatile for many supply The signs are there that the much expected reboundchains. Whereas before the steep and unprecedented will challenge and confront supply chains withdecline in demand, the creation of shareholder value higher demand, and this at unprecedented speed,was significantly driven by a continuous quest for in smaller quantities, and in environments withgrowth, business leaders in a ‘no growth’ environment less inventory and slack capacity. It is clear thatmust focus on the remaining levers for value creation. uncertainty and volatility are here to stay and thatThe mantra in many businesses has changed on very supply chain leaders will have to define and implementshort notice from a quest for growth into a quest strategies to manage the associated risks. But thefor cash, operating margin and asset efficiency, in an current and future volatile business environmentenvironment that is exposed to significantly higher also constitutes an opportunity to win for thoselevels of risk and uncertainty than ever before. businesses that develop supply chain tactics to reduce risk, or offset the risk levels in their supply chains,Shareholder value drivers…in uncertain times by incorporating additional agility and flexibility. In this paper, we develop a point of view on what Revenue Not/Less available supply chain and business leaders in manufacturing Growth and consumer industries should do to create Shareholder Operating value and to prepare for the much expected Value Margin upturn in times of increased uncertainty. Focus Asset 20 Efﬁciency 22 15 35 30 34 80 72 77 65 68 36
2. everything that is structural in the supply chain: theHow does supply chain distribution network, the manufacturing footprint, asset allocation policies for products and customers,management contribute to value decision making about outsourcing, and aligning the trading relations between the various entities in thecreation in the business? supply chain to optimize additional variables such as for instance tax in the equation. Overall, it’s all about doing the right things, focusing on supply chain efficiency and Supply chain management basically contributes to effectiveness. value creation in the business through optimization and alignment of structures, policies and processes: Processes contribute to optimal cost, cash, efficiency and maximum profit by doing things right, conceptually • by providing cost and cash optimal network structures and content-wise, by focusing on the flow of value to at the level of the inbound supply chain, and in the customer and by delivering the aspired business manufacturing and distribution (FOOTPRINT) results with as little waste as possible. • by aligning processes in planning, sourcing, making and delivering (PROCESSES) Aligning and optimizing the supply chain footprint and • by aligning planning and inventory deployment processes, is very often an ideal starting point towards policies that balance service, cost, inventory and supply chain excellence. It will deliver cost, cash and capacity assets (BALANCE), and profit benefits to the business in aggregate, meaning for • by providing TRANSPARENCY at a granular level of all customers and for all products at the same time. customers and products, for portfolio management and profitability improvement in the business. Managing the supply chain for value creation in the business Footprint Balance Transparency Processes Operations strategy & Strategy inventory deployment Cost-to-serve PLAN tactics Portfolio complexity & Footprint & Network Balancing service mix, SOURCE/PROCURE proﬁtability management assets and cost Spend visibility & TCO Strategic Outsourcing MAKE Improving the balance by transparency aligning inﬂuence factors: service offering policies, Strategic sourcing and Tax aligned enhancing responsiveness supplier relationship DELIVER supply chain & reducing variability management RETURN The ﬁnancial supply chain: granular business performance improvement The foundation of the supply chain: aggregate business performance improvement Cost, proﬁt & cash The foundations The supply chain footprint and the supply chain The next level processes basically constitute the foundation or Finding the right balance and providing transparency architecture of the supply chain. When they are for profitability management are competences that are optimized and aligned, they ought to be robust for situated at a more granular level in the supply chain, and the medium term, say the next 3-5 years. Footprint is are indicators for a more advanced type of supply chain management in which cost and cash performance is2
3. further improved by optimizing profitability at the level all of this complexity was added in a profitable way,of individual customers, products and product groups. and it is not uncommon to find out as a result of a cost-to-serve initiative, that a significant portionThe balancing act of the profit potential - ranging from 30%-50% - isFinding a balance is about making decisions where to eroded by unprofitable products and offerings. Fordeploy inventory or slack capacity as a shock absorber companies with average supply chain maturity,for the demand and supply side variability in the supply integrated Cost-to-Serve initiatives often showchain. It is also about deciding how much buffer in potential to improve absolute EBIT% margin with aterms of inventory or capacity is needed to balance range of an additional 0,5% - 2,0%.service requirements with cost and cash. Finding anoptimal and profitable balance between these very often Businesses that invest in supply chain competences toconflicting requirements is probably one of the most ‘Balance the Dynamics’ or to ‘Provide Cost-to-Serveimportant supply chain competences in businesses that Transparency’ are leaders in an evolution