Building the supply chain of the future

Presented by: Komal Tahir Ahad Badar Abbiha Waqar Mohtashim Naqeeb

An overview

Introduction
Challenges to global market Supply chains of global companies are ill-prepared for the new environments growing uncertainty and complexity

Meeting the challenge

Splintering the supply chain (A Case Study)

How many splinters are needed

Seeing which products they see as leaders on cost, service etc Analyze volatility of customer demand for a given product line

Advantages of multiple supply chains Conclusion

Supply chain in the new world

Many global supply chains are not equipped to cope with the world we are entering.

engineered to manage stable, high-volume production by capitalizing on labor-arbitrage opportunities available in China and other low-cost countries, in future when:

But

such standard approaches can leave companies dangerously exposed.

the relative attractiveness of manufacturing locations changes quickly ability to produce large volumes economically

Rising uncertainties that require changes in supply chain: Fluctuating trade and capital flows Rising wealth of developing countries Emergence of credible suppliers from these markets Greater risk for people who make decisions related to manufacturing and supply chain strategies

New supply chains

Supply chain organizations are preparing themselves in two ways:

Splintering their traditional supply chains into smaller and nimbler ones
Better to manage higher levels of complexity

Treating supply chains as hedges against uncertainty by reconfiguring their manufacturing footprints to weather a range of potential outcomes.

Twin challenges

CEO of Caterpillar says:

In our industry, the competitor thats best at managing the supply chain is probably going to be the most successful competitor over time. Its a condition of success.

Yet legacy supply chains of many global companies are ill-prepared for the new environment

A more uncertain world

Sources that are leading to changes in the supply chain:

68% of global executives responding to a McKinsey survey said that supply chain risk will increase in the coming five years Financial crisis of 2008 Route of trade and capital flows Currency values Long-term shifts in the global economy

The increasing importance of emerging markets tops the list of these uncertainties:
Economic growth will boost global energy consumption in the coming decade by one-third Voracious appetite of China and other developing countries for resources like iron ore and agricultural commodities is boosting global prices and thus difficult to configure supply chain assets Environment issues are growing Uncertainty over the scope and direction of environmental regulations

These long-term trends have knock-on effects that reinforce other sources of uncertainity like:
Growth in developing countries leads to volatility in global currency markets Growth in various markets means rising labour cost, which changes relative attractiveness of manufacturing locations
E.g. walk outs, labour strikes and worker suicides lead to increase in 20% wage increase in China Similar trends in Bangladesh, Vietnam, Cambodia

As companies of developing countries become incredible suppliers, difficult to choose which lowcost market to source from.

Rising complexity

Important to deal with complexity

Working harder to meet customers increasingly diverse requirements
E.g. mobile phone makers introduced 900 more varieties of handsets in 2009 than in 2000 E.g. number of SKUs at some large North American grocers exceeded 100,000 in 2009

Efficient distribution in emerging markets requires creativity

E.g. in Brazil, Nestle is experimenting with the use of supermarkets barges to sell directly to low-income customers

Meeting the challenge

Ahad Badar

Meeting the Challenge

In the circumstances of today's world optimizing supply chains is an enormous challenge.

Forward looking companies are trying to overcome this by:

Splintering Treating Supply Chains as dynamic hedges

Splintering

Splitting SCs into smaller & more flexible ones Although they have same assets and network resources. Helping companies to prevail over complexities and give better services

Hedges

Treating SCs as dynamic hedges Examining and reconfiguring their broader supply networks with a future economic conditions For this companies are building diverse & more resilient portfolios

From One To Many

Splintering can help

Tame Complexity Save Money Serve Customers Better

Case

U.S based consumer durables manufacturer Faced problems due to :

Volatile patterns of customer demand Product proliferation resulting into hundred of new SKU (stock keeping units)

Case

The company responded by examining:

The volatility of demand in each SKU Overall SKUs produced each week Resulting matrix helped the company rethink its strategy

Case

Company split its SC in four distinct splinters For high volume stable demand SKUs: China For low and high volume volatile demand SKUs: North America For low demand SKUs: United States, helping them achieve high quality &

Case

Also the company changed its information and planning process Now, it did not try to make forecasts for most volatile SKUs
It rather just chose to produce on demand

This helped the forecasts for production overseas As the noise because of volatile demand SKU's was just in U.S now

Advantages to the company

Advantages to the Company of the steps taken:

Reduced sourcing and manufacturing complexity Lower COGS by 15% Improved Services Shortened lead times Quality Improved

How many Splinters?

Abbiha Waqar

What is a splinter?

