Global Supply Chain Mega Trend Interview

Questuarterly

Supply Chain

Megatrends

2010-11

Feb-Apr 2010

Knowledge Partner

Gateway to Logistics Excellence

global Supply chain M

10

12

14

18

16

Shift from Customer Service to Relationship Management

Forecast to Endcast

Experience to Transition Strategy


Collaborative Approach

20Vertical to Virtual Integration

While traditional customer service focuses on achieving internal operating standards, a truly rela-

tionship-driven supply chain focuses on establishing customer success...

Management often lets forecasting bumble along unsupported in the hope everything will come

out all right in the end....

Firms increasingly confront the need to reinvent processes that are performing adequately when as-

sessed historically, but in fact....

While departments may remain the preferred method of managing work, the reality is that

process-oriented, self-directed....

The notion of focused collaborative arrangements, coupled with true cradle to grave accountability,

is revolutionizing the way that....

Virtually integrating operations with material and service suppliers to form a seamless flow of in-

ternal and external work overcomes the financial barriers....

Trust the expertiseMelvis Furtado

3PL is a two-way traffic where the firms have to be a good listener and always

evaluate what best their partner can do and what constraints he has. 3PL provides

Service not just ....

Supply Chain Opti-Simulation UnwiredTolga Yanasik

Simulation is often regarded as the proper means for supporting deci-

sion making on supply chain design. Owing to its inherent modeling flex-

ibility, simulation is often regarded as the proper means for....

41

44

CONT

Mega Trends 2010-2011

30

26

24

22

28

Absolute to Relative Value

Information Hoarding to Sharing

Training to Knowledge-Based Learning

Reinventing Managerial Accounting to Value-Based Management

Supply Chain design and analytics

The notion of relative value is to grow a larger share of the profitable revenue available in a

business arrangement by a willingness to perform a broader range....

Given the right information-enabling technology and leadership, decision-makers can become per-

formance managers....

Implementing knowledge-based learning to effectively train employees is becoming critical.....

Value management is appropriately viewed as the implementation of financial sophistication. The

key is to identify and support activities that create value as contrasted to....

Changing scenario of Supply Chain is forcing companies to redesign their supply chain model to keep

pace with the market....

“Approach RTC while cutting cost”Thibault Quiviger

Redesign To Cost (RTC), a very efficient Cost Cutting Approach consisting of

reveiwing the very detailed design and specifications of the product, can save 15-

35 % of your total cost.....

Back to Old Nightmares : Mastering TimeYan Lehunchec

This new paradigm is shifting the center of the industrial organization from the

plant to the management of supplies and dispatch....

Corollary of Supply Chain AnalyticsUnnikrishnan

A long forgotten virus is challenging the LLC Industrial base, i.e. Long lead times

50

54

58

TENTS

Feb-April 2010 Log4scm Quest 05

Editorial

Let’s hope

for the bestF

or the last couple of years Supply Chain has matured so have its

complexities. Considered often as a soft skill, Supply Chain manage-

ment, on the contrary, is an engineering activity, as much as manu-

facturing or IT development. This activity requires not only extensive

training and skilled people to be carried out efficiently but also trust among

the different partners in the chain. That’s the most difficult aspect of Supply

Chain management: partners need to trust each others, to share data or

even invest in common systems. This trust issue is often the foot trap which

blocks, for instance, the development of 3rd PL. 3rd PL need to invest in

heavy IT system interconnected with their customer’s systems to provide

up to date services but contracts are challenged every 2 years. This is far

shorter than the breakeven point, impeding the development of long and

fruitful relationship between 3rd PL and orders givers.

There are several aspects of supply chain interaction that have been iden-

tified in supply chain trends over the last few decades. The mega-trends re-

flect fundamental paradigm shifts exhibited by leading firms as they

transform their supply chain capabilities to accommodate the long-term

transition from an industrial to an Scientific Technology driven society.

These mega-trends imply substantial change in logistics practices between

supply chain partners as they struggle to establish efficient, effective, and

relevant product/service solutions for end-customers. The mega-trends

discussed in this paper identify some critical dimensions of change relevant

to supply chain value creation.

