The Power of Supply Chains
Dr. George Harris
Calyptus Consulting Group, Inc.
222 Third Street, Suite 2242
Cambridge, MA. 02142
617.577.0041 (office)
gharris@calyptusgroup.com
Objectives
Participants will gain knowledge about:
 Basic components of supply chain
management
 How to assess your organization’s supply chain
 Benchmarked measures and targets
 Key tasks for on-going supply chain
management
What % of items are out of stock at any one time? 8.3%
What is the impact of these shortages on sales?
4%
Toyota leased a cargo ship as a floating parking garage for 2,500 unsold cars.
Harvard Business Review, March 2011
 The Chief Supply Chain Management Officer (SCMO)
 End-to-end Supply Chain Understanding
 Cost-conscious outsourcing and internal solutions
 Ability to partner with the CIO
 Experience running a business unit
 Collaborate across business units and global functions
Wall Street Journal Headline – March 4, 2011
“New iPad is Two-Edged Sword for Suppliers”
 Asian electronics companies announce tablet computer offerings
 Same 3 companies also provide electronics (chips) to Apple
Conclusion: Your competitors are also your suppliers.
Defining a Supply Chain
 A chain of activities that creates and delivers the
products and services to customers.
Examples of supply chain definitions
Motorola – From approval of engineering concept to
delivery to first customers
Pratt & Whitney – From need for engine parts (pull
system) to raw material ordering by supplier
Bank of America – From customer application to
decision on mortgage application
Aim of SCM: Lowering Total Costs
 Lower delivery, installation, or financing cost
 Lower the required rate of usage of the product
 Lower the direct cost of using the product, such as labor,
fuel, maintenance, required space
 Lower the indirect cost of using the product, or the
impact of the product on other value activities. For
example, a light component may reduce the transport
costs of the end product
 Lower the buyer cost in other value activities
unconnected with the physical product
 Lower the risk of product failure and thus the buyer's
expected cost of failure
Costs Across the Supply Chain
Customer
view
New products
only
Produc t
enginee ring
Raw mate rial
• Price
• Varia nce s
Vendor cos ts • Fini shin g
• Safety stock • Insp ection
• Flexib ility
• Safety stock
• Accoun ts
receivabl e
Proces s
• Equip ment
• Di rect lab or
Procurem ent • Energy
• Purch asin g • Insp ection
• Ma inte nance
overhea d
• Proce ss
• Trans poreng inee ring
tation
• WIP
Order
fulfillme nt
Overhe ad
• Ord er en try
• Plann ing
• Ord er
• Sche duli ng
process ing
• insp ection • Trans por• Ma teria l
tation
ha ndli ng
• Wareh ousi ng
• Fini shed
goo ds
Added Value Supply Chain
Customer
cos ts
• Re pair
• Safety
sto ck
• Warran ty
• Purch asin g
• Insp ection
A Supply Chain: Visual Representation
Chains of activities that create and deliver
the goods and services of a firm’s value chain
Suppliers
Firm
1st Tier
Customers
2nd Tier
End Users
3rd Tier
Example: Supply Chain Service
Travel Services
Orders
Customers:
• Corporate
• Individuals
• On-Site
Options
Order
Management
Suppliers:
• Travel Related
• Direct Providers
• Software Suppliers
Order
Quality
Corporate
Market:
• Dynamic
• Cost Drivers
• Buyers Market
• Time Sensitive
• Regulated
Individual
On-Site
Order
Fulfillment
Order
Acknowledgement
and Billing
Example: Supply Chain Product
Injection Molding
Resins
Supplier
Mold/Die
Maker
In-bound
Logistics
Capital
Equipment
Manufacturer
Plant
(Plastics
Manufacturer)
Assembly
Operations
Interplant
Movement
In-bound
Logistics
Supplier
(Plastics
Manufacturer)
Outbound
Logistics
Transport
Packing
and
Packaging
Distribution
Operations
Distribution
Centers
Dealer
End
User
Contractor
Transport
Customer/
Integrator
End
User
What Does Managing the Supply Chain Mean?
 Customer need
 Supplier and sub-suppliers capability
 Information and communications systems
 Market trends
 Ensure organization’s interests
 Delivery
On-Time Delivery Rate
(Median % Per Industry)
93%
All
95%
Automotive
90%
Industrial Equipment/Machinery
95%
Consumer Packaged Goods
Consumer Products Durables
93%
High Tech
92%
95%
Other
0%
20%
40%
60%
80%
100%
Benchmarks: Supply Chain Performance
Respondents in excellent
or very good chains
Respondents in
poor chains
All
respondents
15 days
21 days
20 days
95%
90%
93%
Cash-to-cash Cycle
60 days
95 days
70 days
New Product Development Cycle
180 days
340 days
180 days
Annual Inventory Turn Rate
10 turns
6 turns
8 turns
Days of Raw Material on Hand
30 days
30 days
30 days
Days of WIP Inventory on Hand
15 days
14 days
14 days
Days of Finished Goods on Hand
