So what are the attributes of the “supply chain of the future”? These include supply and demand synchronization; dynamic sourcing of people, supply and assets; advanced analytics and modeling to evaluate alternatives; end-to-end integration and optimization of product, people and information, as well as cash; and event signals with thresholds and business rules to determine corrective actions from disruptions/interruptions.

Kal went into detail on what capabilities comprise each of the above attributes, and as part of his presentation, he conducted an audience survey to determine how far along companies are in implementing their own “supply chain of the future.” The survey will be repeated at each of the IBM Smarter Supply Chain regional conferences, and the results will be aggregated across all the participants. For example, the survey looked into level of preparedness for cost-efficient sustainability, asking the audience members about their own cost containment strategies; whether they are outsourcing the “right” functions; whether they use simulation models, analyzers and optimizers to evaluate tradeoffs in service levels, costs, time and quality with inventory synchronization; and whether they are implementing a sustainability strategy. The survey also addressed the areas of predictive demand/dynamic sourcing; “sametime” collaborative visibility; globally integrated/virtually optimized; and probability-adjusted risk management.

Supply Chain authority Andrew Reese is Editor of Supply & Demand Chain Executive. He has been invited by IBM PR to attend this show as a blogger and speaker. Like all other speakers, Andrew will receive all speaker benefits including travel and board.

The tax efficient supply chain, by definition, is focused around maximizing after-tax profit for the company. One indicator that a company may use to measure its tax efficiency is its effective tax rate (ETR). On a national basis, some countries have relatively lower tax rates (e.g., 15 percent in Ireland) versus relatively higher rates (e.g., almost 40 percent in the US or Japan).

In thinking about the tax efficient supply chain, companies can look at examining activities that can be moved to a low tax zone, e.g., looking at those activities that contribute to profit, understanding the tax and legal requirements of different jurisdictions, and identifying the appropriate transfer price. They then need to look at the impact on the supply chain and be prepared to make the changes necessary.

Derek walked through an example suggesting the benefits of moving production from a higher-tax to a lower-tax region, where the lower-cost zone proved more profitable despite higher transportation costs from the lower-cost area. Derek also offered a case study of a manufacturer of building materials. The company identified two potential manufacturing sites, in Mexico and Poland, then looked at a scenario aimed at minimizing supply chain costs, resulting in a projected $2 million in savings, while producing in Mexico. Another scenario looked at the tax implications of the different locations, and it turned out that moving production to Poland was the most profitable decision on an after-tax basis. The point was that the “minimum cost” scenario was not the same as the “most profitable” scenario – in the latter case, higher transportation costs were more than compensated for by much lower taxes in Poland.

Supply Chain authority Andrew Reese is Editor of Supply & Demand Chain Executive. He has been invited by IBM PR to attend this show as a blogger and speaker. Like all other speakers, Andrew will receive all speaker benefits including travel and board.

Operational excellence implies all the customary tools that we’ve become accustomed to, like Lean, Six Sigma, Toyota Production System, just in time, and so on. Toyota made the initial implementation of Lean in discrete manufacturing in the middle of the last century, and the automotive industry followed in the 70s (applied to comfort features), 80s (quality) and 90s (product variety and flexibility). More recently, other industries (hi-tech, telecoms) have followed in implementing Lean.

As a refresher, the key objectives of operations excellence focus around eliminating waste, reducing cost and empowering employees. These objectives complement each other: low work in process implies immediate sensing of problems and empowering employees to solve problems and contribute to continuous improvement. The principles of Lean are taking a holistic view (focusing on the entire production process); attention to details (operational details matter strategically); control over WIP, e.g., through Kanban or CONWIP (where you control the entire inventory and WIP on the production line); reduce cycle times; and production smoothing.

How does Lean support a smooth production schedule? Through flexibility (rather than buffer inventory as was the case in a mass production model), using integrated planning and scheduling, V-shaped production lines, and worker cross-training (versus the mass production model of each worker being trained on one specific task).

