Show Them the Money - Agile Supply Chains


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Supply chains make business possible, and companies can use supply chains as a competitive advantage. When you do it right supply chains are a profit center, not a cost center.

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Show Them the Money - Agile Supply Chains

  1. 1. Show Them the Money: Building Supply Chains to Increase Profits Michael Hugos CENTER FOR SYSTEMS INNOVATION [c4si]© 2013 Michael HugosCenter for Systems Innovation [c4si] 1
  2. 2. Overview of Briefing Part 1 – Supply Chain Context Part 2 – Moving Toward Responsiveness Part 3 – Business Case Study© 2013 Michael HugosCenter for Systems Innovation [c4si] 2
  3. 3. PART 1 Supply Chain Context “See the Big Picture”© 2013 Michael HugosCenter for Systems Innovation [c4si] 3
  4. 4. What is Supply Chain Management? “A supply chain is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and distribution of these finished products to customers.” Ganeshan and Harrison, “An Introduction to Supply Chain Management”, 1995 “Supply chain management is coordination of production, inventory, location, transportation, and information among the participants in a supply chain to achieve the best mix of responsiveness and efficiency for the market being served.” Hugos, Essentials Of Supply Chain Management, 2nd Edition, 2006© 2013 Michael HugosCenter for Systems Innovation [c4si] 4
  5. 5. Supply Chain Structure Simple Supply Chain Supplier Company Customer Producers Distributors Extended Supply Chain Ultimate Supplier Company Customer Ultimate Retailers Supplier Customer Customers Service Providers Service Providers − Logistics Example of an Extended Supply Chain − Finance Product Market − Market Research Designer Research − Product Design Raw Mat’l Manufctr Distributor Retailer Retail − Information Producer Customer Technology Logistics Finance Business Provider Provider Customer© 2013 Michael HugosCenter for Systems Innovation [c4si] 5
  6. 6. Supply Chain Drivers 1. 2. RESPONSIVENESS vs. 1. PRODUCTION 2. INVENTORY PRODUCTION INVENTORY EFFICIENCY What, how, and What, how, and How much to How much to when to produce when to produce make, how much make, how much to stock to stock “Increase throughput while 5. simultaneously INFORMATION reducing inventory Basis for making these decisions and operating expense.” Goldratt, The Goal, 4. 4. 3. 3. TRANSPORTATION LOCATION 1984 TRANSPORTATION How and when to LOCATION Where best to do How and when to Where best to do move product move product what activity what activity© 2013 Michael HugosCenter for Systems Innovation [c4si] 6
  7. 7. Responsiveness versus Efficiency Supply Chain Drivers Responsiveness Efficiency 1. Production - Excess capacity - Little excess capacity - Flexible manufacturing - Narrow focus - Many smaller plants - Few central plants 2. Inventory - High inventory levels - Low inventory levels - Wide range of items - Fewer items 3. Location - Many locations close to - Few central locations serve customers wide areas 4. Transportation - Frequent shipments - Few large shipments - Fast & Flexible modes - Slower and cheaper modes 5. Information - Collect & share timely and - Cost of information drops accurate data while other costs rise© 2013 Michael HugosCenter for Systems Innovation [c4si] 7
  8. 8. Markets & Required Performance MATURE STEADY • Customer Service • Customer Service • Internal Efficiency • Internal Efficiency • Demand Flexibility S DEVELOPING GROWTH U • Customer Service • Customer Service P • Product Development P L Y DEMAND© 2013 Michael HugosCenter for Systems Innovation [c4si] 8
  9. 9. Performance Measures Build to Stock CUSTOMER SERVICE Build to Order • Order & line item fill rate • Quoted lead time & completion rate • On time delivery rate • On time delivery rate • Return rate • Warranty returns & repairs INTERNAL EFFICIENCY • Inventory value • Return on sales • Inventory turns • Cash-to-cash cycle time DEMAND FLEXIBILITY • Activity cycle times • Outside flexibility • Upside flexibility PRODUCT DEVELOPMENT • % of sales from new products • Cycle time for new product • % of SKUs as new products development/introduction© 2013 Michael HugosCenter for Systems Innovation [c4si] 9