15 days
25 days
15 days
Measures
Order-to-shipment Lead-time
On-time Delivery Rate
Basic Components of Supply Chain Management
Forecast /
Demand
Management
• Source of
Demand
• Forecasting
Process
• Adjustment to
Forecast
• Production
Scheduling
• MRP
Compliance
Supply
• Continuity
• Feasibility
• Improvement
• Cost Reduction
• Lead-time
• Lowest Costs
• Inter-company
Transfers
Product
Transformation
and Service
Execution
• Transformation
Process
• Equipment
Distribution
and Support
• Warehousing
• Transportation
• People
• Inventory
Management
• Utilities
• Packaging
• Maintenance
• Shipment
• Process
Engineering
• Documentation
Major Barriers to Supply Chain Optimization
Forecast/Demand Management
Excessive forecast errors results in performance problems in many key
business functions
 Customer Service
 Manufacturing
 Poor line item availability
 Production schedule breaks
 Low percent of orders shipped
 Need for outsourcing
complete
 Large number of backorders
 Poor on-time shipment performance
 Customer complaints
 Inventory Management
 Low turns
 High obsolescence
 Transportation
 Large volumes of transferred product
 Heavy use of premium freight
 Increased overtime
 Warehousing
 Excess space / storage cost
 Damaged product
 Finance
 Excess inventory carrying cost
 Marketing
 Excess packaging material
Actions to Improve Supply Chain Performance:
Customer Demand
Product
Design
Optimize product offers and options
Adjust finished goods safety stock
Design for localization
Change transportation mode
Standardize to generic products over time Implement better data systems
Customize products in software
Introduce improved forecasting
techniques
Manage delivery expectations (service
requirements
Subcontract distribution operations
Share information with strategic partners
Reward good performance (based on
ship date, not delivery date)
Measure transportation performance
separately
Strategically source locally (to shorten
lead-times and build closer teamwork)
Review stocks more frequently
Supply
 Strategic Sourcing is a structured methodology and
process which utilizes cross-functional teams and
analytical tools to make buying decisions
 Built on simple premise that the purpose of each buying
decision is to create value
 Value = Savings and Improved Customer Service
Examples
Leverage Buying — aggregate spend across the business unit
or company with fewer suppliers reducing costs: (volume
discounts, reduced inventory and process costs)
Total Cost of Operations — includes purchase price, processing costs, inventory
carrying costs, logistics costs, installation and maintenance costs.
2 X 2 Categories and Strategies
High
Each quadrant has its own strategy
Leverage
Examples:
Staff Augmentation,
Fittings, Wireless
Hardware
Strategic
Examples:
Professional and Plant
Core Services, Valves,
Radiation Waste
Services
Bottleneck
Routine
Examples:
Office Supplies, MRO
Items, Lubricants
Examples:
Plant Auxiliary Systems,
Turbine Generators and
Control Systems
Low
Difficulty in Finding Suppliers
High
2X2 Categories and Strategies
Spend Categories
Routine
Value Levers
Process Efficiency
Purchase Power
Bottleneck
• Reduced purchase price
Purchase Power
Process Efficiency
• Reduced transaction costs
Purchase Power
Supply Chain
Market Efficiency
Process Efficiency
Strategic
• Reduced transaction costs
• Reduced transaction costs
• Reduced purchase price
Process Efficiency
Leverage
Result
Purchase Power
Supply Chain
Aggregated Content
• Reduced purchase price
• Reduced inventory cost, cycle time, etc.
• Improved visibility
• Improved reach
• Reduced transaction costs
• Improved reach
• Reduced inventory cost, cycle time, logistics cost
• Improved visibility
• Improved coordination
Strategic Sourcing Methodology
Analyze
Define
CategorySpend
Define
Specifications
Decide
Define
Suppliers
Define
Strategy
Implement
Obtain
Business Unit
Buy-In
Implement
Strategy
Objectives:
 Identify and profile
opportunity
Tasks:
 Customer Requirements
 Executive Mandate
 Spend Analysis
 Historic
 Future
 Long-Range Projects
 Supply/Demand analysis
 Strategic
 Bottleneck
 Routine
 Leverage
 Business Case
Development
 Identify key stakeholders
Deliverables:
 Opportunity Profiles
 Initial Business Case
 Define special
 Identify issues in the  Develop strategy to
requirements and issues
marketplace
maximize outcome
 Market Analysis
 Safety/Non-safety
 Focus on standard, then  Obsolescence
custom
 Approved Suppliers
List
 Preferred Vendors
 Common Contract
 Strategy Issues
 Action Plan
 Final Business Case
 Schedule
 Action Plan
 Business Unit
adoption
 Execute strategy
 Cross-functional
 Blanket PO

