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  • 1. Optimizing Global Supply Chains Minimizing Diminished Value Risk John Brockwell, Vice President, Global Supply Chain Practice Leader April 2008 © 2008 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC The extended Global Supply Chain is creating dilemmas for both Nations, Enterprises and Consumers Supplier Components Manufacturing Distribution Consumers Customer 2 © 2008 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC 1
  • 2. The Dilemma for a Nation − Nations need to protect their economy and provide security for their citizens • Security – Proliferation of weapons of mass destruction: Nuclear, Chemical, Biological – Terrorism • Health: Disease, Bio-terrorism, Safety • Environment – EU is addressing through several initiatives (RoHS, WEEE, REACH) • Intellectual Property • Impact of imported goods on local industries − Nations need to make global trade easier in order to be competitive • Balance of Trade – Sell products globally & employ citizens – Buy goods at lower cost to improve citizens buying power & standard of living • Foreign Investment • Inflation • Currency Exchange 3 © 2008 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC The Dilemma for an Enterprise − Enterprises need to embrace global trade in order to be competitive • Incredible growth opportunities in emerging markets • Sourcing advantages – Lower labor and natural resources cost – Expertise – Proximity to markets − Enterprises need to manage the risk of the extended supply chain • Total landed costs and supply chain service level attainment – Exposure to fuel price increases and volatility – Increased transit times and number of hand-offs • Increased working capital requirements in the extended supply chain – Days Inventory Outstanding, Days Sales Outstanding, Days Payable Outstanding • Increased exposure to government compliance and tax regulations • Intellectual Property protection • Currency imbalances – Is the sourcing or fulfillment decision still good if the currency exchange varies 10%? How about 20%? 30%? • Political, Economic, Natural Hazards, Health Epidemics and Terrorism • Corporate Social Responsibility (Child or Slave Labor, Labor conditions, Environmental impact of manufacturing process and of end-product) 4 © 2008 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC 2
  • 3. The Dilemma for the Consumer For any given purchase these factors change in importance • Safety • Quality • Price Pi • Support local/national industry vs. offshore sources • Organic • Recyclable • Carbon neutral • Corporate Social Responsibility of Brand – Child and slave labor – L b C di i Labor Conditions – Environmental impact of manufacturing process and end product – Ethics Is Green a differentiator for your product or service? Will it be consumer demand or government regulations that drive Green into your industry first? 5 © 2008 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC Half of U.S. consumers consider at least one sustainability factor in selecting consumer packaged goods (CPG) items and choosing where to shop for those products, according to new survey. A new British Telecom survey finds that just 3% of U.K. consumers believe that businesses are "fully open and honest" about what they are really doing to operate more sustainable and one third think sustainable, one-third companies exaggerate their efforts in order to score brownie points among potential customers Source: Sustainable Brands Weekly January 10, 2008 6 © 2008 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC 3
  • 4. Nations, Enterprises and Consumers are demanding increased visibility and transparency in the supply chain in order to mitigate risk 7 © 2008 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC Supply Chain Management Integrates Procurement, Logistics, Manufacturing and Customer Fulfillment Why do the different disciplines need to be integrated? − Companies that align their operations to satisfy customer requirements efficiently have competitive advantage because they use less inventory, have lower costs and more profit Much of the SCM focus has been on the costs of the individual elements of the supply chain, procurement, freight, manufacturing, distribution etc. Missing delivery requirements causing product availability problems can reduce revenue far in excess of the supply chain costs This “Diminished Value” is an important concept because it brings total SCM optimization into play, including the sales price The customers expectations define how the supply chain must perform and p pp y p they expect levels of product availability exceeding 99% Supply chain management starts with understanding and quantifying Customer’s needs The Customer’s needs are translated into service level requirements that define the physical and financial supply chain 8 © 2008 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC 4
