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DECHERT-HAMPE & CO.

25910 ACEROMISSION VIEJO, CA 92691

949.586-6868

55 CORPORATE DRIVETRUMBULL, CT 06611

203.268-5050

555 SKOKIE BOULEVARDNORTHBROOK, IL 60062

847.559-0490

22 WALL STREETPRINCETON, NJ 08540

609.497-1040

2405 GRAND AVE., STE. 500KANSAS CITY, MO 64108

816.374-7664

MOSSWARNER COMMUNICATIONS

56 ARBOR STREETHARTFORD, CT 06106

860.233-5641

25910 ACEROMISSION VIEJO, CA 92691

949.859-6996

EXPOLOGISTICA 2000"ADVANCES IN SUPPLY CHAIN

MANAGEMENT and

SUPPLY CHAIN ISSUES IN COLOMBIA"April 6, 2000

Presentation by:Shyam S. Sethi

Executive DirectorDechert-Hampe & Co.

Princeton, NJUSA

DHC

AGENDA

1. What is the "Supply Chain?"

2. Evolution of the "Supply Chain" Concept

4. Key Advances in Supply Chain ManagementA. Service Performance -- Speed and QualityB. GlobalizationC. Asset ManagementD. Information Systems and the InternetE. Collaboration -- Manufacturers and Retailers

3. Key Issues Influencing Supply Chain Design

5. Supply Chain Issues in Colombia

6. Steps to Improve Supply Chain Performance in Colombia

7. Summary/Discussion

1. WHAT IS THE SUPPLY CHAIN?

The "Supply Chain" includes all physical product flows, capital and human resources utilized and associated information flows, from raw materials sourcing to satisfying end consumer demand.

• The Supply Chain includes raw material sourcing from vendors, manufacturing of products, distribution of products through distributors/retailers and purchases by end consumers.

• The Supply Chain utilizes physical, financial and human resources -- manufacturing and distribution facilities; transportation; inventories; personnel.

• Information Systems are the "brains" that link an integrated Supply Chain. 1

2. EVOLUTION OF SUPPLY CHAIN

1970's -- The primary concept was "Physical Distribution" with focus on specific "functional silos" such as:

- Order Processing; Warehousing Inventory Management; Transportation

- Sub-optimization of individual processes, for example, Transportation- Most physical distribution systems were based on "push" logic

.

2

Order Entry/Order Processing D.C. Operations Shipping/Transportation Inventory Management

2. EVOLUTION OF SUPPLY CHAIN

3

1980's -- Concept was integration of functions within an enterprise -- "Logistics" vision

- Integration of all activities from order receipt to final delivery to consumer within an organization

- Focus on trade-offs between activities, for example, order fill levels and inventory investment; speed of delivery and inventory investment

- Most logistics systems were still based on "push" logic.

1990's -- SUPPLY CHAIN MODEL – PROCESS and PHYSICAL

Direct Store Drop Shipments

SOURCE MAKE DELIVER

SUPPLIERS

SUPPLY PLANNING INFORMATION FLOW DEMAND PLANNING INFORMATION FLOW

SupplierManagement

InboundLogistics

Processing/Packing

CustomerService Mgmt.

DistributionManagement

Finished GoodsInventory Deployment

PlantsAccount

DistributionCenters

RetailStores

Consumers

Distribution Centers

4

3. KEY ISSUES INFLUENCING SUPPLY CHAIN DESIGN

• The key driver of the supply chain is satisfying end consumer requirements and demand.

- Consumers are significantly more knowledgeable and demanding.- Consumers demand high service levels with very competitive

pricing.- Supply chains have to satisfy end consumer requirements.

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• The nature of competition is global, not local, regional or national.- Manufacturers in Colombia and other countries are competing with

multi- nationals and global suppliers. -- Colgate-Palmolive; P&G; Unilever.

- Retailers in Colombia and other countries are competing with global retailers -- WalMart; Carrefours; Ahold.

- The marketplace is global, not Bogota or Medellin or Colombia or Americas

- Protective national trade barriers are rapidly disappearing.

3. KEY ISSUES INFLUENCING SUPPLY CHAIN DESIGN cont'd

• Channels of distribution have changed significantly.

- Significant new retail channels including E-Retailers (Amazon; CDNow); Category Killers (Home Depot; Staples); International Retailers (WalMart; Carrefours).

- Significant consolidation of manufacturers and retailers globally.- Power has shifted significantly from manufacturers to retailers

because of retailer consolidation. -- WalMart is negotiating with major suppliers on a global basis.

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• Speed and quality of service, rather than price, are key differentiators between companies.

- Speed is essential in satisfying consumer demand. Order cycle times have been reduced from weeks to days or hours.

