1
Supply Chain Management and the
E ti A dExecutive Agenda
David Simchi-Levi
E-mail: dslevi@mit.edu
1
@
Professor, Massach...
2
Today’s Supply Chain Challenges
• Global supply chain with long lead times
• Rising and shifting customer expectations
•...
3
Participating Companies
• 196 companies have participated
173 SCM sections complete
106 CEO sections complete
91 CFO sec...
4
What We’ll Cover …
• Research Motivation and Background
• Key Research Insights and Rules
Summary• Summary
7
©Copyright ...
5
Top 30 Best-in-Class Supply Chain Performance
9
Insight #2: Significant difference between Cost-
Efficient and Responsiv...
6
Supply Chain Flexibility: Definition
• The ability to respond, or to react, to change:
Demand volume and mix
Commodity p...
7
Flexibility through System Design
• Balance transportation and manufacturing costs
• Cope with high forecast error
• Bet...
8
Implementation: A Three-Step Process
• Step 1: Focus on Central Business Unit (3 plants,
22 warehouses in MI, MN, WI)
St...
9
When to focus on Cost-Efficiency? Responsiveness?
©Copyright 2010 D. Simchi-Levi 17
Insight #3: Companies that focus on ...
10
Product Type: Functional vs. Innovative
Low High
Functional Innovative
Product variety
Low High
Product life cycle Long...
11
Functional Products Innovative Products
Strategies for Innovative vs. Functional Products
Efficient
Supply
Chain
(Push)...
12
A Portfolio of Supply Chains: The PC Industry
Fulfillment Supply Chain
Private Consumers
Retailers
Public Sector
Enterp...
13
How does CSR affect supply chain strategy?
Internal standard operating…
Environmental policy
Corporate Social
Responsib...
14
The Nestlé Story – The Impact
• This program grew from 180 farmers in 1961 to 95,000 in
2005 and from 4 milk collection...
15
Links between SC Strategy, Business & Financial Performance
• 62% of the BIC supply chain companies
©Copyright 2010 D. ...
16
What We’ll Cover …
• Research Motivation and Background
• Key Research Insights and Rules
• Summary• Summary
©Copyright...
17
Your Turn!
For information about my
latest book, see
www.operationsrules.com 33
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Supply chain management and the executive agenda

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On June 2nd 2010 there was a high-profile event about supply chain management and sustainability. Worldwide this was the first presentation of the final results of the MIT/TruEconomy research into supply chain management and the executive agenda. Professor David Simchi-Levi released the final results of the MIT/TruEconomy research. The results indicate not only a link between the executive agenda and supply chain strategies but also that business and financial performance go hand in hand with supply chain performance. Interested in the research findings? Download a copy of the executive summary at www.trueconomy.com.

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Supply chain management and the executive agenda

  1. 1. 1 Supply Chain Management and the E ti A dExecutive Agenda David Simchi-Levi E-mail: dslevi@mit.edu 1 @ Professor, Massachusetts Institute of Technology What We’ll Cover … • Research Motivation and Background • Key Research Insights and Rules Summary• Summary 2 ©Copyright 2010 D. Simchi-Levi
  2. 2. 2 Today’s Supply Chain Challenges • Global supply chain with long lead times • Rising and shifting customer expectations • Increase in labor costs in developing countriesIncrease in labor costs in developing countries • Increase in logistics costs • Increase in risks • Importance of sustainability • Unprecedented Volatility Senior management faces competition in an 3 ©Copyright 2010 D. Simchi-Levi Senior management faces competition in an environment that is uncertain, dynamic and chaotic. Identify links between supply chain strategies and the executive agenda Ch t i th i t f ll i l h i tCharacterize the impact of excellence in supply chain management on business and financial performance 1. Review the existing supply chain literature 4 g pp y 2. Interview executives from 14 companies 3. Online survey of CEO, CFO and CSCO ©Copyright 2010 D. Simchi-Levi
  3. 3. 3 Participating Companies • 196 companies have participated 173 SCM sections complete 106 CEO sections complete 91 CFO sections complete • 82 companies completed all three sections SCM • 30 Best-in-Class Supply Chains were identified Cost Inventory Turn 5 CFOCEO 82 ©Copyright 2010 D. Simchi-Levi Inventory Turn Service Levels Lead Time Industry Characteristics Flexible response 0 10 20 30 40 50 60 Cost efficient 6 Insight #1: Increasing drive towards flexibility and responsiveness. ©Copyright 2010 D. Simchi-Levi
  4. 4. 4 What We’ll Cover … • Research Motivation and Background • Key Research Insights and Rules Summary• Summary 7 ©Copyright 2010 D. Simchi-Levi Top 5 Focus areas for Best-in-Class Supply Chains Reduction of customer lead times 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Reduction of total costs Reduction of stock outs Sales and Operations planning Improvement of product or service quality Reduction of customer lead times FocusAreas ©Copyright 2010 D. Simchi-Levi 8 Percentage of Companies