David addressed operational excellence in the process industry, which has a great number of built-in constraints that make it inherently difficult to apply Lean to production (e.g., high demand variability, complex manufacturing process, focus on performance management and cost control, and complex product mix changes). David talked about the use of Plant PowerOps (PPO) to address these challenges. PPO offers a “smart” planning and scheduling system for the process industry at the plant/production line level.

As an example, he cited a company in the fast-moving consumer goods (dairy) space, challenged by a high volume, high product mix; shared resources (production and cleaning equipment); volatile demand, with high service level agreements; regulatory requirements; cleaning in place. This company used PPO from ILOG for integrated planning and scheduling, starting in Mexico before moving out to Europe and the US. The company compared their manual process to the optimized process in terms of inventory excess (where inventory exceeds maximum days of supply), and saw a clear improvement (to near zero) through the optimized process. The optimized process also realized a 2-5 percent improvement in operational time/net production time; an 8-25 percent reduction in cycle time; and an average increase of 6 percent in throughput. Cleaning costs and changeovers saw a 10-40 percent reduction.

David also covered issues around dynamic safety stock and process flexibility and their role in operational excellence.

Supply Chain authority Andrew Reese is Editor of Supply & Demand Chain Executive. He has been invited by IBM PR to attend this show as a blogger and speaker. Like all other speakers, Andrew will receive all speaker benefits including travel and board.

Today’s supply chain challenges are well known: global supply chains with long lead times, combined with rising and shifting customer expectations. In addition, as global manufacturing costs rise in different regions, the optimal supply chain five years ago may longer be applicable.

Logistics costs also have been increasing as a percentage of cost of goods sold, with rising oil costs, rail capacity pressure, truck driver shortages and security requirements. Transportation costs have increased 47 percent in the last five years, but inventory costs have also increased, by 62 percent in the same time period, e.g., due to longer supply chains (more inventory in motion and more safety stock to meet more demanding customers). David also noted that one strategy that companies have used in the face of higher transportation costs, larger shipment sizes (to take advantage of economies of scale), have had the effect of increasing inventory costs.

Risk levels have increased in the supply chain, a result of successful implementations of Lean, outsourcing and offshoring. Lean supply chains make it more difficult to meet high service levels with less inventory, while outsourcing/offshoring creates more opportunity for disruption in the supply chain. At the same time, the supply chain has seen unprecedented levels of volatility, e.g, as a result of commodity price volatility (e.g., high volatility in price of oil in 2008, with 39 days when the price of oil changed 5 percent or more from its previous day close).

Starting the discussion around flexibility, David offered a definition: Flexibility is the ability to respond to change, e.g., demand volume or mix, labor cost, exchange rates. The objective is to reduce costs and reduce the amount of unsatisfied demand and improve capacity utilization, with no or little penalty on the service level side. Flexibility can be achieved through Product Design (e.g., a modular, Dell-like product architecture, standardization, postponement); Process Design (e.g., flexible work force, Lean, Dual Sourcing); or System Design (e.g., capacity redundancy, manufacturing strategy).

On System Design, David looked at an example focusing on balancing transportation and manufacturing costs, coping with high forecast error and utilizing resources more effectively. The goal is to achieve “full flexibility” with a small investment. David ran through two case studies of flexibility.

The first case study focused on a manufacturer in the food and beverage industry. Initially, the company had each product family manufactured in one of five domestic plants, and manufacturing capacity was in place to target 90 percent line efficiency for projected demand. The company was focused around manufacturing costs, e.g., by producing high-volume product in its lowest-cost facility. To analyze the benefits of adding manufacturing flexibility to the network, the company analyzed scenarios that provided for varying degrees of manufacturing flexibility, up to full flexibility, where each plant could produce each product line, and everything in between. An analysis of plant to warehouse shipping costs showed, of course, that full flexibility produced lower transportation costs, but an analysis of the impact on total supply chain costs showed that just investing in a little more flexibility (by adding flexibility at all plants to produce two product lines) produced 80 percent of the benefits of flexibility with less impact on manufacturing costs. But the company also wanted to understand the impact of changes in demand volume, so they considered three different scenarios based on growth for different product lines. In each case, adding the minimal level of flexibility outperformed the baseline and even “full flexibility” in terms of KPIs like demand satisfied, shortfalls, cost/unit and average plant utilization.

