Executive S&OP Case Study presented at GPSEG

Stephen P. Crane, CSCP Wacker Chemical Corporation Director Strategic Supply Chain Implementing an Integrated Sales & Operations Planning Process August 11, 2009 An Executive S&OP Case Study Supply Chain & Operations Group Supply Side Demand Side

CONTENT

What is Sales & Operations Planning

How Does S&OP Help Improve Business Profitability

S&OP Case Study

Key S&OP Success Factors

Wacker Chemie AG WACKER Group (2007) OVER 90 YEARS OF SUCCESS

Founded in 1914 by Dr. Alexander Wacker

Headquartered in Munich

Sales: €3.78 billion

EBITDA: €1.00 billion

Net income: €422 million

Net cash flow: €644 million

R&D: €153 million

Capital expenditures: €699 million

Employees: 15,044

WE ARE COMMITTED TO BENCHMARK-QUALITY PRODUCTS DESIGNED FOR OUR FOCUS INDUSTRIES

Industries

Adhesives

Automotive and transport

Construction chemicals

Gumbase

Industrial coatings and printing inks

Paper and ceramics

Products:

Polymer powders and dispersions for the construction industry

Polyvinyl acetate solid resins, polyvinyl alcohol solutions, polyvinyl butyral and vinyl chloride co- and terpolymers

CONTENT

S&OP Case Study

WHAT IS SALES & OPERATIONS PLANNING?

Is an executive decision-making process

Ties operational plans to financial plans: ONE set of numbers

Is a forum for setting relevant strategy and policy

Balances demand and supply

Deals with volume in both units and $

Monthly process reviewed by management at an aggregate level

What business plans to do covering an 18-month horizon to:

Plan for resources

Execute business plan/strategy

FROM 10,000 FEET Executive S&OP A process to reconcile, agree upon, and communicate the company game plan -- Operations (Units/Hours/Materials) Product Development (Product Introduction) Finance (Dollars) Sales & Marketing (Units/$$ by family)

SALES & OPERATIONS PLANNING OVERVIEW Volume Mix Supply Demand Demand Planning/ Forecasting Supply Planning (Capacity) Master Scheduling Plant & Supplier Scheduling Distribution Scheduling Executive S&OP

SALES & OPERATIONS PLANNING’S PLACE Strategic Planning Business Planning Sales & Operations Planning Plant, Supplier, Distribution Scheduling & Execution

TOP MANAGEMENT NEEDS

To see the Big Picture (volume)

Keep it SIMPLE

Must see dollars as well as units

Must tie to Annual Business Plan

Separate significant from trivial

To establish strategy, policy, and risk level

IMPLEMENTATION PATH Months Business Improvement 1 2 3 4 5 6 7 8 9 Phase I Preparation Phase II Expansion Phase III Financial Integration

IMPLEMENTATION ALTERNATIVES “ Build it and they will come” – design it first, get the mechanics working, then attempt to sell it to top management = Low probability of success “ Hold the high ground” – involve top management at the very beginning of implementation and throughout = High probability of success

CONTENT

S&OP Case Study

TYPICAL BENEFITS FROM IMPLEMENTING S&OP

Forecast error reduction……20-25%

Inventory reduction………...…5-10%

Inventory turns increase….….5-10%

Service level increase…… ...5-10%

Top Line revenue growth.…..…2-5%

SKU rationalization……….…10-20%

Source: IBM

HIGH FORECASTING ACCURACY YIELDS TANGIBLE BENEFITS IN SUPPLY CHAIN PERFORMANCE

High forecast accuracy cuts cost out of the entire supply chain

Companies that are best at demand forecasting average;

15% less inventory

17% higher perfect order fulfillment

35% shorter cash-to-cash cycle times

1/10 the stockouts of their peers

1% point improvement in forecast accuracy can yield a 2% point improvement in perfect order fulfillment

3% increase in forecast accuracy increases profit margin 2%

Source: AMR Research 2008

Companies with higher forecast accuracy also achieve better delivery performance

Delivery performance to request date increased 2% for each 5% increase in forecast accuracy

