Driving Value from the Supply Chain: Best Practices to Deliver Results

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Driving value from the Supply Chain: Best practices to deliver results

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CONFIDENTIAL

Driving value from the Supply Chain: best practices to deliver resultsDRAFT

L.E.K. Consulting is a leading global strategy consulting firm

Overview

Established in 1983 in London

Clients include 25% of the largest 200 companies globally, as well as innovative start-ups and leading private equity firms

Areas of expertise:Strategy & PlanningM&A ServicesMarketing and SalesOperationsOrganization

Worldwide over 1,000 professionals, led by 100+ Partners in 22 offices

Global Network

Note: * Alliance

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Country Coverage

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1

Seoul

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2

Offices and consulting professionals in China’s major urban markets

Wide and deep network of resources in PRC, Hong Kong, and Taiwan

Seamless worldwide practice with 22 global offices and additional affiliates

China practice established in 1998 with offices in Shanghai and Beijing

Experienced professional staff

- 4 partners with decades of consulting experience in Asia and in China

- 65+ bilingual and bicultural professionals drawn from leading Chinese and global universities

Focused on providing firms with the insight and solutions to succeed in China’s complex business environment

Clients include multinational companies in and outside of China, Chinese companies, private equity firms, and government entities

Background Greater China Network

Beijing

Shanghai

In China, L.E.K.’s capabilities and experience support our clients as they grow their business or prepare for major investments

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DRAFT Driving value from the Supply Chain: best practices to deliver results

From Supply Chain

To Demand Chain

Into the Boardroom

3

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Is Your Supply Chain Disconnected from Corporate Strategy?

4

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A Golden Opportunity Missed

5

Japanese Imports

Reagonomics/ Thatcherism

Long Range Planning

Corporate Takeovers

Decentralized Business Governance

Corporate Agenda (circa 1980)

TQM (Total Quality Management)

SPC (Statistical Process Control)

JIT (Just in Time)

MRP II (Materials Requirement Planning)

Six Sigma

Supply Chain Agenda (circa 1980)

● Elevate the Message● Align with Corporate Strategy● Holistic / Inclusive Delivery

Message / content irrelevant to

corporate issues

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Another Golden Opportunity Missed

6

Y2K

Dot Com

“e”

China / Emerging Markets

EVA (Economic Value Added)

Corporate Agenda (circa 1990)

VMI (Vendor Managed Inventory)

3-PL (Third Party Logistics)

Strategic Sourcing

“e”

ERP (Enterprise Resource Planning)

Supply Chain Agenda (circa 1990)

● Translate to Shareholder Value● Move from a Cost to Revenue Focus● Consider the current market

environment (competition)

Delivered the right message but wrong language

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Is Your Supply Chain Misaligned with the Corporate Agenda?

7

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How to Achieve Success in the Boardroom

8

Fully connected and aligned

Profitability (Top-line growth)

Security

Corporate Accountability

Mergers and Acquisitions

Raw Material Costs

Global Uncertainty

Corporate Agenda (Today)

Capabilities

Security / Privacy

Sarbanes - Oxley

Global

Customer Expectations

Visibility

Lean & agile

Supply Chain Agenda (Today)

Align to holistic corporate priorities/issues Focus on how objectives are supported

before communicating “how it works” Use audience’s language & sequence

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Supply / Demand Chain Boardroom Qualifications

Technology

Capabilities

Process

Lean & Agility

Visibility

Functional

Sales and Marketing

Mergers and Acquisitions

Business

Financial

Technical

Risk Management

Executive

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“It is not the strongest of the species that survives, nor the most intelligent, but the one most responsive to change.”

— Charles Darwin

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We now know he was referring to supply chain

Change is the only constant in evolution

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DRAFT

Supply chain is frequently highlighted on recent studies and articles

In 2010 alone, economic losses across the globe resulting from natural and man-made disasters reached $222 billion

Over 70% of survey respondents say the risks to their supply chains have increased over the past five years. Over 85% said they had suffered at least one supply chain disruption during 2011

80% of large organizations will face a crisis of at least 10 days every four to five years. Of those affected, over 70% will close or suffer a significant long-term impact

A well-known insurance company recently revealed that more than half of the claims it received from the Japanese earthquake and tsunami came as a result of supply chain disruption that was not caused by physical damage

In 2011, while 92% of survey respondents had reviewed their supply chain operations, just 12% expected to make significant changes

Investors are becoming increasingly interested in the actions that companies are taking to mitigate risk as supply chains are getting more complex

11

Driving value from the Supply Chain: best practices to deliver results

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Many organizations have spent years streamlining operations

Re-engineering processes, integrating with partners

Implementing enterprise systems

Moving production to low-cost, offshore locations

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They have done all of this in an attempt to improve the services they provide to customers at a more competitive cost

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New risks of creating a global supply chain

Terrorism

Piracy

Currency Fluctuation

Government Instability

Labor Strikes

Quality Considerations

Energy Cost

Transportation Problems

Natural Disasters

Supply Chain Complexity

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Many corporations have tremendous risk hidden in their supply chain

Technology dependence - Have we become too dependent on technology?- “How do I turn on the TV?”