The multiple layer abstraction of a supply chain

Stage 1 Stage 2

Base line

Understanding of material flow from purchasing to distribution. Understanding the functionality of material management, manufacturing management and distribution. Internal integration of material management, manufacturing management and distribution. Integration of suppliers, internal supply chain and customer

Functional Integration

Stage 3

Internal Integration

Stage 4

External Integration

Amount of splinters needed

For this, organizations need to have a closer look on how supply chain assets that company uses to manufacture and distribute its products matches up against the strategic aspirations it has for those Products & Customers. Most companies examine the second half of the equation,

Readily identify which products they see as leaders on:

Cost; Service; Innovation; or Combination of these.

Fewer companies seriously examine the operational trade-offs implicit in such choices.

A good place to start is to:

Analyze the volatility of customer demand for a given product line against historical production volumes Compare the results against the total landed cost for different production locations

This information provides a rough sense of:

Speed-versus-cost trade-offs Location of supply chain splinters E.g. A Global consumer packaged-goods maker saw:
Two-thirds of the demand associated with a key product line (About 40 % of the companys product portfolio) could be moved from a high-cost country to a low-cost country without hurting customer service.

Consumer goods company

Packaging innovation was a differentiator for some of its products

thus configured a single production line in the new, low cost location to make packaging for several markets quickly.

By contrast, in Automotive and other assembly based industries we see:

Customers responsiveness & Complexity of individual products are important inputs that determine where supply chains might be splintered

Second order benefits

1. The act or process of equating or of being equated. 2. The state of being equal 3. A complex of variable elements or factors

Dividing supply chain into splinters Reduces complexity

Manage it better because operational assets focused on tasks they are best equipped to handle Helps Senior managers more effectively employ traditional improvement tools that were difficult to handle before E.g Consumer durable maker after dividing supply chain:

Use formally impractical postponement approaches:

Producing closer in time to demand to keep holding cost low Companys US plants combined SKUs into semi finished components that could quickly be assembled into products

Likewise, global consumer packaged goods maker found that after splintering the supply chain:
Apply lean-management techniques in plants more successfully Faster changeover times in higher-cost production locations Effectively handle product-related complexity

Conclusion
Mohtashim Naqeeb

Use your network as a hedge

The

advantages that multiple supply chains confer are most valuable if companies view them dynamically, with an eye toward the resiliency
Resiliency

- The power or ability to return to the original position after being bent compressed or stretched elasticity.
Example

China's currency appreciates by 20% Oil costs $90 a barrel Shipping lanes have 25% excess capacity

Some companies like NIKE are already thinking this way

Leader in emerging market production
Manufactured more shoes in Vietnam than in China for the first time in 2010.

China - Most attractive option in short term for manufacturing.

the risks associated are

wage inflation currency-rate changes

Which makes Mexico a preferable alternative under several plausible scenarios.

Example

North American industrial manufacturer stretched to Brazil & Mexico.

This helped to hedge against swings in foreign exchange rates.

By this company increased capacity of production by producing in other than Europe & US.

'Reshoring' firms head for home

Almost three years ago, Peerless Industries Inc, a US-based maker of audio-visual mounting solutions, made an unusual decision. It pulled its production out of China to build a new plant in the US. The company predicted that its production costs in China would eventually outweigh those in the US.

Peerless did not have to wait long to discover if it had made the right call. According to a recent study conducted by Boston Consulting Group (BCG)
rising wages shipping costs land prices in China combined with a strengthening yuan and a weaker dollar

are narrowing the cost gap between China and the US for many goods produced for US consumers.

As a result, a trend of US companies moving production from China to the US has begun in recent years. Besides Peerless, the BCG study also cites Ford Motor Co, The Coleman Co, NCR Corp and Outdoor Greatroom Co as having moved their production bases.

These days, it may be more economical for US manufacturers to stay at home, especially when their products serve the US consumer.

China cannot be ignored

The rising level of incomes in China means that Chinese consumers will have more money to spend, which may translate into rising demand for consumer products. Caterpillar Inc recently built a new plant in Victoria, Texas, to produce hydraulic excavators in the US. It also plans to increase its excavator capacity at its existing facility in Xuzhou in East China to support the growing demand for its products in China. Jim Dugan said that the company is not moving work back to the US from China, but rather, it is growing in both countries.

Conclusion

Not an easy task as it effects the entire organization

For starters, such changes require much more cooperation and information sharing across business units than many companies are accustomed to. For many companies, a hands-on-effort by the CEO is needed for success.

However the rewards are worthwhile This can help companies gain significant advantages in longer run.

Thank you