global supply chain mega trend interview
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Plz. find the excerpts of my Interview in on of the Magazines.TRANSCRIPT
Questuarterly
Supply Chain
Megatrends
2010-11
Feb-Apr 2010
Knowledge Partner
Gateway to Logistics Excellence
global Supply chain M
10
12
14
18
16
Shift from Customer Service to Relationship Management
Forecast to Endcast
Experience to Transition Strategy
Experience to Transition Strategy
Collaborative Approach
20Vertical to Virtual Integration
While traditional customer service focuses on achieving internal operating standards, a truly rela-
tionship-driven supply chain focuses on establishing customer success...
Management often lets forecasting bumble along unsupported in the hope everything will come
out all right in the end....
Firms increasingly confront the need to reinvent processes that are performing adequately when as-
sessed historically, but in fact....
While departments may remain the preferred method of managing work, the reality is that
process-oriented, self-directed....
The notion of focused collaborative arrangements, coupled with true cradle to grave accountability,
is revolutionizing the way that....
Virtually integrating operations with material and service suppliers to form a seamless flow of in-
ternal and external work overcomes the financial barriers....
Trust the expertiseMelvis Furtado
3PL is a two-way traffic where the firms have to be a good listener and always
evaluate what best their partner can do and what constraints he has. 3PL provides
Service not just ....
Supply Chain Opti-Simulation UnwiredTolga Yanasik
Simulation is often regarded as the proper means for supporting deci-
sion making on supply chain design. Owing to its inherent modeling flex-
ibility, simulation is often regarded as the proper means for....
41
44
CONT
Mega Trends 2010-2011
30
26
24
22
28
Absolute to Relative Value
Information Hoarding to Sharing
Training to Knowledge-Based Learning
Reinventing Managerial Accounting to Value-Based Management
Supply Chain design and analytics
The notion of relative value is to grow a larger share of the profitable revenue available in a
business arrangement by a willingness to perform a broader range....
Given the right information-enabling technology and leadership, decision-makers can become per-
formance managers....
Implementing knowledge-based learning to effectively train employees is becoming critical.....
Value management is appropriately viewed as the implementation of financial sophistication. The
key is to identify and support activities that create value as contrasted to....
Changing scenario of Supply Chain is forcing companies to redesign their supply chain model to keep
pace with the market....
“Approach RTC while cutting cost”Thibault Quiviger
Redesign To Cost (RTC), a very efficient Cost Cutting Approach consisting of
reveiwing the very detailed design and specifications of the product, can save 15-
35 % of your total cost.....
Back to Old Nightmares : Mastering TimeYan Lehunchec
This new paradigm is shifting the center of the industrial organization from the
plant to the management of supplies and dispatch....
Corollary of Supply Chain AnalyticsUnnikrishnan
A long forgotten virus is challenging the LLC Industrial base, i.e. Long lead times
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54
58
TENTS
Feb-April 2010 Log4scm Quest 05
Editorial
Let’s hope
for the bestF
or the last couple of years Supply Chain has matured so have its
complexities. Considered often as a soft skill, Supply Chain manage-
ment, on the contrary, is an engineering activity, as much as manu-
facturing or IT development. This activity requires not only extensive
training and skilled people to be carried out efficiently but also trust among
the different partners in the chain. That’s the most difficult aspect of Supply
Chain management: partners need to trust each others, to share data or
even invest in common systems. This trust issue is often the foot trap which
blocks, for instance, the development of 3rd PL. 3rd PL need to invest in
heavy IT system interconnected with their customer’s systems to provide
up to date services but contracts are challenged every 2 years. This is far
shorter than the breakeven point, impeding the development of long and
fruitful relationship between 3rd PL and orders givers.
There are several aspects of supply chain interaction that have been iden-
tified in supply chain trends over the last few decades. The mega-trends re-
flect fundamental paradigm shifts exhibited by leading firms as they
transform their supply chain capabilities to accommodate the long-term
transition from an industrial to an Scientific Technology driven society.
These mega-trends imply substantial change in logistics practices between
supply chain partners as they struggle to establish efficient, effective, and
relevant product/service solutions for end-customers. The mega-trends
discussed in this paper identify some critical dimensions of change relevant
to supply chain value creation.
Well, we have tried to create an enabling environment for the supply chain
sector so as to equip supply chain strategists with the changing market
trends which could affect them in future. Moreover supply chain is con-
sidered secondary focus. We hope Log4scm Quest will create value addition
in bringing supply chain in centre stage in companies’ strategic business
planning.
We would be glad to hear from you
Happy reading!!
[email protected], [email protected]
+91 99105 168905
Questuarterly Feb-Apr 2010
Editorial Head
Apresh C Mishra
+91 99105 16905
Intellect Head
Rajeev R Mishra
+91 99711 74574
Marketing and Operations
Head
Shatrunkay Singh
Communications Partner
Renaissance PR
Knowledge Partner
Enetek S.A.R.L.
DisclaimerAll the information in this
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any partner guarantee for theappropriateness of the infor-mation. Kindly check prop-erly before acting accordingto the information we have
provided here. All the matterscontained here are under theintellectual property right ofUvaach Media that prohibitsthe user from copying or re-producing the matter in anyform without the prior writ-ten permission of Uvaach
Media.
Cover Story
06 Log4scm Quest Feb-April 2010
Global Supply Chain
Mega Trends
2010-2011
Feb-April 2010 Log4scm Quest 07
Traditionally, supply chains
created value through
low price and broad
product assortment. Today, how-
ever, supply chain managers are
learning how to accommodate
customers who demand greater
control of the buying process,
have the financial ability to make
choices, and are willing to utilize
a variety of ways to pur-
chase goods and services
to satisfy their
lifestyle re-
quirements. Unfor-
tunately, as firms struggle to
implement best practices to solve
today's problems, the environ-
ment in and around the firm is
changing. If a firm does not have
the capability and inclination to
change, it may find itself in the
position of doing things ex-
tremely well that no one values.
The goal of integrated supply
chain is to enhance end-customer
value, Understanding that end-
customers will increasingly define
value in the context of a technol-
ogy driven competitive environ-
ment is critical to supply chain
success. There are several aspect
of supply chain interaction that
has been identified in sup-
ply chain
t r e n d s
o v e r
t h e
last few
d e c a d e .
The mega-
trends reflect
fundamental par-
adigm shifts exhibited
by leading firms as they trans-
form their supply chain capabili-
ties to accommodate the
long-term transition from an in-
dustrial to an Scientific Technol-
ogy driven society. These
mega-trends imply substantial
change in logistics practices be-
tween supply chain partners as
they struggle to establish effi-
cient, effective, and relevant
product/service solutions for
end-customers. The mega-trends
discussed in this paper identify
some critical dimensions of
change relevant to supply chain
value creation.
Once a product is scanned at a
retail store, a natural delay occurs
in the transmittal of the signal
that triggers a re-
p l e n i s h m e n t
event to
t a k e
place.
De lays
occur for a
number of
reasons, and the
longer the delay, the
greater the uncertainty up-
stream supply chain partners
experience. That uncertainty
translates into those partners tak-
ing measures to guard against
stock outages, in the form of
larger safety stocks. As that de-
mand signal, and its delay, moves
further away from its source, the
larger the amplitude, or uncer-
tainty becomes. That uncertainty
impacts planning cycles, and their
lead times, within and between
the supply chain partners. In this
way, distance and time become
more and more critical to build-
ing an effective and efficient sup-
ply chain.
In addition, there are com-
pounding factors that occur due
to the nature of that initial de-
mand signal the supply chain re-
ceives. The circumstances that
cause a consumer to walk into a
specific store and purchase a par-
ticular SKU are of interest in un-
derstanding supply chains. It
could just be the normal weekly
shopping run, which results in a
Cover Story
08 Log4scm Quest Feb-April 2010
demand signal that is relatively easy
to predict and manage. Problems
arise when product promotions take
place. The consumer might have
made a purchase because of a
coupon event, a store ad placed in a
local paper, or via an in-store event.
These events can cause disruptions
in the supply chain, and far too fre-
quently are mis-communicated to
the supply chain partners.
New product initiatives are an-
other form of disruption in the sup-
ply chain. A new initiative,perhaps a
new product, or variation on an ex-
isting product, requires decisions on
pre-launch production timing, and
pre-building and staging inventory
to meet anticipated demand for the
products. The location and amount
of inventories and production capa-
bility plays a direct impact on the
ability to respond to these types of
supply chain demand-creating
events, further leading to improving
our understanding of how physical
location and work processes are in-
herently linked in efficient supply
chain design. And while these prob-
lems exist in scale in the different
parts of the World, they are further
exacerbated when dealing with in-
ternational trade.
The ENETEK Analytics group
was asked to develop a traditional
distribution network design model,
utilizing mathematical optimization
methods, to suggest a potential lay-
out of warehousing required to
meet this need. To accomplish this,
work processes and policies would
need to be substantially changed.
How successfully those changes
were managed, and how effective
the resulting processes were in
achieving the objectives, was par-
tially dependent on where and how
inventory was physically deployed in
the network. This led us to support
the development of a dynamic sim-
ulation model to adequately repre-
sent the processing of a supply
chain’s work processes and operat-
ing policies against the supply
chain’s primary driver: demand. This
leads to an important point: If a
supply chain’s designing incorpo-
rates not only questions as to Where
and how many stacks of inventory?,
but also of work process like inven-
tory deployment, replenishment
policies, operating policies, the two
issues are inherently linked and must
be solved together.
As we investigated different oper-
ating policies within the warehouse
structure proposed by the optimiza-
tion models, we found that in cer-
tain instances that we would not be
able to achieve the service levels we
had intended. This learning from
the simulation modeling fed back
into the optimization model, in
terms of new constraints required
to determine a feasible warehousing
structure. That, in turn, created a
new scenario to test within the sim-
ulation environment. In the course
of the work, we realized that an eas-
ier process to move back and forth
between the two technologies would
be useful.
Let’s consider the different situa-
tions here below :
A steel maker is designing its 5
years investment plan. It must de-
The location and amount of
inventories and production
capability plays adirect impact on
the ability to respond to these
types of supplychain demand
creating events,further leading to
improving our understanding of
how physical location and work
processes are inherently linkedin efficient supply
chain design.
Feb-April 2010 Log4scm Quest 09
cide where to invest, which pro-
duction line to revamp, which
production capacity to squeeze
down across 27 plants in Europe.
Its product portfolio is made of
16,000 different products and
many of them are processed on
different production lines in dif-
ferent countries. The team in
charge of this process is also con-
cerned by the effect of different
price policies contemplated for
the different product and how
this could modify their invest-
ment plan.
A car maker is willing to re en-
gineer its distribution chain in
Europe to build a competitive ad-
vantage against its competitors in
a context of over production
over capacities, long delivery lead
times and over stock scattered in
the different European countries.
The difficulty for this EOM can
be summarized by the following
different questions:
1. Which product must be
built on demand, which must be
built on stock
2. Where to locate the dif-
ferent Distribution Centers
(DCs)
3. How much stock will be
necessary to guarantee 95% serv-
ice level to every customer with a
delivery lead time of X days (X to
optimize)
4. Out of the total stock,
how much will be safety stock
that is to say dead stock.
These questions must be con-
sidered as a single problem which
must be handled by the OEM. Or
its 3rd PL suppliers. Indeed, since
more and more 3PLs tend to
manage the distribution network,
they should propose added value
solutions to the OEM by study-
ing in depth these questions with
their customers. Nonetheless, as
it is easy to understand, these
questions, which at first sight
seem to be pure distribution is-
sues, go very deep in the OEM
organization and its production
strategy. For each car model, the
EOM will decide if it must be
built on stock or on demand, im-
plying very different industrial or-
ganization scheme : demand
forecast, supplier contracting,
production allocation, capacity
management… Then, once de-
cided which car to build on stock
versus on demand, the OEM
must decide through which DC
sending this car in order to guar-
antee that it will reach the cus-
tomer in less than X days after
this customer passed his order. It
is easy to understand that both
the distribution and the produc-
tion are intrinsically linked when
deciding which marketing offer
about delivery lead time to de-
sign. Let alone considering the
product mix which is per se a
challenge.
A port authority is willing to
build a new container terminal. It
must decide about the new lay-
out of the terminal, the number
of cranes, the size of the parking
lot for the waiting trucks, the
number and location of weigh
bridges and, most important, the
number and lay-out of the cus-
toms gate it must start negotiate
with the government.
In this article, we will consider
the scientific approach which can
be implemented to answer these
technical questions and beyond,
explain the tools and methodolo-
gies and Mega Trends
since more and more 3PLs tend to man-age the distribution network, theyshould propose added value solutions tothe OEM by studying in depth thesequestions with their customers.Nonetheless, as it is easy to understand,these questions, which at first sight seemto be pure distribution issues, go verydeep in the OEM organization and itsproduction
Cover Story
10 Log4scm Quest Feb-April 2010
Shift from Customer Service to Relationship Management
Megatrend-1
Customer Focus and Supe-
rior Service should be a
major objective for every
manufacturing company in order
to either achieve or maintain mar-
ketplace leadership. Customer rel-
evancy will increasingly become
the key strategic commitment of
leading corporations. While tradi-
tional customer service focuses on
achieving internal operating stan-
dards, a truly relationship-driven
supply chain focuses on establish-
ing customer success. For many
customers, such operating features
as cycle time compression, exact
point in time delivery performance
and perfect order-to-delivery may
be the prime drivers of supplier
acceptability. In contrast, other
customers may not be willing to
shoulder the cost of day-to-day
six-sigma logistics support. Their
preference may be for a high level
of average logistical support forti-
fied by immaculate logistical recov-
ery when and where needed.
Supply chains designed to
achieve unique customer value
propositions have the potential to
turn commodities into value-added
solutions. Given an understanding
of what drives end-customer pur-
Relationship does matterWhile traditional customer service focuses on achieving internaloperating standards, a truly relationship-driven supply chain focuses on establishing customer success. For many customers,such operating features as cycle time compression, exact point intime delivery performance and perfect order-to-delivery may bethe prime drivers of supplier acceptability.
Feb-April 2010 Log4scm Quest 11
chase behavior, a supply chain
based on relationships has the
greatest potential to result in
unique logistical solutions that are
simultaneously effective, efficient
and relevant. This implies that
firms will likely participate in
multiple supply chains to support
different customers.
Although most firms have not
achieved the desired level of
closeness with customers, it is the
most advanced of the mega
trends. We assess the current av-
erage achievement to be 5-6 on
the ten-point scale. Leading firms
increasingly recognize that suc-
cess hinges on establishing inti-
mate relationships with key
customers. Intimate relationships
enable firms to generate unique
and profitable product/service
offerings for their preferred cus-
tomers. This, of course, is in di-
rect contrast to principles of
mass marketing, and it is certainly
cost prohibitive to all but the
most narrowly defined market
niche firms. Managers seeking to
achieve this level of intimacy with
customers must assess their
firm's resources relative to the
needs and desires of select indi-
vidual customers. Then the firm
can deploy its resources and ca-
pabilities to perform customer-
valued activities and services that
competitors cannot match at all
or at a reasonable cost.
