supply chain management and the executive agenda
DESCRIPTION
On June 2nd 2010 there was a high-profile event about supply chain management and sustainability. Worldwide this was the first presentation of the final results of the MIT/TruEconomy research into supply chain management and the executive agenda. Professor David Simchi-Levi released the final results of the MIT/TruEconomy research. The results indicate not only a link between the executive agenda and supply chain strategies but also that business and financial performance go hand in hand with supply chain performance. Interested in the research findings? Download a copy of the executive summary at www.trueconomy.com.TRANSCRIPT
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Supply Chain Management and the E ti A dExecutive Agenda
David Simchi-LeviE-mail: [email protected]
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@
Professor, Massachusetts Institute of Technology
What We’ll Cover …
• Research Motivation and Background • Key Research Insights and Rules
Summary• Summary
2©Copyright 2010 D. Simchi-Levi
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Today’s Supply Chain Challenges
• Global supply chain with long lead times• Rising and shifting customer expectations• Increase in labor costs in developing countriesIncrease in labor costs in developing countries• Increase in logistics costs• Increase in risks• Importance of sustainability• Unprecedented Volatility Senior management faces competition in an
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Senior management faces competition in an environment that is uncertain, dynamic and chaotic.
Identify links between supply chain strategies and the executive agendaCh t i th i t f ll i l h i t Characterize the impact of excellence in supply chain management on business and financial performance
1. Review the existing supply chain literature
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g pp y2. Interview executives from 14 companies3. Online survey of CEO, CFO and CSCO
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Participating Companies
• 196 companies have participated 173 SCM sections complete106 CEO sections complete91 CFO sections complete
• 82 companies completed all three sections
SCM• 30 Best-in-Class Supply Chains were identified
CostInventory Turn
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CFOCEO 82
©Copyright 2010 D. Simchi-Levi
Inventory TurnService LevelsLead Time
Industry Characteristics
Flexible response
0 10 20 30 40 50 60
Cost efficient
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Insight #1: Increasing drive towards flexibility and responsiveness.
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What We’ll Cover …
• Research Motivation and Background • Key Research Insights and Rules
Summary• Summary
7©Copyright 2010 D. Simchi-Levi
Top 5 Focus areas for Best-in-Class Supply Chains
Reduction of customer lead times
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Reduction of total costs
Reduction of stock outs
Sales and Operations planning
Improvement of product or service quality
Reduction of customer lead times
Focu
s A
reas
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Percentage of Companies
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Top 30 Best-in-Class Supply Chain Performance
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Insight #2: Significant difference between Cost-Efficient and Responsive supply chain strategies
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Cost-Efficient vs. Responsive Supply Chains
Cost-Efficiency Responsiveness
Primary goal Cost TimePrimary goal Cost Time
Supply Chain Innovation Process focus Product focus
Strategy High utilization High flexibility
Inventory Maximize turns Position inventory
Lead time strategy Reduce but not at expense of increasing cost
Reduce even if costs are significant
Supplier selection strategy Total Landed Cost quality Speed qualitySupplier selection strategy Total Landed Cost, quality Speed, quality
Transportation strategy Low cost transportation modes Fast modes of transportation
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Supply Chain Flexibility: Definition
• The ability to respond, or to react, to change:Demand volume and mixCommodity pricesLabor costsExchange rates……
• The objective is to Reduce cost
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Reduce the amount of unsatisfied demand Improve capacity utilization
• With no, or little, penalty on response time
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Achieving Flexibility through….