  5. 5. 5 Top 30 Best-in-Class Supply Chain Performance 9 Insight #2: Significant difference between Cost- Efficient and Responsive supply chain strategies ©Copyright 2010 D. Simchi-Levi Cost-Efficient vs. Responsive Supply Chains Cost-Efficiency Responsiveness Primary goal Cost TimePrimary goal Cost Time Supply Chain Innovation Process focus Product focus Strategy High utilization High flexibility Inventory Maximize turns Position inventory Lead time strategy Reduce but not at expense of increasing cost Reduce even if costs are significant Supplier selection strategy Total Landed Cost quality Speed qualitySupplier selection strategy Total Landed Cost, quality Speed, quality Transportation strategy Low cost transportation modes Fast modes of transportation 10 ©Copyright 2010 D. Simchi-Levi
  6. 6. 6 Supply Chain Flexibility: Definition • The ability to respond, or to react, to change: Demand volume and mix Commodity prices Labor costs Exchange rates …… • The objective is to Reduce cost ©Copyright 2010 D. Simchi-Levi Reduce the amount of unsatisfied demand Improve capacity utilization • With no, or little, penalty on response time 11 Achieving Flexibility through…. • Product design Modular product architecture, Standardization, Postponement, Substitution • Process design Flexible work force, Cross-Training, Lean, Organization & Management structure, Flexible contracts, Dual sourcing, Outsourcing • System design Capacity redundancy Manufacturing strategy Distribution ©Copyright 2010 D. Simchi-Levi Capacity redundancy, Manufacturing strategy, Distribution strategy 12
  7. 7. 7 Flexibility through System Design • Balance transportation and manufacturing costs • Cope with high forecast error • Better utilize resources 1 A 2 B 3 C 4 D No Flexibility 1 A 2 B 3 C 4 D 2 Flexibility 1 A 2 B 3 C 4 D Total Flexibility ©Copyright 2010 D. Simchi-Levi 13 ProductPlant 5 E ProductPlant 5 E ProductPlant 5 E Case Study: Optimizing S&OP at Pepsi Bottling Group Make Sell Deliver Service Operates 57 Plants in the U.S. and 103 Plants Worldwide 7 Business units in the U.S. each responsible for local demand 240,000 Miles are Logged Every Day to Meet the Needs of Our Customers Strong Customer Service Culture The Challenge: • Shifting consumer preference •From carbonated to non-carbonated drinks •From cans to bottles • Produced these products in limited plants • Service problems during periods of peak demand 14
  8. 8. 8 Implementation: A Three-Step Process • Step 1: Focus on Central Business Unit (3 plants, 22 warehouses in MI, MN, WI) Start small to understand the intricacies of the process Build confidence in model assumptions • Step 2: Move on to more complicated regions (East Coast – 20 plants, 125 warehouses) • Step 3: Implement across all business units 15 The Impact of Sourcing Flexibility • Creation of regular meetings bringing together Supply chain, Transport, Finance, Sales and Manufacturing functions to discuss sourcing and pre-build strategies Reduction in raw material and supplies inventory from $201 to $195• Reduction in raw material and supplies inventory from $201 to $195 million • A 2 percentage point decline in in growth of transport miles even as revenue grew • An additional 12.3 million cases available to be sold due to reduction in warehouse out-of-stock levels 16 To put the last result in perspective, the reduction in warehouse out-of-stock levels effectively added one and a half production lines worth of capacity to the firm’s supply chain without any capital expenditure. ©Copyright 2010 D. Simchi-Levi Rule #1: A small investment in flexibility can make a significant impact on supply chain performance.
  9. 9. 9 When to focus on Cost-Efficiency? Responsiveness? ©Copyright 2010 D. Simchi-Levi 17 Insight #3: Companies that focus on Market share and Revenue growth emphasize responsiveness, in particular reducing stock outs and lead times When to focus on Cost-Efficiency? Responsiveness? • SKU Proliferation Innovative vs. Functional Products • Different types of Customersyp Individual consumers vs Corporate • Multiple channels Stores vs. Online 18 ©Copyright 2010 D. Simchi-Levi
  10. 10. 10 Product Type: Functional vs. Innovative Low High Functional Innovative Product variety Low High Product life cycle Long Short Forecast accuracy High Low ©Copyright 2010 D. Simchi-Levi Obsolescence Risk Low High Cost of lost sale Low High 19 Channel Type: Retail vs. Online L Hi h Retail Online Product Variety Low High Customization Limited High Forecast Accuracy High Low Volume by Product High Low ©Copyright 2010 D. Simchi-Levi y g PC-DirectPC-Retail 20
  11. 11. 11 Functional Products Innovative Products Strategies for Innovative vs. Functional Products Efficient Supply Chain (Push) onsive pply hain Pull) Match MatchMismatch Mismatch ©Copyright 2010 D. Simchi-Levi Resp Su Ch (P Mismatch Marshall L. Fisher, Harvard Business Review, March-April 1997 Retail Channel Online Channel Strategies for Online vs. Retail Channels Efficient Supply Chain (Push) onsive pply hain Pull) Match MatchMismatch Mismatch ©Copyright 2010 D. Simchi-Levi Respo Sup Ch (P Mismatch
  12. 12. 12 A Portfolio of Supply Chains: The PC Industry Fulfillment Supply Chain Private Consumers Retailers Public Sector Enterprise Assemble-To-Order No-Touch Low-Touch Planning OrderFulfillment Procurement Logistics Manufacturing pp y PCs Notebooks Servers Portfolio of ProductsPortfolio of Customers 23©Copyright 2010 D. Simchi-Levi A Portfolio of Supply Chains: The Gap Inc. Banana Republic Gap Old Navy Low Cost Fashion Casual Planning OrderFulfillment Procurement Logistics Manufacturing Rule #2: Different brands channels and Portfolio of Brands 24©Copyright 2010 D. Simchi-Levi Customer Value Proposition Rule #2: Different brands, channels, and product characteristics may require different supply chain strategies.