There are two shifts that must
take place for firms to evolve
along this continuum. First, firms
seeking to develop strong cus-
tomer relationships should recog-
nize that all customers do not
have the same service expecta-
tions and do not necessarily want
or deserve the same overall level
of service. They must, therefore,
identify core customers best
suited to be their business clients
and then meet or exceed expecta-
tions by providing unique value-
added services. These services
may include assignment of spe-
cific focus teams to identify, de-
sign, implement, and refine
specialized and synchronized of-
ferings. Additionally, firms must
develop the ability to satisfy not
only existing needs but also those
that may emerge. By continuously
matching service capabilities with
changing customer expectations,
providers can stay ahead of com-
petition.
Second, firms seeking to en-
hance customer relationships
must develop operating systems
capable of quickly reacting to
change rather than depending
upon anticipatory deployment of
inventory to handle planned re-
quirements. This is facilitated by
gathering and exchanging infor-
mation throughout the supply
chain as contrasted to guessing
what may happen. The focus
must be on efficient and effective
accommodation of unique cus-
tomer requests as well as on the
ability to react to unexpected op-
erational circumstances.
These capabilities enable firms
to capitalize on uncertainty to en-
hance customer satisfaction.
Some approaches that facilitate
flexibility include providing front-
line employees with the authority
to approve special customer re-
quests, automatically accommo-
dating stock outs through
multiple service locations, and
implementing preplanned solu-
tions. Another critical enabler of
flexibility is routinization and
simplification of fundamental
work to minimize effort ex-
pended on handling day-to-day
details and free resources to deal
with unexpected events. Judicious
employment of form and time
postponement also contributes to
a firm's ability to respond to un-
known or unplanned circum-
stances.
Although most firms have not achieved the
desired level of closeness with customers, it
is the most advanced of the mega trends. We
assess the current average achievement to be
5-6 on the ten-point scale. Leading firms in-
creasingly recognize that success hinges on
establishing intimate relationships with key
customers.
Cover Story
12 Log4scm Quest Feb-April 2010
Forecast to Endcast
Megatrend-2
Its difficult to forecast our
business, it’s too unpre-
dictable. The fact is, when in-
ventory exists at any level in
anticipation of customer orders, it
is the result of a forecast. Some-
one, somewhere in the organiza-
tion has made predictions that
have activated capacity, consumed
cash and driven the customer serv-
ice level. Also, it’s a good bet that
the someone who’s forecasting is
doing it without the right tools,
without proper training, and with
little or no information to support
the process. Yet, the forecast drives
material planning, production
scheduling, inventory levels, and
customer service (among other
things). Managers know this, in
their hearts, but for some un-
known reason they insist that “we
can’t forecast this business”. The
result is that management often
lets forecasting bumble along un-
supported in the hope everything
will come out all right in the end.
This approach can only contribute
to repeating cycles of poor per-
formance.
Experience demonstrates that
the consequence of bad forecast-
ing is a significant and unfavorable
impact on overall business per-
Predicting the
unpredictableManagement often lets forecasting bumble along unsupported in thehope everything will come out all right in the end. This approach canonly contribute to repeating cycles of poor performance.
Feb-April 2010 Log4scm Quest 13
formance. To make matters
worse, a form of denial sets in
and the real costs of poor fore-
casting are consistently underes-
timated and often overlooked.
When “bad numbers” drive ma-
terial planning and production
schedules, the inevitable results
are longer cycle times, higher
overhead activity costs, erratic
production schedule perform-
ance, excessive inventory, lower
throughput, and lots of dissatis-
fied customers – eventually hav-
ing a negative impact on sales.
The cost of bad forecasting is
enormous. Forecasting deserves
increased recognition of that im-
portance and must become one
of the most critical management
functions. As such, improving the
forecasting process deserves the
small investment required to
achieve incredible returns on that
investment.
The Self-Diagnostics Checklist
The following ten point check-
list is a simple self-diagnostic
which can help companies envi-
sion what performance could be.
Another enlightening aspect from
the test could be the differing an-
swers various managers will give
the same questions. This, of
course, opens up an entire area
for discussion (spirited discussion
in many cases) which should be
the beginning of swift problem
resolution.
Answer “Yes” or “No” to each
of the following:
• Order fill rates meet man-
agement’s specific and measured
customer service strategy.
• Delivery lead-times are at
least competitive and predictable.
• All functions agree on
which products are stocked and
which are made to order.
• The mix and investment
in inventory are a shared respon-
sibility between Sales and Manu-
facturing.
• Appropriate mathemati-
cal and statistical calculations are
used instead of “rules of thumb”
to establish desired mix and lev-
els.
• Management’s inventory
investment plan and customer
service objectives are the actual
results being realized.
• Short-term forecast devi-
ations are monitored and ad-
justed and long-term forecast
accuracy is continuously improv-
ing.
• Inventory record accuracy
is maintained at 98+%.
• Excess safety stock
buffers are not pyramidally main-
tained at various inventory levels
to compensate for “bad num-
bers”.
• Excess and obsolete in-
ventories are measured and are
less than 1% of total inventory.
What to do further?
For those who do not score wellon the Self-Diagnostics testabove, appropriate action is defi-nitely required.
First, management must for-mally recognize sales forecastingas a vital business control point.
Second, this recognition shouldbe followed by a thorough evalu-ation of the current forecastingprocess. Third, where needed, anaction plan for improvementshould be launched without delay.
The good news is getting a fore-casting process in place is not asdifficult as many people think;statistical forecasting tools arereadily available and the proce-dural requirements are modest. Ifyou have to forecast, then theonly proper course is do it withthe right tools, techniques, infor-mation and properly trained staff.Then, and only then, will you beable to say “we can forecast ourbusiness.”
Forecasting deserves increased recogni-
tion of that importance and must be-
come one of the most critical
management functions. As such, improv-
ing the forecasting process deserves the
small investment required to achieve in-
credible returns on that investment.
Cover Story
14 Log4scm Quest Feb-April 2010
Experience to Transition Strategy
Megatrend-3
Executive Leadership is re-
quired to bring heavy em-
phasis on the vision,
objectives, and the importance of
the process redesign. Even after
the redesign and implementation
are completed, executive manage-
ment must be steadfastly diligent
to make sure the old ways do not
slowly resurface. For years, the so-
called experience curve has domi-
nated strategic responses to market
and competitive situations. Firms
based their strategies on concepts
that had achieved past success. In-
creasingly, however, firms confront
unique situations about which they
have zero or limited experience.
For example, it is becoming com-
mon for firms to employ solely
contracted resources (possibly in-
cluding consigned inventories) for
many supply chain activities. Most
firms have limited experience in
establishing and managing these
relationships.
A second example is the increas-
ing focus on achieving reduced or
negative cash-to-cash cycles.
Today, new competitors have
Leading the edgeFirms increasingly confront the need to reinvent processes that areperforming adequately when assessed historically, but in fact arebeing dramatically out-performed by solutions tailored to newcompetitive conditions.
Feb-April 2010 Log4scm Quest 15
achieved success in traditional
supply chains using a combina-
tion of e-commerce and direct
logistics to, in fact, operate on less
than zero capital investment. This
shift in measurement and practice
has forced many firms to design
and manage in uncharted waters.
The point is that all the experi-
ence in the world concerning
how the traditional logistics
model works is of very little value
in developing a strategy to con-
front this new competitive pat-
tern. During periods of intensive
change, previous experience and
existing infrastructure are typi-
cally among the most difficult
barriers to overcome. Firms in-
creasingly confront the need to
reinvent processes that are per-
forming adequately when as-
sessed historically, but in fact are
being dramatically out-performed
by solutions tailored to new com-
petitive conditions.
When assessing the status of
the shift from an experience to a
transition process, our experience
suggests a typical score of 3 to 4
on the ten-point scale. Manage-
ment is beginning to realize the
potential benefits of more
broadly conceived and executed
strategies. Three changes must
occur to facilitate the shift from
an experience to transition based
strategy.
First, fundamental total cost-to-
serve frameworks must he identi-
fied, documented, and refined.
Through experience, most man-
agers have created business mod-
els regarding the processes they
manage. While these models are
sometimes comprehensive, in
many cases they are limited in
scope and perspective. As a re-
sult, the decisions weigh heavily
on past limited experience. In the
future, new business models must
include the organizations, activi-
ties, resources, and relative pa-
rameters of the expanded
enterprise.
Second, managers need to de-
velop skills in solving case situa-
tions outside their traditional
experience base. This should in-
clude analysis of situations in-
volving "fictional" products and
markets where managers must
rely on the application of concept
rather than historical practice.
Finally, managers must develop
expertise in the application and
interpretation of decision sup-
port tools that are becoming
more crucial in the conceptualiza-
tion and evaluation of supply
chain alternatives. Effective deci-
sion support system applications
provide a broader range of non-
traditional experiences for the
manager of the future. The capa-
bility to identify new strategic pat-
terns, accurately assess their likely
performance, and manage con-
tinuous transition is becoming
the leading edge model
managers must
develop expertise in
the application and
interpretation of
decision support
tools that are
becoming more
crucial in the
conceptualization
and evaluation of
supply chain
alternatives.
Effective decision
support system
applications provide
a broader range of
nontraditional
experiences for
the manager of the
future.
Cover Story
16 Log4scm Quest Feb-April 2010
Functional to Process Integration
Megatrend-4
One of the oldest and
potentially most
productive trends is
the continued migration from
functional to process integra-
tion. While the work of logis-
tics itself has remained
relatively the same over the past
decade and will continue to re-
main the same during the next
ten years, what has and will
continue to change rapidly is
how we view work. As pockets
of power and control devel-
oped within organizations, the
traditional notion of a depart-
ment became synonymous with
being departed from the rest of
the organization.
While departments may re-
main the preferred method of
managing work, the reality is
that process-oriented, self-di-
rected work teams are increas-
ingly the solution for significant
For significant
breakthroughs in
efficiencyWhile departments may remain the preferred method of man-aging work, the reality is that process-oriented, self-directedwork teams are increasingly the solution for significant break-throughs in efficiency.
Feb-April 2010 Log4scm Quest 17
breakthroughs in efficiency.
Managers realize that functional
excellence is only important in
terms of the contribution func-
tions make to the processes they
serve. In terms of organiza-
tional structure, the concept of
functional departments is as ob-
solete as punch cards are to in-
formation technology.
The validity of wading costs
among functional areas to ben-
efit total cost is beyond ques-
tion. Information technology
extensions such as ERP are
starting to support more so-
phisticated costing approaches,
lessening the difficulty of meas-
uring across functions.
On the basis of these develop-
ments and applications, we be-
lieve that firms have achieved 4
to 5 on the ten-point scale rep-
resenting the shift from func-
tional to process integration.
While there has been substantial
progress, major opportunities to
shift to the process focus re-
main.
First, while purchasing, pro-
duction, logistics and marketing
functions have each been inte-
grated within their individual
processes, there has been less
progress integrating between
these areas. This is still recog-
nized as the "Great Divide" by
most managers. Further integra-
tion across the firm's major
functional boundaries is the first
step toward additional process
integration.
Second, there must be sub-
stantial advancement of process
integration with external supply
chain partners, particularly with
service providers. This requires
more consistency in the defini-
tion, execution, and measure-
ment of supply chain processes
to establish common language
and expectations.
Third, most employees will do
what they are measured on and
what they are paid to do. The
challenge is to convert metric
and reward structures from de-
partment related budgets to co-
ordinated process-related
incentives.
The reality and potential of
meaningful metrics based on
one plan, which in turn is based
on one forecast, will increas-
ingly become reality. There has
been substantial progress in this
area but more opportunities re-
main as additional cost informa-
tion and accuracy will lead to
more refined processes with re-
duced duplication.
Most employeeswill do what theyare measured onand what they arepaid to do. Thechallenge is to con-vert metric and re-ward structuresfrom departmentrelated budgets tocoordinatedprocess-related in-centives
Cover Story
18 Log4scm Quest Feb-April 2010
Collaborative Approach
Megatrend-5
In most business relation-
ships today, suppliers sell to
customers. Often there is
considerable conflict in these
buyer/seller arrangements as each
party seeks the best financial deal.
Neither side fully trusts the other.
Vendors must guess customers'
needs since specific demand or
planning information is not
shared. In such situations, the po-
tential for achieving overall oper-
ating efficiency is limited as firms
maneuver for short-term benefits
at the expense of their trading
partners. The concept of inte-
grated supply chain management,
however, highlights the leveraged
benefits of firms collaborating to
achieve common goals.
The notion of focused collabo-
rative arrangements, coupled with
true cradle to grave accountability,
is revolutionizing the way that
firms work together to streamline
the distributive process. The po-
tential for increased overall effi-
ciency as a result of reduced work
duplication and redundancy are as-
tounding.
To streamline the distributive processThe notion of focused collaborative arrangements, coupled with
true cradle to grave accountability, is revolutionizing the way that
firms work together to streamline the distributive process.
Feb-April 2010 Log4scm Quest 19
Developing collaborative be-
havior has been the subject of
substantial discussion. These be-
haviors, however, are not well de-
fined in most firms. Managers at
many firms feel that behavioral
change is extremely difficult to
achieve. Often they find them-
selves talking about collaboration
much more than they actually
practice it. Our assessment for
the average firm is 2 to 3 on the
ten-point scale.
There are three shifts that must
occur to enhance firm collabora-
tion. First, true collaboration is
not dominated by or self-serving
to one party in the arrangement.
Collaborative relationships must
encourage the mutual trust and
value needed to develop and sus-
tain coordinated operations and
strategies.
There must be a shared vision
and objectives among customers
and suppliers about interdepend-
ency and principles of collabora-
tion. Efforts to achieve objectives
must focus on providing the best
end-customer value regardless of
where along the supply chain the
necessary competencies exist.
This perspective is key to long-
term supply chain viability.
Second, successful collabora-
tion requires structures, frame-
works, and metrics that
encourage cross-organizational
behavior. Rules and agreements
should clarify leadership roles and
shared responsibilities, delineate
guidelines for sharing proprietary
planning and operational infor-
mation, and create financial link-
ages that make firms dependent
on mutual performance.
They also should encourage risk
and benefit sharing by detailing
how rewards and penalties are to
be apportioned across partner
firms. Such sharing reflects com-
mitment to the belief that indi-
vidual firm performance is linked
to overall supply chain perform-
ance. In addition, formal guide-
lines that define joint operating
policies and procedures for han-
dling both routine and unex-
pected events should be derived.
Finally to be truly effective, col-
laborative arrangements also
must be highly sensitive to the
potential negative aspects of in-
terlocking agreements. Specifi-
cally, participating firms must be
willing to address difficult issues
related to relationship de-integra-
tion far in advance of the actual
need to dissolve a supply chain
arrangement. Although most col-
laborative relationships are volun-
tary and, in effect, can be
dissolved at any point, setting for-
mal exit procedures is advisable
to prevent disputes over assets. A
clause relating to duration and
termination of the relationship
ensures that it does not outlive its
usefulness to the participants.