BENEFITS OF IMPROVING FORECAST ACCURACY Source: PRTM 2008

INVENTORY LEVEL VS. FORECAST ACCURACY Source: Aberdeen Group 2008

BENCHMARKING OBSERVATIONS

Emphasize S&OP as a first step

S&OP is the most critical element to drive supply chain benefits

Demand planning and supply planning are the largest profit drivers

Supply chain benefits normally fall into the range of 3 to 5% of sales revenue on a sustainable basis through CI efforts

Over 50% of increases in shareholder value over the past three years have come from supply chain improvements

CONTENT

S&OP Case Study

AIR PRODUCTS POLYMERS BUSINESS UNIT

$600 million global business

Diversified geographies

65% of sales in N. America

30% Europe, 5% Asia

6 Plants (4 NA, 1 Europe, 1 Asia)

600 Products

1,800 Ship-to Customer Locations

3,500 Planning Combinations (Material-Ship-to-Primary Source Plant)

Just went live on SAP, master data issues

New processes, tools, and data sources

Planning processes loosely integrated

Poor visibility of demand/supply balance

Numerous service issues, late deliveries, renegotiated orders

Communication gaps between business, finance, and supply chain

No linkage between volume forecasts for supply chain and financial forecast

WHERE THEY STARTED IN 2003

GLOBAL WORK PROCESSES Metrics Follow the Money!

S&OP PROCESS STEPS P1.1A – Identify, Prioritize, & Aggregate SC Requirements DAY 0 - 8 P1.4 – Establish & Communicate SC Plans DAY 13-15 P1.3A – Balance Supply Chain Requirements with SC Resources DAY 9 – 12 P1.2A – Identify, Prioritize, & Aggregate SC Resources DAY 0 - 8 Review Historical Sales Data Review Demand Metrics Apply Historical Sales Data Adjustments Apply Future Demand Change Notifications Run Forecast Model Agree & Communicate Approved Plans Communicate Implications to Financial & Sales Plans Review Supply Plan & Cost Projections Develop/Modify Supply Chain Plans Review Supply Planning Measures Adjust Supply Planning Constraints Load & Review Unconstrained Demand Plan Submit Supply Plan with Documented Options Approve & Publish Supply Plan Approve & Publish Unconstrained Demand Plan Gather Data [DAY0] Gather Data [DAY 0] Define Supply Capability [DAY 1 – 8] Develop Supply Plan Proposals [DAY 9] Finalize & Approve Supply Plan [DAY 10 -12] Aggregate All Sources of Supply Initiate Req Master Data Changes Review Inventory Available Review Supply Capability Create Demand Change Summary B A Partnership Meeting [DAY 13] Executive S&OP [DAY 15] Summarize Supply Chain Plans Gather Collaborative Input (Future Function) Create Unconstrained Demand Plan [DAY 1 -8] Develop Unconstrained Revenue Projection Apply New Characteristic Combos Adjust Statistical Parameters (if needed) Review and Validate Unconstrained Forecast Input Source, Make, Deliver Product & Capacity Plans Create Supply Change Summary Develop Supply Plan Proposal (Optimization) Review Alerts Assess Impact & Develop Options Review Excess Capacity, Supply Options, Demand Exceptions Issue Resolution Agree to Supply Plan Initiate any Master Data MOC Review Supply Chain Plans Review Revenue Projections A B C C BI

S&OP PROCESS CYCLE Monthly Cycle Create Unconstrained Demand Plan (Days 1-7) Adjust Historical data, Statistical Forecast Develop Supply Plan Proposals (Days 7-9) Approved Demand Plan Partnership Meeting (Day 13) Approved Supply Plan (Days 10-12) Approved Plan Executive Meeting (Day 15) Balanced Plan Demand Change Summary (Day 0)

EXECUTIVE S&OP MEETING Review Demand Plan (Review Product Families, Demand Assumptions) Review Supply Plan (Inventory Plan, Cost Projections, Supply Assumptions, Issue Resolution) Agree to Supply Plan (Develop Supply Chain Plans, Source, Make, Deliver) Develop Revenue Projections (Identify Gaps) 18 Month Projections Communicate Approved Plans (Source, Make, Deliver) Communicate Plan Implications (Financial, Sales)