Workforce management and oversight- The people controlling the dials and millions of dollars of decision making

have never stepped on a warehouse floor

Preparing for and adapting to industry evolution- As margins shrink, supply chain becomes more visible. “Are we ready and

able to respond?”

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What about China? Six myths of the China Supply Chain

Despite Weak Links, the Supply Chain is Effective

China’s Workforce is Increasingly Skilled

Rethink How You Forge Strategic Partnerships

Despite Rising Wages, Manufacturing is Still a Good Bet

Optimize Production at Home, Replicate Abroad

Understand the Real Currency of Business

1

2

3

4

5

6

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Capitalizing on Market Opportunities in China

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Despite Rising Wages, Manufacturing is Still a Good Bet1

16

150

Product Cost Index by Country (2016F)*Index U.S. 2010 = 100

125

100

75

50

25

0Romania

93

Bulgaria

86

Mexico

94

Brazil

128

Vietnam

85

Thailand

91

129

Germany

136

US

109

China

98

Sri Lanka

83

Malaysia

85

Indone-sia

82

India

94

Switzer-land

Material

Overhead

Labor

Transportation

Inventory

Duty

China US Germany Switzer-land India Indone-

sia Malaysia SriLanka Thailand Vietnam Brazil Mexico Bulgaria Romania

2.5 1.5 1.2 0.5 1.7 1.4 1.5 1.3 1.5 1.2 2.2 1.5 1.4 2.0

CAGR% (2010-16F)Asia Latin America Eastern Europe

Source: EIU, World Bank, searates.com, freght-calculator.com, L.E.K. analysis

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China’s Workforce is Increasingly Skilled

17

Note: * GDP at PPP takes the relative cost of living and the inflation rates of countries into account Source: The World Bank, EIU, L.E.K. analysis

0.75

0.60

0.45

0.30

0.15

0.00

-0.15

USA

Germany

Romania

Mexico

Brazil

Vietnam

Bulgaria

GDP at PPP, per worker* (2005-15F)U.S. Dollars1.50

1.35

Thailand

Sri Lanka

Malaysia

Indonesia

India

China

15F14F13F

1.20

1.05

0.90

12F11E10090807062005

CAGR%(05-10) (10-15F)

10.5 8.4

4.6 4.8

3.0 4.2

2.62.4 3.81.9 3.4

2.1 2.7

2.3 2.2

1.2 1.10.1 1.6

0.3 0.7

3.7

6.1 6.4

7.0 5.6

2

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Despite Weak Links, the Supply Chain is Effective

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Weak links Antiquated information

technology (IT) systems and operational procedures

Potential upside/ solutions

Better understand the supply chains of their Chinese counterparts

Cloud technology will provide more room to improve supply chain efficiency

Source: L.E.K. analysis

3

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Optimize Production at Home, Replicate Abroad

Manufacturers tend to increase specification standards by as much as 20-30% for outsourced suppliers vs. in-house suppliers in Asia

19

Current Situation

Key Actions Manufacturers need to ensure they review the

expectations that they place on Chinese supply chains to ensure that they are reasonable and fair


4

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Rethink How You Forge Strategic Partnerships

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Local hiring

In-person business meeting

Partnering with supply chain expert firms

Finding various types of partners

Strong strategic partnership

Multiple local relationship

Collaborative relationship


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Understand the Real Currency of Business

In China, local distributors can be strong partners

Distributors’ margins can be significant in China due to the business model

Chinese companies may value very different things as their international counterparts

21

Mul

ti-le

vel d

istr

ibut

ion

mod

el

Plat

form

mod

el

Hospitals

L1 dealer

Manufacturer

L2 dealer

Hospitals

Platform

Manufacturer

Dealer(Non inventory

holding)

Different distribution models for MedTech companies


6

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Routine

Bus

ines

s Im

pact

Supply Power

Bottleneck

Leverage Strategic

Case Studies

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Spending on marketing services accounted for almost 30% of the companies worldwide spending on materials and services

5 “C” level executives estimated that advertising agency spend was less than $30 million

Preliminary analysis showed the company spent almost 70% of the $135 million (i.e., $95 million) in worldwide marketing services on advertising agencies

By taking a process view of a typical advertising agency, we are trying to understand if opportunity exists for cost reduction

Unbundling the various functions performed by the agencies we were able to identify specific opportunities

Therefore, companies became more concerned with agency accountability, agency profitability and advertising effectiveness

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Executive estimate:

$30 million

Analysis result:

$95 million

costreduction

opportunity

Advertising spend analysis

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Companies have become more demanding in driving value from their advertising agencies