To be truly effec-tive, collaborativearrangements alsomust be highlysensitive to thepotential negativeaspects of inter-locking agree-ments.Specifically, par-ticipating firmsmust be willing toaddress difficultissues related torelationship de-integration far inadvance of the ac-tual need to dis-solve a supplychain arrange-ment.
Cover Story
20 Log4scm Quest Feb-April 2010
Vertical to Virtual Integration
Megatrend-6
Historically, firms have
tried to reduce supply
chain conflict by owning
consecutive levels in the business
process. Henry Ford's original
business strategy is a legendary at-
tempt at using ownership to
achieve vertical supply chain inte-
gration. Ford's dream was full
ownership and management of
the entire value creation process in
order to reduce waste and increase
relevancy. Ford's rubber planta-
tions, ships, and foundries con-
verted raw iron ore to a finished
car in seven days.
The problem with vertical inte-
gration is that it requires tremen-
dous capital investment and an
incredibly complex organizational
structure. Recreating Henry Ford's
vertical supply chain is infeasible
today. Firms, therefore, must har-
ness the expertise and synergy of
external supply chain partners to
achieve success. Virtually integrat-
ing operations with material and
service suppliers to form a seam-
less flow of internal and external
work overcomes the financial bar-
riers of vertical ownership while
retaining many of the benefits.
On the way to
process reformsVirtually integrating operations with material and service suppliers
to form a seamless flow of internal and external work overcomes
the financial barriers of vertical ownership while retaining many of
the benefits.
Feb-April 2010 Log4scm Quest 21
While many manufacturing and
retail firms have traditionally
worked with third party logistics
providers (3PL's) to handle phys-
ical movements of products,
there is a growing trend to out-
source knowledge processes as
well. Staff and process design ac-
tivities are being outsourced to
consultants. Information design,
collection, maintenance, and
analysis are outsourced to infor-
mation integrators. Knowledge
specialization will increasingly be-
come an activity considered for
outsourcing by the virtual enter-
prise. The benefits of outsourc-
ing such competency in order to
focus on core business require-
ments will continue to drive firms
from vertical to virtual integra-
tion.
Our research provides evidence
that most firms have taken initial
steps toward virtually integrating
their supply chains. Relatively few
firms, however, have achieved
full-scale implementation. Expan-
sion of this mega-trend is cur-
rently slowed by some highly
publicized failures of contract lo-
gistics relationships. As a result,
prospective service providers are
being carefully qualified prior to
engaging in virtual relationships.
We assess the average perform-
ance score on this trend to be 4
to 5 on a ten-point scale.
To move to virtual integration,
three shifts must occur. First,
managers who interface with ma-
terial and service suppliers must
learn how to manage assets and
activities that they do not directly
control and cannot directly see,
but whose performance they can
and must monitor to ensure suc-
cess. These suppliers represent a
firm's extended family and will
contribute as much to the future
success or failure of the supply
chain as any internal department.
A firm's management strategy
must reflect the recognition that
a supply chain is only as strong as
its weakest supplier link.
Second, evolving the structures
to facilitate virtual integration is
neither easy nor quick. Supply
chain partners must have a com-
mon vision of the total value cre-
ation process as well as shared
responsibility for achieving it.
Firms must carefully identify and
select partners with complemen-
tary visions, strategies, and oper-
ational capabilities. Partners must
interface their operations in ways
that reduce duplication, redun-
dancy, and dwell time while main-
taining synchronization.
Additionally, firms must spread
the risks and rewards of collabo-
ration to solidify goal attainment.
Finally, firms must extend man-
agement practices beyond suppli-
ers to include suppliers' suppliers.
Suppliers' views on resource
needs and constraints, threats,
opportunities, and weaknesses
must be considered when setting
goals, objectives, and action plans
as they play increasingly vital and
irreplaceable roles in creating
end-customer value.
Most firms have
taken initial steps
toward virtually
integrating their
supply chains.
Relatively few firms,
however, have
achieved
full-scale
implementation.
Expansion of this
mega-trend is
currently slowed by
some highly
publicized failures of
contract logistics
relationships.
Cover Story
22 Log4scm Quest Feb-April 2010
Absolute to Relative Value
Megatrend-7
The key to long-term
success is doing the
things that attract and
maintain the most profitable
customers and doing them
well. A traditional success
measure has been absolute
market share typically meas-
ured in gross sales dollars.
A more sophisticated ap-
proach to measuring success
may be the relative share a sup-
plier enjoys in terms of key
customer success and resulting
profitability the difference be-
tween revenues and cost. Many
firms act to increase sales in re-
sponse to market pressures
only to find that escalating
costs associated with the in-
creased sales fully erode the
marginal profits. The notion of
relative value is to grow a larger
share of the profitable revenue
available in a business arrange-
ment by a willingness to per-
form a broader range of
value-added services while en-
hancing marginal profitability.
Some enlightened firms are
Enhancing marginal
profitabilityThe notion of relative value is to grow a larger share of the profitable revenue available in a business arrangement by a willingness to perform a broader range of value-added serviceswhile enhancing marginal profitability.
Feb-April 2010 Log4scm Quest 23
beginning to accept and ex-
ploit this shift. They realize
that efforts focused on serv-
ing profitable accounts can
yield enhanced returns com-
pared to those obtained by of-
fering mediocre service to a
wide range of customers.
Such "average" service may
over-satisfy some customer
segments while under-satisfy-
ing other segments willing to
pay more for better service.
Often the result is losses in
both revenue and profit in
these marginal accounts.
Thus, the true measure of
successful growth may not be
the absolute size of dollar
sales as it is the relative share
of sales received for value
rendered.
Our estimate of the current
status of firms regarding this
trend is a meager I to 2 on the
ten-point scale. There is a
long way to go to implement
this trend within the next
decade. While there are many
changes that must occur for
this trend to materialize, there
are two that are particularly
critical.
First, a wider implementa-
tion and acceptance of activ-
ity based and segmental
costing is required. Logistics
information systems capable
of accurately tracking cost
components, assigning them
to the correct segments, and
producing credible reports for
senior management must be
employed. Sales and market-
ing involvement must be se-
cured, as they have to accept
the principle that more sales
and revenue do not necessar-
ily mean higher firm prof-
itability. Logistical practices
such as multi-customer trans-
portation consolidation,
cross-docking, mixing in-tran-
sit, and other operational in-
novations that improve
efficiency and enhance rela-
tive value must be adopted.
Second, the financial mar-
kets must begin to place more
emphasis on profit than mar-
ket share. While earnings per
share (EPS) and profitability
are very important measures
of performance, the financial
markets do place some em-
phasis on share. This forces
senior management to main-
tain share even when the mar-
ginal share is not profitable.
While visionary firms are be-
ginning to recognize this
change, the focus on relative
value will evolve quite slowly
as it requires major paradigm
shifts. The concept is easy to
understand, its implementa-
tion, however, requires major
changes in management phi-
losophy.
current status offirms regarding thistrend is a meager Ito 2 on the ten-point scale.There is a long wayto go to implementthis trend withinthe next decade.While there aremany changes thatmust occur for this trend to materialize, thereare two that areparticularly critical.
Cover Story
24 Log4scm Quest Feb-April 2010
Information Hoarding to Sharing
Megatrend-8
Every decision-making cycle de-pends on finding the answers tothree core questions: How are we
doing? Why? What should we be doing?Scorecards and dashboards monitor thebusiness with metrics to find answers toHow are we doing? Reporting and analy-sis provides the ability to look at historicdata and understand trends, to look atanomalies and understand Why? Plan-ning and forecasting help you establish areliable view of the future and answerWhat should we be doing? Integratingthese capabilities allows you to respondto changes happening in your business.
The quality information offers insightsand lessons learned on leveraging yourinformation assets better in support ofyour most valuable human capital assets:the growing number of high-value deci-sion-makers. Given the right informa-tion-enabling technology and leadership,these decision-makers can become per-formance managers. Such managers de-
liver sustainable competitive advantageby growing revenue faster, reducing op-erational expenses further, and leverag-ing long-term assets better. Implicit inseveral of the mega-trends is the needfor supply chain participants to share in-formation.
The shift from a need to know mental-ity to relevant information sharing is adifficult transition for old school man-agers. Most, with years of experience inthe trenches, have learned the hard waythat information is power. It is becomingincreasingly clear, however, that thosewho hoard information can only exploitit - they cannot leverage it. The immedi-ate gains that are generated from such in-formation hoarding pale in comparisonto the cost savings and enhanced servicethat progressive firms find attainablethrough sharing relevant informationwith supply chain partners. The open de-ployment of information across the sup-ply chain is the catalyst that enables
Share...Learn...Grow...Given the right information-enabling technology and leadership, decision-makers can become performance managers.
Feb-April 2010 Log4scm Quest 25
effective integration. It serves asthe key that unlocks the power ofsupply chain integration.
Currently, the shift from informa-tion hoarding to information shar-ing is dependent upon technology.Primarily, the ease of use and lowcost of the Internet is driving rapidchange. This is presenting a diffi-cult transition for managers whoare measured and rewarded on tra-ditional metrics. As a result, thescore of the average firm is only 3to 4 on a ten-point scale. To ad-vance further on this continuum,four major shifts must occur.
First, effective information shar-ing is heavily dependent on trustbeginning within the firm and ulti-mately extending to supply chainpartners. Managers are slowlylearning to share information al-though some still believe that shar-ing forecasts, sales, inventories,costs, and promotional or develop-ment plans will compromise theirorganization's competitive posi-tion. This is particularly frustratingwhen a manager's view of the or-ganization encompasses only his orher own specific functional depart-ment. For this reason, informationis often not shared among depart-ments of the same operating unit.If managers do not share internallyits doubtful they will share infor-mation with supply chain partners.
The scope of shared information
usually expands as trust is estab-lished. Initially, such tactical data asshort-term forecasts and inventoryavailability may be provided to fa-cilitate resource planning and prod-uct flow. Once the benefits oftactical sharing are realized, firmstend to become more open to shar-ing sensitive information on costs,product development plans, andpromotional schedules. The auto-motive industry is a prime exampleof firms designating tier one leadsuppliers who in turn coordinateand sequence the work of second-ary suppliers. This supply chainstrategy has significantly reducedcost and time of automobile as-sembly. Such benefits are totally de-pendent on information sharing.Eventually, long-term plans andstrategies are revealed in order todevelop and integrate logisticsprocesses and resources across thesupply chains.
Second, many organizations willnot share forecast or planning dataunder any circumstances while oth-ers have adopted the practice ofselling it to a third party providerof competitive data such as Infor-mation Resources. Some retailers,for example, view point-of saledata as a valuable commodity theyown and from which they can ex-tract a profit. This is a short-termmentality. Managers must begin torealize that the efficiencies ob-tained through information sharing
substantially exceed the profits re-sulting from the sale of such infor-mation.
Third, organizations that view in-formation as a key resource man-age its exchange in a confidentialmanner to reduce conflict whenconducting business with compet-ing suppliers or in serving compet-ing customers. For example, anumber of manufacturers have es-tablished separate cross-functionalteams to serve competing massmerchants. The teams include per-sonnel from both organizations insuch areas as sales, marketing, fi-nance and logistics. Increasingly,shared confidential information isrequired to plan joint operations.To ensure that confidentiality ismaintained, there must be credibil-ity and trust between supply chainpartners.Information Quality, Rel-evance, and Timeliness have amajor impact on overall companybusiness performance. This meansthe integrity of computer files andoutputs must be very high.
Finally, information sharing maytake many forms. The most com-prehensive is the exchange of datafiles and provision of direct accessto databases. Shared employees, al-though not yet common, extendsthe process by providing a manage-rial conduit through which infor-mation flow between organizationscan be coordinated and translated.Information also can be sharedthrough third party logistics suppli-ers who assign dedicated employ-ees to shipper locations to ensurecoordination. A substantial in-crease in information sharing iscritical to enhanced supply chainintegration and performance. De-spite the historical inhibition, firmsmust begin to extend their willing-ness to share.
Currently, the shift from information hoarding to information sharing depends
upon technology. Primarily, the ease of use and low cost of the Internet is driving
rapid change. This is presenting a difficult transition for managers who are measured
and rewarded on traditional metrics
Cover Story
26 Log4scm Quest Feb-April 2010
Training to Knowledge-Based Learning
Megatrend-9
In the foreseeable future the lo-
gistics process will remain
human centric. Effective man-
agement of the logistics process,
however, is complicated by the fact
that over ninety percent of all logis-
tical work takes place outside of the
vision of any supervisor. No other
employees within the typical busi-
ness enterprise are expected to do so
much critical work without direct su-
pervision as those that make logis-
tics happen. For example, an
unsupervised truck driver performs
almost all the value created by mov-
ing a product from a shipping loca-
tion to a customer destination.
Truck drivers, in fact, may spend
more time face-to-face with key cus-
tomer representatives than any other
company employee.
The truck driver may not even be
an employee of the firm that is mak-
ing the shipment to the customer.
Other examples include customer
representatives and inventory plan-
ners. There is a critical need in these
areas for employees that understand
supply chain dynamics and can use
Coping with
Human Factor
Implementing knowledge-based learning to effectively train employees is becoming critical.
Feb-April 2010 Log4scm Quest 27
information-based tools to develop
and implement effective strategies.
While many enlightened execu-
tives acknowledge that this mega-
trend is one of the most critical
they face, practice indicates that not
much progress is being made.
Those that are trying to implement
knowledge-based learning are hav-
ing problems finding the time and
the appropriate methods to effec-
tively train employees. Training
time is difficult to find due to the
manpower reductions that have
been forced on most firms.
It is difficult to find the appropri-
ate training approaches as they
must integrate across a number of
functional areas and incorporate
multiple technologies. The chal-
lenges of effective human resource
management are being complicated
by increased globalization. As a re-
sult, our assessment is that the av-
erage industry rating for this shift
is I to 2 on the ten-point scale. The
low rating on this assessment sug-
gests that there are significant
changes needed to achieve an envi-
ronment of knowledge-based
learning.
First, senior management must
improve capabilities to manage a
diverse workforce. Training must
shift from emphasizing individual
employee skill training to develop-
ing knowledge-based learning. This
means that skill development must
be placed in the context of the
overall process in terms of objec-
tives, dynamics, and measurements.
For example, a truck driver cer-
tainly must be skilled in all facets of
driving. However, they also need to
possess knowledge concerning
how they fit into the logistical
process and how to access expert
data warehouses, tracking capabili-
ties, and adaptive decision support
systems to resolve and prevent op-
erating problems. Some forms of
knowledge generation are as simple
as learning how to cooperate. Oth-
ers may require astute skills to iden-
tify emerging trends or observe
competitive superiority.
