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Supply Chain Best Practices

Issues that are driving and will drive companies

byTom Craig

tomc@ltdmgmt.com

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Best Practice Topics

1) Metrics2) Inventory velocity3) Cycle time compression4) Lean logistics5) Technology6) Supplier performance7) Segmenting supply chains

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Set the Stage

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SUPPLY CHAIN MANAGEMENT

--FOUNDATION--Applies regardless—

of industry Make to Stock and Make to Order

Runs from suppliers doors through to your customers’ doors or your stores

ProcessInternalExternal

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3 Supply Chains & Flows

ProductInformationFinance

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Supply Chains

Flow is important for supply chainsIs not ONE supply chainAre series of supply chains – supply

chains within supply chains

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Big Guys and SCM

Link supply chain to corporate strategy“Optimize” inventory and service with Best Practices

(these tie together)--inventory velocitycycle time compressionlean logisticssupplier performancesplinter supply chains

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Complex and extended real supply chain

Why firms wants control

Are chains within chains

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Additional supply chain challenges

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Market strategy competitive differentiator

27%

Cost center necessary to conduct business

25%

Customer servicecompetitive differentiator

30%

Lower performing companies are 3 times more likely to view their supply chains as cost centers.

Cost savings opportunity area to helpfund R&D or business expansion

18%

Supply Chain as Competitive

Differentiator

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The Opportunity for the Best

Best in ClassBest in Class organizations have organizations have clear competitive clear competitive advantages over advantages over Industry Average & Industry Average & Laggards.Laggards.

Laggards Industry Average Best in Class

Organization

Silo-based supply chain operations with little synchronization and collaboration across departments; moving toward more business unit or regional oversight

Moving toward a more centralized supply chain management organization but most activity is still decentralized into business units and regions

Central supply chain management organization established with executive who has end-to-end supply chain responsibility; strong cross-functional metrics in place

Knowledge

No budgeted projects for visibility improvement

Actively working to improve end-to-end and plant floor to top floor visibility

End-toend supply chain visibility in place with strong strides being made toward plant floor to top floor visibility

Technology

Spreadsheets and home grown Access database solutions are common for supply chain planning; legacy or heavily customized supply chain execution applications

Advanced supply chain technology solutions deployed for a handful of key supply chain management functions; lack closed-looped integration between planning and execution

Extensive use of advanced supply chain technology with closed-loop integration between planning and execution

Performance Metrics

Forecast accuracy at the family product level is below 61%; Perfect Order percentage is 85% or less; Logistics costs as a percent of sales is greater than 10%

Forecast accuracy at the product family level is 61% to 71%; Perfect order percentage is 86%-90%; Logistics costs as a percent of sales is 7%-10%

Forecast accuracy in the product family level is 71% or better; Perfect order percentage is 91% or better; Logistics costs as a percentage of sales 6% or less

LaggardsLaggards Industry AverageIndustry Average Best in ClassBest in Class

OrganizationOrganization

KnowledgeKnowledge

TechnologyTechnology

Performance MetricsPerformance Metrics

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Benefits of Best

Revenue Lift• Customer service enhancements• Product quality improvements• Increased quality availability

Reduced Supply Chain Costs by 10 to 15%• Operational efficiencies• Process enhancements• Procurement savings

Reduced Working Capital Requirements by 20 to 30%• Inventory reductions• Reduced cycle times

Reduced Supply Chain-Related Capital• Capital asset transfer• Enhanced asset utilization• Capital procurement savings

Revenue Revenue EnhancementEnhancement

Operating Operating Cost Cost ReductionReduction

Working Working Capital Capital ReductionReduction

Fixed Capital Fixed Capital ReductionReduction

Invested Invested Capital Capital ReductionReduction

Profit Profit EnhancementEnhancement

Shareholder Shareholder Value Value EnhancementEnhancement

Shareholder Shareholder Value Value EnhancementEnhancement

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Walmart

Private labelsBuying direct Expanding leveragingMore control of supply chain (going

upstream)

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Walmart

Take control of deliveries from suppliers (with its fleet--price cuts greater than what freight costs suppliers—and possible warehouse inefficiencies for suppliers)

Consolidating its purchasing with suppliers (Pepsi and potatoes)

Orders $1Bil in supply chain savings (produce)

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Retailers

Will Walmart expand their efforts to other products/categories?

