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Creating Agile Supply Chains In Chemical Industry


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A case study on how to create a more agile supply chain

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Creating Agile Supply Chains In Chemical Industry

  1. 1. A BUSINESS - ENGINEERING JOINT RESEARCH CENTER AT LEHIGH UNIVERSITY Creating Agile Supply Chains in the Chemical Industry Stephen P. Crane Director Supply Chain Air Products Bethlehem, PA May 14, 2008 Adapt Supply Chain Networks from Selling What I Make, to Making What I Sell
  2. 2. Who is Air Products?
  3. 3. Air Products in Brief <ul><li>Global supplier of gases, chemicals, equipment, and health care services </li></ul><ul><li>FY07 revenue ~$10 billion </li></ul><ul><li>Serving customers in technology, energy, industrial and healthcare markets </li></ul><ul><li>One of the safest large-scale chemical companies </li></ul><ul><li>Operations in more than 30 countries </li></ul>
  4. 4. Performance Polymers Worldwide Leader in Co-Polymer Dispersion Technology, Serving Adhesives, Nonwovens, Coatings, and PSA markets
  5. 5. Performance Polymers Dimensions <ul><li>$630 million global business </li></ul><ul><li>Multi regional (NA, Europe, Asia) </li></ul><ul><li>6 Plants (4 NA, 1 Europe, 1 Asia) </li></ul><ul><li>230 Products </li></ul><ul><li>1,800 Ship-to Customer Locations </li></ul><ul><li>3,500 Planning Combinations (Material-Ship-to-Primary Source Plant) </li></ul>
  6. 6. Why focus on supply chain agility?
  7. 7. <ul><li>“ Supply Chain variability is one of the chief threats to profit margins, and in some industries, this can be as high as 100%” </li></ul>Source: David Caruso, AMR Research, “Demand-Driven Supply Networks: SCM Done Right” (November, 2003)
  8. 8. Oil Price Volatility 1998 2008
  9. 9. Natural Gas Price Volatility 1998 2008
  10. 10. <ul><li>Stock market reactions on days when supply chain glitches are reported </li></ul><ul><ul><li>Delays in product development: -10% </li></ul></ul><ul><ul><li>Ramp-up and rollout problems: -11% </li></ul></ul><ul><ul><li>Production problems: -10% </li></ul></ul><ul><ul><li>Quality problems: -9% </li></ul></ul><ul><ul><li>Parts shortage in manufacturing: -7.5% </li></ul></ul>Potential Impact on the Unpredictable Source: DePree College of Management Georgia Institute of Technology “ In the real world, you a have to be ready for the unexpected”
  11. 11. What is supply chain agility?
  12. 12. <ul><li>Agile: “quick in movement or nimble” </li></ul><ul><li>Agility is exceptional nimbleness to respond rapidly and appropriately to unpredictable changes in demand or supply </li></ul><ul><li>Agility is not a single function concept, it extends from one end of the supply chain to the other </li></ul>What is Agility?
