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Flexible Supply Chain Strategies
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Copyright 2008 SCDigest and
The Supply Chain Television Channel
Flexible Supply Chain Strategies
Supply Chain VideoCast™
Copyright 2008 SCDigest and
The Supply Chain Television Channel
Broadcast Made Possible by:
3
Flexible Supply Chain Strategies
David Simchi-Levi
Professor, Massachusetts Institute of Technology
Chief Science Officer
ILOG
4
What We’ll Cover …
• Supply Chain Challenges
• Introduction to Flexibility
• Manufacturing Strategy
• Capacity Redundancy
• Summary
5
Today’s Supply Chain Challenges
• Global supply chain with long lead times
• Rising customer expectations
• Increase in labor costs in developing countries
Country Brazil China Malaysia Mexico US
Average Annual Wage Increase 21% 19% 8% 5% 3%
The Average Annual Wage Increase between 2003 and 2008
in different Countries
6
Today’s Supply Chain Challenges
• Global supply chain with long lead times
• Rising customer expectations
• Increase in labor costs in developing countries
• Increase in logistics costs
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9
10
11
12
13
14
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
US Logistics Costs as Percent of GDP
Increase in Logistics Costs
• Rising energy prices
• Rail capacity pressure
• Truck driver shortage
• Security requirements
15% increase
7
0
200
400
600
800
1000
1200
1400
1600
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Total US Logistics Costs in $MMs
Inv Carrying Transportation Admin Total
Total US Logistics Costs 1984 to 2007 ($ Billions)
Source: 19th Annual Logistics Report 8
52%
Transportation
Admin
47%
62%
Total Cost
Inventory
9
Today’s Supply Chain Challenges
• Global supply chain with long lead times
• Rising customer expectations
• Increase in labor costs in developing countries
• Increase in logistics costs
• Importance of sustainability
• Unprecedented Volatility
10
What We’ll Cover …
• Supply Chain Challenges
• Introduction to Flexibility
• Manufacturing Strategy
• Capacity Redundancy
• Summary
Supply Chain Flexibility: Introduction
• The ability to respond, or to react, to change:
� Demand volume and mix
� Commodity prices
• The objective is to
� Reduce cost
� Reduce the amount of unsatisfied demand
� Improve capacity utilization
• With no, or little, penalty on response time
11
Achieving Flexibility through….
• Product design
� Modular product architecture, Standardization, Postponement, Substitution
• Process design
� Flexible work force, Lean, Organization & Management structure, Flexible contracts, Dual sourcing, Outsourcing
• System design
� Capacity redundancy, Manufacturing strategy, Distribution strategy
©Copyright 2008 D. Simchi-Levi
Flexibility through System Design
• Balancing transportation and manufacturing costs
• Coping with high forecast error
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1 A
ProductPlant
2 B
3 C
4 D
5 E
No Flexibility
1 A
ProductPlant
2 B
3 C
4 D
5 E
2 Flexibility1 A
ProductPlant
2 B
3 C
4 D
5 E
Total Flexibility
Case Study 1: Flexibility and the Manufacturing Network
• Manufacturer in the Food & Beverage industry.
• Currently each product family is manufactured in one of five domestic plants.
• Manufacturing capacity is in place to target 90% line efficiency for projected demand.
• Objectives:
� Determine the cost benefits of manufacturing flexibility to the network.
� Determine the benefit that flexibility provides if demand differs from forecast;
� Determine the appropriate level of flexibility
Summary of Network
• Manufacturing is possible five locations with the following average labor cost:� Pittsburgh, PA $12.33/hr� Dayton, OH $10.64/hr� Amarillo, TX $10.80/hr� Omaha, NE $12.41/hr� Modesto, CA $16.27/hr
• 8 DC locations: Baltimore, Chattanooga, Chicago, Dallas, Des Moines, Los Angeles, Sacramento, Tampa
• Customers aggregated to 363 Metropolitan Statistical Areas & 576 Micropolitan Statistical Areas
� Consumer product- Demand is very closely proportional to population
• Transportation
� Inbound transportation Full TL
� Outbound transportation LTL and Private Fleet
Network Visualization- Customer Demand
Baseline Summary
Plant Labor Rate
Pittsburgh, PA $12.33/hr
Dayton, OH $10.64/hr
Amarillo, TX $10.80/hr
Omaha, NE $12.41/hr
Modesto, CA $16.27/hr
Introducing Manufacturing Flexibility
• To analyze the benefits of adding manufacturing flexibility to the network, the following scenarios were analyzed:
1. Base Case: Each plant focuses on a single product family
2. Minimal Flexibility: Each plant can manufacture up to two product families
3. Average Flexibility: Each plant can manufacture up to three product families
4. Advanced Flexibility: Each plant can manufacture up to four product families
5. Full Flexibility: Each plant can manufacture all five product families
Plant to Warehouse Shipping Comparison
Plant to Warehouse Shipping Comparison
Sourcing Product 5 from Omaha rather than Modesto offers large transportation savings for Baltimore warehouse
Total Cost Comparison
• The maximum variable cost savings with full flexibility is 13%
• 80% of the benefits of full flexibility is captured by adding minimal flexibility.