Well, we have tried to create an enabling environment for the supply chain

sector so as to equip supply chain strategists with the changing market

trends which could affect them in future. Moreover supply chain is con-

sidered secondary focus. We hope Log4scm Quest will create value addition

in bringing supply chain in centre stage in companies’ strategic business

planning.

We would be glad to hear from you

Happy reading!!

[email protected], [email protected]

+91 99105 168905

Questuarterly Feb-Apr 2010

Editorial Head

Apresh C Mishra

[email protected]

[email protected]

+91 99105 16905

Intellect Head

Rajeev R Mishra

[email protected]

[email protected]

+91 99711 74574

Marketing and Operations

Head

Shatrunkay Singh

[email protected]

[email protected]

Communications Partner

Renaissance PR

Knowledge Partner

Enetek S.A.R.L.

DisclaimerAll the information in this

magazine has been providedwith due care. However nei-ther Uvaach Media nor its

any partner guarantee for theappropriateness of the infor-mation. Kindly check prop-erly before acting accordingto the information we have

provided here. All the matterscontained here are under theintellectual property right ofUvaach Media that prohibitsthe user from copying or re-producing the matter in anyform without the prior writ-ten permission of Uvaach

Media.

Cover Story

06 Log4scm Quest Feb-April 2010

Global Supply Chain

Mega Trends

2010-2011


Traditionally, supply chains

created value through

low price and broad

product assortment. Today, how-

ever, supply chain managers are

learning how to accommodate

customers who demand greater

control of the buying process,

have the financial ability to make

choices, and are willing to utilize

a variety of ways to pur-

chase goods and services

to satisfy their

lifestyle re-

quirements. Unfor-

tunately, as firms struggle to

implement best practices to solve

today's problems, the environ-

ment in and around the firm is

changing. If a firm does not have

the capability and inclination to

change, it may find itself in the

position of doing things ex-

tremely well that no one values.

The goal of integrated supply

chain is to enhance end-customer

value, Understanding that end-

customers will increasingly define

value in the context of a technol-

ogy driven competitive environ-

ment is critical to supply chain

success. There are several aspect

of supply chain interaction that

has been identified in sup-

ply chain

t r e n d s

o v e r

t h e

last few

d e c a d e .

The mega-

trends reflect

fundamental par-

adigm shifts exhibited

by leading firms as they trans-

form their supply chain capabili-

ties to accommodate the

long-term transition from an in-

dustrial to an Scientific Technol-

ogy driven society. These

mega-trends imply substantial

change in logistics practices be-

tween supply chain partners as

they struggle to establish effi-

cient, effective, and relevant

product/service solutions for

end-customers. The mega-trends

discussed in this paper identify

some critical dimensions of

change relevant to supply chain

value creation.

Once a product is scanned at a

retail store, a natural delay occurs

in the transmittal of the signal

that triggers a re-

p l e n i s h m e n t

event to

t a k e

place.

De lays

occur for a

number of

reasons, and the

longer the delay, the

greater the uncertainty up-

stream supply chain partners

experience. That uncertainty

translates into those partners tak-

ing measures to guard against

stock outages, in the form of

larger safety stocks. As that de-

mand signal, and its delay, moves

further away from its source, the

larger the amplitude, or uncer-

tainty becomes. That uncertainty

impacts planning cycles, and their

lead times, within and between

the supply chain partners. In this

way, distance and time become

more and more critical to build-

ing an effective and efficient sup-

ply chain.

In addition, there are com-

pounding factors that occur due

to the nature of that initial de-

mand signal the supply chain re-

ceives. The circumstances that

cause a consumer to walk into a

specific store and purchase a par-

ticular SKU are of interest in un-

derstanding supply chains. It

could just be the normal weekly

shopping run, which results in a

Cover Story


demand signal that is relatively easy

to predict and manage. Problems

arise when product promotions take

place. The consumer might have

made a purchase because of a

coupon event, a store ad placed in a

local paper, or via an in-store event.

These events can cause disruptions

in the supply chain, and far too fre-

quently are mis-communicated to

the supply chain partners.