  • 5. Understand the Customer’s Requirements Distributors/ Customers Dealers Industrial I d ti l Retail Materials Inbound Outbound Direct to Distributors Manufacturers Distribution Suppliers Logistics Logistics Customer Direct Mail Internet OEM Service / Spare Parts 1. Begin with understanding Customer’s expectations of price, sensitivity to service levels and the most appropriate measurements (e.g., deliver to promise) = price erosion impact as the result of time and place failures 2. Capture current costs, service levels, performance metrics, inventory levels, and import and export compliance posture 3. Identify gaps in business processes and information flow that create customer satisfaction problems, add cost and cycle time to the business process and impact inventory value 9 © 2008 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC Failure to meet customer’s product availability needs often have significant “Diminished Value” impact Selling Season Expected Price Service Level Requirement For On Time Delivery Diminished Sales Late Shipment Diminished Price Diminished Profit due to Higher Product, Storage Cost, Manufacturing Inventory Obsolescence and Inbound Logistics Raw Outbound Logistics and Write-downs Materials & Inventory Investment Risk Components Product & Distribution Forecasting Costs 75% reduction in price Time In Season Out of Season Selling Season Start Selling Season End Does not include lost revenue and profit from product service and follow-on sales 10 © 2008 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC 5
  • 6. “Diminished Value” is not an abstract concept 11 © 2008 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC Can you protect and proactively generate improved sales and reduce “diminished value”? “Diminished Value” happens when circumstances cause a reduced selling price, lost sales and/or significant cost increases, resulting in a drop in total transaction value Understanding a product’s seasonality is critical • “season” is not a calendar term but a window of sales and profit opportunity – Seasons can be years – telecommunication, computer, aerospace – Seasons can be hours – service contracts guaranteeing product availability in hours Diminished Value can happen for many reasons: − Back to school children's clothing arrive 1 week after the peak sales season = 55% price markdowns are required − Late delivery of hospital X-Ray and MRI equipment resulted in penalties - 15% lower price − Out of stock shoes result in customers going to competition amounting to over $2,000,000 a day in a 3,500 store chain --- value $640 million annually − Lead based paint is used in toys costing millions in sales ($100M+), defaults on contracts, lost Sales (> $150M), inventory write-downs ($42M), restocking (0), potential health liability law suits and damage to the brand Diminished Value occurs every day when there are time, place and product delivery failures in the supply chain 12 © 2008 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC 6
  • 7. Risk of “Diminished Value” is much greater when the supply chain is global Global sourcing and sales Domestic sourcing and sales fulfillment − Customer service levels − Customer service levels by country − Tiered delivery service levels − Tiered delivery service levels by country − Manufacturing to single country standards f l d d and global contracts − Multiple local suppliers − Multiple country importing and exporting regulations − Missing or wrong data does not stop the − Extra-territorial regulations supply chain − Multiple country free trade agreements − Multiple country supply chain security and safety issues − Inspections – government or private − Manufacturing to multiple country and customer standards − Multiple country suppliers conforming to free trade agreements − Missing or wrong data can stop the SC − Few ports of entry represent potential high risk failure points 13 © 2008 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC Managing global supply chains requires we employ different skills Exporter/Seller Forwarder International Broker Importer/Buyer Carrier Track Shipments Resolve Issues Manage Brokers Export Processes Export Processes Import Processes Import Processes Classification Classify ECCN #’s Forwarder Processes Carrier Processes Broker Processes Classify HS #’s Classify HS #’s Jurisdiction Determination Select Carriers Transport Goods Pre-Entry Import Data Mgmt Screen Orders Submit Pre-Entry EAR/ITAR Manage Doc Creation Book Carriers Track Shipments Submit Entry Screen Orders Licensing Determine GenerateRulings (BTI) Binding Documents Determinefor Licenses Apply Licensing Consolidate Freight On-time arrivals Clear Customs Binding Rulings Manage FTAs Apply for Licenses Generate Documents Track Shipments Bulk Breaking File DutyDuty Recovery Manage Drawback Generate Documents Submit SED MinimizeCoO Manage Duties Submit Export Dec Declare Goods Value Track/Trace Shipment p Perform Liquidation qT i i Education Ed cation & Training Education & Training Ed ti Deemed Export& Training Education Mgmt AssistEntry Processing Post Tracking Export Declaration Import Declaration Landed Cost Export Mgmt Deemed Calc. Education & Training Supplier Management Metrics Landed Cost Modeling Metrics Government Invoice Adjustments Import Data review - 10+2 Post Entry Info Mgt Trade Logistics Trade Logistics Mgt Supporting Supply Chain Security and Supply Chain Security and Inbound Landed Cost Safety Safety Technology Trade Management Professionals 14 © 2008 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC 7