towards aare exposed to volatility. more advanced type of supply chain management inFor companies with average supply chain maturity, which business performance is improved by fine tuningit is not uncommon to reduce total inventory the supply chain at a granular level. It is a clear examplelevels by 5-20% with a service improvement or a of what is commonly referred to as ‘the Financialcost reduction on top, by optimizing the planning Supply Chain’, and constitutes a transformation toand inventory deployment tactics at the level of a more mature type of supply chain function in theindividual products, product groups, distribution business, reaching out to, and facilitating the businesschannels and customers. performance improvement dialogue with the Finance and with the Sales & Marketing functions. ResearchCreating transparency conducted by Insead and Stanford University on theCreating Transparency is about supply chain link between Financial and Supply Chain Performance,professionals delivering cost-to-serve transparency indicated that companies with higher levels of supplyto the business in order to facilitate profitability and chain maturity also outperform their competitorsportfolio complexity decisions at the granular level of financially.products and customers. Cost-to-Serve in this respectis a collective term for methodologies that reveal thetrue cost of processes and activities in manufacturing(Cost-to-Make), Logistics (Cost-to-Fulfill), and selling Supply Chain Leaders show(Cost-to-Sell), by using pragmatic activity based costingprinciples in a supply chain and commercial context. significantly higher MarketAt the inbound side of the supply chain, this costtransparency could be called Cost-to-Own (or more Capitalization Growth Ratescommonly known as Total Cost of Ownership), which isan important lever to enhance spend and cost efficiency. (Insead/Standford University , The link between Supply ChainGranular Cost-to-Serve transparency is generally used and Financial Performance)to define priorities for cost reduction and processimprovement initiatives, to make decisions about A regional consumer business company was able toproduct and customer portfolio’s and to develop and realize significant profitability improvements by applyingimplement service offering policies and trade terms that the above mentioned principles. Through alignmentdrive customer behavior in a way favorable to overall of planning policies and parameters in line withbusiness profitability. volatility in supply and demand, significant inventory reductions were achieved in several countries withIn the current uncertain business environment, stockholding responsibility. An alignment initiative ofmethodologies that align the supply chain at the lot sizes in the factories at the various levels within thegranular level (individual products and customers), product hierarchy (recipies, semi-finished products,probably comprise the biggest opportunity for profit and finished products) revealed potential for longer runs,cash improvement. The rationale is that in the past especially for those products that triggered a majoryears with relatively high growth rates, companies portion of costs in changeover and product waste.have added significant amounts of complexity in Several unprofitable SKU’s were rationalized followingterms of products and service offering policies. Not a Cost-to-Make and Cost-to-Serve initiative. Overall this 3
4. company was able to significantly reduce unprofitable demand volatility, supply uncertainty, currency exchangeSKU’s, changeovers, and waste, resulting in a reduction risk etc.). In a perfectly predictable world without supplyof manufacturing cost by 10%, in inventory by 40%, chain risk, there is no need for flexibility and hence theand in an absolute EBIT% margin increase by 1,5%. value of flexibility and agility enhancing investments is limited. Risk and Flexibility: communicating vesselsImpact of the currentvolatile and uncertain Supply Chain Flexibility Enhancementenvironment onsupply chain value Supply Chain Risk Reductioncreation:understanding risk,and the value of Flexibility however comes with a cost, as it very often means adding slack and redundancy in aflexibility. focused and useful way. More and more companies however, look at it as an option that creates value to the business, and that creates more value the more volatile and uncertain the businessThe most relevant learning of the current downturn environment becomes.is about understanding how risk impacts supply chain Making decisions under uncertainty and understandingperformance and more in particular how this impact the value of flexibility has its roots in real-optionscan be reversed by balancing or offsetting risks with theory. This theory makes explicit that flexibility is moresupply chain flexibility and agility. Risk and flexibility in important when uncertainly and volatility are high. Andthis respect have to be seen as communicating vessels more specifically it provides a framework to estimateor forces that have to be balanced. The requirement to the value of flexibility. In footprint optimization orenhance and invest in supply chain flexibility and agility, asset rationalization programs for instance, lackingand the business value that derives from it, is directly the capability of being able to appraise the value ofcorrelated to the level of residual uncertainty and related flexibility, leads to suboptimal decision making. Scenariosrisks a supply chain is exposed to (e.g. in terms of with additional flexibility in terms of volume, product4