New product initiatives are an-

other form of disruption in the sup-

ply chain. A new initiative,perhaps a

new product, or variation on an ex-

isting product, requires decisions on

pre-launch production timing, and

pre-building and staging inventory

to meet anticipated demand for the

products. The location and amount

of inventories and production capa-

bility plays a direct impact on the

ability to respond to these types of

supply chain demand-creating

events, further leading to improving

our understanding of how physical

location and work processes are in-

herently linked in efficient supply

chain design. And while these prob-

lems exist in scale in the different

parts of the World, they are further

exacerbated when dealing with in-

ternational trade.

The ENETEK Analytics group

was asked to develop a traditional

distribution network design model,

utilizing mathematical optimization

methods, to suggest a potential lay-

out of warehousing required to

meet this need. To accomplish this,

work processes and policies would

need to be substantially changed.

How successfully those changes

were managed, and how effective

the resulting processes were in

achieving the objectives, was par-

tially dependent on where and how

inventory was physically deployed in

the network. This led us to support

the development of a dynamic sim-

ulation model to adequately repre-

sent the processing of a supply

chain’s work processes and operat-

ing policies against the supply

chain’s primary driver: demand. This

leads to an important point: If a

supply chain’s designing incorpo-

rates not only questions as to Where

and how many stacks of inventory?,

but also of work process like inven-

tory deployment, replenishment

policies, operating policies, the two

issues are inherently linked and must

be solved together.

As we investigated different oper-

ating policies within the warehouse

structure proposed by the optimiza-

tion models, we found that in cer-

tain instances that we would not be

able to achieve the service levels we

had intended. This learning from

the simulation modeling fed back

into the optimization model, in

terms of new constraints required

to determine a feasible warehousing

structure. That, in turn, created a

new scenario to test within the sim-

ulation environment. In the course

of the work, we realized that an eas-

ier process to move back and forth

between the two technologies would

be useful.

Let’s consider the different situa-

tions here below :

A steel maker is designing its 5

years investment plan. It must de-

The location and amount of

inventories and production

capability plays adirect impact on

the ability to respond to these

types of supplychain demand

creating events,further leading to

improving our understanding of

how physical location and work

processes are inherently linkedin efficient supply

chain design.


cide where to invest, which pro-

duction line to revamp, which

production capacity to squeeze

down across 27 plants in Europe.

Its product portfolio is made of

16,000 different products and

many of them are processed on

different production lines in dif-

ferent countries. The team in

charge of this process is also con-

cerned by the effect of different

price policies contemplated for

the different product and how

this could modify their invest-

ment plan.

A car maker is willing to re en-

gineer its distribution chain in

Europe to build a competitive ad-

vantage against its competitors in

a context of over production

over capacities, long delivery lead

times and over stock scattered in

the different European countries.

The difficulty for this EOM can

be summarized by the following

different questions:

1. Which product must be

built on demand, which must be

built on stock

2. Where to locate the dif-

ferent Distribution Centers

(DCs)

3. How much stock will be

necessary to guarantee 95% serv-

ice level to every customer with a

delivery lead time of X days (X to

optimize)

4. Out of the total stock,

how much will be safety stock

that is to say dead stock.

These questions must be con-

sidered as a single problem which

must be handled by the OEM. Or

its 3rd PL suppliers. Indeed, since

more and more 3PLs tend to

manage the distribution network,

they should propose added value

solutions to the OEM by study-

ing in depth these questions with

their customers. Nonetheless, as

it is easy to understand, these

questions, which at first sight

seem to be pure distribution is-

sues, go very deep in the OEM

organization and its production

strategy. For each car model, the

EOM will decide if it must be

built on stock or on demand, im-

plying very different industrial or-

ganization scheme : demand

forecast, supplier contracting,

production allocation, capacity

management… Then, once de-

cided which car to build on stock

versus on demand, the OEM

must decide through which DC

sending this car in order to guar-

antee that it will reach the cus-

tomer in less than X days after

this customer passed his order. It

is easy to understand that both

the distribution and the produc-

tion are intrinsically linked when

deciding which marketing offer

about delivery lead time to de-

sign. Let alone considering the

product mix which is per se a

challenge.

A port authority is willing to

build a new container terminal. It

must decide about the new lay-

out of the terminal, the number

of cranes, the size of the parking

lot for the waiting trucks, the

number and location of weigh

bridges and, most important, the

number and lay-out of the cus-

toms gate it must start negotiate

with the government.