  • 8. Global trade management costs are small as a percentage of the value of the goods traded Trade Management Affects •Revenue, •Revenue Cost of Goods Sold, Inventory, Sold Inventory Development Expense, Sales and General Administration (SG&A), Days Purchases Outstanding, Days Sales Outstanding Trade Management Costs • Operational staffing •People • Supply Chain Flow - Defects in the Trade •Processes Management process can and do stop the supply chain •Technology Typically for large companies < .1% of goods value traded 15 © 2008 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC Supply Chain Management Affects almost every line item in the Financial Reports Income Statement Revenue enhancing logistics Product availability matched to customer needs Revenue + Stockout elimination programs Logistics based sales channels - - Cost of Product - catalog, TV, Internet, home delivery etc. Cost & expense saving logistics Gross Profit ++ Just-In-Time or Continuous Flow distribution techniques - Expenses - Carrier contract management Duty minimization programs Automation, goods tracking & handling Net Earnings Before Tax +++ Investment optimization logistics Inventory reduction - vendor managed Balance Sheet inventory, quick response, etc. Order cycle time reduction programs Inventory - Asset productivity enhancement Fixed Assets - programs - 3rd party logistics, multi-function DCs, etc. © 2006 JPMorgan Chase and Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC. 16 16 © 2008 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC 8
  • 9. Sourcing and Fulfillment decisions are often based on unrealistic assumptions about process capability The Perfect Order Supplier’s Order Fill Rate 100% Supply Chain On-Time Delivery 100% Sales Discount or Markdowns 10% Supplier 100% Quality (No Rejects) Supply Chain Accurate Paperwork 100% 17 © 2008 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC Real World variability eats into profits The Actual Order Global supply chain The Actual Order Demand Actuals to Plan 90% (+/-) processes must be close Order Fill Rate 90% to 99% reliable to achieve high customer On-Time Delivery 90% satisfaction Quality (No Rejects) 90% Accurate Paperwork 90% Discount or Markdowns 50% Impacts Increased Time and Variability Demand Forecast Deviation from Plan Order Lead Times Transit Times Increased Costs Transportation (More Expedited Freight) Increased Inventory Levels Cost of Lost Sales or Cost of Stock-Out Profit Margin Erosion Possible Market Share Loss 18 © 2008 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC 9
  • 10. Q. How can you achieve the 99% product availability demanded by customers? Domestic factory to the store, 3 days at 95% reliability 1 day 2 days 18 days 1 day 3 days International factory to the store, with 5 hand-offs and each leg 95% reliable for a total of 25 days. 0.95x0.95x0.95x0.95x0.95 = 77.4% reliability Irregularities in goods flow like cargo cut-offs or customs delays can result in full days added to the supply chain, causing expedited freight and increased inventory A. Increase Inventory and use of expedited freight 19 © 2008 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC Variability of Import Processing Trading Across Borders Time for Cost to import Documents for Time for export Cost to export (US$ per Documents for Region or Economy import (US$ per export (number) (days) container) import (number) (days) container) Australia 6 9 930 6 12 1,120 Brazil 8 18 1,090 7 22 1,240 Canada 3 7 1,385 4 11 1,425 China 7 21 390 6 24 430 Germany 4 7 740 5 7 765 Hong Kong, China 4 6 525 4 5 525 India 8 18 820 9 21 910 Poland 5 17 834 5 27 834 Russia 8 36 2,050 13 36 2,050 Singapore 4 5 416 4 3 367 Taiwan, China 7 13 747 7 12 747 United Kingdom 4 13 940 4 13 1,267 1 267 United States 4 6 960 5 5 1,160 World Bank Ease of Doing Business 2007 20 © 2008 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC 10
  • 11. Building a reliable Supply Chain Integration of financial optimization techniques with Supply Chain processes improves operational performance Physical supply chain – managed inventory Forecasting – procurement – production – shipment – delivery/reconciliation Expenditure Supply chain Revenue Management Management Management Procurement – risk mitigation – credit – fulfillment – payment/settlement Financial supply chain – managed cash Integration of Physical Supply Chain information with Financial Supply Chain processes improves financial performance 21 © 2008 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC Supply Chain processes can be designed to minimize “Diminished Value” risk Analyze important transaction information − Order information: – assortment, sizes, quantity, quality, critical data quality and availability, ship date etc. − Goods movement information: - condition of goods, time and date of key way point arrivals and departures Report variances from the planned order − assortment, sizes, quantity, quality, trade data (goods passport), ship date etc − condition of goods, time and date of key way point arrivals and departures Recommend best possible actions − Expedite emergency stock by air − Expedite missing information to a broker or forwarder − Arrange inspection of damaged goods before shipment All of this implies “smart” supply chains that have timely information, supply chain control and we know the value of our alternatives for each transaction 22 © 2008 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC 11