David also ran through a case study of optimizing S&OP at a bottling company operating 57 plans in the US and 103 plants worldwide, driving 240,000 miles a day to meet customer demand. Implementing the flexibility described above, the company created a process that brought together sales, supply chain, marketing, manufacturing in collaborative planning process. Results: The company reduced raw materials and supplier inventory from $201 million to $195 million; saw a 2 percent decline in the growth of transport miles even as revenue grew; and added 12.3 million cases available to be sold, adding up to the equivalent of adding 1.5 production lines without actually any investment in plant.

David also spoke about redundancy in the supply chain and the challenges and benefits of scenario analysis for optimizing a supply chain network and setting supply chain strategy. He suggested that supply chain executives can think about supply chain risk in their scenario analysis in the same way that financial analysts think about risk, using tradeoff curves to show total supply chain costs and its constituent components across various scenarios. David’s summary point was that companies should look at “optimal solutions,” but also should look at near-optimal solutions that add most of the benefits of the optimal, perhaps at a lower cost or in a way that can meet other objectives, e.g., sustainability, corporate social responsibility.

So, in summary, a small amount of flexibility can often provide large benefits, supply chain costs often is flat around the optimal strategy, and positioning inventory effectively can make a big impact.

Supply Chain authority Andrew Reese is Editor of Supply & Demand Chain Executive. He has been invited by IBM PR to attend this show as a blogger and speaker. Like all other speakers, Andrew will receive all speaker benefits including travel and board.

Ronan discussed several case studies of the application of multi-echelon inventory optimization (MEIO) and product flow management, including for planning inventory build-up for seasonal peaks in demand (a project that saw the company actually reduce inventory in the system by 18 percent thanks to increases at the plant level and reductions at the DC level).

A major automotive parts distribution network targeting four weeks of supply validated through an optimization exercise that they were hitting their 98 percent service level, but they found were doing it through a high level of expediting (30 percent), incurring 3-4 times the cost for overnight shipments. They found that if they went from 70 percent sourced from a local DC to 85 percent, they could realize considerable savings. Key lesson: they didn’t need to reduce inventory or increase service levels, but they were able to realize significant savings through smarter optimization.

A large US-based apparel retailer running a network of over 3000 stores served out a Central DC (CDC) and two Regional DCs (RDCs) sought to provide better service to stores, reduce peak-congestion at CDC and minimize incremental cost. They wanted to determine the optimal stocking strategy for each SKU that would minimize total cost, subject to minimum order quantity and store presentation minimum constraints. They established that SKUs with low demand variability were regionally distributed, and SKUs with high demand variability were best fulfilled from CDCs.

Bottom line lessons learned (to paraphrase Ronan): Inventory and product flow optimization must become a formal business process within organizations, front and center and part of the regular monthly planning process. Where organizations put optimization at the heart of the process, the technology tends to follow to enable that process. Note that this process will evolve and mature over time within a company, as the company learns which factors to incorporate and how best to incorporate them. Ultimately, optimization will never be an “easy button” that will make everything work automagically, but it’s a necessary and critical process.

Supply Chain authority Andrew Reese is Editor of Supply & Demand Chain Executive. He has been invited by IBM PR to attend this show as a blogger and speaker. Like all other speakers, Andrew will receive all speaker benefits including travel and board.

The setting is extreme economic volatility, with downward sloping demand still in many sectors. “The tide is all the way out in the harbor, and we can only see it starting to come back in.” Planning is still very complex, with increased network complexities and product portfolio turmoil. In fashion, for example, they’re planning new releases within seasons, not just between seasons.

The study took about six months to get through, with conversations with 400 supply chain leaders in more than 29 industries across 25 counties. They focused on supply chain strategy; how companies are collaborating; how agile companies are; how they manage risk; how they use technology and leverage opportunities around real-time data management.

The study focused around the “Three Is”: Instrumented — the ability to collect and aggregate data; Intelligent; and Interconnected. The conclusions point to the emergence of a Chief Supply Chain Officer responsible for managing these complex, global supply chains.