  10. 10. Supply Chain Challenge • Market conditions change constantly as prices of raw materials, labor, fuel, and customer demand fluctuate • Supply chain performance needs constant adjusting to meet these changes • Some markets require more responsiveness (highly engineered products), other markets require more efficiency (bulk commodities) • What is right blend of responsiveness and efficiency for markets your company serves? • How can you best increase supply chain throughput while simultaneously reducing inventory and operating expenses?© 2013 Michael HugosCenter for Systems Innovation [c4si] 10
  11. 11. Supply Chain Operations PLAN • Companies perform •• PLAN Demand Demand operations in one or •• Forecasting Forecasting Product Pricing Product Pricing more of these supply ••Inventory Inventory Mgmt. chain activities Mgmt. • Supply chains must DELIVER DELIVER SOURCE SOURCE ••Order ••Procurement continually improve Order Management •• Procurement Credit && Management Credit performance as ••Delivery Delivery Collections Collections Scheduling conditions change •• Scheduling Process Returns Process Returns • Collaborative MAKE MAKE Planning, Forecasting ••Product Design Product Design ••Production & Replenishment Production Scheduling Scheduling (CPFR) coordinates ••Facility Facility Management Management these operations© 2013 Michael HugosCenter for Systems Innovation [c4si] 11
  12. 12. The “Bullwhip Effect” 1200 Customer Demand 900 For Product 600 300 0 4 8 12 16 20 24 Mo. 1200 Retailer Orders 900 To Distributor 600 300 0 4 8 12 16 20 24 Mo. 1200 Distributor Orders 900 To Manufacturer 600 300 0 4 8 12 16 20 24 Mo.© 2013 Michael HugosCenter for Systems Innovation [c4si] 12
  13. 13. Why The Bullwhip? • Demand Forecasting Based on orders received not end user demand • Order Batching Companies place periodic orders based on EOQ, etc • Product Rationing Allocation of available supply as % of amount ordered • Product Pricing Promotional pricing causes distortions in demand • Performance Incentives Quarterly and yearly quotas and sales bonuses© 2013 Michael HugosCenter for Systems Innovation [c4si] 13
  14. 14. Data Sharing Reduces Bullwhip • Company A may have High high levels of customer service with low levels of Inventory inventory… Levels • But success may be short-lived if its customer is not the end use customer of the supply chain Low Service Levels High© 2013 Michael HugosCenter for Systems Innovation [c4si] 14
  15. 15. Data Sharing Reduces Bullwhip (cont.) • Company A may be High part of Supply Chain X which has to hold Supply Chains ‘X’ & ‘Y’ more inventory than Inventory Supply Chain Y to Levels deliver similar levels of customer service. • Bullwhip distortions drive up inventory Low Service Levels High© 2013 Michael HugosCenter for Systems Innovation [c4si] 15
  16. 16. PART 2 Moving Toward Responsiveness “Responsiveness Trumps Efficiency”© 2013 Michael HugosCenter for Systems Innovation [c4si] 16
  17. 17. Responsive Supply Chain “Drum – Buffer – Rope” Sales and Forecast Data Raw Manufacturer Distributor Retailer Market Materials Demand Buffer Buffer Buffer Buffer Flow of inventory to meet fluctuating market demand • Market demand sets drum beat or tempo of supply chain • Manage uncertainty with buffer of either inventory or production capacity • Reduce uncertainty and keep buffers low by sharing sales and forecast data • Data is rope that ties supply chain together© 2013 Michael HugosCenter for Systems Innovation [c4si] 17
  18. 18. RFID & EPC Global Network RFID tags on incoming palets and cases are scanned. l • Company receiving system sends scanned EPC numbers to GS1 GS1 ONS EPC Nbr. and gets web address of System manufacturers Company Application Product description & System manufacture date • Manufacturer systems Manufacturer EPC Nbr. send back product EPC-IS Interface ERP MES SCM description and manufacture date Logistics • Company may contact Product Provider EPC-DS movement SCM other companies who data Interface handled the product as it moved through supply Distributor chain EPC-DS Interface SCM© 2013 Michael HugosCenter for Systems Innovation [c4si] 18