Second, it is becoming increas-
ingly clear that firms must build the
knowledge capabilities of key man-
agers and planners. These individ-
uals must be provided the
education and experience that en-
ables them to build an understand-
ing of the risks and benefits
inherent in supply chain integration
and the relationships between sup-
ply chain partners.
In a world where all logistics and
supply chain employees are rela-
tively high paid specialists, the
Firms that develop and maintain
broad-based supply chain man-
agers will exploit the winning for-
mula. Among all the mega-trends,
the development of effective
knowledge based learning systems
may be the least developed. This
represents a substantial challenge
and opportunity for the people re-
sponsible for developing and train-
ing personnel.
it is becoming in-creasingly clear thatfirms must buildthe knowledge capabilities of keymanagers and planners. These individuals must beprovided theeducation and experience thatenables them tobuild an understanding ofthe risks and benefits inherent insupply chain integration and therelationships between supplychain partners.
Cover Story
28 Log4scm Quest Feb-April 2010
Reinventing Managerial Accounting to Value-Based Management
Megatrend-10
For decades firms have been
managed by the numbers.
Over the last ten years, how-
ever, managers have become suffi-
ciently aware of the limitations of
Generally Accepted Accounting
Procedures (GAAP) to be willing to
spend significant resources on man-
agerial accounting methods such as
activity-based costing. These meth-
ods improve managers' understand-
ing of the dynamics of integrating
internal and external functional ac-
tivities. They also provide the met-
rics managers need to support
strategic and tactical decisions.
Today managers seek to extend
measurement to assess how their
work drives stakeholder value. Re-
cent developments, driven in part by
widespread adoption of Economic
Value Added (EVA) and Market
Value Added (MVA), are resulting in
integrative frameworks to imple-
ment value-based management.
Value-based management is closely
related to the basic paradigm shift
toward financial sophistication. In
fact, value management is appropri-
ately viewed as the implementation
of financial sophistication. The key
is to identify and support activities
that create value as contrasted to
those that only increase revenue or
decrease cost.
This mega-trend has long been
Paradigm Shift towards
financial sophisticationValue management is appropriately viewed as the implementation of
financial sophistication. The key is to identify and support activities
that create value as contrasted to those that only increase revenue or
decrease cost.
Feb-April 2010 Log4scm Quest 29
recognized as particularly relevant
for operational managers. Unfortu-
nately, it has taken a considerable
amount of time and effort to gain
senior management's attention.
Current initiatives to link opera-
tions to value-based performance
are facilitated by commitment to
ERP implementation. The trend is
likely to take off now that supply
chain management concepts are re-
ceiving increased acceptance by the
financial community. Still, the aver-
age firm today scores only a 1 to 2
on a ten-point scale.
Although the drive toward value-
based management remains in its
infancy, managers are increasingly
forced to demonstrate how supply
chain practice and process changes
can affect the overall financial
health of their enterprise. Tradi-
tional performance measures do
not describe achievement in the fi-
nancial language spoken in the ex-
ecutive suite. Measurement systems
must enable managers to link sup-
ply chain performance directly to
financial performance.
There are three transformations
required to apply value-based man-
agement. First, firms must identify
and assign the benefits of specific
initiatives to the appropriate supply
chain partner. Activity-based cost-
ing approaches provide one way
for firms to measure performance
across functional areas and focus
on benefits associated with a spe-
cific activity or process. Total cost
and activity-based methods enable
firms to pinpoint the profitability
of specific products, customers,
and supply chains, as well as project
cost-revenue outcomes for differ-
ent programs and strategies. These
approaches enable managers to set
goals for specific actions and pro-
grams and to measure achieved
performance. They have the poten-
tial to relate customer sales and
profitability based on exact costing
of ordering practices and delivery
expectations. This precise cost in-
formation can be used to modify
supply chain practices. For exam-
ple, managers can work with spe-
cific customers to develop new
routines that simplify and stream-
line order placement, resulting in
better service as well as lower cost.
Second, there must be a change in
the way benefits are measured. A
few firms have adopted a compre-
hensive value model that incorpo-
rates operational excellence and
asset utilization perspectives to as-
sess value-based management deci-
sions. Key operational excellence
metrics focus on increased cus-
tomer service and lowest total cost
of ownership. The combination al-
lows the supply chain to respond
more precisely to specific customer
needs.
Customer service measurement is
associated with revenue and is as-
sessed by developing a set of
shared cross-functional and cross-
organizational measures to guide
and monitor work performed by
multiple supply chain partners as
they add value for the end-cus-
tomer. Lowest total cost of owner-
ship incorporates all basic product
costs as well as all supply chain
costs related to inventory financ-
ing, acquisition, processing, move-
ment, storage, handling, and
delivery.
Customer service
measurement is
associated with
revenue and is
assessed by
developing a set of
shared cross-func-
tional and cross-
organizational
measures to guide
and monitor work
performed by
multiple supply
chain partners as
they add value for
the end-customer.
Cover Story
30 Log4scm Quest Feb-April 2010
Supply Chain design and analytics
Megatrend-11
With this level of visibility,planners and key decisionmakers can test scenarios
to determine how the network canbest address changes in the market,the business, or customer demand.They can define, select, and monitorkey performance indicators (KPIs)to get an integrated, comprehensiveview of performance, using prede-fined KPIs based on the supplychain operations reference model,which includes sourcing, planning,production, distribution, and returnsprocesses.
A 360° view of the business letsyou analyze forecast accuracy, mon-
itor the satisfaction of key cus-tomers, take snapshots of the globalcapacity and inventory status for aspecific product group, or comparethe performance of the top 10 sup-pliers. There are powerful Web-based customer and supplier toolsthat allow you to expose internalprocesses without deploying a costlyinfrastructure. That gives you andyour suppliers and partners the visi-bility needed to effectively monitorsupply chain activities, identify criti-cal events, and take the actions nec-essary to keep your entire supplychain process flowing smoothly. Youcan give customers faster and better
How do you
monitor your
supply chain activity?
Changing scenario of Supply Chain is forcing companies to redesigntheir supply chain model to keep pace with the market.
Feb-April 2010 Log4scm Quest 31
responses to inquiries regardingproduct availability and order andfulfillment status. With critical de-cision support, you and your part-ners can quickly adapt to customerdemand on an ongoing basis, re-sulting in shorter cash-to-cash cycletimes and a more responsive supplynetwork that helps keeps cus-tomers satisfied.
Analyze and Anticipate
SCM design and analytics are keycapabilities that make the solutionthe cornerstone of your adaptivesupply chain network. By perform-ing “what if ” analyses of global in-ventory based on total quantities,total dollar value, and terms ofcoverage range (days of supply),for example, you can anticipate in-ventory shortages. You can also an-alyze inventory levels and trends bylocation and product group. Youenjoy improved customer service,greater access to inventory acrossthe network, and the ability to real-locate and divert shipments in tran-sit. For new orders, you can obtaina global capacity status for a prod-uct group within the supply chainat the push of a button. You cananalyze global capacity utilizationand compare utilization of differ-ent plants and lines across time pe-riods.
Improve Visibility
How are suppliers performing?You can set the system to triggeralerts when a PO is received forless quantity than ordered, or if an“out of stock” situation is pro-jected. You can analyze vendor per-formance by products, latedeliveries, undershipments, andmany more KPIs. You also have a
window into warehouse operations.You can obtain a snapshot of keySKUs, analyze the top 10 slow-moving or fast-moving materialsfor a chosen warehouse, or analyzethe top 10 obsolete parts by valuein both a graphical and a more de-tailed report format. Are carriersmeeting their obligations? WithSCM design and analytics you cannot only see which carrier is meet-ing expectations, but also wherecarrier changes should occur due toan excessive rate of load-tenderingrejections. The solution providesvisibility into forecast accuracy forone, three, or six months aheadthat can be viewed as a combina-tion of categories, country, prod-ucts, and key accounts. You alsohave improved visibility into yourcurrent order situation, and cantrack invoiced sales quantity, salestarget, and existing orders. You cannavigate by key account, product,and country. There are SCM toolswhich enables a comparison ofsales target versus existing ordersby country or key account andidentifies areas where the sales tar-get might not be reached. The dis-tribution of existing orders bycountry or key account enables youto compare the current statusagainst overall company targets.You can also synchronize supplywith demand, these tools providesvisibility into sales quantities byproduct groups, and allows you tomatch demand with inventory aswell as with production. You cananalyze historical production leadtimes to fulfill demand as well ascurrent and historical inventorylevels.
Leverage Your Investment
With SCM design and analytics,you can leverage your IT invest-ments in supply chain managementthrough real-time information onsupply chain events that impactplans and Schedules, as well asbenchmark and performance indi-cators that help drive improve-ments. You can adjust plans,schedules, and transactions auto-matically and quickly through thetight linkage of event managementsolutions to planning and executionsystems. You can more effectivelymanage inventory across the net-work through an integrated viewacross businesses and disparatesoftware environments. Synchro-nization of the entire supply chainnetwork helps eliminate excess in-ventory and unnecessary capitalcommitment.
SCM Designing allows you tosuccessfully outsource non-coreprocesses through effective, real-time monitoring of supply chainprocesses. You can track operatingtrends against performance indica-tors to see where breakdownsoccur or improvements can bemade. You will spend less time fire-fighting by anticipating and manag-ing potential breakdowns in plansand schedules before they disruptoperations. And you have access toall the information you need to en-sure compliance with governmentmandates. Two of the importanttools which may come handy forSupply Chain Designing and Ana-lytics would be the Optimizationand Simulation Techniques:
1.) Optimization:
Use of Optimization and Simula-tion methodologies for supplychain network design has had a sig-
Cover Story
32 Log4scm Quest Feb-April 2010
nificant impact on developing cost-efficient capital investment and re-plenishment strategies across manyindustries. Supply Network designnormally utilizes optimization tech-nology, which develops a con-strained, least cost network. Anoptimization model can be con-strained by capacity limitations onfacilities, and also by limiting thelength of replenishment links. Thistype of constraint attempts to ad-dress time-based aspects of a sup-ply chain, normally by usingdistance as a surrogate for time.However, this type of constraint isa crude representation of leadtime, as many factors beyond justdistance contribute to a facility’stimely ability to react to a demandsignal. The power of using opti-mization technology on networkdesign problems is the technology’sability to effectively select fromamong thousands of options si-multaneously to determine a sup-ply chain structure. The macronature of this analysis best suits it-self to structural, location prob-lems. Within large organizations, acentral planning Teams usually isresponsible for commissioning aNetwork design analysis. This canbe accomplished by either in-houseresources, with specially licensed oreven proprietary tools, or througha consulting firm like ENETEKretained to perform some or all as-pects of the analysis.
2.) Simulation:
Less understood is the impact dy-namic simulation modeling canhave on determining the success ofa particular network design inmeeting its operating objectives.Here we provide an understanding
of the methods and appropriateusage of a dynamic simulationmodeling tool coupled with a logis-tics network optimization tool. Wewill discuss how coupling thesetools can provide insight into thestructure of a supply chain, as wellas the robustness of that structurethrough immediate testing via dy-namic simulation modeling.
Simulation modeling allows time-based, execution-level events to berepresented, analyzed, and under-stood. Simulation provides a richenvironment for experimentingwith different approaches to oper-ating strategies that may be effec-tive. Until recently, simulation hasextensively been used to examinemanufacturing operations for re-moving throughput bottlenecks,improving operating efficiencies,testing sequences of operations,material handling design, etc. Moreinstances of utilizing simulationtechnology on broader supplychain issues are being reported.Within the context of supplychains, simulation allows closeanalysis of inventory positions,their deployment and how they areaffected by changes in downstreamdemand signals, and the reorderpolicies in place to respond tothose signals. Synchronizing plan-ning cycles and production sched-ules with up- and down-streamsupply chain partners, as well asunderstanding capacity utilizationissues in response to closer cou-pling of supply chains are issuesthat can be addressed with simula-tion modeling.
As we investigated different op-erating policies within the ware-house structure proposed by the
optimization models, we foundthat in certain instances that wewould not be able to achieve theservice levels we had intended.This learning from the simulationmodeling fed back into the opti-mization model, in terms of newconstraints required to determine afeasible warehousing structure.That, in turn, created a new sce-nario to test within the simulationenvironment. In the course of thework, we realized that an easierprocess to move back and forth be-tween the two technologies wouldbe useful.
Simulation is the tool to study in-teractions in context of high vari-ability of input variables. SupplyChain and Logistics is very muchsubject to this variability becauseof the interactions with the “exter-nal” environment which often can-not be controlled. Simulation hasturned out to be one of the megatrends as simulation helps handlevariability and explore the "tails" ofdistribution, these not so frequentevents which account for 80% ofthe losses
What is strategic network de-sign about?
Network design is the planningactivity for the strategic level whichdetermines the optimal productportfolio, the production locations,the production capacities and theoptimal distribution network aimedat delivering the products at theminimal cost while guaranteeingthe target service level. Networkdesign focuses on the location-spe-cific aspects of a supply chain, suchas the location of production andwarehousing facilities to best meetcustomer demand replenishment
Feb-April 2010 Log4scm Quest 33
locations. Included in that analysisis determining not only the loca-tion, but also the replenishmentlinkages from a facility to its down-stream supply chain partners. Usu-ally, network design time horizonwill be 6 months to 5 years. Net-work design or Supply Chain de-sign is not about line scheduling ornext week delivery. Network designis the strategic planning activitywhich determines the backboneproduction and distribution sys-tems as well as the optimum prod-uct flows across this network.
Using network design tools andquantitative methodologies, peoplecan answer the following questions:
• Which product must beproduced in which unit ?
• Where should I build aNew DC ?
• Where to locate the inven-tories and how much to guaranteea certain service level ?
• What is the most carbonefficient network ?
• Is it better to build on de-mand or to build on stock?
• What is the impact ofadding a new product in my SupplyChain?
• What if I reduce my prod-uct portfolio complexity in termsof total cost, customer service andinventory level across the supplychain?
• At which stage of the sup-ply chain should I hold safetystock? What about sharing this costwith my suppliers and customersand optimize the overall inventorylevel?
But beyond answering thesequestion, scientific planning canhelp decision makers rank the dif-ferent scenarios and options tomake better decisions.
Most important decisions aremade at the strategic level and willhave huge consequences for thecompany. If the location of a pro-duction unit or a DC is not opti-mum, however good may be themanagers to slim down their costsand lean their operations, they willnever make this unit profitable.
Which techniques to use?
Usually, we distinguish differentlevel of planning: strategic, tacticaland operational. Basically, the dif-ference between each is the timehorizon, driving then different de-cision processes:
• Strategic: 1 year to 5 years,depending on the industry dynam-ics.
• Tactical: 1 month to 1 year
• Operational: 1 day to 1month
For each of these time horizons,
the main driver to choose one tech-nique or another is the level of un-certainty about the market.
