Riding the Globalization Wave

Presented byLori Sisk, CPM

Hewlett Packard Sponsored by Women In Leadership Group

Agenda

Introduction Overview Economic Factors Internal Impacts Risk vs. Reward Total Cost Analysis Enablers Conclusions

Introduction

Lori Sisk, C.P.M. – Over 20 years of Consulting/Industry global supply chain

experience in automotive, aerospace, and home building industries

– Focus on saving companies money and increase efficiencies in business processes

– Career has been built from several different companies: Mazda, TRW, Ernst & Young Consulting (Lucas Aerospace, Fleming Foods, Covisint), Delphi, HP (GM, American Express)

– MBA and BSBA from Bowling Green State University – ISM former Metro Detroit President, Women In Leadership

Chairperson – Speaker for ISM, APICS, PanHellenic Logistics and Supply Chain

Institute, SAPICS

North America: Primary - Mexico/South America Secondary - Eastern Europe or AsiaWestern Europe: Primary - Eastern Europe Secondary - Asia or Mexico/South AmericaPacific Rim: Primary - Asia Secondary - Eastern Europe or Mexico/South America

Where Should We Source?

Regionalization

Reverse Globalization? Changes that have occurred over the past few years

– Less dominant labor costs » As technology progresses and productivity improvements drive down

labor hours required in many processes – Increased infrastructure development

» Developing countries investing more in education and infrastructure, companies can now source confidently in any hemisphere

– Focus on supply chain risks » Natural disasters, volatility of fuel prices, performance of supply chain

partners, and financial stability of organizations seem to be the biggest risks

– Need for more flexibility » There needs to be a very quick response to the changing economic

conditions and demand by the supply chain Have created many companies to move towards regional or

hemispheric sourcing

Economic Factors Financial Volatility of commodities such as fuel Labor costs increasing globally Logistics costs increasingly important Language complexities Capacity in shipping industry Taxes Geopolitics Focus on energy

Internal Impacts Collaborative cross-functional effort to:

– Maximize supply assurance – Reduce overall costs – Identify hidden costs

Review of previous sourcing decisions Material sourcing strategy considerations

» Source in LCC at lower cost or source regionally? Can LCC supplier utilize regional logistics hub to minimize risk? LCC may have 5 weeks in transit or airfreight LCC may be lower cost but to source regionally may be less risk and

lower logistics costs

Total Cost Analysis

Total Cost of Ownership • Typical costs included in a manufacturing TCO model:

– Design Costs – Raw Material – Purchased Parts – Direct and Indirect Labor – Fringe Benefits – Machines Costs such as depreciation, interest, insurance, utilities – Selling, General, and Administrative Costs – Profit – Acquisition Costs – Duties, fees, taxes– Usage Costs – End of Life Costs

• Ensure that your TCO model includes the following risks:– International freight – Lack of logistics infrastructure which drives cost– Increased inventory carrying costs– Lost sales/costs due to unreliable source of supply– Cost of quality– Hidden costs generated by poor communication and management

misunderstandings – Additional costs due to off-shoring

Total Cost Analysis

Take another look: – Logistics Costs-

» Expedited Shipments » Repacking at warehouses » Evaluate for types of shipment (container, truck, rail, LTL, parcel)» Evaluate customs fees- fixed fee for all shipments whether a

container is a load or a parcel.– Additional Inventory Driven Costs to Evaluate:

» Price Protection and returns for channel inventory» Can too much channel inventory delay New Product Introductions?» Material devaluation and Obsolescence Costs» Engineering Change costs with 5 weeks of incoming material

– Understand the cost drivers

June 19, 2009

1

(1)Total Cost of Ownership Models: An Exploratory Study, The Journal of Supply Chain Management Copyright © August 2002, by the Institute of Supply Management, Inc., Bruce G. Ferrin, Richard E. Plank

Risk vs. Reward Supply Chain Risk Categories

Relationship

Performance

Human Resources

Supply ChainDisruption

FinancialHealth

EnvironmentalIndicators

Supplier RiskScore

Influence, Alignment, Information Sharing

Quality, Delivery, Capacity, Cost

Turnover, Union Issues

Market Power, Information Visibility Concentration, Disruption Potential

Size, Asset Utilization, Capitalization, Profitability

Social Responsibility

Honda of America Supplier Management Evaluation

Source: Honda

Honda of America Supplier Management Process

Source: Honda

Honda of America Supplier Management Message

Source: Honda

Demand Forecast

0Q1 Q2 Q3 Q4

Dem

and

(uni

ts/p

erio

d)