Sensitivity analysis to changes above and below the forecast:
1. Growth for leading products (1 & 2) by 25% and slight decrease in demand for other products (5%).
2. Growth for the lower volume products (4 & 5) by 35% and slight decrease in demand for other products (5%).
3. Growth of demand for the high potential product (3) by 100% and slight decrease in demand for other products (10%).
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Impact of Changes in Demand Volume
Impact of Changes in Demand Volume
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Scenario Demand Satisfied Shortfall Cost/ Unit Avg Plant Utilization
Demand Scenario 1
Baseline 25,520,991 1,505,542 $ 2.94 91%
Min Flexibility 27,026,533 0 $ 2.75 97%
Demand Scenario 2
Baseline 25,019,486 1,957,403 $ 2.99 91%
Min Flexibility 26,976,889 0 $ 2.75 96%
Demand Scenario 3
Baseline 23,440,773 4,380,684 $ 2.93 84%
Min Flexibility 27,777,777 43,680 $ 2.79 100%
Impact of Changes in Demand Volume
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Scenario Demand Satisfied Shortfall Cost/ Unit Avg Plant Utilization
Demand Scenario 1
Baseline 25,520,991 1,505,542 $ 2.94 91%
Min Flexibility 27,026,533 0 $ 2.75 97%
Demand Scenario 2
Baseline 25,019,486 1,957,403 $ 2.99 91%
Min Flexibility 26,976,889 0 $ 2.75 96%
Demand Scenario 3
Baseline 23,440,773 4,380,684 $ 2.93 84%
Min Flexibility 27,777,777 43,680 $ 2.79 100%
Why 2-Flexibility is so powerful?
Pittsburgh 3
ProductPlant
2
Modesto 5
Dayton 1
Amarillo 4
2 Flexibility
Omaha
• 2 Flexibility provides the benefits of full flexibility through the creation of a chain
Key Concepts
• A small amount of flexibility provides large benefits
• A chain is a group of products and plants that are all connected directly or indirectly � Long chains perform better than many short chains
� A long chain is preferred when designing a flexibility structurebecause it pools more plants and products and thus deals with uncertainty more effectively than a short chain
• Higher impact is achieved when each product is connected to the same number of plants
� Measured by total capacity
• Higher impact is achieved when each plant is connected to the same number of products
� Measured by average demand©Copyright 2008 D. Simchi-Levi
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Key Observations
• Cost savings and revenue increase� To cover for the cost of implementing flexibility
• Multiple products at the same plant� Require production planning and scheduling technology
• Impact on transportation cost and sustainability � Better response to changes in oil price
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What We’ll Cover …
• Supply Chain Challenges
• Introduction to Flexibility
• Manufacturing Strategy
• Capacity Redundancy
• Summary
29
Case Study 2: Risk Management
• Manufacturer of consumer packaged goods
� Household goods
• Global network
� About 40 manufacturing facilities
� Many distribution centers
• Two objectives:
� Plant rationalization
� Risk management
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Brazil
Argentina
Ecuador
Colombia
Venezuela
Dominica
Puerto Rico
Guatemala
Mexico
USA
Canada
South Africa
Zimbabwe
Zambia
Kenya
Cameroon
Senegal
Morocco
UK
Poland
Romania
ItalyTurkey
Egypt
S Arabia
PakistanNepal
India
Thailand
Malaysia
Vietnam
China
Taiwan
Fiji
Australia
Global CPG Plant Location Study: Baseline
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(4.5) (2.5)(4.2)
(4.0) (4.5)
(3.6)
(1.6)
(1.4)
(1.2)
(1.2)
(0.9)
Optimized Network
$40 Million Savings from Baseline
Impact of Lean Supply Chain Design
• Significant reduction in total cost, but….
• …. Higher risk
� Utilization of manufacturing facilities in Asia and Latin America is maximized; any disruption of supply will make it impossible to satisfy many market areas
� No manufacturing facilities in North America and Europe; long and variable supply lead times
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Trade-Off Curve
38 36 30 25 23 20 10 9 8Total Plants
To
tal C
ost
Total Var Conversion Fixed Trans Duty Inv
Below 8 plants there is not enough capacityCurrent Number of Plants
+2.4MM
Optimal Solution
+50MM
34
Trade-Off Curve
38 36 30 25 23 20 10 9 8Total Plants
To
tal C
ost
Total Var Conversion Fixed Trans Duty Inv
Below 8 plants there is not enough capacityCurrent Number of Plants
+2.4MM
Optimal Solution
+50MM
7 More Plants is Near Optimal
35
What We’ll Cover …
• Supply Chain Challenges
• Introduction to Flexibility
• Manufacturing Strategy
• Capacity Redundancy
• Summary
36
Key Points to Take Home
• Unprecedented volatility has significant impact � Business, consumers, environment, technology
• Need to consider the entire supply chain� Replace static by dynamic supply chain strategies
• Flexibility generates real value� Partial flexibility may be more than enough
• Managing risk is the number one concern of CEO and COO� Redundancy, Risk Sharing, Risk Pooling,
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Your Turn!
Copyright 2008 SCDigest and
The Supply Chain Television Channel
Speaker Contact Info
� David Simchi-Levi– [email protected]
� Dan Gilmore – Supply Chain Digest
Resources
www.ilog.com
www.scdigest.com
Copyright 2008 SCDigest and
The Supply Chain Television Channel
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