It is well documented that:
• for the strategic level, un-certainty is maximum. Given thatuncertainty is maximum, the bestoption is to study a limited numberof different scenarios with differ-ent market conditions : prices, mar-ket production capacity, long termdemand trends… That’s the do-main of network design, invest-ment decisions, new productlaunch study, optimal product flowdefinition across the chain…In thiscontext, the number of potentialsupply chain is huge, the combina-tion of possible flows can be veryhigh (millions of possibilities). Thespace scale is the country, the con-tinent, the world.
• For the tactical level, uncer-tainty is quite high: demand will bevolatile but production capacitiesare considered set, prices stable.Production capacities variabilitycan be also considered: break-downs… That’s the domain of dy-namic simulation: a whole year of
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34 Log4scm Quest Feb-April 2010
operations, simulated minute afterminute, can be performed. Deci-sions about stocks are made at thatlevel: safety stocks location, inven-tory replenishment policies defini-tion, back-up scenarios definition.Detailed investment right sizingcan be performed using simulation.The space scale is the plant, theproduction unit.
• For the operational level,variability is often considered null.Everything is set: production is al-located, demand is well known…that’s the domain of very low leveldecision making: production se-quence optimization, choice oftransportation assets,… The spacescale is the plant, the specific pro-duction line.
In this article, we will considerboth strategic and tactical levels,because that’s where the big chunkof savings is.
Supply Chain costs optimizationthrough network design, stockright sizing and intensive simula-tion along the supply chain
Strategic Level Planning:
How to perform strategic net-work design?
To go simple, the purpose ofstrategic design is to minimize thetotal cost of the supply chain undercapacity constraints.
Capacity constraints types are:
• Transport constraint:min/max volume of producttransported on a lane, max numberof transportation assets, max leadtime between different points ofthe Supply Chain
• Production constraints:
min/max production for eachproduct in each plant for differentperiods of the time horizon, maxnumber of units in use… Produc-tion of by products included(waste, CO2…)
• Warehousing constraints:max volume/quantity stored ineach warehouse
• Flow conservation: any-thing coming in a node of the net-work is either stored, transformedor goes out of the node.
• Demand constraints: allthe customers must be deliveredthe exact quantity they order dur-ing each period under considera-tion in the model.
Typology of cost is very wide andcan be almost infinite. Can be men-tioned:
• Variable Production costs:per unit, including economies ofscale if producing beyond a certainthreshold decreases the unit pro-duction cost.
Feb-April 2010 Log4scm Quest 35
• Fixed production costs: perplant, per production line…
• One shot Investment cost,closing costs
• Transport cost: per unit,per transport asset…units can beexpressed per kg, per m3/ per unit,per container…
• Storage costs, handlingcosts, loading/unloading costs
• Financial costs attached tothe inventories
• Fees and taxes per prod-uct…
• CO2 costs.
The approach will be to build amathematical model representingthe current and potential supplychain, with all its products, byproducts, production sites, distribu-tion sites… relevant for the deci-sion making process. Then tounderstand the constraints on thesupply chain (target service level,max capacity of each plant, trans-port lane…) and quantify preciselythese constraints. Costs will be en-tered into the model. Specific at-tention must be dedicated to thesecosts because often one knows thetoday’s costs but what if produc-tion increases by 30% ? Whatabout the costs of new transporta-tion lanes not used currently ?
Once all these data gathered, wewill solve the mathematical prob-lem about minimizing the total costwhile respecting the constraintsenumerated before.
For our chance, it can be provenmathematically that there is onlyone single supply chain with mini-mum cost.
If building such models was chal-lenging a few years back, it is nowquite simple and fast thanks to newtools available on the markets.These tools, network design soft-ware, enable a well trained analystto build a supply chain models in acouple of weeks, to optimize thesupply chain network in a coupleof days and produce alternativescenarios in minutes.
These software embed data trans-formation tools, optimization en-gines, reporting systems,cartography engines to representthe supply chain on maps…
Usual results of a network designproject for an industrial companyor a distribution company?
Usually, expected savings resultsin a well managed company reach4% to 7% of the Supply Chaincosts. In specific situations wheredistribution, inventories can be re-duced by 50% or more. The net-work design can be also coupled toa tax optimization scheme thoughthe transit in a more “tax friendly”zone with appropriate producttransformation and pricing transfermechanism. In this case, costs canbe reduced by much more than 7%of the overall Supply Chain costswhen including the taxes.
Tactical Level Planning:
How to perform tactical SupplyChain planning?
Pretty much the same techniqueas in the strategic area can be used.The main difference lies in the ex-pected higher variability of de-mand, which can be quantifiedfrom the past and or anticipated. Inthis stage, since demand is consid-
ered variable, we will tackle theissue of the inventory dimension-ing.
Basically, inventories are set up totackle different problems:
• Production rules involvingbatch production…
• Longer supply lead timethan committed delivery lead time
• Supply uncertainty & De-mand uncertainty
In the case of inventories due toinconsistency between supply leadtime and committed delivery leadtime, these inventories are easy todefine, if measured in days of de-mand: the inventory must cover thedifference of due dates.
Regarding the inventories to copewith demand uncertainty, alsocalled safety stocks, things are a bitmore complex; traditionally, everystage in the supply chain builds upits own safety stock to guarantee agiven service level. It can be math-ematically demonstrated that thisapproach is not optimum and tendsto build up too much inventory inthe supply chain. Even better, onecan show mathematically that it ispossible to reduce the overall valueof safety stock in the chain whileincreasing the service level of thefinal consumer (final consumer de-pends on the definition of theperimeter of the supply chain). Thekey point is here not the total quan-tity of safety stock but the totalvalue of the safety stock. The moredownstream in the chain, thehigher the value of the products is,so the more costly it is to holdsafety stock but the closer to thecustomer to guarantee a given serv-
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36 Log4scm Quest Feb-April 2010
ice level. On the contrary, the moreupstream safety stock is accumu-lated, the lower the value of thesestocks. The mathematical challengeis to find the optimum locationsand quantities of different prod-ucts and components to hold in thesupply chain to guarantee the targetservice level for the final customer.In many cases, the overall value re-duction of safety stocks in thechain can exceed 30% of the initialsafety stocks while increasing theservice level from 80% to 96% forinstance. This performance isachieved through reducing thesafety stocks in the intermediatenodes f the Supply chain while in-creasing them in the final stage ofthe supply chain to increase theservice level for the end customer.
Let’s consider the following ex-ample:
An industrial company is runninga production chain made of thefollowing units with the followingsourcing times:
A 3 echelons supply chain ismade of a final assembler assem-bling components from different
suppliers. Each must decide howmuch safety stock to handle for agiven service level to the end cus-tomer on the far right. Quoted alsothe transport lead time between 2plants and the commited servicetime by each plant to its down-stream customer. Each supplierquotes also its processing time andthe product value as estimated byits controlling department. To min-imize the overall safety stock value,the question is:
• Who should bear safetystock?
• How much?
This question can be summarizedby: what should be the committedcustomer service time for eachplant? Indeed, let’s consider a com-pany whose processing time is 32days. If the processing time is 32days and the committed servicetime is 20 days, the company willhave to hold 12 days of inventoryand the corresponding safety stock.The usual approach in which eachactor estimates the necessary safetystock to hold at its stage would leadto an exaggerated quantity of
safety stock in the overall supplychain, whatever may be the finalcommitted service time quoted bythe last production stage:
In a pure pull system, the laststage would quote a customer serv-ice time of 77 days. No inventorywould be necessary. In a pure pushsystem, the last stage would hold77 days of inventory and the re-lated safety stock.
For every committed service timeto the final customer, we computedthe optimal safety stock allocationalong the supply chain and com-pared this result with the usualsafety stock setting when each pro-duction step sets its own safetystock targets. Differences can behuge as it can be see here belowwhere the red line shows the totalsafety stock when no optimizationis done and the green one the op-timized safety stock.. For instance,for a committed service time of 40days (the average service time inthe Indian Pharmaceutical busi-ness), the difference in safety stockwould be close to 30% of thesafety stock if computed locally byeach actor.
Use of simulation for tacticalplanning and investment ca-pacity fine tuning
If in the tactical supply chain
planning, uncertainty is mainly
driven by the demand uncertainty,
there may be other sources of un-
certainty: process times, availability
of equipments, complex interac-
tions with flows sharing limited re-
sources (people, equipments…)
making complex to precisely know
the overall system capacity. In these
Feb-April 2010 Log4scm Quest 37
conditions, simulation can be of
great help.
Simulators help managers to
measure the consequences of these
different sources of uncertainty in
the production chain.
Let’s consider here below the ex-
ample of a container terminal in
Turkey : container business is
booming in Turkey. A company is
building a new container terminal
close to Istanbul in order to follow-
up the container market demand.
This company is already running
another car export business, cars
from the Renault Plant located
close to the port and an import of
steel slab for a neighboring plant.
When considering the different
product flows, capacity computa-
tion is not simple:
• the different product flows
share some common resources
(roads, custom tolls, weigh
bridges…), interactions of traffic
are multiple because of the lay-out
of the installation…
• Arrival of truck is not con-
stant, nor during the day, nor dur-
ing the week:
• Weighing time and custom
control times are very variable:
• Boat arrival is very unstable
because of the crossing of the
Bosphorus where many boats are
queuing.
Simulation process
The overall operations have been
simulated:
• Arrival of the boat
• Loading/unloading of the
container
• Traffic of the trucks on the
container terminal
• The parking capacity
• The workload of every
crane
Each and every equipment work-
load was recomputed for every day
of operation:
Using simulation, is was now pos-
sible to check that:
1. The current lay-out pro-
posed was not optimal and could
not absorb peak traffic
2. No new investment was re-
quired: changing the lay-out to
make it more flexible was enough
to absorb the different traffic
peaks.
3. Investment saved versus
contemplated countermeasures: 4
M$
The example of the shipping and
port businesses is a good example
of this difficulty to assess precisely
system capacity: handling capacity,
port capacity,…
If cutting edge in the logistics in-
Cover Story
38 Log4scm Quest Feb-April 2010
dustry, simulation has been exten-
sively used in manufacturing. Man-
ufacturing plants are under the
pressure of ever diversifying prod-
ucts and shrinking production re-
sources. Different products should
share the same resources to mini-
mize the production costs. Lean
manufacturing initiatives are also
terminating the once comforting
production stocks. So today, man-
ufacturing engineers should be
more precise and accurate when
considering a new production line
or reconfiguring the materials flow
inside the plant.
Simulation can help the engineers
to go through otherwise expensive,
time wasting and production dis-
turbing experiments in a virtual
computer model of their plants.
They can observe the possible re-
sults of a Kaizen, or addition of a
new equipment or reassigning
workers and shifts. After detecting
the bottlenecks in the simulation
model, they can further improve
their idea by several iterations such
as doing necessary changes in the
model and re-running it to see the
new results. By doing so, engineers
can always implement a mature and
bullet-proof idea to the shop floor.
They have the chance to validate
their new ideas by using an exact
copy of their real world environ-
ment.
Production engineers are plan-
ning to change the layout of an as-
sembly line into a flexible assembly
cell which will operate according to
the lean production principles.
However rather than rushing to
shop floor to make the changes,
engineers can simulate the current
Feb-April 2010 Log4scm Quest 39
and future states and compare the
outputs to precisely calculate the
benefit.
The simulation model can quan-
tify the utilization of workers to see
if the assembly line is properly bal-
anced. Simulation can also measure
the walking distance and accumu-
lating work in process so that engi-
neers will be aware of the level of
non value added work.
Use of simulation in ware-houses :
Very similar to manufacturing
plants, simulation offers many ben-
efits to warehouses. With the aid of
simulation, logistics engineers can
calculate how a new picking or re-
plenishment strategy will affect the
service levels or the utilization of
reach trucks. Since logistics opera-
tions are exposed to much more
variation when compared to pro-
duction, it’s crucial to monitor the
behavior of the system during ex-
tremities. Simulation is the only
tool for precisely calculating the ef-
fect of variations.
For example, engineers can pin-
point the congestion zones.
Or present their ideas to decision
makers and shareholders in easy to
understand 3D format. 3D is espe-
cially important when designing
and simulating automation systems
such as conveyors, sorters or pal-
letizers.
Conclusion
Designing supply chains requiresnot only hindsight, but also fore-sight to understand where costs,time, and ultimately, the consumerare headed. It’s necessary to super-impose what the future is going tobring to you as a result of the sys-tem that you’re going to build. Inthis short article, we have showndifferent techniques and ap-proaches to optimize supply chaininvestments and operations. We de-
Cover Story
40 Log4scm Quest Feb-April 2010
liberately chose to look first at thestrategic level (network design,…)because that’s where the big moneyand big savings are. Managers, be-cause they are often stuck in day today operations, tend to look atthings the opposite, starting fromtheir daily experience to extrapolatestrategies. The difficulty lies in en-larging the picture and in thinkingbroader to understand the marketinteractions, in defining a businessstrategy and then from this analy-sis, in determining the optimal sup-ply chain and production/distribution system. The supplychain must be tailored to the busi-ness strategy, not the opposite. Theweight of history is often impor-tant and people try to adapt analy-sis to their current supply chain totheir analysis and not the opposite.
After analyzing the gap between
the current supply chain and the
target strategy, investments and
needs can be deduced. Once the
big picture is clear (number and lo-
cation of plants, DCs…), tactical
planning will optimize safety
stocks and fine tune capacities and
investment requirements using, for
instance simulation. The last stage
will be to optimize daily operations
with tools such as Warehouse Man-
agement Systems, ERP, bar codes
or RFID systems. But that is defi-
nitely the extreme stage of the
analysis. That’s not where a com-
pany will make the difference.
But these techniques, to be prop-erly put in practice, require prlimi-nary steps to be taken, especally :
• A good view on the busi-
ness through extensive data collec-
tion and proper data management:
costs, level of inventories, lead
times, point of sales data…
• A clear definition and shar-
ing of accountability between the
different partners in the chain, and
of course, a fair risk sharing strat-
egy: if every part of an Airbus
A320 are ready for assembly but a
screw is missing, the plane will not
take off.
• And more important, a
skilled and well trained staff which
understands the dynamics of the
business, not only broadly, but the
very detailed interactions from pro-
duction, to distribution, data gath-
ering.
Send your comments to:
The difficulty lies in enlarging the picture
and in thinking broader to understand the
market interactions, in defining a business
strategy and then from this analysis, in de-
termining the optimal supply chain and pro-
duction/ distribution system. The supply
chain must be tailored to the business strat-
egy, not the opposite. The weight of history
is often important and people try to adapt
analysis to their current supply chain to their
analysis and not the opposite.
Feb-April 2010 Log4scm Quest 41
Months go by for a
3PL to win a con-
tract with a com-
pany but it can take a few sparks
to break the same contract….
Never the less, SLAs, SOPs,
should not go into a Box file or
archived on a computer and for-
getting… Yes opened only when
there is a problem…. SLAs are
not reference guides? Are they
…… What does a 3PL fail
most of the time on Processes
or People? We tend to forget
that they are providing us
SERVICE….. So does process
drives people or vice versa be-
tween 3PL and a Customer,
PEOPLE and ONLY PEOPLE
DRIVE PROCESSES?