teams
 Site Specific

 Identify
 Multiple BU
opportunities to
 Auction

improve TCO
 One-off Buy
 Identify
 Supplier Alliance
opportunities to 
 Consignment/Vendor
Managed Inventory
improve current
 Reverse Engineering

process
 Change Standards
 Approved Business
 Performance Incentive
Case
based Contract
 Presentations
 One-on-ones
 Strategy Document
 Validated Action Plan
Supplier Selection
Material
Standardization
Contract
Implementation
Performance
Management
Savings Reporting
 Signed contract  Right part, right place,
right time, right price
 Validated Action
Plan
Actions to Improve Supply Chain Performance:
Supply
PRODUCT/SERVICE
PROCESS
• Leverage volumes
• Collect spend data
• Standardize requirements
• Complete category plans
• Eliminate sole source supply
• Develop sourcing strategies
relationships
• Evaluate Total Costs
• Use value analysis
• Ensure Effective Implementation
• Look for global best-in-class
sources
• Develop supplier performance
management system
Transformation
 Key Elements of Strategy
 Capacity
 Facilities
 Technology
 Vertical Integration
 Workforce
 Quality
 Production Planning / Materials Control
 Organization
25
Influences on Transformation
 Quality, time, and cost competition
 Environmental control
 New product development
 Globalization and restructuring
 Human resources and empowerment
 Technology and innovation
 Strategic alliances
 Operations improvement
26
Transformation Economics
Structure
• Cost of goods sold
• Labor
• Overhead
• Material
• Depreciation Cost
• Fixed vs variable costs
• Investment Levels
• Break-even points
Trends
• Business cycle effects
• Leading / lagging indicators
• Raw material cost drivers
• Labor Increases
• Projected technology improvements
• Product
• Material
• Process
• Equipment
• Environmental regulations
• Safety and health regulations
Levels
• Total cost performance
• Produce line costs
• Inventory levels
• Product line
• Raw, WIP, FG
• Point in supply chain
• Departmental costs
• Shipping, maintenance, etc
• Plant costs
• Distribution costs
Behavior
• Forecast variance
• Cost sensitivity due to
• Product mix changes
• Volume changes
• Delivery date changes
• Economies of scale
• Productivity improvements
• Regulatory or socio-economic impact
• Capital cost and availability
27
Bottleneck Analysis
What is Bottleneck Analysis?
 Bottleneck
 A resource whose capacity is less than or equal to the
demand placed upon it
 It is the evaluation of the capacity of resources and
demand placed upon those resources and
 It is a comparison of the demand for a resource to the
capacity of a resource
Demand
Vs.
Capacity
28
Tools for Improving Transformation
Bottleneck Analysis
Step 1. Identify the following information about resources
• Which resources are bottlenecks?
• How often do the bottlenecks occur?
• The severity of the bottlenecks.
• Which resources are non-bottlenecks?
• The amount of available non-bottleneck capacity.
Step 2. Use the tool to allow for better decision making
• Determine sales or profit gain or loss
• Determine bottleneck management policies
• Evaluate product mix decisions
• Production planning and scheduling (inventory or overtime)
• Resource optimization
29
Ways to Reduce Cycle Time
 Expeditious design cycles
 Pull products through
 Focused plants
 Efficient product flow
 Streamline and decision-
plant
 Similar services grouped
for volume purchasing
 Alignment of service
project completion dates
 Value-added Indirect Staff
effort
making processes
 Dependable stream of
supplier furnished product
30
Actions to Improve Supply Chain Performance:
Transformation
PRODUCT
PROCESS
• Lower tolerances
• Remove bottlenecks
• Pool engineering change orders
• Size buffers appropriately
• Use standard processes
• Reduce set-ups
• Promote design for
• Shorten cycle times
manufacturability
• Introduce self-managed work
• Produce a generic product
teams
• Install buffer capacity
Distribution
SUPPLIERS
AND SOURCES
MANUFACTURING
AND
CONVERSION
Plants
PRIMARY
DISTRIBUTION
Distribution
centers
SECONDARY
DISTRIBUTION
CUSTOMERS
Field distribution centers
Dealers
OEMs
End users
Distribution
centers
Plants
Distributors
32
Forces Influencing Distribution Activities Today
 Geographic shifts in production and consumption
 Increasing market segmentation
 Low capital supply and high cost of borrowing
 Revolution in manufacturing technology
 New supply sources and constraints
 Energy cost and availability
 Regulatory changes
 New labor management considerations
 Internationalization of sources and markets
33
Costs of Distribution
Cost of
Lost Sales
Inventory
Inventory
Carrying
Carrying
Costs
Costs
Production
Production
Lot
Lot
Quantity
Quantity
Costs
Costs
Transportation
Transportation
Costs
Costs
Order
Order
Processing
Processing
and
and
Information
Information
Costs
Costs
Warehousing
and
Value-Added
Costs
(throughput costs)
Total Costs = Transportation Costs + Warehousing Costs + Order
Processing and Information Costs + Production Lot Quantity
Costs + Inventory Carrying Costs + Cost of Lost Sales
34
Workload Analysis
Define Activities (Routine)
Define Activities (Scheduled)
 Receiving
 Cleaning
 Put away
 Inspections
 Restock
 Cycle counts
 Stock Issues
 Special requests
 Tool issues
 Processing obsolete
 Processing returns
 Special projects
 MIS updates
35
Actions to Improve Performance :
Distribution
 Supply Chain Collaboration
 Collaborative Planning, Forecasting and Replenishment
(CPFR)