In this article, we will consider

the scientific approach which can

be implemented to answer these

technical questions and beyond,

explain the tools and methodolo-

gies and Mega Trends

since more and more 3PLs tend to man-age the distribution network, theyshould propose added value solutions tothe OEM by studying in depth thesequestions with their customers.Nonetheless, as it is easy to understand,these questions, which at first sight seemto be pure distribution issues, go verydeep in the OEM organization and itsproduction

Cover Story


Shift from Customer Service to Relationship Management

Megatrend-1

Customer Focus and Supe-

rior Service should be a

major objective for every

manufacturing company in order

to either achieve or maintain mar-

ketplace leadership. Customer rel-

evancy will increasingly become

the key strategic commitment of

leading corporations. While tradi-

tional customer service focuses on

achieving internal operating stan-

dards, a truly relationship-driven

supply chain focuses on establish-

ing customer success. For many

customers, such operating features

as cycle time compression, exact

point in time delivery performance

and perfect order-to-delivery may

be the prime drivers of supplier

acceptability. In contrast, other

customers may not be willing to

shoulder the cost of day-to-day

six-sigma logistics support. Their

preference may be for a high level

of average logistical support forti-

fied by immaculate logistical recov-

ery when and where needed.

Supply chains designed to

achieve unique customer value

propositions have the potential to

turn commodities into value-added

solutions. Given an understanding

of what drives end-customer pur-

Relationship does matterWhile traditional customer service focuses on achieving internaloperating standards, a truly relationship-driven supply chain focuses on establishing customer success. For many customers,such operating features as cycle time compression, exact point intime delivery performance and perfect order-to-delivery may bethe prime drivers of supplier acceptability.


chase behavior, a supply chain

based on relationships has the

greatest potential to result in

unique logistical solutions that are

simultaneously effective, efficient

and relevant. This implies that

firms will likely participate in

multiple supply chains to support

different customers.

Although most firms have not

achieved the desired level of

closeness with customers, it is the

most advanced of the mega

trends. We assess the current av-

erage achievement to be 5-6 on

the ten-point scale. Leading firms

increasingly recognize that suc-

cess hinges on establishing inti-

mate relationships with key

customers. Intimate relationships

enable firms to generate unique

and profitable product/service

offerings for their preferred cus-

tomers. This, of course, is in di-

rect contrast to principles of

mass marketing, and it is certainly

cost prohibitive to all but the

most narrowly defined market

niche firms. Managers seeking to

achieve this level of intimacy with

customers must assess their

firm's resources relative to the

needs and desires of select indi-

vidual customers. Then the firm

can deploy its resources and ca-

pabilities to perform customer-

valued activities and services that

competitors cannot match at all

or at a reasonable cost.

There are two shifts that must

take place for firms to evolve

along this continuum. First, firms

seeking to develop strong cus-

tomer relationships should recog-

nize that all customers do not

have the same service expecta-

tions and do not necessarily want

or deserve the same overall level

of service. They must, therefore,

identify core customers best

suited to be their business clients

and then meet or exceed expecta-

tions by providing unique value-

added services. These services

may include assignment of spe-

cific focus teams to identify, de-

sign, implement, and refine

specialized and synchronized of-

ferings. Additionally, firms must

develop the ability to satisfy not

only existing needs but also those

that may emerge. By continuously

matching service capabilities with

changing customer expectations,

providers can stay ahead of com-

petition.

Second, firms seeking to en-

hance customer relationships

must develop operating systems

capable of quickly reacting to

change rather than depending

upon anticipatory deployment of

inventory to handle planned re-

quirements. This is facilitated by

gathering and exchanging infor-

mation throughout the supply

chain as contrasted to guessing

what may happen. The focus

must be on efficient and effective

accommodation of unique cus-

tomer requests as well as on the

ability to react to unexpected op-

erational circumstances.

These capabilities enable firms

to capitalize on uncertainty to en-

hance customer satisfaction.

Some approaches that facilitate

flexibility include providing front-

line employees with the authority

to approve special customer re-

quests, automatically accommo-

dating stock outs through

multiple service locations, and

implementing preplanned solu-

tions. Another critical enabler of

flexibility is routinization and

simplification of fundamental

work to minimize effort ex-

pended on handling day-to-day

details and free resources to deal

with unexpected events. Judicious

employment of form and time

postponement also contributes to

a firm's ability to respond to un-

known or unplanned circum-

stances.