5. mix or network flexibility would only be burdened with often boils down to an increased level of integration the additional cost of the flexibility without being able or regionalization of the supply chain. In mature to account for the value that derives from it. Especially in business environments, integrating or regionalizing the environments with a lot of uncertainty, this will give rise supply chain provides opportunities to take advantage to suboptimal decision making at the level of preferred of consolidated services and synergies, to drive out footprint scenarios. redundancy and increase efficiency. In addition, more With uncertainty and volatility expected to stay, integrated supply chain structures are more capable to what are the options for supply chain leaders? Using leverage network flexibility potential. the analogy of the communicating vessels, there are two potential strategies: Network flexibility • Managing and reducing supply chain risk: e.g. At the level of the supply chain network, it is often • starting a formal supplier risk management about making the hidden flexibility transparent by program integrating information from around the network • increasing demand planning accuracy based on a holistic view of the supply chain. Hidden • Managing and enhancing supply chain flexibility: e.g. flexibility in practice can take different forms: alternative • investing in additional tooling and assets to sources of supply, alternative locations to manufacture enhance mix flexibility on a production line, and to deliver. In complex and interdependent • finetuning deployment tactics at a more granular supply chains (complex routings, multiple steps with level, and doing it more frequently interdependencies, limited slack capacity and excess inventories), the transparency and the flexibility The section below will provide more examples on leveraged by a central supply chain entrepreneur brings how supply chain risk can be reduced or supply chain added value by supporting better decision making in flexibility can be enhanced. short and medium term sourcing, product and customer allocation, and inventory deployment tactics throughout the network. In general the experience is that supplyHow to reduce risk and enhance chain integration promotes more (cost and cash) optimal and faster decision making by leveraging hiddenflexibility in the supply chain? network flexibility. This effect is particularly strong in intensely volatile environments with many degrees of freedom to manage. Very often, leveraging this hidden network flexibility and Enhancing flexibility and reducing risk can be achieved creating a centralized supply chain function requires a in different ways. It can be done within the supply chain redesign of the business model. Therefore it is complex, network, within the 4 walls of the operational units, and but it is often less expensive than building additional within supply chain management processes. flexibility within the walls of individual operational facilities in response to market demand, supplier risk, In the current uncertain times, managing the supply currency exchange and commodity price volatility. chain is all about managing for cash with a strong focus on inventories, and cost reduction in the business. On the Inbound side of the Supply Chain, the And most businesses across a variety of industries contemporary Supply Management environment is have started with the obvious things, by streamlining characterized by a newly discovered recognition that their G&A, by aggressively tackling external spend, by some of the major risks an organization faces may streamlining their organizations etc. come from the supplier base. Proactive management of these risks can demonstrate the strategic perspective There are companies however, that have realized that and value, as well as the professional competence there is an opportunity to go beyond the obvious by of the Supply Management function. The increasing taking a multi-tiered approach to the downturn. These dependence on suppliers makes the traditional ‘laissez companies take advantage of the current restructuring faire’ approach dangerous, and has caused leading friendly environment (suppliers, unions, regulators, enterprises to start investing in Supplier Relationship employees, etc.) to take an extended enterprise view Management (SRM),a discipline that ensures the and redesign their business model. In the more mature enterprise actively manages its relationships with and low growth business environments, this very strategic suppliers. 5
6. Reducing lead times Within the 4 walls of operational or manufacturing facilities, flexibility can be enhanced by investing in additional tooling or assets to enhance product mix flexibility on existing manufacturing assets, by negotiating more flexible labor or supplier agreements, or by investing in lead time reduction efforts. Reducing supply chain lead times through enterprise lean six sigma efforts for instance, very often allows moving the decoupling point or the push-pull boundary in the supply chain, physically to more upstream levels. This typically results in a situation where relatively a larger part of the supply chain can be planned against firm orders instead of uncertain forecasts. At the same time, decisions in the supply chain that need to be taken based on uncertain forecasts can be delayed to a later point in time when the quality of the forecasts is typically higher. Lead time reduction is a powerful lever to reduce risk and rigidity in supply chains and to make them more flexible and responsive. Lead Time Reduction Information ﬂow Raw material supplier Manufacturers / Assemblers Retailer End - User Material ﬂow Push Pull Buy to order Push Pull Make to order Push Pull Assemble to order Push Pull Make to stock Push Pull Ship to stock Decoupling point Demand upstream Demand downstream from decoupling point from decoupling point = uncertain forecast = ﬁrm orders (mainly) Frequently rebalancing supply chain tactics