- Quality of service -- product availability; conforming to defined service requirements -- is equally important


• Efficiency in managing supply chain costs, while providing excellent service, is essential for survival.

- Global nature of competition exerts major pressure on prices and profits for both manufacturers and retailers.

- Competition from new channels adds to profit pressures -- E-Retailing (Amazon; CDNow) and new trade channels/"Category Killers" -- Home Depot; CostCo; Staples.

- Supply chain efficiency has a significant impact on costs, and profitability.

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• The Internet will have a major impact on Supply Chain design.- Competition from "virtual" companies with limited investment in

logistics infrastructure.- Significant pressure on cycle times based on efficiency of E-tailers,

for example, Amazon.com for books -- millions of books available; 2-3 day home delivery.

- Significant pressure on prices, profitability based on E-Commerce.-- Visibility on prices and price comparisons between suppliers.-- Pressure on prices from E-Commerce vendors based on lower costs

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• Advances in Information Systems will offer significant opportunities for improving Supply Chain efficiency.

- ERP Systems to support all major functions with a common information database and significant process re-engineering..

- "Best of Breed" package systems to address specific areas such as Warehouse Management Systems (WMS) to improve DC operations.

- Wide acceptance of EDI to streamline information exchange between trading partners.

- Development of UCCNET to link major Consumer Packaged Goods manufacturers and retailers in U.S.

- Internet-based Collaborative Systems for Planning/ Forecasting/ Replenishment (CPFR).

- Internet-based open systems, rather than limited proprietary systems.

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4. KEY ADVANCES IN SUPPLY CHAIN MANAGEMENT

A. Service Performance -- Speed and Quality• Service requirements have become far more stringent

(tight) for both manufacturers and retailers.

- Benchmark for service performance will be E-Commerce retailers -- very short order cycle times; very high product availability/order fill levels.- Retailers are demanding very short order cycle times, high fill rates from manufacturers.- Consumers are demanding very high fill rates and excellent product availability on retail shelves from retailers.

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• Service performance has become a key differentiator for competitors in manufacturing and retailing.- Both manufacturers and retailers are competing on the basis of service performance.- Excellent product availability and short order cycle times will be

critical for manufacturers.- High "in stock" position will be critical for retailers.

4. KEY ADVANCES IN SUPPLY CHAIN MANAGEMENT con't

• Information Systems are providing detailed and summary service performance analyses.

- Both large scale ERP systems and traditional Legacy systems are focusing on service performance reporting.- Both retailers and manufacturers use service performance reports in evaluating suppliers and selecting suppliers.

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B. Globalization• Nature of competition is global rather than local, regional

or national. - Large multi-national consumer packaged goods manufacturers (P&G; Colgate; Lever) are truly global in scope and focus.- Major retailers are global in scope either through direct entry or regional alliances. -- WalMart and Carrefours expansion in Americas; Europe; Asia.- Companies will not be limited in sourcing products globally.- Tariffs and trade barriers are largely disappearing because of "open markets" in most countries and trade blocs - NAFTA; EEU; Mercosur.

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13

• Supply chains are global in scope and complex, to support global commerce. - Global sourcing and logistics will add significantly to complexity of supply chains. -- Multi-nation transportation and information links.- Examples include major retailers (Exito; Cadenalco; WalMart;

Carrefours) sourcing apparel and consumer goods in China, South- East Asia


C. Asset Management• Nature of competition has forced retailers to focus heavily

on cost reduction to improve profitability.- Global competitors, for example, WalMart- Competition from new companies such as "Category Killers" -- Home Depot- Competition from E-Commerce - Limited ability to consistently increase prices

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• Manufacturers are facing similar cost and profit pressures.

- Global, well-established competitors- Limited ability to increase prices


• Retailers and manufacturers are focusing heavily on improving asset management to improve profitability, return on assets.- Focus on reducing inventory investment through shorter order cycle times, smaller order sizes.- Cross-docking with major suppliers to reduce inventory investment, improve product availability at stores.- Reliance on manufacturers/suppliers to manage inventory -- Vendor-Managed Inventory (VMI) and CPFR (Collaborative Planning, Forecasting and Replenishment).

- "Return on assets" will be key area of focus for both manufacturers and retailers.

15


16

• Sophisticated third-party logistics providers are helping manufacturers and retailers in improving "Return on Assets".- Global third-party suppliers will provide total logistics support.

-- Distribution Centers; Customization/Assembly; Transportation; Inventory Management; Information Systems support

-- Examples include UPS; Fedex: CHEP


D. Information Systems and the Internet• The Internet will significantly improve information

exchange between manufacturers and retailers.- Internet-based systems, using open standards, will largely replace proprietary systems. -- XML is already being established as an open language for supply chain information exchange.- EDI will be replaced by Internet-based information exchange.