Technology is not THE an-
swer; it is part of the answer.
E.g. we have $ 2 Million ERP
Software or a Tailor-made WMS
(Warehouse Management Sys-
tem) but we tend to fail as it all
depends on Data Entry and RF
/ Interface issues. Bottom line is
if we enter in Junk / wrong in-
puts, imagine the reports / out-
put? Half the time discussions
are spending on why Physical
Inventory is not matching with
Trust the
expertise3PL is a two-way traffic where the firms haveto be a good listener and always evaluate whatbest their partner can do and what con-straints he has. 3PL provides Service not justin managing physical movement of goods butalso key “inventory” & “customer fulfillment”
Melvis Furtado
Originally from India,
has been working for
the last 15 years with
4 MNCs (Kraft Foods,
Unilever ME, Philips
ME & EMI Music /
Virgin Records in
Supply Chain and
Logistics Roles across
ME, Check his profile
on linkedin
http://www.linkedin.co
m/in/melvis
He can be contacted at
Invited
Invited
42 Log4scm Quest Feb-April 2010
System? If 3PL follows the SLA
and SOP, There could be more
light in the tunnel. e.g. Physical
check/counts Check and Audit at
Import Level / Docks before
putaway, Stagging area random
checks, perpetual inventory
check, Change of shift / Moves
checks. How will a Warehouse
Supervisor who is 2nd Shift
check if an operator has moved
the Pallet to a different location
as a result can’t trace it in a 10000
Pallet location warehouse?
Well, Some 3PLs have not fully
stepped up to meet the exact
needs of customers. Some have
become too focused on “manag-
ing” tasks, not processes and on
serving the parent companies
core business, and have missed
opportunities to present value.
After all, he knows to customize
the needs of each customer. It
enables firms to manage a critical
part of their supply chain by pro-
viding visibility and integration
across multiple enterprises. They
manage with the three key ele-
ments of process, people and
technology. Users of a 3PL can
focus on core competencies and
better manage and utilize com-
pany assets and resources, as to
inventory and personnel.
Let’s have a look below:
(1) A 3PL can not just be
successful with Infrastructure,
SOP, SLAs, KPIs, WMS, RFID,
following processes but having
the right people with a positive at-
titude as People drive the
processes & long term strategy to
maintain the business principles
& vision. Does a professional
3PL provider ever understands a
business needs of customer
based on his product line or just
Power point presentations and
Excel calculations are done to se-
cure the business ?
(2) A 3PL should not just
look at Storage, Throughput or
Handling in/out of a customer,
but seriously look at adding value
to the business by branching out
in Value Added Services and ad-
vising solutions to customers,
looking at bringing in technology
into the good movement mecha-
nism. All we look is how much is
the Teus coming in per month
and how much is going out on
trucks or can we make some
money on Pallets?
(3) Cost of Storage has risen
drastically. Also, costs of having
a warehouse today is more like a
real estate investment boom.
Storage in 3PL lunch discussions
is not where the money is as its
still in cents does not reach the
USD $. Oops cool room costs
are going up very smoothly……
(4) Handling in / Handling
out costs vary based on cus-
tomer’s volume and throughput
but is this costs to balance your
financial module of a 3PL
provider? Or is there any other
dimension to the business? Or is
it that a customer who keeps 40%
Outsourcing is a viable option / solution tomost companies. Why do companies out-source has various reasons. Some increaseshareholder value, reduce costs, business
transformation, improve operations, over-come lack of internal capabilities, keep upwith competitors, gain competitive advan-
tage, improve capabilities, increase sales, im-prove service, reduce inventory, increase
inventory velocity and turns, mitigate capitalinvestment, improve cash flow, turn fixed
costs into variable costs and other benefits,both tangible and intangible.
Feb-April 2010 Log4scm Quest 43
stocks is a bad customer as his han-
dling out is low….. ?
(5) Value Added Services: Co
packing and adding value to products
is what the future of Distribution.
Today just everyone is talking about
starting this and does it sound easy?
Or it’s just the calculation of man
hours, or getting a Dulsco daily
waged staff to sticker your product
in 8 hours and u give me additional
overtime? Or is it the ink in the
date coding machine? Or is it the
table and space used in the co pack-
ing area which benefits that one can
unstuffy a 20ft box to do the job?
Or is it good salesman spirit that
scope of work is identified with the
customer & Sales persons takes the
job just to make the kill or reduce
the margins so that business does
not go their competition.
(6) HR / Resources plan-
ning’s : Losing a staff after 6
months of training is the biggest
loss so why don’t we invest in right
people who is the most integral
part of the business. Due to infla-
tion there is a huge movement of
skilled personnel leaving one or-
ganization to another and other
reasons are motivation levels...
(7) Equipments: Reach Truck
=} VNA operations has been the
trend, Is technology & Investment
going hand in hand in terms of
going for the right equipment but
neglecting the fact that the flooring
was not right and not proper atten-
tion was given at the time of con-
structions.
(8) Electricity / Fixed costs :
Rising every 6 months in the last 2
years
(9) Transportation trends /
KPIs: Do we Manage Drivers and
Equipment well enough to just pick
and load / measure time taken to
Deliver or there is lot more?
(10) New trends in spotlight,
One has to consider
(11) Is 3PL really having its im-
pact? If yes why are companies leav-
ing one and joining another is it just
the attitude or service levels or
prices?
3PL is like Clay modeling….
Mould your partner the way you
want and you will happy with the re-
sult. One should know what he
wants and what he can get. Some-
times are Wants are hitting the roofs
and to fulfill this our partners bend
backs and fall eventually…. A Clear
Process should be drafted and always
remember for me Practical Commu-
nication and Positive “Think out of
the box” attitude matters…
Hope we all collectively look at the
risks
Send your comments to:
3PL is like Claymodeling….
Mould your part-ner the way you
want and you willhappy with the
result. Oneshould know
what he wantsand what can heget. Sometimes
are Wants are hit-ting the roofs and
to fulfill this ourpartners bendbacks and fall
eventually….
Invited
44 Log4scm Quest Feb-April 2010
The ultimate success of
supply chain Opti-
mization and simula-
tion, however, is determined by
a combination of the analyst's
skills, the chain members' in-
volvement, and the modeling ca-
pabilities of the simulation tool.
This combination should pro-
vide the basis for a realistic
model, which is both transpar-
ent and complete. The need for
transparency is especially strong
for supply chains as they involve
(semi)autonomous parties each
having their own objectives. Mu-
tual trust and model effective-
ness are strongly influenced by
the degree of completeness of
each party's insight into the key
decision variables. Ideally, visual
interactive simulation models
present an important commu-
nicative means for realizing the
required overview and insight.
Unfortunately, most models
strongly focus on physical trans-
actions, leaving key decision
variables implicit for some or all
of the parties involved. This es-
pecially applies to control struc-
tures, that is, the managers or
systems responsible for control,
their activities and their mutual
attuning of these activities. Con-
trol elements are, for example,
Supply Chain
Opti-Simulation
UnwiredSimulation is often regarded as theproper means for supporting decisionmaking on supply chain design. Owingto its inherent modeling f lexibility,simulation is often regarded as theproper means for supporting decisionmaking on supply chain design.
Mr. Tolga Yanasik,VP- Turkey and Middle East ,
ENETEK S.A.R.L. CEO of
Dijitalis Ltd.
Mr. Tolga prior to joining
ENETEK Business Consulting
worked in managerial roles at
Bogazici Yazilim a Software
firm for several years. Later on
went on to form his own com-
pany Dijitalis Ltd. A Digital
Manaufacturing Technology
Co. providing custom solutions
in Simulation and Industrial
Engineering solutions, and also
engages in software sales. He is
an Industrial expert in Produc-
tion Simulation & Optimiza-
tion Models for the
Automotive industry, training
now Fiat, Renault and Volk-
swagen experts from Turkey
and South Africa.
.
He can be contacted at:
Feb-April 2010 Log4scm Quest 45
dispersed over the model, are not
visualized, or form part of the
time-indexed scheduling of
events. Owing to its inherent
modeling flexibility, simulation is
often regarded as the proper
means for supporting decision
making on supply chain design.
Owing to its inherent modeling
flexibility, simulation is often re-
garded as the proper means for
supporting decision making on
supply chain design.
Perhaps no word other than
“Optimal” gets tossed more
around in supply chain
In a general layman’s sense, it
tends to mean “make it a lot bet-
ter,” or “as good as we can
achieve under the present circum-
stances.” As in, “We’re going to
optimize our safety stock levels,”
or “We optimized the layout in
our distribution center.”
But there is also a mathematical
notion of “optimization,” and
whether the above examples re-
ally qualify under that concept de-
pends on the tool sets used. This
mathematical notion of optimiza-
tion is at the heart of many – but
not all – of the supply chain soft-
ware applications that profess to
“optimize” some process or deci-
sion, from supply chain network
design to pick face slotting and a
lot of situations in between.
On top of all that, there is re-
newed interest in supply chain
“simulation” at multiple levels;
and new concepts for the supply
chain that straddle optimization
and simulation approaches, such
as “stochastic optimization" that
add to the confusion for most of
us.
There are hundreds of places
where supply chain software goes
beyond automation of processes
to helping users make better de-
cisions. The most basic approach
to this is the use of “heuristics,”
in which business rules or algo-
rithms are executed by the system
to make or recommend a deci-
sion. Relatedly, heuristics are
often used as a pre-process, even
in a true optimization-based pro-
gram, to break the problem down
a bit to make it easier for the op-
timizer to find a solution. Opti-
mization-base programs, such as
those usually found in supply
chain network planning, trans-
portation planning, inventory op-
timization, factory scheduling,
etc. use well-known mathematical
techniques such as linear pro-
gramming and its cousin con-
straint-based optimization to
scientifically determine the “best”
result.
Why Simulation?
Due to the Bullwhip effect, a
poor plan can easily propagate to
the whole supply chain areas. The
impact of a poor plan on the
overall business is huge. It causes
cycles of excessive inventory and
severe backlogs, poor product
forecasts, unbalanced capacities,
poor customer service, uncertain
production plans, and high back-
log costs, or sometimes even lost
There are hundreds of places where supply
chain software goes beyond automation of
processes to helping users make better de-
cisions. The most basic approach to this is
the use of “heuristics,” in which business
rules or algorithms are executed by the sys-
tem to make or recommend a decision.
Invited
46 Log4scm Quest Feb-April 2010
sales. Although the ERP and
SCM solutions provide lots of
benefits to industries, it is too
costly to use those solutions for
academic research. Discrete event
simulation permits the evaluation
of operating performance prior
to the implementation of a sys-
tem: It enables companies to per-
form powerful what-if analyses
leading them to better planning
decisions; it permits the compar-
ison of various operational
alternatives without interrupt-
ing the real system; it permits
time compression so that timely
policy decisions can be made.
Most of simulation tools are de-
signed as interactive tools to be
used by a human planner not as
real time decision-making tools,
which are directly linked to con-
trol system to dispatch tasks. Sim-
ulation tools aid human planner
to make a right decision by pro-
viding information. However,
human planner should be able to
interpret and modify the plan in
order to achieve better supply
chain performances.
Benefits of supply chain simu-
lation are as follows:
1.) It helps to understand the
overall supply chain processes
and characteristics by
graphics/animation.
2.)Able to capture system dy-
namics: using probability distri-
bution, user can model
unexpected events in certain
areas and understand the impact
of these events on the supply
chain.
2.) It could dramatically mini-
mize the risk of changes in plan-
ning process: By what-if
simulation, user can test various
alternatives before changing plan.
What are the Data require-
ments for Supply Chain Mod-
eling?
In supply chain, decisions taken
are usually classified as strategic,
tactical, or operational. Strategic
decisions are related to the com-
pany’s strategy and are long term
(2-5 years) with involvement of
the most partners in the supply
chain. Tactical decisions are mid
term (a month to 1 year). Opera-
tional decisions are short term,
which are related to the day-to-
day activities. Tactical and opera-
tional decisions are taken in
individual area of the supply
chain (e.g. plant and warehouse).
They deal with issues in demand,
procurement, production, ware-
house and distribution. We devel-
oped a framework on metrics for
the performance evaluation of a
supply chain. They also distin-
guished the metrics as financial
and nonfinancial so that suitable
costing method can be applied.
Selection of performance meas-
ures is depends on the organiza-
tional goal.
Most of simulation tools are designed asinteractive tools to be used by a humanplanner not as real time decision-makingtools, which are directly linked to controlsystem to dispatch tasks. Simulation toolsaid human planner to make a right deci-sion by providing information. However,human planner should be able to interpretand modify the plan in order to achievebetter supply chain performances.
Feb-April 2010 Log4scm Quest 47
Procedures for the Simulation
study of Supply Chain:
__ Understanding supply chain
processes understanding the busi-
ness process and industry charac-
teristics and planning processes
1.) Design scenario most of the
time it is not reasonable to model
every details of the supply chain.
It is a good idea to focus on the
problem areas.
2.)Data collection
3.)Performance measures
4.) Define target (what is near
optimal) for each performance
measure
5.) Define termination condi-
tion
6.) Evaluation of supply chain
policies/strategies show a simple
supply chain model and example
data requirements for the supply
chain modeling, respectively.
Some of the questions the users
might have……
1.)Which supplier policy is
achieving best delivery perform-
ance under given demand pat-
tern?
2.) Which supplier policy is
most robust under demand fluc-
tuation?
3.) Which is the most cost
saving inventory policy under
given demand pattern ?
4.)How would profit can be im-
pacted by adding xx % more ca-
pacity?
5.) What is the trade-off be-
tween delivery performance and
inventory cost when building
more inventory?
6.) What is the impact of infor-
mation accuracy on the manufac-
turing performance (e.g. cycle
time, order fill rate)
Many researchers are investigat-
ing the possibility of creating a
simulation-based real time sched-
uling system that will be able to
monitor the system status and
make decisions in real-time. To
have the capability, it is desirable
to have
(1) capability to interface with
legacy databases to obtain infor-
mation
(2) hardware and software pro-
cessing capability to run simula-
tion within very short time- at
least, pseudo in real time
(3) capability to interface with
the control system to assign tasks
and receive feedback on system
status and performance.
What are the Long term ben-
efits of Supply Chain Opti-
mization and Simulation?
Throughput improvements:
Better coordination of material
and capacity prevents loss of uti-
lization waiting for parts.
1.)Cycle time reduction: By con-
sidering constraints as well as its
alternatives in the supply chain, it
helps to reduce cycle time
2.) Inventory cost reductions:
Demand and supply visibility
lowers the requirement of inven-
tory levels against uncertainty.
Ability to know when to buy ma-
Many researchers are investigating the
possibility of creating a simulation-based
real time scheduling system that will be
able to monitor the system status and
make decisions in real-time.
Invited
48 Log4scm Quest Feb-April 2010
terials based on the customer de-
mand, logistics, capacity and
other materials needed to build
together.