  13. 13. Characteristics of Agile Organizations <ul><li>They are demand driven rather than forecast driven </li></ul><ul><li>They substitute information for inventory </li></ul><ul><li>They manage processes not just functions </li></ul><ul><li>They leverage the capabilities of their network partners </li></ul><ul><li>They employ time-based key performance indicators </li></ul><ul><li>They postpone the deployment of inventory </li></ul>Source: Cranfield University School of Management
  14. 14. Agility is all about managing in the face of variability <ul><li>Identify sources of variability and determine their relative negative impacts </li></ul><ul><li>Eliminate or reduce variability wherever possible by changing supply chain design, processes, policies, and business rules </li></ul>
  15. 15. Four Levels of Process Maturity Level of Maturity Agility <ul><li>Level 1 </li></ul><ul><li>Functional Optimization </li></ul><ul><li>No formal synchronization </li></ul><ul><li>Vulnerable to variability and </li></ul><ul><li>risks </li></ul><ul><li>No provision for contingencies </li></ul><ul><li>Level 2 </li></ul><ul><li>Cross-Functional Plan Optimization </li></ul><ul><li>Clearly defined global </li></ul><ul><li>objectives and metrics </li></ul><ul><li>Constraints optimized and </li></ul><ul><li>synchronized </li></ul><ul><li>Plans become invalid when </li></ul><ul><li>variance occurs </li></ul><ul><li>Ad hoc monitoring process </li></ul><ul><li>Level 3 </li></ul><ul><li>Closed-Loop Performance to Plan </li></ul><ul><li>Strive to the make plan </li></ul><ul><li>happen within each </li></ul><ul><li>function </li></ul><ul><li>Embed early-warning </li></ul><ul><li>sensors in the execution </li></ul><ul><li>process </li></ul><ul><li>Corrective actions remain </li></ul><ul><li>at functional level </li></ul><ul><li>Waterfall-oriented process </li></ul><ul><li>Level 4 </li></ul><ul><li>Real-Time S&OM (Sales and Operations Management) </li></ul><ul><li>Continuous cross- </li></ul><ul><li>functional synchronization </li></ul><ul><li>Service level offerings </li></ul><ul><li>based on experience for a </li></ul><ul><li>menu of options </li></ul><ul><li>Rapidly evaluate multiple </li></ul><ul><li>scenarios of plans for </li></ul><ul><li>profitable decisions </li></ul><ul><li>Shift from S&OP paradigm </li></ul><ul><li>to a “living dashboard” </li></ul>Source: Supply Chain Leader / April 2007
  16. 16. How Can Companies Organize to Enable Agile Supply Chains?
  17. 17. Agile Organizations <ul><li>Agile organizations establish synchronized inter-organizational processes, designed to enable a rapid response to shifts in demand or supply </li></ul><ul><li>Processes and systems that facilitate real-time- transfer of information and plans among multiple functions </li></ul><ul><li>Cross-functional synchronization is especially critical, with shared goals and metrics that support agility </li></ul>
  18. 18. Synchronized Planning <ul><li>Synchronized Planning is primary process that aligns different functions to a single synchronized plan which optimizes company performance, not just functional performance </li></ul><ul><li>Functional organizations have responsibility to deliver on their sub-plans understanding their plans can compromise the overall plan and hurt the entire company </li></ul><ul><li>Agile companies live and die by their plans </li></ul>
  19. 19. Fast Escalation <ul><li>Variability presents new threats and opportunities beyond the bounds of any plan </li></ul><ul><li>When opportunities arise, agile companies respond quickly if they have designed processes in place </li></ul><ul><li>Escalation processes are defined on basis that most situations occur multiple times </li></ul><ul><li>With defined processes, determining the appropriate course of action is easier, faster, more effective than making decisions on the fly </li></ul>
  20. 20. Performance Measurement of Plans <ul><li>One obstacle to taking appropriate action when variability occurs is adherence to “local” metrics </li></ul><ul><li>Agile companies coordinate each function’s plan performance in achieving the overall synchronized plan objectives </li></ul><ul><li>Did each function’s plan aid or hurt achievement of the overall plan? </li></ul>
  21. 21. Agility Requires Keeping Commitments to Overall Plans
  22. 22. Keeping Commitments to Plan <ul><li>Plans in typical companies are “dead on arrival” </li></ul><ul><li>They’re out of sync with demand conditions or violate supply constraints </li></ul><ul><li>Agile companies ensure plans are valid and synchronized across functions continuously monitoring plan execution </li></ul><ul><li>Every function commits to it’s own sub-plan and provides early warning if deviation occurs </li></ul><ul><li>Enables corrective actions to be taken rapidly </li></ul>
  23. 23. Constraint-Optimized Planning <ul><li>Typical process for generating a plan is constraint-insensitive </li></ul><ul><li>Agile companies use the latest information on constraints in their planning process </li></ul><ul><li>They consider multiple scenarios to arrive at realistic, optimal plans – fast </li></ul><ul><li>Agile companies create a plan in one-tenth the time it takes to execute it </li></ul>
  24. 24. Proactive Monitoring / Analysis of Threats <ul><li>Once a plan is rolled-out, it is subject to threats </li></ul><ul><li>Plan owners are expected to take quick corrective actions to ensure their commitments to the synchronized plan holds </li></ul><ul><li>Preferred actions are those that can be taken unilaterally </li></ul><ul><li>Such actions reduce the element of surprise and variability for the rest of the business </li></ul><ul><li>When a plan has to change, it’s important to collaborate and communicate quickly to all functions </li></ul>
  25. 25. How Has Performance Polymers Increased Supply Chain Agility?