  • 12. Let’s illustrate the risk mitigation capability of a smart supply chain to reduce “Diminished Value” If a Retail Order could talk; Order 2676 has arrived at the vendor 5 days late − No action will result in 2 weeks late delivery due to shipping schedules resulting in missing the first two weeks of the season’s sales with significant impact on sales and gross profit − Optimal Action: shipping the first two weeks volume (20%) by air will allow product availability for the first two weeks of the season − Notification: • SCM Manager, Procurement Manger, Controller − Action Time Window – 6 hours − Order Recovery Analysis: Impacted Order Report Cost of Order 2676 Optomal Optimal Defect - Thanksgiving Center Forecast Sales Impacted Diminished Action Action Action Diminished Piece Value Order Value Risk Case Savings ROI Value Action Cost $ 125,000 Max Revenue $ 2,969,938 $2,321,813 $ (648,125) $2,969,938 $ 648,125 $ - Max Gross Profit $ 1,444,938 $ 796,813 $ (648,125) $1,319,938 $ 523,125 318.5% $ 125,000 Min Revenue $ 1,871,938 $1,528,813 $ (343,125) $1,871,938 $ 343,125 $ - Min Gross Profit $ 346,938 $ 3,813 $ (343,125) $ 221,938 $ 218,125 74.5% $ 125,000 Max Inventory Loss The cost of the defect needs to be calculated and corrective action taken for future orders 23 © 2008 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC Future trends demand flexible “smart” global supply chains that support operations Supply chain security programs − Failure to plan and develop secure supply chains will result in significant disruptions when supply chains are threatened g p pp y Environmental and Safety regulatory concerns − Failure to incorporate the regulations in supply chain processes can expose companies to disruptions, seizures, significant fines and inventory write-downs Intense competition for demanding global customers − Customers in all global markets are demanding high product g g g p availability and reliability, creating intense competition and high risk of “diminished value” Security, Environment and Customers Demands create significant risk to inventory value, we have a choice, to let it happen or manage it with flexible supply chains 24 © 2008 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC 12
  • 13. The many risks of diminished value are growing but can be managed by focusing on four key areas The Customer: Understanding the customer satisfaction economics − When, where and what must the customer have to be satisfied? − The season price erosion curve by product − The supply chain inventory investment, costs and expenses for each transaction − The indirect significance of the product, accessory sales and service drag Global Trade Management: Learn the processes and language of global trade and make it work for you − Classification − Country of Origin − Valuation − Free Trade Agreements and duty minimization g y − Export Licensing − Business relationship screening and Supply chain security processes − Etc… 25 © 2008 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC The many risks of diminished value are growing but can be managed by focusing on 4 primary areas Integrate the Physical and Financial Supply Chain: Focus on supply chain process reliability, efficiency and quality − Low process reliability causes supply chain managers to achieve high reliability by building inventory buffers and expediting p g y p g product to save sales or reduce costs − Design supply chain processes for global operations so safety, health, security and quality standards that are country explicit, verified and achieved − Design logistics processes with flexibility that allows recovery from exceptional situations Measure - Inspect What You Expect: Integrate supply chain activities with performance metrics that allow rapid response to exceptional situations and optimal decision making − Measure the relevancy of an activity – how big or important − Measure the defects and take root cause corrective action – define and count defects − Measure the efficiency to assure you are constantly improving – cycle time, cost per transaction − Use “real time” measurements necessary to detect and take corrective actions using highly flexible processes that minimize diminished value 26 © 2008 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC 13
  • 14. Global Trade Management Supply Chain Best Practices Executive Checklist Global Strategy: Are you preparing your global supply chain to accommodate future business growth and multi-governmental security and product safety regulations? Global Management Practices: Do business units manage to global goals, measurements and incentives to achieve the best results for the company globally? Optimized Business performance: Are the supply chain strategy and operations aligned and quality measured with the sales channels to optimize global client satisfaction, sales, product costs and expenses? Operational Risk and Recovery: Are global operational and compliance risks regularly identified, reviewed and are risk recovery plans in place? Global Sourcing: Are your products sourced to meet customer or internal service requirements for landed cost, quality and availability 99% of the time with optimized inventory? Global Customer Fulfillment: Are customer service requirements in all sales channels quantified and the supply chain delivering at 99%+ reliability with defect measurements and root cause analysis? Inventory Management: Do you have visibility to inventory and costs throughout your extended global supply chain and have the ability to analyze and react to inventory “diminished value” threats? Logistics Flexibility: Is there flexibility in your logistics contracts to allow for different service levels and the ability to speed-up or slow-down inbound inventory? Metrics and Continuous Improvement: Is information accurate, available, measured and continuous improvement practiced throughout the global supply chain? Regulatory Compliance: Are your regulatory compliance programs communicated, documented, staffed with oversight by executive management? Working Capital Optimization: Is your company an industry sector leader in working capital utilization (accounts payable, inventory, and accounts receivable)? 27 © 2008 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC 14