3.) Optimized transportation:
By optimizing logistics and vehi-
cles loads.
4.) Increase order fill rate: Real-
time visibility across the supply
chain (alternate routings, alternate
capacity)enables to increase order
fill rate.
5.) Analysis of the supply chain
management can help to predict
propagation of disturbance to
downstream.
6.)Increase customer respon-
siveness: Understanding the capa-
bility to delivery based on
availability of materials, capacity
and logistics.
Optimization versus Simula-
tion
Supply Chain optimization
technologies are in use in thou-
sands of companies, and we’ve
actually noted a bit of an upsurge
in interest over the past year or so
(more on that soon). But there
are some things optimization isn’t
so good at.
Optimization is generally based
on some fixed estimate of de-
mand over a given time frame.
You can alter that demand esti-
mate and run a different scenario
to compare the impact on the
recommended solution, but opti-
mization in general is not good at
handling highly variable demand
or system inputs.
Optimization is also considered
to be a “black box” approach,
taking inputs, crunching the
numbers, and presenting a solu-
tion. It’s often hard for the user
to really understand the interplay
of various factors, and how the
supply chain “system” whether
that’s a network or a factory
works as a whole.
That is where “simulation” can
come into play. In simulation, a
model of the system is built
again, whether it’s a conveyor sys-
tem in a DC or a supply chain
network. Rules are created often
still through programming, but
increasingly with at least some
level of system configuration that
describe how the system should
work.
The key is that demand or other
key inputs aren’t static, but are
more dynamic. Demand can be
estimated or based on actual his-
tory at a daily level. For individual
plants or DCs, it could be on an
almost minute- by-minute basis.
Running the simulation then al-
lows the analyst to see the behav-
ior of the supply chain system
over time, as these inputs change.
It may allow bottlenecks to be
identified that would be missed in
an optimization program that
gives the best total answer but
misses supply chain or opera-
tional glitches along the way. But
to find the “optimal” answer, the
Optimization is also considered to be a
“black box” approach, taking inputs,
crunching the numbers, and presenting a
solution. It’s often hard for the user to re-
ally understand the interplay of various
factors, and how the supply chain “system”
whether that’s a network or a factory works
as a whole.
Feb-April 2010 Log4scm Quest 49
analyst has to observe what has
occurred, make some hypotheses
about the dynamics of the “sys-
tem,” change a factor (for exam-
ple, add some more inventory, or
another packing station), and see
what happens.
The benefits: better ability to
understand the impact of dy-
namic events, better total system
understanding, and (increasingly
important today) risk mitigation.
But these benefits come at some
cost
The objective of supply chain
is to meet customer demand for
guaranteed delivery of high qual-
ity and low cost with minimal
leadtime. To achieve this objec-
tive, companies need to have bet-
ter visibility into the entire supply
chain of their own plans as well
as those of their suppliers and
customers. Companies today
should be agile enough to adjust
and rebuild plans in real time, to
take care of unexpected events in
the supply chain. These needs
have propelled the application of
discrete event simulation for an-
alyzing entire supply chain
process. In this article, we re-
viewed the benefits, functionali-
ties and data requirement of the
supply chain, which needed to
prepare for the modeling of sup-
ply chain through optimization
and simulation. Efficient supply
chain management can be
achieved through careful consid-
eration of capacity and material
information. Companies today
want to reduce inefficiencies in
their business processes and to
redesign their business processes
in order to achieve world-class
business performances. Some of
inefficiencies can be found from
the company, some of them are
caused by their suppliers and
some of them are caused cause
by both. Simulation can help
companies become more aware
of their supply chain dynamics
and efficiency. When developing
simulation models of a supply
chain, first of all a good under-
standing of the overall supply
chain is most important. Good
understanding of the business
characteristics (e.g. performance
measures, make-to-stock or
make-to-order) is also essential
since every industry has different
business characteristics and sup-
ply chain management processes.
It is better to focus on the prob-
lem area based on the specific
scenario. Setting proper perform-
ance measures is another impor-
tant task.
Send your comments to:
In this article, we reviewed the benefits,
functionalities and data requirement of the
supply chain, which needed to prepare for
the modeling of supply chain through op-
timization and simulation. Efficient supply
chain management can be achieved
through careful consideration of capacity
and material information. Companies
today want to reduce inefficiencies in their
business processes and to redesign their
business processes in order to achieve
world-class business performances.
Invited
How to cut cost?
There are basically 3 ways to cut
costs: transfer the problem to
your supplier and get better
prices, be more efficient in your
Supply Chain –stock reduction,
new distribution networks, bet-
ter use of assets, minimize losses
(time, material) and a 3rd one not
explored often, review your product
offer through a Redesign To Cost ap-
proach (RTC). These 3 different ap-
proaches bring in general savings
ranging respectively in 3-5%, 2-10%
and 15-35% of the total cost.
Let’s see what more Mr. Thibault
says in an exclussive interview with
Log4scm.
What is RTC?
Redesign To Cost is a very ef-
ficient Cost Cutting Approach
consisting of reviewing the very
detailed design and specifica-
tions of the products to relax
the too constraining ones and in
“Approach
RTC while
cutting cost”
Redesign To Cost (RTC), a very efficient CostCutting Approach consisting of reveiwing thevery detailed design and specifications of theproduct, can save 15-35 % of your total cost.Mr. Thibault Quiviger shares his ideas howto go for it with Log4scm.
50 Log4scm Quest Feb-April 2010
Mr.Thibault, an Ex-Army
Officer from the French
Army and Prior to setting his
company in 2004, worked
primarily in Arcelor (now
Arcelor-Mittal) and he
worked in various capacities
from Quality Division and
then went on to Supply Chain
and Network Design, and
later on for different indus-
tries, from heavy industry
companies –Steel & Mining,
Oil & Gas to Retail busi-
nesses, specializing in re engi-
neering their Distribution
Networks, Investment Plan-
ning and Production Alloca-
tion and also developing
Quality Model Builder based
on Machine Learning Algo-
rithms and then Supply Chain
Modeller for the European
industry.
He founded his own firm and
expanded his company ex-
pertise to Operations Simula-
tion and Operation
Excellence with 2 new Re-
gional offices in India and
Turkey. In early 2009, he has
been appointed Associate
Professor at the Technical
University of Compiègne,
France for Industrial Network
Design for the Mechanical
Engineering Department.
You can reach to him at
Feb-April 2010 Log4scm Quest 51
optimizing the product range
offer.
How can RTC be compared to
other Cost Reduction Ap-
proaches?
Indeed, our experience in Eu-
rope has shown that 85% of the
product cost is frozen during the
design phase. The so efficient and
popular lean approahces,6 sigmas
and network design projects act-
ing only on less than 15% of the
product cost. Indeed, during the
design phase, the focus is much
more centered on fulfilling spe-
cific marketing requirement than
optimizing the total cost (sourc-
ing + manufacturing + distribu-
tion). Marketing requirements are
often too stringent, asking for
functionalities not valued by the
customers. And because design
Engineers like complexity, they
will tend to propose complex de-
signs or complex manufacturing
processes, regardless of their
cost. Most engineers prefer de-
signing their own system than re
using an existing system proved
reliable or produced in such
quantities that its unit cost will be
always much smaller than any
new system designed from
scratch.
Which are the potential costs
to be cut?
Sources of cost easy to cut are
plethoric: choice of materials
(plastic vs steel, steel grade, thick-
ness), the shape of the product
(so easy to draw complex but
costly to produce shapes with
CAD software today), tolerances
(too narrow tolerances = very
high production costs) or func-
tionalities not valued by the cus-
tomers or by the targeted
customer segment (is a camera
necessary on any cell phone?).
Reviewing specifications and sec-
ondary functions on products
lead to an average savings of 30%
on the unit prices while guaran-
teeing the same level of customer
satisfaction.
But beyond the product specifi-
cations,
What could be the effects of
Product Range on RTC ?
It is necessary to consider the
product range to optimize the
trade-off between product diver-
sity aimed at satisfying the identi-
fied distinct customer clusters
and the induced
production/sourcing complexity
in the Supply Chain.
For instance, a car maker real-
ized that its AC system power was
30% higher compared to its
peers. Aligning specs led to a 25%
cost reduction on the AC system.
A payment terminal producer re-
duced the resolution of its printer
head from 8 dots/mm to 4
Outsourcing is a viable option / solution tomost companies. Why do companies out-source has various reasons. Some increaseshareholder value, reduce costs, business
transformation, improve operations, over-come lack of internal capabilities, keep upwith competitors, gain competitive advan-
tage, improve capabilities, increase sales, im-prove service, reduce inventory, increase
inventory velocity and turns, mitigate capitalinvestment, improve cash flow, turn fixed
costs into variable costs and other benefits,both tangible and intangible.
Invited
52 Log4scm Quest Feb-April 2010
dots/mm, reducing cost of the
equipment by 21%. A small car
maker replaced its in house devel-
oped breaking system and re used
the system of a competitor: cost re-
duction of 48%. For sure, all these
action require intensive analysis of
the specifications, of the suppliers
offer and potential sourcing diver-
sification while meeting customer
needs (and not design engineer
pride)
Do Marketing Heads need to
Optimize Product Diversity?
Marketing teams tend to define
distinct specifications for the differ-
ent customer clusters and customer
needs they have identified. Tempta-
tion is high then to customize each
and every product for every cus-
tomer. But mass customization is
extremely complex and often ex-
tremely costly. Basically, customers
prefer a full option car than a car
with the limited options they could
afford! This reality can lead engi-
neers to the opposite direction, over
simplifying the product offer
aligned on the most demanding
customer needs, generalizing every
option for every customer. Leading
to expensive production costs. If
the first problem of over cus-
tomization is often found in many
industries in their infancy stage, the
“platform” strategy pushed too far
is every day more common in the
industries which understood the
risks of over customization. The
right balance is in between: defining
the right number of “generic” plat-
form enabling economies of scale
and differentiating enough the
product features to fit the market
needs at the cheapest cost for every
customer segment identified.
Could you elaborate it with an
example?
For example, proposing an inte-
grated camera for the low range cell
phones in India has been rejected
by Nokia because most people
would not pay for it, too expensive
while it has been generalized in Eu-
rope to achieve economies of scale
pushing costs down cost enough to
propose it for every European cus-
tomer.
A harness makers split its single
harness offer between high and
middle range customer to build
them with cheaper components for
the middle range: savings achieved
= 21%...
These examples show that the
product range optimization requires
a systematic and quantified pros
and cons approach to achieve the
best trade-off between cheapest
cost and Supply Chain complexity
management costs.
Send your comments to:
The first problemof over cus-
tomization isoften found in
many industriesin their infancystage, the “plat-
form” strategypushed too far is
every day morecommon in the
industries whichunderstood the
risks of over cus-tomization. Theright balance is
in between:defining the right
number of“generic” plat-form enablingeconomies of
scale and differ-entiating enoughthe product fea-
tures to fit themarket needs at
the cheapest costfor every cus-
tomer segmentidentified.
Invited
54 Log4scm Quest Feb-April 2010
The new industrial paradigm
with a new demand clustering
between high end market seg-
ments proposing top quality, technol-
ogy advanced products and the low
end market segment featured by ro-
bust, reliable, economical and cheaper
product is complicating the task of the
mid segment players who need to
adapt their production system to be
able to lower their costs. The recog-
nized overvaluation of the Euro over
the competing currencies, specially the
Dollar and Yen has been forcing the
European automotive companies to
look for alternate production countries
to be closer to the emerging markets
but also close to Europe for re import-
ing part of the production.
This new paradigm is shifting the
center of the industrial organization
from the plant to the management of
supplies and dispatch. Whereas histor-
ically, automotive companies have im-
posed their suppliers to be located
next door, the pressure imposed on re-
ducing their cost led many of them to
shift production to LCCs(Low Cost
Countries), complicating the supply
coordination. Unfortunately, few Eu-
ropean components makers had the
resources to invest massively in intel-
lectual capital centered on Supply
Chain management and the new prob-
lems it was posing: distant sourcing,
coordination issues, induced stocks,
lead time lengthening and higher lead
time volatility, forecasts instability for
Back to Old Nightmares
Mastering Time
Yan Lehunchec is Vice
President in charge of
Cost Reduction and
"Product competitive-
ness" at ENETEK, and is
based in Belgium. He
holds a Master in Indus-
trial management from
the French Military Engi-
neering school ENSI-
ETA. Yan has extensive
experience in the cost
cutting Sector. Formerly
Partner at H&Z, the lead-
ing German consulting
firm specialized in cost
reduction, he joined
Enetek to develop the
branch "product competi-
tiveness", focusing on
Product re design to
Cost, Value Analysis and
Purchasing Optimization.
He can be contacted at
This new paradigm is shifting the center of the
industrial organization from the plant to the
management of supplies and dispatch.
Feb-April 2010 Log4scm Quest 55
longer time ranges, transport
costs inflation…
The new industrial footprint of
the car makers is going to lead
them to tackle these issues and
adopt a more systemic point of
view. This is the right time to
build this knowledge and take the
full advantage of lower produc-
tion costs countries.
This evolution is a revolution:
The change of paradigm in the
product segmentation between
high end and low end products is
forcing many industries to local-
ize their production base in low
cost countries. Nonetheless, if in
the mid term local markets will
develop in these countries, the re-
quired investment at the start-up
is by far exceeding the local mar-
ket absorption capacity and most
part of the production is sailing
out back to more advanced coun-
tries, specially the EU.
This distance between the in-
dustrial base and its market makes
the logistics critical and enhance
its importance so far relegated as
a simple commodity, a so called
“service provider” with infinite
capacity.
In a context where logistics in-
frastructures are more and more
difficult to develop, especially in
the developed countries where
building permits can demand
years of intense lobbying before
acceptance because of the envi-
ronmentalist pressure, companies
which will have not integrated
these constraints in their indus-
trial strategy will faced with unex-
pected supply costs, stock
build-up and difficulties to dis-
patch their production, specifi-
cally when resorting to maritime
shipments.
The comeback of an old trou-
ble maker: Time
As already mentioned, so far
suppliers, car makers and destina-
tion markets where living symbi-
otically in very close areas. Time
had been cut to its shortest ex-
pression: 0 delay. The new indus-
trial footprint is inoculating again
the time related problems which
had been overcome during the
past 25 years: induced stocks,
higher safety stocks, flexible pro-
gramming to adapt not only to
demand variability but also to
variable operational constraints…
Solutions are not easy: it will re-
quire precise quantification of the
different well known levers in-
cluding product range simplifica-
tion, better demand management,
production site flexibility, sequen-
tial site specialization, new ship-
ping and dispatch strategies.
Other strategies may be chal-
lenged: is mass customization de-
mand feasible when logistics lead
times are inflated from days to
weeks because of logistics con-
straints. How to overcome these
problems by implementing a late
differentiation stage?