Will other retailers copy the programs?Taking total control of its total supply chain

(de facto vertical integration—throwback to Standard Oil and US Steel?) (does it change role for suppliers?)

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You

Do you have a supply chain strategy (or do you just react?)

Is it tiered by market segment and/or customers (or is it one size fits all?)

How much do you spend annually on SCM—inventory, sourcing, transport, warehousing, people, technology, etc?

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Your Supply Chain

Do you know how well it performs?Do you measure? (Or is it by complaints or

chargebacks?)

How much do you expedite/fight fires?What metrics do you use to measure?Do you look at it as a process or in functional

terms or tasks– freight, warehousing?

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LSPs

Do you initiate best SCM practices?How do you develop/lead best practices?

Way to create value propositionHigher marginsGreater customer retentionSeparate from other commodity service providers

Way to gain share

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Best Practice

Metrics

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Metrics

Metrics for sake of metricsGood vs bad from my article

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Are They Really Metrics?

Financial measures—used as performance metrics

Internal SCM KPIsWarehousing—orders pickedFreight costsEtc.

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Question—Which Are You

Are you focused on freight and other logistics costs? (misdirection)

--or--Are you focused on your supply chain and

how well it performs?

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Key Metrics

Customer orders DELIVERED complete, accurate, on time (customer service / chargebacks)

Purchase orders DELIVERED complete, accurate, on time (critical to your SCM success)

Inventory turns

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Metrics--More

Measures that are strategic and complement company direction

Time it takes from “sales order” through to payment is received from customer

• SCM has a key role in that PROCESS whether existing product, new product development, etc.

Inventory turns or the corollary of how long inventory is in the supply chain

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Best Practice

Inventory Velocity

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Ask

Are you inventory rich and cash poor?How often does your inventory turn (Raw, WIP,

Finished Goods)? Why does it not turn faster?How long does it take from when you know

you need to reorder until the material is received? Why does it take so long?

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Inventory

Raw, WIP, finished goods Buffer against uncertainty Inventory rich and cash poor More uncertainty (time) means more inventory Turns represent time company goes unpaid More warehouses means more inventory with safety

stock (square root of the number of warehouses) Too much—more than capital tied up and the

opportunity cost; becomes part of the company portfolio

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Inventory

Out of stock of needed products—customer service problems

Too much of products that sell slowly or almost not at all

Impact of long lead times on levels?Inventory rich and cash poor?

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Inventory Turns

Is both a problem and a symptomReflects how fast company is paid (like a salary)Aggregate turns and Breakdown

A B C and ….product categorymarket segmentrevenue and profit contributionsdomestic vs imports

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Inventory/Time Measures

Days in inventory – Cost of Goods Sold / 365 DaysCan understate total inventory in the supply chain–

excludes inventory that is on order and inventory in transit Manufacturers and wholesalers—over 60 days of

inventory Retailers—over 90 days of inventory Factor in what is excluded makes it 25% more

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Increase Inventory Velocity

Multi-step program Align with business strategy Key metric--Perfect Order--orders delivered

complete, accurate and on-time Purpose/Direction

Manage and reduce total supply chain costs Increase inventory velocityCompress cycle timeNeed for Lean success

Provides structure, platform and integration for new processes internally and externally with suppliers

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Inventory Velocity

How fast inventory moves through the supply chain

Is more than “turns”Shows as days of inventory on hand

Flaw because it excludes product on order and/or in transit

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Inventory Velocity

Recognizes emphasis is beginning of supply chain with suppliers

Transit time is one factorAvoid stopping inventory (lean)Supplier performance is key

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Inventory Yield

Time is very importantIssues with demand planning and timeInternal “battles can create discord to create

inventory yield maximization and minimize supply chain costs, inventory and time--Procurement looks at low product price and Transport looks at low freight price

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Inventory Yield Maximization

Yield Maximization—used to sell airline seats and hotel rooms

Is a “right” time to sellView inventory is same wayToo little inventory—lost salesToo much inventory—mark down and fire

salesInventory can go stale

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Best Practice

Cycle Time Compression

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Cycle Time

Time to convert a sales / replenishment / purchase order into finished product that is at the customer or at the store Ties to scope of supply chainRemember effect of time on inventory