• Product designModular product architecture, Standardization, Postponement, Substitution
• Process designFlexible work force, Cross-Training, Lean, Organization & Management structure, Flexible contracts, Dual sourcing, Outsourcing
• System design Capacity redundancy Manufacturing strategy Distribution
©Copyright 2010 D. Simchi-Levi
Capacity redundancy, Manufacturing strategy, Distribution strategy
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Flexibility through System Design
• Balance transportation and manufacturing costs• Cope with high forecast error• Better utilize resources
1 A
2 B
3 C
4 D
No Flexibility1 A
2 B
3 C
4 D
2 Flexibility1 A
2 B
3 C
4 D
Total Flexibility
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ProductPlant
5 E
ProductPlant
5 E
ProductPlant
5 E
Case Study: Optimizing S&OP at Pepsi Bottling Group
Make Sell Deliver Service
Operates 57 Plants in the U.S. and 103 Plants Worldwide
7 Business units in the U.S. each responsible for local demand
240,000 Miles are Logged Every Day to Meet the Needs of Our Customers
Strong Customer Service Culture
The Challenge: • Shifting consumer preference
•From carbonated to non-carbonated drinks •From cans to bottles
• Produced these products in limited plants• Service problems during periods of peak demand
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Implementation: A Three-Step Process
• Step 1: Focus on Central Business Unit (3 plants, 22 warehouses in MI, MN, WI)
Start small to understand the intricacies of the processBuild confidence in model assumptions
• Step 2: Move on to more complicated regions (East Coast – 20 plants, 125 warehouses)
• Step 3: Implement across all business units
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The Impact of Sourcing Flexibility
• Creation of regular meetings bringing together Supply chain, Transport, Finance, Sales and Manufacturing functions to discuss sourcing and pre-build strategiesReduction in raw material and supplies inventory from $201 to $195 • Reduction in raw material and supplies inventory from $201 to $195 million
• A 2 percentage point decline in in growth of transport miles even as revenue grew
• An additional 12.3 million cases available to be sold due to reduction in warehouse out-of-stock levels
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To put the last result in perspective, the reduction in warehouse out-of-stock levelseffectively added one and a half production lines worth of capacity to the firm’ssupply chain without any capital expenditure.
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Rule #1: A small investment in flexibility can make a significant impact on supply chain performance.
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When to focus on Cost-Efficiency? Responsiveness?
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Insight #3: Companies that focus on Market share and Revenue growth emphasize responsiveness, in particular reducing stock outs and lead times
When to focus on Cost-Efficiency? Responsiveness?
• SKU ProliferationInnovative vs. Functional Products
• Different types of CustomersypIndividual consumers vs Corporate
• Multiple channels Stores vs. Online
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Product Type: Functional vs. Innovative
Low High
Functional Innovative
Product varietyLow High
Product life cycle Long Short
Forecast accuracy High Low
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Obsolescence Risk Low High
Cost of lost sale Low High
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Channel Type: Retail vs. Online
L Hi h
Retail Online
Product VarietyLow High
Customization Limited High
Forecast Accuracy High Low
Volume by Product High Low
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y g
PC-DirectPC-Retail
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Functional Products Innovative Products
Strategies for Innovative vs. Functional Products
Effic
ient
Supp
ly
Cha
in(P
ush)
onsi
vepp
ly
hain
Pull)
Match
MatchMismatch
Mismatch
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Res
pSu C
h (P Mismatch
Marshall L. Fisher, Harvard Business Review, March-April 1997
Retail Channel Online Channel
Strategies for Online vs. Retail Channels
Effic
ient
Supp
ly
Cha
in(P
ush)
onsi
vepp
ly
hain
Pull)
Match
MatchMismatch
Mismatch
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Res
po Sup
Ch (P
Mismatch
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A Portfolio of Supply Chains: The PC Industry
Fulfillment Supply ChainPrivate Consumers
Retailers
Public Sector
EnterpriseAssemble-To-Order
No-Touch
Low-Touch
Planning
Order Fulfillm
ent
Procurem
ent
Logistics
Manufacturing
pp yPCs
Notebooks
Servers
Portfolio of ProductsPortfolio of Customers
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A Portfolio of Supply Chains: The Gap Inc.
Banana Republic
Gap
Old NavyLow Cost
Fashion
Casual
Planning
Order Fulfillm
ent
Procurem
ent
Logistics
Manufacturing
Rule #2: Different brands channels andPortfolio of Brands
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Customer Value Proposition
Rule #2: Different brands, channels, and product characteristics may require different supply chain strategies.