  13. 13. 13 How does CSR affect supply chain strategy? Internal standard operating… Environmental policy Corporate Social Responsibility (CSR) Product or service design for supply chain Product or Service lifecycle management Network redesign to support faster time to market Forecast accuracy Supply Chain Innovation 0% 20% 40% 60% 80% Responsibility for social needs Brand image benefits Customer value Shareholder value Compliance to regulatory… p g ©Copyright 2010 D. Simchi-Levi 25 250% 10% 20% 30% 40% 50% 60% 70% 80% Launch of new products or services Introducing new channels of distribution Sustainability and CO2 footprint initiatives Insight #4: Strong correlation between CSR and innovations in the supply chain The Nestlé Story • Nestlé entered India in 1961 • It set up its first milk processing facility at Moga in the State of Punjabj Provided technical assistance and education to improve milk productivity and quality Established milk collection points and chilling centers, Installed farm cooling tanks, Provided the transportation to pick-up milk at the farms and d li th t th ilk i f ilit ©Copyright 2010 D. Simchi-Levi deliver them to the milk processing facility. Delivered veterinary medicines and helped the village women learn good dairy practices. 26
  14. 14. 14 The Nestlé Story – The Impact • This program grew from 180 farmers in 1961 to 95,000 in 2005 and from 4 milk collection centres to 1700 during the same time period. • It provided employment, higher income, and a higher standard of living not only to the farmers but to the entire rural community. • This business model was not a “charity” – it allowed Nestlé to establish a unique supply chain and generatedRule #3: Corporate Social Responsibility can create tangible business opportunity and ©Copyright 2010 D. Simchi-Levi a new stream of revenue in a challenging market. 27 create tangible business opportunity and value. Links between SC Strategy, Business & Financial Performance • Business Performance Indicator (BPI) Revenue, Market Share, Customer Satisfaction and Return on Equity • Financial Performance Indicator (FPI) Return on Equity, Return on Assets, Total Assets Turnover, Inventory Turnover, Operating Cash Flow, Net Working Capital to Assets, Operating Margin, Debt to Equity Ratio, and Total Debt RatioDebt Ratio 28 ©Copyright 2010 D. Simchi-Levi
  15. 15. 15 Links between SC Strategy, Business & Financial Performance • 62% of the BIC supply chain companies ©Copyright 2010 D. Simchi-Levi 29 achieved above average BPI compared with 43% of the remaining companies • 40% of the BIC supply chain companies achieved above average FPI compared with 24% of the remaining companies Insight #5: Strong link between supply chain strategies and business and financial performance. Different Ways to Compete in Retail Customer Value Proposition Example Operations Strategy High Fashion content at a bl P i Zara Speed to Market reasonable Price Customer Experience Dell Direct Responsiveness through Configure-to-Order Product Innovation Apple Efficiency through outsourced manufacturing and logistics Rule #4: The operations strategy that a company d l t b t d th l iti ©Copyright 2010 D. Simchi-Levi Everyday Low Pricing Wal-Mart Cost Efficiency Product Selection and Availability Amazon Efficient and reliable Order Fulfillment 30 deploys must be centered on the value proposition that the firm provides to its customers.
  16. 16. 16 What We’ll Cover … • Research Motivation and Background • Key Research Insights and Rules • Summary• Summary ©Copyright 2010 D. Simchi-Levi 31 Key insights and Rules • Increasing drive towards flexibility Si ifi t diff b t • A small investment in flexibility can make a significant impact on l h i f Insights Rules • Significant difference between Cost-Efficient and Responsive supply chain strategies • Companies that focus on Market share and Revenue Growth emphasize responsiveness • Strong correlation between CSR supply chain performance • Different brands, channels, and product characteristics may require different supply chains • Corporate Social Responsibility can create tangible business opportunity and valueStrong correlation between CSR and innovations in the supply chain • Strong link between supply chain strategies and business and financial performance. opportunity and value • Operations strategy must be centered on the value proposition the firm provides its customers. 32
  17. 17. 17 Your Turn! For information about my latest book, see www.operationsrules.com 33

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