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• "Off the Shelf" Systems to support supply chain operations are readily available, significantly less expensive, easy to install and use.- Warehouse Management Systems (WMS) with RF-technology are

in most large distribution centers in the U.S.- Transportation routing and tracking systems are widely used for

improving efficiency of transportation.- Third party providers are also using these systems extensively.- Wide variety of Supply Chain software will be available on a fee basis on the Internet.


• Internet-based systems will significantly improve collaboration between manufacturers and retailers.- Collaborative Planning, Forecasting and Replenishment Systems (CPFR) will be readily available and widely used by major manufacturers and retailers. - "Scan-based" payment systems will further link manufacturers and retailers.- Cross-docking systems, supported by store POS reporting, will be common.

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19

• Collaborative systems will link End Consumers to raw material suppliers.- Internet-based "business to business" systems will significantly improve interaction between all links of the Supply Chain. - Consumer "demand"-based systems will link consumers; retailers/distributors; manufacturers and raw material suppliers.- Most systems will be driven by end consumer "demand". -- "Pull" systems based on demand rather than "Push" systems based on production.


E. COLLABORATION -- Manufacturers and Retailers• Collaboration, rather than confrontation, between

manufacturers and retailers is a key advance in the area of Supply Chain management. - Major manufacturers and retailers realize the importance of collaboration in jointly improving supply chain performance.- They are partners in eliminating costs from system, not shifting costs.

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• Information Systems, including Internet-based systems, will significantly facilitate information exchange for collaboration. - Relatively easy to exchange information on sales and production plans at detailed and summary levels between retailers, manufacturers and raw material suppliers.- Internet-based information exchange will further improve collaboration.- All links of the supply chain will have visibility of end consumer demand.

5. SUPPLY CHAIN ISSUES IN COLOMBIA

• Service performance standards are not clearly defined.- No clear definition of order cycle times -- days from order

placement to order delivery.- Order completeness standards are generally not defined or are

defined ambiguously.- Order delivery lead times are defined as a range, for example,

delivery from April 3 to April 8, rather than as precise number -- deliver on April 3.

- Additional service requirements -- bar coding, packaging, unitizing are not well defined.

- Current service standards are not competitive with global companies.

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5. SUPPLY CHAIN ISSUES IN COLOMBIA

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• Lack of service standards and monitoring results in high "out- of-stocks" at stores, high inventory investment.

- "You cannot improve what you cannot measure".- Retail stores have significant out-of-stock situations because of poor

vendor service performance -- late deliveries; incomplete deliveries.- Retailers have to significantly increase inventory investment to guard

against service failures -- "just in case" inventory rather than "just in time" inventory.

- No shipments by several vendors during period prior to Christmas -- holidays??

5. SUPPLY CHAIN ISSUES IN COLOMBIA cont'd

• Companies make poor short-term trade-offs between service and costs.

- Example is non-unitized/palletized shipments. A large truck, non-palletized, requires

5hours to unload versus 0.5 hours for palletized truck.- Truck cube utilization is unimportant relative to efficient loading,

unloading and storage.- Unitization is basic to improving transportation and distribution

center efficiency.

23


24

• Manufacturers and retailers often do not realize the importance of managing inventory investment.- Rationale for cross-docking -- to improve product availability on

store shelves and reduce inventory investment -- is poorly understood by manufacturers.

- Most manufacturers tend to "load" inventory during special events, promotions. -- truckloads of toilet tissue in retail distribution centers.

- Both manufacturers and retailers must understand that a product is "sold" only when the end customer buys it, not when you sell to each other.

- High inventory investment, poor inventory turns to support level of sales

- No system to establish inventory parameters -- reorder points; reorder quantities; safety stocks -- based on item classification -- "A", "B", "C".


• Business relations between manufacturers and retailers are "adversarial" rather than "partnerships".- Each group views the other group with suspicion -- "win-lose" rather than

"win-win".- Collaboration between manufacturers and retailers is critical to success in the

future.- Objective is to eliminate costs from supply chain, not push costs upstream to

vendors.

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• Supply chain costs are not well developed or monitored.- Difficult to identify "high cost" accounts/options versus "low cost"

accounts/options.- Difficult to establish costs/benefits of supply chain activities such as

centralized distribution; cross-docking.


• Distribution operations at most companies are not well developed.- Distribution centers use inefficient storage and handling methods.

-- Lack of unitization; no labor performance standard; limited systems support.

- Transportation methods are inefficient -- non-unitized loads requiring significant loading/unloading time.

- Third-party rates and cost structures are not well defined.