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How does CSR affect supply chain strategy?
Internal standard operating …
Environmental policy
Corporate Social Responsibility (CSR)
Product or service design for supply chain
Product or Service lifecycle management
Network redesign to support faster time to market
Forecast accuracy
Supply Chain Innovation
0% 20% 40% 60% 80%
Responsibility for social needs
Brand image benefits
Customer value
Shareholder value
Compliance to regulatory …
p g
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250% 10% 20% 30% 40% 50% 60% 70% 80%
Launch of new products or services
Introducing new channels of distribution
Sustainability and CO2 footprint initiatives
Insight #4: Strong correlation between CSR and innovations in the supply chain
The Nestlé Story
• Nestlé entered India in 1961• It set up its first milk processing facility at Moga in the
State of Punjab jProvided technical assistance and education to improve milk productivity and qualityEstablished milk collection points and chilling centers, Installed farm cooling tanks, Provided the transportation to pick-up milk at the farms and d li th t th ilk i f ilit
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deliver them to the milk processing facility. Delivered veterinary medicines and helped the village women learn good dairy practices.
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The Nestlé Story – The Impact
• This program grew from 180 farmers in 1961 to 95,000 in 2005 and from 4 milk collection centres to 1700 during the same time period.
• It provided employment, higher income, and a higher standard of living not only to the farmers but to the entire rural community.
• This business model was not a “charity” – it allowed Nestlé to establish a unique supply chain and generated Rule #3: Corporate Social Responsibility can
create tangible business opportunity and
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a new stream of revenue in a challenging market.
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create tangible business opportunity and value.
Links between SC Strategy, Business & Financial Performance
• Business Performance Indicator (BPI)Revenue, Market Share, Customer Satisfaction and Return on Equity
• Financial Performance Indicator (FPI)Return on Equity, Return on Assets, Total Assets Turnover, Inventory Turnover, Operating Cash Flow, Net Working Capital to Assets, Operating Margin, Debt to Equity Ratio, and Total Debt RatioDebt Ratio
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Links between SC Strategy, Business & Financial Performance
• 62% of the BIC supply chain companies
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achieved above average BPI compared with 43% of the remaining companies
• 40% of the BIC supply chain companies achieved above average FPI compared with 24% of the remaining companies
Insight #5: Strong link between supply chain strategies and business and financial performance.
Different Ways to Compete in Retail
Customer Value Proposition Example Operations Strategy
High Fashion content at a
bl P iZara Speed to Market
reasonable Price
Customer Experience Dell Direct Responsiveness through
Configure-to-Order
Product Innovation Apple Efficiency through outsourced manufacturing and logistics Rule #4: The operations strategy that a company
d l t b t d th l iti
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Everyday Low Pricing Wal-Mart Cost Efficiency
Product Selection and Availability Amazon Efficient and reliable Order
Fulfillment
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deploys must be centered on the value proposition that the firm provides to its customers.
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What We’ll Cover …
• Research Motivation and Background • Key Research Insights and Rules • Summary• Summary
©Copyright 2010 D. Simchi-Levi 31
Key insights and Rules
• Increasing drive towards flexibilitySi ifi t diff b t
• A small investment in flexibility can make a significant impact on
l h i f
Insights Rules
• Significant difference between Cost-Efficient and Responsive supply chain strategies
• Companies that focus on Market share and Revenue Growth emphasize responsiveness
• Strong correlation between CSR
supply chain performance• Different brands, channels, and
product characteristics may require different supply chains
• Corporate Social Responsibility can create tangible business opportunity and valueStrong correlation between CSR
and innovations in the supply chain
• Strong link between supply chain strategies and business and financial performance.
opportunity and value• Operations strategy must be
centered on the value proposition the firm provides its customers.
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Your Turn!
For information about my latest book, see
www.operationsrules.com 33