Although most firms have not achieved the

desired level of closeness with customers, it

is the most advanced of the mega trends. We

assess the current average achievement to be

5-6 on the ten-point scale. Leading firms in-

creasingly recognize that success hinges on

establishing intimate relationships with key

customers.

Cover Story


Forecast to Endcast

Megatrend-2

Its difficult to forecast our

business, it’s too unpre-

dictable. The fact is, when in-

ventory exists at any level in

anticipation of customer orders, it

is the result of a forecast. Some-

one, somewhere in the organiza-

tion has made predictions that

have activated capacity, consumed

cash and driven the customer serv-

ice level. Also, it’s a good bet that

the someone who’s forecasting is

doing it without the right tools,

without proper training, and with

little or no information to support

the process. Yet, the forecast drives

material planning, production

scheduling, inventory levels, and

customer service (among other

things). Managers know this, in

their hearts, but for some un-

known reason they insist that “we

can’t forecast this business”. The

result is that management often

lets forecasting bumble along un-

supported in the hope everything

will come out all right in the end.

This approach can only contribute

to repeating cycles of poor per-

formance.

Experience demonstrates that

the consequence of bad forecast-

ing is a significant and unfavorable

impact on overall business per-

Predicting the

unpredictableManagement often lets forecasting bumble along unsupported in thehope everything will come out all right in the end. This approach canonly contribute to repeating cycles of poor performance.


formance. To make matters

worse, a form of denial sets in

and the real costs of poor fore-

casting are consistently underes-

timated and often overlooked.

When “bad numbers” drive ma-

terial planning and production

schedules, the inevitable results

are longer cycle times, higher

overhead activity costs, erratic

production schedule perform-

ance, excessive inventory, lower

throughput, and lots of dissatis-

fied customers – eventually hav-

ing a negative impact on sales.

The cost of bad forecasting is

enormous. Forecasting deserves

increased recognition of that im-

portance and must become one

of the most critical management

functions. As such, improving the

forecasting process deserves the

small investment required to

achieve incredible returns on that

investment.

The Self-Diagnostics Checklist

The following ten point check-

list is a simple self-diagnostic

which can help companies envi-

sion what performance could be.

Another enlightening aspect from

the test could be the differing an-

swers various managers will give

the same questions. This, of

course, opens up an entire area

for discussion (spirited discussion

in many cases) which should be

the beginning of swift problem

resolution.

Answer “Yes” or “No” to each

of the following:

• Order fill rates meet man-

agement’s specific and measured

customer service strategy.

• Delivery lead-times are at

least competitive and predictable.

• All functions agree on

which products are stocked and

which are made to order.

• The mix and investment

in inventory are a shared respon-

sibility between Sales and Manu-

facturing.

• Appropriate mathemati-

cal and statistical calculations are

used instead of “rules of thumb”

to establish desired mix and lev-

els.

• Management’s inventory

investment plan and customer

service objectives are the actual

results being realized.

• Short-term forecast devi-

ations are monitored and ad-

justed and long-term forecast

accuracy is continuously improv-

ing.

• Inventory record accuracy

is maintained at 98+%.

• Excess safety stock

buffers are not pyramidally main-

tained at various inventory levels

to compensate for “bad num-

bers”.

• Excess and obsolete in-

ventories are measured and are

less than 1% of total inventory.

What to do further?

For those who do not score wellon the Self-Diagnostics testabove, appropriate action is defi-nitely required.

First, management must for-mally recognize sales forecastingas a vital business control point.

Second, this recognition shouldbe followed by a thorough evalu-ation of the current forecastingprocess. Third, where needed, anaction plan for improvementshould be launched without delay.

The good news is getting a fore-casting process in place is not asdifficult as many people think;statistical forecasting tools arereadily available and the proce-dural requirements are modest. Ifyou have to forecast, then theonly proper course is do it withthe right tools, techniques, infor-mation and properly trained staff.Then, and only then, will you beable to say “we can forecast ourbusiness.”