Outsourcing global media planning and buying resulting in lower transaction costs and greater buying leverage

Negotiate a lower rate for media planning and buying or move to a $/hour rate

Negotiate overall rate reductions based on an explicit longer term contract

Compensation based on value added (pay for performance)

Hire experts that specialize in advertising agency negotiations

Technological advancements - desktop publishing of print advertising

— Examples of Cost Reduction Methods—

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Routine

Bus

ines

s Im

pact

Supply Power

Bottleneck

Leverage Strategic

Case Studies

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Supplier 1 Supplier 2 Supplier 3 Supplier 4 Supplier 5 Supplier 6

Ahold’s Sourcing Challenge

● Dispersed spend across six retail banners ● Limited insight into true NFR spend

− Stored within multiple incompatible financial systems− Over 300 unmanaged categories − Specifications not clearly documented

● 45% of NFR spend was service related● Lacked standard sourcing approach ● Supplier base in excess of 60,000 suppliers ● No structured supplier qualification or performance rating systems

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Routine

Bus

ines

s Im

pact

Supply Power

Bottleneck

Leverage Strategic

Case Studies

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● Suppliers are also customers

● Lack of focus on aggregation

● Non-compliance

● Everyone can get a better deal

● Insufficient spend in many categories

Solution

Case Study – Key Client Issues

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Outsourced

Aggregation upgraded skills

Brought BackIn-house

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Routine

Bus

ines

s Im

pact

Supply Power

Bottleneck

Leverage Strategic

Case Studies

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Examples of completed initiatives

MarketingCircular Printing . . . . . . . . . . . . . . Commercial Printing. . . . . . . . . . .In-Store Music Service . . . . . . . . .

Hired ServicesArmored Car . . . . . . . . . . . . . . . . .Floor Care Services . . . . . . . . . . . .Locksmiths. . . . . . . . . . . . . . . . . . .Third Party Check Collection . . . . . Pest Control . . . . . . . . . . . . . . . . . .Parking Lot Sweeping . . . . . . . . . .Security Guard Services . . . . . . . . Window Washing . . . . . . . . . . . . . .Commercial Debt Collection . . . . . Recruiting . . . . . . . . . . . . . . . . . . . .Waste Removal . . . . . . . . . . . . . . .

Travel/MeetingsAir . . . . . . . . . . . . . . . . . . . . . . . . . . Meeting - Group Travel . . . . . . . . .

Savings %

49%34%63%

21%11%34%

35%*17%22%

5%15%

22%*17%

7%

3%**16%

Logistics & DistributionFleet Graphics . . . . . . . . . . . . . . . .Distribution Labels. . . . . . . . . . . . . .Helium . . . . . . . . . . . . . . . . . . . . . . Plastic Totes . . . . . . . . . . . . . . . . . .Batteries . . . . . . . . . . . . . . . . . . . . .

ConstructionLight Fixtures . . . . . . . . . . . . . . . . Skylights . . . . . . . . . . . . . . . . . . . . . Elevators . . . . . . . . . . . . . . . . . . . . .Elevator Maintenance . . . . . . . . . . .TPO Membrane Roofing . . . . . . . . . Switch Gear . . . . . . . . . . . . . . . . . . .

Store EquipmentFront-End Check Stands . . . . . . . . .Coolers & Freezers . . . . . . . . . . . . .Bakery Cases . . . . . . . . . . . . . . . . . .Evaporator Coils & Condensers . . . .

40%30%37%21%27%

24%33%25%39%12%

3%

25%14%31%10%

Savings %IT/TelecomHandhelds . . . . . . . . . . . . . . . . . Wireless . . . . . . . . . . . . . . . . . . . KII Telecommunications . . . . . . .Enterprise Storage Server . . . . . IVR System . . . . . . . . . . . . . . . . .

Store SuppliesScale Sheets . . . . . . . . . . . . . . .Chicken Containers . . . . . . . . . . Store Apparel . . . . . . . . . . . . . . .Produce Bags . . . . . . . . . . . . . . .Dome Lids . . . . . . . . . . . . . . . . . .Departmental Bags . . . . . . . . . . .Salad Bowls . . . . . . . . . . . . . . . . .Fruit & Veggie Trays . . . . . . . . . .

Office Products/ServicesToner . . . . . . . . . . . . . . . . . . . . . . Copy Paper . . . . . . . . . . . . . . . . . Office Supplies . . . . . . . . . . . . . .

23%15%

8%20%11%

40%22%50%11%

5%17%18%

5%

20%10%20%

Savings %

30

Note: * of revenue; ** of incremental

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THANK YOU!

31

Michel BrekelmansPartner & Managing Director

L.E.K. Consulting LimitedFloor 34, CITIC Square1168 Nanjing Road WestShanghai 200041China

T: 86.21.6122 3900F: 86.21.6122.3988

[email protected]

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