  26. 26. <ul><li>Standardized Work Processes </li></ul><ul><li>Integrated Sales & Operations Planning Process </li></ul><ul><li>Supply Chain Planning (APS) </li></ul><ul><li>Supply Chain integration </li></ul><ul><li>Supply Chain Network Simplification </li></ul><ul><li>KPI Measurement </li></ul><ul><li>Collaboration Processes </li></ul><ul><li>Transactional Automation (orders, pricing) </li></ul><ul><li>Business Rules </li></ul>Approaches to Increasing Supply Chain Agility
  27. 27. Global Work Processes Metrics Follow the Money!
  28. 28. Sales & Operations Planning <ul><li>Combines all business plans into one integrated plan </li></ul><ul><li>Monthly process </li></ul><ul><li>Reviewed by management at an aggregate level </li></ul><ul><li>Reconciles demand and supply plans at detail and aggregate level and linked to operating plan </li></ul><ul><li>What the business plans to do over near/intermediate term covering an 18- month horizon to: </li></ul><ul><ul><li>Plan for resources </li></ul></ul><ul><ul><li>Execute business plan/strategy </li></ul></ul>
  29. 29. Plan Supply Chain P1 Plan Supply Chain P1.1 Aggregate Demand P1.2 Aggregate Supply P1.3 Balance Demand & Supply P1.4 Issue Supply Chain Plans Sales & Operations Planning Raw Material Planning Inventory Planning Master Production Scheduling Distribution Planning Financial Planning
  30. 30. Supply Chain Planning Advanced Planning Systems (APO) <ul><li>Air Products ERP Platform is SAP </li></ul><ul><li>SAP R/3 Single Instance </li></ul><ul><ul><li>Go-Live August 2003 </li></ul></ul><ul><ul><li>Global Release strategy developed through 2008 </li></ul></ul><ul><li>APO (Advanced Planner & Optimizer) v4.1 </li></ul><ul><ul><li>Scope included deploying Demand Planning (DP) and Supply Network Planning (SNP) modules </li></ul></ul><ul><ul><li>First APO forecast generated in October 2003 </li></ul></ul><ul><ul><li>APO planned orders passed to plants for production scheduling </li></ul></ul>
  31. 31. <ul><li>Centralized planning, local execution </li></ul><ul><li>Forecast generated monthly for 18 months - Target 85% </li></ul><ul><li>Supply plan generated monthly for 18 months </li></ul><ul><li>Planned orders passed from APO to plant for execution - Production Plan Target 85% </li></ul><ul><li>APO re-plans demand every night based on new sales orders and generates supply requirements for 60 days </li></ul><ul><li>APO generates 18 month raw material forecast </li></ul>Supply Chain Planning Advanced Planning Systems (APO) (This approach integrated planning with execution)
  32. 32. <ul><li>Supply chain complexity increases costs, reduces supply chain agility and responsiveness </li></ul><ul><li>Developed cost-to-serve model to understand profitability </li></ul><ul><li>Rationalized plants, warehouses, products, assets, and customers </li></ul><ul><ul><li>Plants 40% </li></ul></ul><ul><ul><li>Warehouses 80% </li></ul></ul><ul><ul><li>Products 55% </li></ul></ul><ul><ul><li>Customers 65% </li></ul></ul>Supply Chain Network Simplification “ 20 % of products generated 80% of the profits, but only 49% of the revenue”
  33. 33. Product Rationalization History
  34. 34. <ul><li>Large number of transactions involved small quantity, packaged orders (15% of volume, ~30% of transactions) </li></ul><ul><li>Established national distributor network for North America </li></ul><ul><li>Transferred customers purchasing only packaged products to distributors </li></ul><ul><li>Transferred ~68% of ship-to customers to distributor network </li></ul><ul><li>Adherence to distributor business rules critical for delivering low cost to serve for this segment </li></ul><ul><ul><li>Full truckload orders </li></ul></ul><ul><ul><li>Extra lead time requirements </li></ul></ul><ul><li>Sales orders decreased by ~40%, distribution costs decreased by ~50%, and packaged inventory decreased by 95% </li></ul><ul><li>Distributor revenue grew 2-3 times market growth rate </li></ul>Distributor Channel Expansion (NA) Use Distributors for Package Customers