Another good practice in a volatile environment is to rebalance the supply chain tactics more frequently at the level of planning and portfolio policies. For instance, a lot of supply chains currently have more slack capacity that can be used as a buffer for (demand or supply) uncertainty rather than using inventory for this purpose. This requires taking a more frequent view at planning and service offering policies and to rebalance them more regularly in order to trade excess inventory for slack capacity and release cash out of the supply chain. In a volatile supply chain environment, regular alignment of planning and service offering policies reduces the risk of experiencing service problems and of carrying excess inventory. Process flexibility Supply chain management processes also have a high potential of contributing to either reducing risk or enhancing flexibility in the business. When cash is king, the importance of an effective S&OP process is paramount. But while the process seems widely adopted nowadays, recent studies showed that the value delivered often remains limited. In times of greater uncertainty, the following practices typically improve the value of the S&OP process: increasing the frequency, doing mid-cycle sensitivity checks, accelerating the S&OP process, developing multiple demand/supply scenarios, more pro-activeness and collaboration with customers and suppliers, and the incorporation of risk factors.6
7. A global manufacturing company used the S&OP Risk and Flexibility: communicating vesselsprocess initially to increase transparency and trustbetween Sales & Marketing and Production, making Supply Chain Volatilityeverybody work with the same set of planning numbers.Typically, the Sales department would prepare monthlysales forecast figures supported by a strong Sales plan n tioincluding promotional actions and the Manufacturing Ma Ac rkdepartment would take this set of figures to review tive et E.G. eti Dethe Master Production Plan and highlight any capacity • Lead Time Reduction mp m • Re-balancing tactics anissues. But as the market volatility increased in the Co Supply d • Managing supplier riskpast months, the quality of the forecast deteriorated. Chain • Aligning processes, FlexibilityThe increased uncertainty called for a new way of event management Enhancementworking in the monthly S&OP process. One set of • Enhanced intra & inter ﬁrm collaborationforecast figures, as best as they could be, was no E.G.longer enough to prepare the company to serve its • Volume Flexibility Supply Chain • Mix Flexibilityclients with the required service level at an acceptable risk reduction • Supply Chain Integrationcost. The solution consisted in developing multiple – Business Model Cudemand plans, with associated probabilities. These Redesign rre ce • Multi-scenario planning Pridifferent demand scenarios were then studied by the cy n ity ExcSupply side of the company, leading to multiple supply od ha mmplans. One scenario was chosen as the most probable ng Co eone and followed by the company. Would the marketcircumstances change, the company was prepared toswitch to an alternative plan more in line with the newreality. Supplier RiskWinning with your supply chainin uncertain timesThe above mentioned practices are examples of what Summarizing the top initiatives that will enable youcompanies are doing today to mitigate the impact of to win with your supply chain in these uncertainincreased risk and to enhance flexibility in their supply times, brings us to the following items:chains. It can be done at the level of the network, theoperational facilities and at the level of supply chain • balancing planning and service offering policies at the policies and processes. The bottom line is that these granular level of products and customerspractices mitigate business risk, enhance flexibility and • providing Cost-to-Serve transparencytherefore increase the value of the firm. • applying strategies to reduce risk at the level of the network, the policies and processes in the supplyBy embracing the concept of the granular and financial chainsupply chain and by managing risk and enhancingsupply chain flexibility, there is a clear opportunity for With state of the art Supply Chain, Pricing, Finance andbusinesses to win in the current uncertain environment, Tax capabilities, Deloitte has gained extensive experienceand sustain their supply chains as a critical asset and covering a full range of services across the whole valuedifferentiating factor for success towards the future. chain to manage supply chain risk and complexity, and enhance profitability at a granular level in the business. 7
8. ContactsFor more information, please contact:Stefan Van Thienen Kobe Naesens Paul DelesallePartner Manager DirectorSupply Chain Strategy & Supply Chain Strategy & Supply Chain Strategy &Operations Operations Operations+ 32 476 22 01 03 + 32 475 30 07 44 + 32 476 49 50 email@example.com firstname.lastname@example.org email@example.comFor further information, visit our website at www.deloitte.beDeloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of memberfirms, each of which is a legally separate and independent entity. Please see www.deloitte.com/ about for a detailed description of the legalstructure of Deloitte Touche Tohmatsu Limited and its member firms.Deloitte provides audit, tax, consulting, and financial advisory services to public and private clients spanning multiple industries. With a globallyconnected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and deep local expertise to helpclients succeed wherever they operate. Deloitte’s approximately 170,000 professionals are committed to becoming the standard of excellence.© January 2011 Deloitte ConsultingDesigned and produced by the Creative Studio at Deloitte, Belgium.