Five themes that emerged as challenges:

Supply Chain Visibility, cited by 70 percent of participants. People know they need more visibility, but often the technology does not allow a higher level of visibility, or the culture (e.g., internal or inter-company) gets in the way.

Risk Management, cited by 60 percent. We have seen some pockets of risk management take hold in certain areas of certain industries, but companies have not adopted a global risk management strategy.

Increasing Customer Demand, cited by 56 percent. Despite the economy, customers still want higher levels of service; they want more, and yet companies are doing less and less to understand customers or collaborate around customers.

Cost Containment, cited by 55 percent. Leaders are not just cutting costs, but they are trying to restructure their supply chains, to make them more variable, to ramp supply up and down in response to changes in demand.

Globalization, cited by 43 percent. Globalization is part and parcel of every supply chain; you can’t avoid it.

So what are leaders doing around each of these issues?

Visibility

The name of the game in visibility is inter-enterprise visibility into material, financial and information flows between companies. The biggest barriers to visibility are organizational silos, as well as performance metrics (each echelon is optimizing its own world, which prevents global optimization).

Just 15 percent of participants have widely adopted real-time information transparency inside and outside the enterprise, while 75 percent have somewhat adopted it. Just 18 percent have widely adopted event management and notification, while 70 percent have somewhat adopted it.

Bottom line: The Smart Supply Chain will require more connectivity, collaboration and integrated processes to improve visibility among network partners. Leaders (as represented by the 17 of AMR’s Top 25 Supply Chains participating in the IBM study) show much higher levels of planning with suppliers, continuous replenishment with customers, customer inventory planning and deployment, and shared, real-time electronic data.

Risk Management

Sixty-nine percent of the participants are doing something around risk management, but the largest portion are not integrating risk and performance management, which continue to be disjointed within their organizations. The big three inhibitors of risk management are Process, Data and Enabling Technology.

Bottom line: Leaders have more integrated risk management strategies and compliance programs. They have integrated process controls in logistics and operations to a much greater extent than average companies, and they work with suppliers and service providers more closely around compliance programs.

Customer Intimacy

Sixty-seven percent of respondents said that correctly identifying customer needs is still their most significant challenge in bringing new products and services to market. Almost half of the participants have no collaboration on demand with customers. Just 20 percent have significant or a great deal of collaboration with customers around demand.

Bottom line: Almost 100 percent of leaders have adopted Sales & Operations Planning – but going deeper, you find that the vision for S&OP is great, while in practice you’re seeing “baby step” S&OP, run with spreadsheets and pencil work, rather than a real enabled process. Further, there’s a 24 percent gap between the leaders and average companies in their use of integrated demand and supplier planning applications.

Cost Containment

Cost, obviously, has been front and center for all organizations, crowding out many other issues. Sixty-nine percent said they are focused on cost containment efficiencies in terms of how they are positioning their supply chains to meet the challenges facing their organizations. This is likely to shift toward enabling growth and gaining competitive advantage as the economy tips upward again.

Bottom line: Leaders are more focused around enabling agility or flexibility in their supply chains, and around maximizing variable supply chain costs to be aligned with revenues. This needs to be enabled with real-time data flow and simulation analysis.

Globalization

The costs issues with regard to globalization continue to be around delivery issues and reliability of commitments; lead times often are greater than expected; quality issues remain a problem. As Asia continues to grow, all these issues will only grow more difficult to manage, especially as new suppliers come online as the world economy returns to growth.

Asia continues to be the leading region for sourcing direct materials and is expected to continue to grow, with Eastern Europe also expected to be a growing region. No surprise that North America and Western Europe are looking at declines.

Sustainability

This would probably be a top-five issue were it not for the “struggle for survival” that the economy has forced. But this will no doubt return to the top and pick up steam as growth returns. The top steps that companies are taking now are product redesign and packaging changes (cited by 63 percent); adopting supply chain sustainability strategies that align with broader corporate sustainability goals (e.g., around carbon management, water management, energy usage and waste management); incorporating sustainability in supplier evaluations.