If well known on the small scale
of the plant, these strategies are
more complicated to implement
at the Supply Chain level. Indeed,
after massively delegating the
shipping and dispatch functions,
most industrial organizations
have lost insight in the logistics
market. As already mentioned,
because these markets have long
been seen as commodity markets,
these logistic providers are often
lacking the knowledge and analyt-
ical underpinning which would
The new industrial footprint is inoculating
again the time related problems which had
been overcome during the past 25 years:
induced stocks, higher safety stocks, flexi-
ble programming to adapt not only to de-
mand variability but also to variable
operational constraints.
Invited
56 Log4scm Quest Feb-April 2010
enable them to understand these
issues, let alone proposing right
away innovative solutions to their
customers problems they do not
necessary deeply understand (be-
cause most often, the solution will
be again a mix of logistics solu-
tion, adapted production rules…
This new situation demands a
holistic approach and a systemic
view on the whole Supply Chain.
Few companies have these skills in
house after 20 years of intensive
resorting to external suppliers and
consultants. With Zero stock poli-
cies, closeness of component sup-
pliers and abundant cheap
logistics suppliers, car makers had
virtually eliminated 2 branches or
2 variables of the complex system
ruling Supply Chain efficiencies.
The eruption of time lags and
long lead time is re introducing
these 2 forgotten pillars of the
system and re introducing exoge-
nous complexity and variability.
Industrial companies and car
makers in particular need to re-
build these Supply Chain analyti-
cal skills which are not lost but
may be scattered within the com-
pany. They should dedicate efforts
in building a task force in charge
of analyzing these issues, able to
quantify precisely the trade-off
strategies and chose the optimal
set of actions fulfilling the com-
pany’s objective under well recog-
nized and accepted pattern of
risks.
The market and industrial land-
scape has been changing dramati-
cally during the past 15 years:
companies are searching for
cheaper production places to
compete in a global market. This
change of paradigm for compa-
nies, especially for the automotive
sector should trigger a new way of
thinking and a deeper understand-
ing of the way companies in dif-
ferent sector must manage their
Supply Chain. This will require
smart dedicated teams focusing
on Supply Chain issues across the
different functions (Supply, pro-
duction, logistics, demand…).
These people will acquire a broad
understanding of Supply Chain
dynamics and will be able to adapt
faster to the next Industrial para-
digm. Companies should consider
these skills as part of their core
skills now. Or at least, build suffi-
cient in-house understanding of
these issues to be able to pilot
studies carried out by external
partners.
Indeed, the people able to un-
derstand the systemic complexity
of the new international value
chain will be in position tomorrow
to adapt to an ever ending chang-
ing world..
Send your comments to:
The market and
industrial landscape
has been changing
dramatically during
the past 15 years:
companies are
searching for
cheaper production
places to compete
in a global market.
This change of
paradigm for com-
panies, especially
for the automotive
sector should
trigger a new way
of thinking and
a deeper
understanding of
the way companies
in different sector
must manage their
Supply Chain.
Invited
58 Log4scm Quest Feb-April 2010
Analytics An Investment strat-egy paying in the long run…..
Some companies, whose Sup-
ply Chain excellence has been
recognized, have been investing
in Supply Chain analytical team
for years. The Consumer Goods
Companies, specially Unilever
and Procter & Gamble, have set
up already 10 years ago such
cross functional team dedicated
at modeling, quantifying and im-
plementing optimal Supply
Chain strategies. Unilever, for in-
stance, has a dedicated team of
10 people in the UK, in charge
of leading this kind of study and
giving services to any organiza-
tion within the group. This team
has built a strong analytical skill
in the fields of Supply Chain op-
timization, Supply Chain simula-
tion, stock management,
capacity optimization, demand
management…
These technical profiles are not
only very needed in the short
run, but they are also necessary
in a longer term. Indeed, the
people who will have integrated
these skills are obvious candi-
dates for higher management
positions. They will have under-
stood how factors interplay, how
to sort complexity issues and
spot immediately and intuitively
the problem for a given situa-
tion. No position today in many
companies can offer such a sys-
temic understanding of the mar-
ket dynamics, of the production
constraints. The people who will
have been working on large scale
Supply Chain modeling projects
can relate lead time issues, cost
issues, production capacities and
demand… These are rare pro-
files. Many experimented peo-
ple, in their 50s have acquired
this understanding, intuitively.
They may have more difficulties
in quantifying precisely these re-
lationships or the potential
trade-offs available. In any case,
the wave of retirements to come
Corollary of
Supply Chain
AnalyticsUnnikrishnan
Director-Operations (Asia
Pacific & Middle East),
Enetek S.A.R.L.Unnikrishnan primarily worked
with a Canadian International Trade
firm and later on with Johnson and
Johnson Medical, Analytics Divi-
sion for the Asia Pacific Region. He
assumed senior responsibility with
ENETEK, for the Asia Pacific &
Middle East Region.
Unnikrishnan, is an expert energiz-
ing professional, who has lead sev-
eral MNC Organizations in Medical
Device, Pharma, Port Operators to
Steel Co. And Automotive sectors
to higher levels of performance &
Customer Satisfaction in the Logis-
tics & SCM Sector, by using his ex-
tensive Global Exposure &
Qualifications in Supply Chain, In-
ternational Business, and other Cor-
porate functions for developing &
implementing the right IT- driven
Supply Chain Breakthrough Strate-
gies.
He can be contacted on:
[email protected]:+919960626888
Feb-April 2010 Log4scm Quest 59
in the industry will dramatically
deplete this layer of people able
to make the right decisions.
This situation is valid for any in-
dustry. Even for the old “indus-
tries”. The recent flare up of
commodity prices has changed
the old balance between produc-
tion/transport costs leading
many commodity players to re
consider their production and
distribution footprints. If true for
the commodity markets, it is even
more valid for the other players
when climbing up the value
chain.
The steel plant of ArcelorMittal
Ghent, Belgium, for instance is
an excellent example of how
even in a mature industry, com-
panies can make a huge differ-
ence by training intensively their
smarter profiles on Supply Chain
issues. ArcelorMittal Ghent, for-
merly Sidmar, has set up an ana-
lytical team 15 years ago. This
team was in charge of leading im-
provement projects using inten-
sive optimization and simulation
tools in and outside the company.
Beyond the technological and
successful projects these people
have implemented, the interesting
point lies in the fact that this “op-
timization school” was used as a
fast track for many recognized
high potentials of the company
who were spreading then in man-
agement positions after 3 to 5
years in this constantly renewed
team. The consequence today, 15
years after implementing this
management process at a single
plant in Belgium: ArcelorMittal,
the steel giant, is run by these
smart Flemish guys in Europe. A
single plant is providing the vast
majority of the top managers of
ArcelorMittal in Europe. They
are recognized as better man-
agers, as having a deeper under-
standing of Supply Chain issues,
even by the French people
trained in the so called “Grandes
Ecoles”.
Are companies OutsourcingSupply Chain Analytics?
As the expertise of outsourcing
providers has improved—and
confidence in their expertise has
grown—companies have begun
to outsource increasingly sophis-
ticated functions, such as spe-
cialty design and manufacturing.
Now, a handful of forward-
looking companies are off-
shoring the analysis of supply
chain data to help make better
operating decisions. By tapping
into the analytical skills of lower-
cost countries with a well-edu-
cated workforce—such as
India—companies are getting
valuable insights from data that
had once been too voluminous or
too complex to deal with quickly
and in a cost-effective manner in-
house.
Unlike traditional outsourcing
and offshoring, which always
carry a degree of operational and
financial risk—and in some cases,
disappointing results—outsourc-
ing supply chain analytics is virtu-
ally risk-free. It's relatively easy to
implement, requiring no ex-
change of people, processes or
systems. It's also flexible. Instead
of being locked into multi-year
contracts, most companies simply
subscribe to a data-analytics serv-
ice on an as-needed basis. Out-
sourcing providers in India are
able to spread one highly skilled,
low-cost expert across three or
four accounts, for far greater
leverage than an individual com-
pany could achieve on its own.
Which are the critical areas inSupply Chain that would re-quire Analytical approach?
Managed supply chain services
can rapidly improve business re-
sults, especially in the closely
aligned areas of demand manage-
ment and inventory optimization.
By collecting and analyzing point-
of-sale data, along with data on
inventory levels throughout the
supply chain, product seasonality,
the effect of promotions in dif-
Unlike traditional outsourcing and off-
shoring, which always carry a degree of oper-
ational and financial risk—and in some
cases, disappointing results—outsourcing
supply chain analytics is virtually risk-free.
It's relatively easy to implement, requiring no
exchange of people, processes or systems. It's
also flexible.
Invited
60 Log4scm Quest Feb-April 2010
ferent regions and competitive
data, companies can manage de-
mand far more effectively by
quickly reacting to market
changes and competitive actions
to increase revenue. The insights
gained can help companies target
promotional spending to "shape"
demand and make better deci-
sions about when and how to re-
plenish inventory.
A flexible demand forecastingmodel that regularly tunes itselfto changing market conditionsgives companies better guidanceon how much inventory to keepand which channels and regionsto distribute it to, based on buy-ing patterns in the marketplace.These insights, in turn, help com-panies maintain the right—that is,minimum—level of inventorythroughout the supply chain, formajor cost savings. Also, focusingon the right inventory strategycan have a huge impact on serv-ice levels or availability, affectingrevenue and market share.
These insights can be especiallyvaluable for companies with alarge number of SKUs. For in-stance, one large manufacturer inthe high-tech industry offered10,000 different types of compo-nents. Keeping the right numberavailable to meet changing cus-tomer needs was an ongoingnightmare. But by outsourcinganalysis of its sales data, the com-pany discovered that 10 percentof its products—dubbed the Aproducts—resulted in 90 percentof its shipments. Another groupof products—C products—wasrarely ordered at all. Also, the or-dering patterns varied widely bycustomers. Certain customersgave four to six weeks of leadtime for delivery, while others
wanted shipment within threedays of placing an order. Basedon these insights, the companydecided to focus on keeping thehigh-demand components instock at all times.
The manufacturer also decidedto follow an inventory deploy-ment strategy that aligned withcustomer order lead times—forshorter lead times, following amake-to-stock model, and forlonger lead-time demand, adopt-ing a build-to-order model withperiodic inventory target recom-mendations. Customer-servicelevels on these high-demandproducts soared. By contrast, Ccomponents were only finishedand shipped when a specific cus-tomer order came in. This seg-mentation strategy led toenormous cost savings andgreatly simplified inventory man-agement—benefits that the com-pany wouldn't have realizedwithout outsourcing.
Better data analysis can also pin-point problems that might havegone unresolved before. Oneconsumer electronics companyhad just started selling a new
Electronic gadget in a discountstore chain. The companyshipped five weeks of inventoryto the store's distribution net-work, then sat back and waitedfor the revenue to roll in. Butsales were far lower than ex-pected. Working with data onsales per store, per region, theAnalytical Team discovered thatin the two regions that usuallyhad the highest sales, the Elec-tronic Gadget had only reachedthe discount store's distributioncenters, not the stores them-selves. In fact, the retailer had anundiscovered execution issue.When the service providershowed the retailer the analyticsthat revealed the log jam, thestore quickly corrected the prob-lem. Sales doubled in those re-gions over the next three weeks.This level of analysis—and thespeed with which it was done—would have been impossible withthe company's existing staff andexpertise. Managed supply chainservices can rapidly improvebusiness results, especially in de-mand management and inventoryoptimization. Analytics for Sales& Operations Planning and Sup-
Managed supply chain services can rapidlyimprove business results, especially in de-mand management and inventory optimiza-tion. Analytics for Sales & OperationsPlanning and Supply Chain Network Designhave emerged as important tools for achiev-ing better decision making. They help man-agers extract intelligence from the large andgrowing databases created by Enterprise Re-source Planning and other transactional soft-ware systems.
Feb-April 2010 Log4scm Quest 61
ply Chain Network Design haveemerged as important tools forachieving better decision making.They help managers extract intel-ligence from the large and grow-ing databases created byEnterprise Resource Planningand other transactional softwaresystems. Timely and penetratingintelligence is especially needed intoday’s volatile business environ-ment.
What are the initial steps to-wards Supply Chain Analytics?
With shrinking product life cy-cles, ongoing cost pressures andgrowing variability in customerdemand, the supply chain mustbe more agile and effective thanever before. Yet many companieshave been disappointed in theirsupply chain software, often aftermaking major investments in timeand money. Add to this the factthat the granularity and frequencyof information are increasingfrom such sources as POS datacapture, market research, the In-ternet and RFID. Subscriptionoutsourcing is a way to improvesupply chain planning and effec-tiveness quickly, at a reasonablecost. Getting started can take aslittle as two months, so time-to-results is far faster and less costlythan implementing yet anothersoftware program or developingthe needed skills in-house, whichtakes even longer because of the
steep learning curve involved.
Supply Chain Analytics usuallystarts with a needs-analysis stage,where the Analytical expertsseeks to understand the company,its supply chain and its data.Based on its findings, the serviceprovider creates a customizeddata-analysis program designed tomeet the company's needs. Typi-cally, the program focuses on aspecific problem or goal, such aspreventing lost sales, increasinginventory turns or improvingpromotional effectiveness. Thesegoals are then linked to improve-ment in a specific supply chaincompetency, such as more accu-rate forecasting or better inven-tory management. Then, theprovider integrates with the cus-tomer's data sources and deter-mines how often to receive data,in what format and so forth. Thisprocess takes about two months.Then, the data-analysis service isup and running, and new insightsbegin to accrue.
Are there any Data sharing is-sues while employing Analyti-cal firms?
Although starting up a data-analysis program is relativelystraightforward, a company mayfind that getting its employees totrust and use the findings will be
a challenge. Change managementand changing the way peoplework is always hard. Strong exec-utive sponsorship is usuallyneeded to ensure that the new in-sights are acted on. Another hur-dle for some companies isbecoming comfortable giving outproprietary data. However, mostAnalytical Consultancy firmshave strong security measures inplace and will sign Non-Disclo-sure Agreements(NDA’s) up-front.
At some point, many compa-nies elect to bring the data-analy-sis service in-house in a"co-sourcing" arrangement,where the Analytical ExpertTeam integrates with the clientteam and teaches them theneeded data-analysis skills.
Outsourcing data analysis holdsgreat promise for companies thatwant to reach the next level ofsupply chain effectiveness quickly,at a relatively low cost. By sup-porting better planning, demandforecasting and inventory man-agement, this new category ofout-sourcing is delivering majorreturns to the companies thathave tried it.
People and processes for ex-ploiting these analytics are neces-sary for their successfulapplication. A critical require-ment is the creation of new busi-ness entities comprised ofknowledge professionals who as-sist managers with overlappingresponsibilities in making intelli-gent, integrated decisions. Busi-ness process changes wouldexploit analytics over the years atseveral junctures.
Send your comments to:
Outsourcing data analysis holds great prom-
ise for companies that want to reach the next
level of supply chain effectiveness quickly, at
a relatively low cost. By supporting better
planning, demand forecasting and inventory
management, this new category of out-
sourcing is delivering major returns to the
companies that have tried it.