Forecasting deserves increased recogni-

tion of that importance and must be-

come one of the most critical

management functions. As such, improv-

ing the forecasting process deserves the

small investment required to achieve in-

credible returns on that investment.

Cover Story



Megatrend-3

Executive Leadership is re-

quired to bring heavy em-

phasis on the vision,

objectives, and the importance of

the process redesign. Even after

the redesign and implementation

are completed, executive manage-

ment must be steadfastly diligent

to make sure the old ways do not

slowly resurface. For years, the so-

called experience curve has domi-

nated strategic responses to market

and competitive situations. Firms

based their strategies on concepts

that had achieved past success. In-

creasingly, however, firms confront

unique situations about which they

have zero or limited experience.

For example, it is becoming com-

mon for firms to employ solely

contracted resources (possibly in-

cluding consigned inventories) for

many supply chain activities. Most

firms have limited experience in

establishing and managing these

relationships.

A second example is the increas-

ing focus on achieving reduced or

negative cash-to-cash cycles.

Today, new competitors have

Leading the edgeFirms increasingly confront the need to reinvent processes that areperforming adequately when assessed historically, but in fact arebeing dramatically out-performed by solutions tailored to newcompetitive conditions.


achieved success in traditional

supply chains using a combina-

tion of e-commerce and direct

logistics to, in fact, operate on less

than zero capital investment. This

shift in measurement and practice

has forced many firms to design

and manage in uncharted waters.

The point is that all the experi-

ence in the world concerning

how the traditional logistics

model works is of very little value

in developing a strategy to con-

front this new competitive pat-

tern. During periods of intensive

change, previous experience and

existing infrastructure are typi-

cally among the most difficult

barriers to overcome. Firms in-

creasingly confront the need to

reinvent processes that are per-

forming adequately when as-

sessed historically, but in fact are

being dramatically out-performed

by solutions tailored to new com-

petitive conditions.

When assessing the status of

the shift from an experience to a

transition process, our experience

suggests a typical score of 3 to 4

on the ten-point scale. Manage-

ment is beginning to realize the

potential benefits of more

broadly conceived and executed

strategies. Three changes must

occur to facilitate the shift from

an experience to transition based

strategy.

First, fundamental total cost-to-

serve frameworks must he identi-

fied, documented, and refined.

Through experience, most man-

agers have created business mod-

els regarding the processes they

manage. While these models are

sometimes comprehensive, in

many cases they are limited in

scope and perspective. As a re-

sult, the decisions weigh heavily

on past limited experience. In the

future, new business models must

include the organizations, activi-

ties, resources, and relative pa-

rameters of the expanded

enterprise.

Second, managers need to de-

velop skills in solving case situa-

tions outside their traditional

experience base. This should in-

clude analysis of situations in-

volving "fictional" products and

markets where managers must

rely on the application of concept

rather than historical practice.

Finally, managers must develop

expertise in the application and

interpretation of decision sup-

port tools that are becoming

more crucial in the conceptualiza-

tion and evaluation of supply

chain alternatives. Effective deci-

sion support system applications

provide a broader range of non-

traditional experiences for the

manager of the future. The capa-

bility to identify new strategic pat-

terns, accurately assess their likely

performance, and manage con-

tinuous transition is becoming

the leading edge model

managers must

develop expertise in

the application and

interpretation of

decision support

tools that are

becoming more

crucial in the

conceptualization

and evaluation of

supply chain

alternatives.

Effective decision

support system

applications provide

a broader range of

nontraditional

experiences for

the manager of the

future.

Cover Story


Functional to Process Integration

Megatrend-4

One of the oldest and

potentially most

productive trends is

the continued migration from

functional to process integra-

tion. While the work of logis-

tics itself has remained

relatively the same over the past

decade and will continue to re-

main the same during the next

ten years, what has and will

continue to change rapidly is

how we view work. As pockets

of power and control devel-

oped within organizations, the

traditional notion of a depart-

ment became synonymous with

being departed from the rest of

the organization.

While departments may re-

main the preferred method of

managing work, the reality is

that process-oriented, self-di-

rected work teams are increas-

ingly the solution for significant

For significant

breakthroughs in

efficiencyWhile departments may remain the preferred method of man-aging work, the reality is that process-oriented, self-directedwork teams are increasingly the solution for significant break-throughs in efficiency.


breakthroughs in efficiency.