Cycle time often exceed demand planning credibility and capability

Supplier performance is key

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Cycle Time Compression

Recognize need for product till sales paid by customer

Subsets—such as time from recognize need (before PO is issued) until product delivered to you

In Lean, time is waste

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Best Practice

Lean Logistics

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Lean SCM

Similarity with Lean principlesPull vs pushInventory reduction (reduce waste)Cycle time compression (reduce waste)

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Lean Logistics

Extending it beyond domestic and factory walls (end to end)

WasteUnnecessary, additional timeUnnecessary, additional inventoryStopping or waiting on the flow of inventory and

information (add no value to final product or value for customer)

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Lean

Assess entire supply chain as to where time is spent and whyLook especially at internal

Smaller orders/more frequency from suppliers

Do not store--cross dock at port or DC

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5R’s (Rights) of Lean SCM

Right ProductRight QuantityRight ConditionRight PlaceRight TimeAnything that does not contribute to the

5Rs is waste

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Examples of SCM Waste

Over supply--Supplying product at a faster rate than customer requires, having it ahead of demand. Bringing in large quantities of product without matching demand creates excess inventory and can cause write-down and fire sales to draw down inventories—and revenues and profits.

Transportation. Unnecessary or slow movement of product adds no value (for lower freight cost). This can include movement of inventory between company facilities.

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SCM Waste

Movement. Any unnecessary movement of product or people during their work is to be avoided. This may be seen in warehouses or in special operations such as kitting.

Defective Service or Product. Poor quality, rework, or scrap because it does not meet the customer requirements adds no value.

Over processing. This is doing more than is necessary.

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SCM Waste

Inventory. Firms have more finished product, raw materials, or work in process than the absolute minimum. This includes inventory in transit, regardless of whether it is treated as inventory when it is delivered or not; it is still inventory regardless of such transaction nuances.

Waiting. Delays in previous supply chain steps cause unnecessary waiting of people or equipment. Inventory at warehouses reflect waiting.

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Becoming Lean

Realize cause-effect impacts. Distinguish problem from symptom of a problemHigh freight cost can be a problem or a symptom. Inventory can be a problem or symptom of a problem

Ask customers about how well your supply chain operates

Comprehend the complexity of supply chains with multiple suppliers in multiple countries, distribution centers and customers

Assess time—especially internal—for waste

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Best Practice

Technology

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Technology--IS

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Process Enabler

Manage the “buy” evenImportant tool to deliver complete,

accurate , on time

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Technology

Supply chain execution tool for—integrationend-to-end global visibilitydealing with complexityissue PO and changes to POexception management

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Supply Chain Technology

Much more than online “track and trace”Not about the container—about what’s in

the container It’s about the PO

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Best Practice

Supplier Performance

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Supplier Performance

SCM success starts hereKey to:

reduced cycle timeincreased inventory velocityimproved inventory turnsremoving wastebetter demand planning

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Importance

Supplier performance is critical to—SCM successInventory velocity and turns improvementCycle time compressionLean SCMCosts, such as expedited freightAnd more

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KRALJIC MODEL

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Supplier Performance

Start with Procurement StrategyIt’s about “price” and MUCH MOREInclude

Supplier rationalizationSupplier collaborationSupplier developmentSpend management and compliance

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Best Practice

Segment Supply Chains

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One Size Does Not Fit All

Is not one approach to SCM for all industries and all businesses

Should be multiple approaches used by a companyFor A vs B vs C itemsFor Tier 1 vs Tier 2 vs Tier 3 customers

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Different Approaches

Segment use of speed--transport modesWhere/how inventory is positionedSegment integration—internal and

external Cannot be everything to everybody

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Develop multiple supply chains

Move away from monolithic supply chain approach

Splinter/multiple supply chain approachesreduce static/noise with better focusincreased flexibility and responsivenessenables better demand planning

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Types of SCM Splintering

Master/prioritize/differentiate by--product demand, volatility, velocity where made or sourcedwhen sold in quarter or yearmarket segments

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Nothing will come of nothing

King Lear Act 1, Scene 1

Doing the same thing over and over and expecting the same results.

Einstein’s definition of insanity