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• Information Systems support is not well developed.- Largely "home-developed" legacy systems for most applications.- Recent focus on EDI applications.- Internet usage for supply chain is relatively new.


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• Third party logistics infrastructure is not well developed.- Transportation companies doe not compete and generally provide

unreliable service.- Third-party distribution service providers (distribution centers)

provide primarily basic warehousing rather than advanced distribution services.

- Third-party rates and cost structures are not well defined.

6. STEPS TO IMPROVE SUPPLY CHAIN PERFORMANCE IN COLOMBIA

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• Both manufacturers and retailers must focus on eliminating costs rather than shifting costs.- Inventory turns improvement for retailers must be accompanied by

inventory turns improvement for manufacturers.- This requires collaboration rather than confrontation.

• Define service requirements based on End Consumer service requirements.- Timely product availability at retail shelves is critical for survival of both

retailers and manufacturers.- Service requirements must be defined to permit competition with

emerging channels, for example, E-Retailers

6. STEPS TO IMPROVE SUPPLY CHAIN PERFORMANCE IN COLOMBIA

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• Both manufacturers and retailers must focus on the old proverb "Time is Money".- Most companies will operate on "Internet time" in the future -- hours, not

days.- Both manufacturers and retailers must eliminate supply chain activities

that add to cycle time, for example, non-palletized shipments.

6. STEPS TO IMPROVE SUPPLY CHAIN PERFORMANCE IN COLOMBIA con'td

• Focus on improving efficiency of all logistics operations.- Employ economically justifiable levels of automation in distribution

centers. -- rack storage; forklift trucks; conveyers where appropriate

- Establish efficient transportation operations.- Use palletized loads for transportation to improve transportation

efficiency. -- 30 minutes to load/unload trucks rather than 5 to 6 hours

- Use palletization for improving distribution center operations. -- handling pallets rather than cases or units

- Build distribution facilities with well designed loading/unloading docks.

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6. STEPS TO IMPROVE SUPPLY CHAIN PERFORMANCE IN COLOMBIA con'td

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• Invest significantly in Information Systems support for improving Supply Chain efficiency.- Systems to support store and distribution center replenishment based on

actual demand at store level.- Use EDI and Internet for information exchange with suppliers.- Establish Vendor-Managed Inventory Systems if feasible.- Develop collaborative Planning, Forecasting and Replenishment Systems.- Install Warehouse Management Systems (WMS) based on RF-technology

to improve distribution center efficiency.- Install transportation routing and tracking systems to improve

transportation efficiency.

6. STEPS TO IMPROVE SUPPLY CHAIN PERFORMANCE IN COLOMBIA cont'd

• Establish internal and external service performance standards; routinely monitor performance against standards.- Establish "realistic" service standards, both internal and external.- Routinely monitor and report performance against standards, preferably

using Information Systems support.- Take corrective action, including penalties to improve poor performance- Remember --

"YOU CANNOT IMPROVE WHAT YOU CANNOT MEASURE".

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• Both manufacturers and retailers must focus on product line rationalization. - Use"ABC" ranking, based on sales, to eliminate significant portion of

slow-moving "C" items from line.- No logic in having slow-moving items in line that consumers do not buy.


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• Both retailers and manufacturers must also focus on supplier rationalization.- Use "ABC" ranking, based on purchases, to eliminate portion of "C"

vendors with limited capability to grow.- Encourage "C" vendors to collaborate or merge, to enable them to invest

in technology and systems.


• Formally evaluate logistics trade-offs in developing supply chain network.- Centralize "high value" merchandise in a few stocking locations -- pay

transportation premium.- Decentralize low value merchandise -- position it as close to end markets

as possible -- multiple stocking locations

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SERVICE PERFORMANCE ANALYSIS -- Example

35

0%

20%

40%

60%

80%

100%

Cum

. % o

f Ord

ers

0-3 4-7 8-10 11-14 15-30 31-60 61-90 >90

Lead Time (Days)

Vendor Lead Time -- Supermarket -- Orders > $50,000,000

Cum. % Orders

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SERVICE PERFORMANCE ANALYSIS -- Example

0%

20%

40%

60%

80%

100%

Cum

. % o

f Ord

ers

50% 60% 70% 80% 90% 95% 98% >98%

$ Fill level

$ Service Performance--Varieties--Orders > $50,000,000

Cum. % orders

"ABC" ANALYSIS, SKU's -- Example

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"ABC" National--Varieties Items--

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Cum. % Items

Cum

. % S

ales

Sales

"ABC" ANALYSIS, VENDORS -- Example

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"ABC"--Varieties Vendors--1999 Purchases

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Cum. % Vendors

Cum

. % P

urch

ases

Purch

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