Managers realize that functional

excellence is only important in

terms of the contribution func-

tions make to the processes they

serve. In terms of organiza-

tional structure, the concept of

functional departments is as ob-

solete as punch cards are to in-

formation technology.

The validity of wading costs

among functional areas to ben-

efit total cost is beyond ques-

tion. Information technology

extensions such as ERP are

starting to support more so-

phisticated costing approaches,

lessening the difficulty of meas-

uring across functions.

On the basis of these develop-

ments and applications, we be-

lieve that firms have achieved 4

to 5 on the ten-point scale rep-

resenting the shift from func-

tional to process integration.

While there has been substantial

progress, major opportunities to

shift to the process focus re-

main.

First, while purchasing, pro-

duction, logistics and marketing

functions have each been inte-

grated within their individual

processes, there has been less

progress integrating between

these areas. This is still recog-

nized as the "Great Divide" by

most managers. Further integra-

tion across the firm's major

functional boundaries is the first

step toward additional process

integration.

Second, there must be sub-

stantial advancement of process

integration with external supply

chain partners, particularly with

service providers. This requires

more consistency in the defini-

tion, execution, and measure-

ment of supply chain processes

to establish common language

and expectations.

Third, most employees will do

what they are measured on and

what they are paid to do. The

challenge is to convert metric

and reward structures from de-

partment related budgets to co-

ordinated process-related

incentives.

The reality and potential of

meaningful metrics based on

one plan, which in turn is based

on one forecast, will increas-

ingly become reality. There has

been substantial progress in this

area but more opportunities re-

main as additional cost informa-

tion and accuracy will lead to

more refined processes with re-

duced duplication.

Most employeeswill do what theyare measured onand what they arepaid to do. Thechallenge is to con-vert metric and re-ward structuresfrom departmentrelated budgets tocoordinatedprocess-related in-centives

Cover Story


Collaborative Approach

Megatrend-5

In most business relation-

ships today, suppliers sell to

customers. Often there is

considerable conflict in these

buyer/seller arrangements as each

party seeks the best financial deal.

Neither side fully trusts the other.

Vendors must guess customers'

needs since specific demand or

planning information is not

shared. In such situations, the po-

tential for achieving overall oper-

ating efficiency is limited as firms

maneuver for short-term benefits

at the expense of their trading

partners. The concept of inte-

grated supply chain management,

however, highlights the leveraged

benefits of firms collaborating to

achieve common goals.

The notion of focused collabo-

rative arrangements, coupled with

true cradle to grave accountability,

is revolutionizing the way that

firms work together to streamline

the distributive process. The po-

tential for increased overall effi-

ciency as a result of reduced work

duplication and redundancy are as-

tounding.

To streamline the distributive processThe notion of focused collaborative arrangements, coupled with

true cradle to grave accountability, is revolutionizing the way that

firms work together to streamline the distributive process.


Developing collaborative be-

havior has been the subject of

substantial discussion. These be-

haviors, however, are not well de-

fined in most firms. Managers at

many firms feel that behavioral

change is extremely difficult to

achieve. Often they find them-

selves talking about collaboration

much more than they actually

practice it. Our assessment for

the average firm is 2 to 3 on the

ten-point scale.

There are three shifts that must

occur to enhance firm collabora-

tion. First, true collaboration is

not dominated by or self-serving

to one party in the arrangement.

Collaborative relationships must

encourage the mutual trust and

value needed to develop and sus-

tain coordinated operations and

strategies.

There must be a shared vision

and objectives among customers

and suppliers about interdepend-

ency and principles of collabora-

tion. Efforts to achieve objectives

must focus on providing the best

end-customer value regardless of

where along the supply chain the

necessary competencies exist.

This perspective is key to long-

term supply chain viability.

Second, successful collabora-

tion requires structures, frame-

works, and metrics that

encourage cross-organizational

behavior. Rules and agreements

should clarify leadership roles and

shared responsibilities, delineate

guidelines for sharing proprietary

planning and operational infor-

mation, and create financial link-

ages that make firms dependent

on mutual performance.