  19. 19. GDSN – Global Data Synch Network 1. Seller or manufacturer uploads item and location GS1 Global data to a GS1 data Registry 3.Request for pool Subscription 3.Request for Subscription Data Data 2. Register 2. Data pool registers Data data with GS1 global 1. Load Source Recipient registry Item and Data Pool 4. Publish Data Pool 4. Publish Location Requested Requested Data Data Data 3. Buyer or retailer subscribes to a data Seller 3.Request for Buyer Subscription pool and requests Or Data Or Manufacturer Retailer item data 4. Data pool sends requested item data© 2013 Michael HugosCenter for Systems Innovation [c4si] 19
  20. 20. Company and Supply Chain Partners Company out Company Alliance sources support Partner Supply chain focuses on functions to services ‘A’ Customer core partners functions Company that Alliance Partner Support Support produce Core unique ‘B’ Core Customer Core value-add Product components Support for its customers Partners provide Customer tailored bundle of Alliance Product Partner design and products & services sub-assembly ‘C’© 2013 Michael HugosCenter for Systems Innovation [c4si] 20
  21. 21. Characteristics of Strategic Alliances 1. Delivery of a customized blend of products and services to meet a specific set of business needs 2. Coordination of inter-company operations so as to achieve predefined performance targets 3. Longer term, 3 to 5 year, contract time frames for the alliance partners to work together 4. Prospects for mutually profitable business growth over the life of the contract Strategic supply chain alliances have these four characteristics, without them, relationship is not strategic© 2013 Michael HugosCenter for Systems Innovation [c4si] 21
  22. 22. Strengthening Supply Chain Alliances Supply chain alliance is strengthened when three interrelated conditions are present: 1. People have access to current information - always know the “score” 2. 3. People have training People have stake in – skilled in achieving outcome - motivated performance targets to improve© 2013 Michael HugosCenter for Systems Innovation [c4si] 22
  23. 23. Supply Chain Strategy • 21st century economy requires supply chain systems that empower decentralized and highly responsive business operating model – Use of rigid monolithic supply chain systems cripple competitive advantage gained from responsive operating model – Companies using rigid monolithic supply chains optimized for efficiency find they don’t work well in real time economy because of lack of stability and predictability in global markets • Adaptive supplier networks are strong competitive advantage – Supply chain should accommodate many different suppler systems and different levels of technical sophistication – Supply chain systems can support business unit autonomy and flexibility and still provide economies of scale© 2013 Michael HugosCenter for Systems Innovation [c4si] 23
  24. 24. Supply Chain Strategy (cont.) Create “Virtuous Cycle” Evolving Do this first! – of continuous supply relationships: stores; Virtuous cycle DCs; factories chain improvement starts here • Big DC to serve many stores or smaller DCs to Empower network of serve fewer ELECTRONIC many suppliers and stores? CONNECTIONS WITH producers • Keep inventory at ALL PARTIES DC or crossdock? • How to support local • Automate routine suppliers? tasks to increase productivity, cut • How to drive errors continuous Learn to support improvement in different store • Effective forecasting and formats scheduling and order fulfillment? coordination with • How much inventory suppliers in stores? • Capture CPFR process with supply • Replenish which performance data chain partners products how often?© 2013 Michael HugosCenter for Systems Innovation [c4si] 24
  25. 25. PART 3 Business Case Study “Promise of the Real-Time Supply Chain”© 2013 Michael HugosCenter for Systems Innovation [c4si] 25
  26. 26. Supply Chain Opportunities Biggest challenge to running efficient supply chain is overcoming perceived demand distortion caused by “Bullwhip Effect” PERCEIVED DEMAND STORE Customer DC Demand STORE DC Customer STORE Demand DC STORE Customer Demand Suppliers and distributors struggle to fill unpredictable demand© 2013 Michael HugosCenter for Systems Innovation [c4si] 26