S&OP DRIVES THE BUSINESS PLAN Create Unconstrained Demand Plan (Days 1-7) Revenue Forecasting Volume Forecasting Process Links Together Business, Supply Chain, and Finance Demand Change Summary (Day 0) Partnership Meeting (Day 13) Executive Meeting (Day 15) Develop Supply Plan Proposals (Days 7-9) S&OP Monthly Cycle Adjust Historical data, Statistical Forecast Approved Demand Plan Approved Supply Plan (Days 10-12) Approved Plan Balanced Plan Drives Business Plans: - Outlooks/Budgets - Sales/Marketing Plans - Gross Profit Forecast Drives Supply Chain Plans: - Plant Loadings - Inventory Levels - Raw Material Forecasts Financial Variances: volume, price & margin

S&OP PROCESS KPIs

Forecast Accuracy (%)

Production Plan Adherence (%)

Inventory Days of Supply

Financial Forecast Accuracy (%)

FORECAST ACCURACY IMPROVEMENT (Product Mix Level) Process, People, Statistical Forecasting Exception Analysis Forecast Adjustments Forecast Segmentation Data Aggregation World Class + 6% + 15% + 7%

Demand Forecast Accuracy (%) Inventory Days of Supply 20% Improvement Forecast Accuracy (%) FORECAST ACCURACY VS INVENTORY DOS Target Target

38% Improvement 2004 2007 PRODUCTION PLAN ADHERENCE SUPPLY PLANNING ACCURACY

21% Improvement 2004 2007 FINANCIAL FORECAST ACCURACY

WHERE ARE THEY TODAY

Improved visibility of demand and supply

Improved service, On-Time Delivery at 98%

Improved financial forecast accuracy

S&OP meetings are boring…a sign of success

Communications aligned between business, finance, and supply chain

Sales and volume forecasting for outlooks/budgets; easier and more accurate; drives supply chain plans

Business plans validated against supply chain capabilities on a monthly basis

One volume forecast aligned w/ all business plans; Financial, Supply Chain, Operational, & Commercial

Ongoing net productivity benefits ~ $18 Million+ / year

Improved financial performance

Net Asset Investment down by 25%

Operating Income increased by 80%

ORONA improved from 5% to 13%

MAJOR IMPROVEMENTS SINCE 2003 “ All these benefits were driven by better supply chain planning & forecasting”

THE S&OP CHECK LIST

Does your S&OP actively involve senior leadership?

Are accountabilities clearly defined?

Is the data accurate and timely?

Does it cover a 18 month time horizon?

Is volume expressed in units as well as $?

Is financial difference between S&OP plan and financial plan evaluated monthly?

Are proactive decisions made?

Does it occur on a monthly cycle?

Does it include a capacity review?

Does it include actual vs forecasted sales?

ROAD BLOCKS & CHALLENGES

Identifying S&OP Champion or expert to lead implementation

Senior leadership support

Adapting the process to the organization

Achieving process compliance

Data accuracy and integrity

Clear definition and acceptance of roles and responsibilities, including defining specific objectives in employee appraisals

Organizational silos

Establishing S&OP meetings as the business priority

IT enabling process with adequate tool functionality

BU A FORECAST DEVIATION TREND

It took only 6 months to achieve the lowest Forecast Deviation in Wacker

Target

BU B FORECAST DEVIATION TREND

Forecast deviation chemical product level

Target

“ The only sustainable competitive advantage any company can have is the ability to consistently react to market opportunities faster than the competition. A company’s products, engineering, proprietary manufacturing processes or even a powerful brand simply no longer ensure long term, sustainable advantage”

But those who can build superior, agile, and responsive supply chains, have a real chance CONCLUSION

The WACKER Group THANK YOU FOR YOUR ATTENTION Stephen P. Crane Director Strategic Supply Chain Management [email_address] CREATING TOMORROW'S SOLUTIONS