  35. 35. Standardized KPIs <ul><ul><li>Supply chain planning </li></ul></ul><ul><ul><ul><li>Forecast Accuracy % </li></ul></ul></ul><ul><ul><ul><ul><li>Forecast Value Added </li></ul></ul></ul></ul><ul><ul><ul><li>Production Plan Adherence </li></ul></ul></ul><ul><ul><ul><li>Inventory DOS </li></ul></ul></ul><ul><ul><ul><li>Inventory Accuracy % </li></ul></ul></ul><ul><ul><ul><li>Master Data Accuracy (APO, production, customer) </li></ul></ul></ul><ul><ul><li>Operational Performance </li></ul></ul><ul><ul><ul><li>On-stream </li></ul></ul></ul><ul><ul><ul><li>Efficiency </li></ul></ul></ul><ul><ul><ul><li>Non-prime inventory </li></ul></ul></ul><ul><ul><ul><li>Off-grade </li></ul></ul></ul><ul><ul><li>Financial </li></ul></ul><ul><ul><ul><li>Financial Forecasting Accuracy </li></ul></ul></ul><ul><ul><ul><li>Cash-to-Cash cycle time </li></ul></ul></ul><ul><ul><li>Purchasing/Fulfillment </li></ul></ul><ul><ul><ul><li>% Orders Received on Time </li></ul></ul></ul><ul><ul><ul><li>On-Time delivery </li></ul></ul></ul><ul><ul><ul><li>% Perfect Order Fulfillment </li></ul></ul></ul><ul><ul><li>Customer </li></ul></ul><ul><ul><ul><li>% Complaints closed by target date </li></ul></ul></ul>
  36. 36. Forecast Accuracy World Class Performance 2003 2007 50% Improvement
  37. 37. Production Plan Adherence (Supply Planning Accuracy) 38% Improvement 2004 2007
  38. 38. Financial Forecast Accuracy 21% Improvement 2004 2007
  39. 39. Where We Are Today The Benefits <ul><li>Established standardized supply chain processes that integrate all functions </li></ul><ul><li>Improved integration with suppliers, customers, and service providers </li></ul><ul><li>More accurate capacity plans developed based on real world constraints and variability </li></ul><ul><li>One volume forecast aligned w/ all business plans </li></ul><ul><ul><li>Financial, Supply Chain, Operations, Commercial, and R&D </li></ul></ul>
  40. 40. Force Majeure Case So how agile was our supply chain? <ul><li>From May-October 2007, 4 suppliers announced force majeures in NA/EU </li></ul><ul><li>Supplier allocations ranged from 80-10% </li></ul><ul><li>Competitors cutoff many customers </li></ul><ul><li>Established daily S&OP meetings </li></ul><ul><li>Calculated run-out dates for raw materials by plant </li></ul><ul><li>Procured materials from all around the world </li></ul><ul><li>Implemented “force majeure” surcharge </li></ul><ul><li>Gained several $ million in new business </li></ul>“ We were so impressed how you maintained uninterrupted supply of product during the force majeures”
  41. 41. <ul><li>Improved Financial Performance </li></ul><ul><ul><li>Inventory reduced by 25% </li></ul></ul><ul><ul><li>Net Asset Investment down by 25% </li></ul></ul><ul><ul><li>Profitability increased by 80% </li></ul></ul><ul><ul><li>ORONA improved from 5% to 13% </li></ul></ul>Where We Are Today The Benefits “ All these benefits have been easier to achieve due to increased supply chain agility”
  42. 42. Conclusion <ul><li>“ 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/technologies or even a powerful brand simply no longer ensure long term, sustainable advantage” </li></ul><ul><li>But those who can build superior agile and responsive supply chains have a real chance </li></ul>
  43. 43. Thank you! Stephen Crane Director Supply Chain Air Products and Chemicals [email_address]