  27. 27. IT Enables Responsiveness • Maximize leverage of existing systems and infrastructure • Support for responsive operations is layered on top of existing systems (ERP, CRM, SCM, etc.) as needed: – Data Warehouses and Business Intelligence (BI) – Business Process Management (BPM) – Simulation and Predictive Analytics • Use parts of old systems in creation of new systems; grow systems iteratively as needs unfold • SOA + Virtualization + Cloud + SaaS + Mashups = Responsive© 2013 Michael HugosCenter for Systems Innovation [c4si] 27
  28. 28. Keep IT Simple & Flexible • ASCII Text Files - every computer system can read & write these files, great format to exchange data (easy upgrade to XML) • Internet & FTP - these two technologies make data transfer easy and cheap • Batch Asynch Interfaces - batch data transfers every hour, every ½ hour, every 10 minutes…approaches real-time at a fraction of the cost of true real-time • Relational Databases - provide powerful means to store, retrieve, and display data and are easily interfaced to spreadsheets and web pages • Web Pages/Email/Spreadsheets – common user interfaces that everyone can access and operate • Cloud Computing/SaaS/Mashups/Agile Development – build systems with: Low Cap Ex; Variable Cost; Scalable Platform© 2013 Michael HugosCenter for Systems Innovation [c4si] 28
  29. 29. Network Services’ Supply Chain NSC Virtual Private Network S U P NSC Web-Based P NetLink Member E-Commerce Systems L Company I CUSTOMER Sales E History R Order Data NSC Data Entry CUSTOMER S Whse Member Whse U Company P Customer P Service L CUSTOMER I Product E NSC Catalog R Member Company Inventory CUSTOMER Status S U Order P Status P NSC NetLink CUSTOMER L Corporate I Office E R© 2013 Michael HugosCenter for Systems Innovation [c4si] 29
  30. 30. Timely Data Enables Collaboration Strategic MarketData warehouse provides Viewdifferent views of data to Tacticalsupport senior executives, Company Viewline managers, and staff.It also facilitates sharing Operationsof data with customers Viewand suppliers. Data Warehouse Reports to Reports to Suppliers Customers© 2013 Michael HugosCenter for Systems Innovation [c4si] 30
  31. 31. Dashboards & Alerts Supplier Compare Invoice to ASN and PO to Electronic Distributor calculate Perfect Order Rate Invoice Electronic Customer ASN Compare PO to ASN to calculate On-Time Delivery Electronic and Order Fill Rate PO Display KPI score KPI Score Card % Plan vs cards through Actual dashboards on A B C D E Wk 1 Wk 2 Wk 3 Wk 4 Order Fill Rate company web site. Supplier On Time Delivery Rate Plan vs 80% Set customer service Actual 90% 70% alerts for quick Wk 1 Wk 2 Wk 3 Wk 4 Inventory Turns response. 100% Perfect Order Rate 60%© 2013 Michael HugosCenter for Systems Innovation [c4si] 31
  32. 32. Case Study: The Value-Added Paper Cup Surround commodity items with tailored Ordering Budgeting blanket of value added services Labeling Receiving Usage Reporting Delivering Invoicing “Never sell a naked commodity” Actual Item or Service (commodity, easily copied, low margin) Every product has two components Information Component (tailored to each customer to achieve desired results)© 2013 Michael HugosCenter for Systems Innovation [c4si] 32
  33. 33. Case Study: Tao of Supply Chains • Big customer wanted to reduce excess inventory • Customer, suppliers, and Network members all use different ERP systems • We had 90 days and could not spend a lot of $$$ • How to operate in an agile, real-time world? What would you do? • Decline to start a project that could not succeed • Say you would try but make no firm commitments • Deliver 80% solution that solves most important problems© 2013 Michael HugosCenter for Systems Innovation [c4si] 33
  34. 34. Case Study: Tao of Supply Chains (cont.) If everyone can see sales, forecasts and inventory in supply chain; they can coordinate to produce and deliver products when and where needed to meet customer demand (this is most important problem). Sales & Forecast Data Supplier Distributor Distributor Retailer Customer Inventory Inventory Demand Data Data Inventory Inventory Inventory Synchronized supply chains “increase throughput while simultaneously reducing inventory and operating costs.”© 2013 Michael HugosCenter for Systems Innovation [c4si] 34