High Demand Base Demand Low Demand

page 15

Risk Management Approach: Uncertainty is measured using

forecast scenarios for demand, price, & availabilityAvailability Forecast

0%

20%

40%

60%

80%

100%

120%

Q1 Q2 Q3 Q4

perc

ent a

vaila

ble

High Availability Base Availability Low Availability

HPHorizon build demand scenarios from historical data

Component Price Forecast

Q1 Q2 Q3 Q4

Uni

t Pric

e

High Price Base Price Low Price

Results of Supply Chain Risk Management implementation at HP

Direct materials quantity commitments

HP total materials spend in PRM contracts

Realized Savings

Program life

>$1B+

>$75M

Indirect materials quantity commitments

Commodity Cost Savings

Commit-ment

Custom ASIC 12% 12 moScanner assy. 8% 12 moFlash memory 5% 6 moParts for repair & refurbishment

4% 3 mo

Hard disk drives

2.3% 3 mo

DRAM 0 – 10% 3-6 mo Average 6%

Commodity Cost Savings

Commit-ment

Energy 25% 12 mo

Refining a Spend-Oriented Framework to Supply Chain Risk vs. Business Impact

Leverage Strategic

Tactical Bottleneck

Supply market complexity

Spen

d

Reduce structuralrisk factors

Impr

ove

cont

inge

ncy

plan

s

Hed

ge c

ost i

ncre

ases

and

guar

ante

e su

pply

Bus

ines

s Im

pact

Extended supply chain complexity(i.e., probability of adverse risk event)

From spend segmentation To understanding risk vs. reward

Source: 2008 The Hackett Group 17

Discuss how your organization is riding the globalization wave: – Has changed it’s direction on globalization – Manage risk vs. reward – Review Total Cost of Ownership – Collaborates across the organization on sourcing decisions– Has managed the economic factors and which ones have had the

largest impact to your organization and how have you mitigated the risk

Discuss what you can take back to your organization – Institutionalize a risk management program/process– Re-analyze past sourcing decisions with new information – Review cost drivers – have they changed? – Other ideas?

Networking

Automate Supply Chain– Define the end-to-end transaction / process– Consolidate, standardize and automate the defined transaction / process

whenever possible– Identify, optimize and /or transform the transactions / processes that

cannot be automated (e.g., move processing off-shore) Centers of Excellence

– Create a winning best-shore location strategy – Determine what strategies should be global vs. regional and which

activities need to be centralized vs. decentralized Spend Analytics

– Perform spend analytics on a global basis using tools that can provide multiple dimensions to support the identification of new sourcing and savings opportunities

Transaction Management– Actively manage compliance and demand management policies and

procedures across the end-to-end supply chain through SLAs and KPIs

Enablers

Enablers Supply Chain Analytics

– Total Landed Costs- including all transportation costs, customs…– Supply Chain Network Design and Modeling and Optimization Tools-

What-If Modeling to look for the most efficient cost and service levels Supply Chain Visibility

– Look both upstream and downstream and giving critical suppliers downstream view

– Automated Alerts and Notifications to Supply Chain Events- more efficient Buyers/Planners

Cross Functional Supply Chain Dashboard– Minimize the effect of Silos– Sales and Operations Planning Process- Metrics back to executing the

plan

Supply Chain Visibility Operational Improvements

21Aberdeen Group 2009

Benefits to SC Visibility Inventory Reductions:

– Companies that are Best in Class in Inventory Management are 2.4 times as likely to have implemented SC Visibility. Customer Service Levels are at 96% and Inventory Levels have been reduce by up to 30% since 2004.

Cycle Times:– Companies with SC Visibility are 3 times as likely to have a faster

order to fulfillment as companies with plans for an SC Visibility implementation.

On-Time Deliveries:– Companies that track more than 80% of domestic shipments are 2

times as likely to have an on-time delivery rate of 95% or higher.

22Aberdeen Group 2006

The Supply Chain Dashboard- The key to an Integrated Supply Chain Organization

23

Perc

ent I

mpr

ovem

ent

2003

-200

5

Having End-to-End Supply Chain Visibility and Span of Control Enables the Business to Make Quick Resource

Trade-Offs to Respond to Changing Market NeedSupply Chain Executive Board 2006

What does tomorrow bring?

Future Trends of Organizations– Joint ventures will increase – View suppliers as external resources of innovation – Linkage of sales to purchasing – Demand driven supply chains – Integration across supply chain – Improvement of supplier relationships – Rethinking of out-source vs. in-source and near-shoring vs. off-shoring– Risk management formal programs to secure continuity of supply – Collaboration with suppliers in the Product Lifecycle Management process– Increased reliance on outsourced logistics– Visibility and traceability of products has become increasingly important

Conclusions

Economic factors will drive many companies’ direction for globalization

As companies “restudy” total cost, there may be opportunity to source regionally and reduce cost

Ensure that one has a supply management risk program that proactively alerts the organization when risk becomes too high and how to act upon it

Understand the cost drivers in order to make effective and optimal sourcing decisions

Trends will continue that will encourage companies to continually review “reverse globalization”