Talent Management

This continues to be a challenge for business. This doesn’t mean just the chief supply chain officers, but the mid- to senior-level executives with product management experience and analytical and collaboration skills. This is a “new breed” of supply chain talent that companies need and are starting to look for.

Opportunities for Improvement

Companies are doing well as aligning supply chain and broader business strategy, continuous process and business improvement, and driving cost reductions. Companies also are getting middling grades on driving integration and visibility of information across the supply chain, and also on developing talent within their organizations. Where improvement is clearly needed is in driving integration and visibility across the supply chain, and positioning the supply chain as a revenue growth driver.

The Smarter Supply Chain – The 3 Is

It is IBM’s belief that the supply chain of the future must be:

Instrumented, using sensors, actuators, RFID and smart devices to automate transactions, inventory location, shelf-level replenishment detection; supporting real-time data collection and transparency from POS to manufacturing to raw materials; and “sense and respond” demand/supply signals that allow “predict and act” information flows.

Interconnected, with multi-tier system integration across the network, and standardized data and processes that spans different companies; collaborative decision-making through decision support and business intelligence, starting with the customer.

Intelligent, using simulation models to evaluate tradeoffs of cost, time, quality, service, carbon and other criteria – evaluations that can’t be done on the back of an envelope; with probability-based risk assessment and predictive analytics; and networked planning/execution with optimized forecasts and decision support.

So are we ready for the Smart Supply Chain? People have the vision of where they want to take their supply chains, and as the Chief Supply Chain Officer becomes more influential, the move toward the Smarter Supply Chain will pick up steam.

Supply Chain authority Andrew Reese is Editor of Supply & Demand Chain Executive. He has been invited by IBM PR to attend this show as a blogger and speaker. Like all other speakers, Andrew will receive all speaker benefits including travel and board.

Supply Chain authority Andrew Reese is Editor of Supply & Demand Chain Executive. He has been invited by IBM PR to attend this show as a blogger and speaker. Like all other speakers, Andrew will receive all speaker benefits including travel and board.

The session description:

Learn about a joint MARS/Wrigley 2009 network modeling project in which supply chain metrics were a key driver to understanding how each company’s network were measured, calibrated and harmonized. An overview of the project itself will also be analyzed from a perspective of what worked, what did not, and lessons learned.

The presenters:

Kristen Daihes
Global Sourcing Leader
Wrigley

Martin Murphy
Logistics Development Director
MARS Snackfood US

Nick Roberts
RPSM/DMO Manager
Wrigley

Alex Scott
Managing Consultant
IBM

The session is from 1:45 - 3:15 on Sept 22 in the “Supply Chain Metrics Transformation: How Metrics Can Measure Process Performance” track.

The article shows how the techniques are being applied in a non-discrete manufacturing environment.

We are seeing a similar trend.

However, many firms struggle with translating the lean system developed by Toyota for their environments.  This can be especially difficult in long supply chains or in a environment where there is inherent batch or tank processes.

The excellent book by Hopp and Spearmen, Factory Physics, helps translate Toyota’s system to other environments by defining lean as:

A manufacturing supply chain is lean if it accomplishes its fundamental objective with minimal buffering costs.

They define three types of buffers a firm can have:  inventory, time, or capacity.  In short, if you can make your product with a minimum of inventory, short cycle times, and excess capacity, you are getting closer to lean.

We are finding that optimization can be a great way to minimize these buffers and evaluate the trade-offs between them.

With inventory optimization, firms realize that the may not be able to eliminate inventory completely or that they have removed it from the wrong location.  In these cases, optimizing inventory is important to achieving a lean operation.

In process manufacturing plants, these firms are relying on high-end optimization to better schedule the plants.  They realize that they cannot get around batch and tank production, set-ups, cleaning operations, and other realities in the process industry.  Optimization-based scheduling allows them to reduce manufacturing costs, improve inventory, and achieve lean operations.

Recently, one of our clients of Inventory Analyst and LogicNet Plus reported that they were able to take their monthly inventory and network planning time from about 10 man-days to 2-3 days.  This is a significant productivity improvement that allows for additional analysis and a more frequent process.

This is a good example of the benefits of the right tool connected with the right information.

As an added bonus, they were able to also reduce costs.