Buyers and sellers share information on demand and product
availability
 Cross Docking

Move product from receiving dock to shipping dock without
placing the product in storage
 Merge-in-Transit

Orders brought together in hub, then shipped to customers
36
Actions to Improve Supply Chain Performance:
Distribution
PRODUCT
• Use common components and
subassemblies in many
products (to reduce risk of
stockouts)
• Follow industry standards
(to increase part availability)
PROCESS
• Reward good performance
(based on ship date, not
delivery date)
• Measure transportation performance separately
• Subcontract inbound freight handling
• Share information with
strategic partners
• Strategically source locally (to
shorten lead times and build closer
teamwork)
• Review stocks more frequently
Examples of Supply Chain Transformation
 Thyssen creates virtually integrated steel operations, linking
workers on three continents by networks and software
systems (12/10)
Rotterdam Team
Monitors Orders
and Shipments
Sepetiba Brazil
Provides Steel
Raw Material
Iron Ore
(Brazil)
End Customer
40% N.A. Automakers
Freighters
(5 Days)
Alabama Plant
Rolled and Treated for Use in
Cars, Construction, and Pipes
38
Managing Risk in the Supply Chain
ISM Inside Supply Management Magazine, December 2010 – January 2011
 Using Failure Mode and Effects Analysis (FMEA) can also
help in evaluating, mitigating, and eliminating risks
39
2011 New Thinking for SCM
 Use of mobile devices to track supplier performance
 Consideration of “Near-sourcing’ alternatives
 Resurgence of customer service
 Organic collaboration
 Legitimate use of total cost as a decision-making tool
40
Supply Chain Diagnostic Tool
 This is a tool you can use to assess your supply chain.
41
For additional information,
please consult the addendum.