  35. 35. Case Study: Tao of Supply Chains (cont.) “Robust 80% Solution” built from simple IT components Network Member Company Existing Process for • Web Pages Invoice Files Network NetLink System • Spreadsheet Member FTP • Display logic Company Inventory Inventory Inventory Database Files Database • Supply Chain Visibility Network Member Company E-Mail Spreadsheets E-Mail S U S S System created by combining: U U P P P P - Small Programs - Spreadsheets P P L L L - Relational DB - E-Mail I E I I - Web - Text Files (CSV) E E R R R Pages - Web - FTP© 2013 Michael Hugos BrowsersCenter for Systems Innovation [c4si] 35
  36. 36. Tao of Supply Chains: Results • Quickly created new system using existing systems and few new program modules – SOA; SaaS; Agile Development • Reduced excess inventory from 4% and $600,000 to 1.3% and less than $200,000 in first holiday season on higher sales volumes than previous years • System became basis for further value creation – track roll out of all new non-food items, not just seasonal promotion items • Signed new multi-year supply contract • Experimented with value sharing ideas such as if we achieved SLA’s in one quarter, we could raise prices a fraction of a percent in following quarter (kept our head in the game…)© 2013 Michael HugosCenter for Systems Innovation [c4si] 36
  37. 37. Case Study: A Parable About Payables • Big new customer was showing up on slow pay list • To get their national contract we came in with good prices for them and tight margins for us • Needed to run business operations with them very efficiently to make profits we desired • Customer promised payment in 15 days but their receiving and payables process was slow; sometimes they lost our invoices What would you do? • Put them on notice – send a letter • Put them on hold – no more product until they pay up • Put up with them – do nothing • Other© 2013 Michael HugosCenter for Systems Innovation [c4si] 37
  38. 38. Case Study: A Parable About Payables • Answer is “Other” • Strengthen relationship with the customer through establishing broad base of working contacts between our two companies • Who better than IT, Accounting and Supply Chain to do this? This is how to transition from cost center to profit center • Controller and I made a visit to customer’s HQ and shared ideas on how to improve receiving and payables process© 2013 Michael HugosCenter for Systems Innovation [c4si] 38
  39. 39. Case Study: A Parable About Payables Store Portal - Paying Send Invoice before - Receiving delivery truck - Ordering arrives Network Data - Usage Rpt Member Whse Company POs Invoices Invoices • Start by sending Invoices Customer Network NetLink electronic invoice. Member System Portal Company System • Then do receiving POs from invoice POs Invoices • Then do electronic Network customer ordering Our Member Company Bank Customer • Already providing ACH $$ A/P usage reports to System customer© 2013 Michael HugosCenter for Systems Innovation [c4si] 39
  40. 40. Supply Chain Insights • Use systems to lower operating costs and increase responsiveness to unique customer needs • Earn higher gross margins by wrapping products with tailored mix of information based value-added services to meet needs of individual customers • Best practices developed for one customer can attract other customers • Use Internet dashboards to track performance levels - updated daily so everyone knows the score and knows what to do • Data about the product (descriptive data and usage data) is almost as valuable as the product itself • Profits are made in a 100 small adjustments every week to reduce costs and increase revenue – like compound interest!© 2013 Michael HugosCenter for Systems Innovation [c4si] 40
  41. 41. Learn More… Presentation excerpted from my book: Essentials of Supply Chain Management, 3rd Edition Best selling book worldwide on Supply Chain Management since 2004 as reported by Center for Systems Innovation [c4si]© 2013 Michael HugosCenter for Systems Innovation [c4si] 41