They also should encourage risk

and benefit sharing by detailing

how rewards and penalties are to

be apportioned across partner

firms. Such sharing reflects com-

mitment to the belief that indi-

vidual firm performance is linked

to overall supply chain perform-

ance. In addition, formal guide-

lines that define joint operating

policies and procedures for han-

dling both routine and unex-

pected events should be derived.

Finally to be truly effective, col-

laborative arrangements also

must be highly sensitive to the

potential negative aspects of in-

terlocking agreements. Specifi-

cally, participating firms must be

willing to address difficult issues

related to relationship de-integra-

tion far in advance of the actual

need to dissolve a supply chain

arrangement. Although most col-

laborative relationships are volun-

tary and, in effect, can be

dissolved at any point, setting for-

mal exit procedures is advisable

to prevent disputes over assets. A

clause relating to duration and

termination of the relationship

ensures that it does not outlive its

usefulness to the participants.

To be truly effec-tive, collaborativearrangements alsomust be highlysensitive to thepotential negativeaspects of inter-locking agree-ments.Specifically, par-ticipating firmsmust be willing toaddress difficultissues related torelationship de-integration far inadvance of the ac-tual need to dis-solve a supplychain arrange-ment.

Cover Story


Vertical to Virtual Integration

Megatrend-6

Historically, firms have

tried to reduce supply

chain conflict by owning

consecutive levels in the business

process. Henry Ford's original

business strategy is a legendary at-

tempt at using ownership to

achieve vertical supply chain inte-

gration. Ford's dream was full

ownership and management of

the entire value creation process in

order to reduce waste and increase

relevancy. Ford's rubber planta-

tions, ships, and foundries con-

verted raw iron ore to a finished

car in seven days.

The problem with vertical inte-

gration is that it requires tremen-

dous capital investment and an

incredibly complex organizational

structure. Recreating Henry Ford's

vertical supply chain is infeasible

today. Firms, therefore, must har-

ness the expertise and synergy of

external supply chain partners to

achieve success. Virtually integrat-

ing operations with material and

service suppliers to form a seam-

less flow of internal and external

work overcomes the financial bar-

riers of vertical ownership while

retaining many of the benefits.

On the way to

process reformsVirtually integrating operations with material and service suppliers

to form a seamless flow of internal and external work overcomes

the financial barriers of vertical ownership while retaining many of

the benefits.


While many manufacturing and

retail firms have traditionally

worked with third party logistics

providers (3PL's) to handle phys-

ical movements of products,

there is a growing trend to out-

source knowledge processes as

well. Staff and process design ac-

tivities are being outsourced to

consultants. Information design,

collection, maintenance, and

analysis are outsourced to infor-

mation integrators. Knowledge

specialization will increasingly be-

come an activity considered for

outsourcing by the virtual enter-

prise. The benefits of outsourc-

ing such competency in order to

focus on core business require-

ments will continue to drive firms

from vertical to virtual integra-

tion.

Our research provides evidence

that most firms have taken initial

steps toward virtually integrating

their supply chains. Relatively few

firms, however, have achieved

full-scale implementation. Expan-

sion of this mega-trend is cur-

rently slowed by some highly

publicized failures of contract lo-

gistics relationships. As a result,

prospective service providers are

being carefully qualified prior to

engaging in virtual relationships.

We assess the average perform-

ance score on this trend to be 4

to 5 on a ten-point scale.

To move to virtual integration,

three shifts must occur. First,

managers who interface with ma-

terial and service suppliers must

learn how to manage assets and

activities that they do not directly

control and cannot directly see,

but whose performance they can

and must monitor to ensure suc-

cess. These suppliers represent a

firm's extended family and will

contribute as much to the future

success or failure of the supply

chain as any internal department.

A firm's management strategy

must reflect the recognition that

a supply chain is only as strong as

its weakest supplier link.

Second, evolving the structures

to facilitate virtual integration is

neither easy nor quick. Supply

chain partners must have a com-

mon vision of the total value cre-

ation process as well as shared

responsibility for achieving it.

Firms must carefully identify and

select partners with complemen-

tary visions, strategies, and oper-

ational capabilities. Partners must

interface their operations in ways

that reduce duplication, redun-

dancy, and dwell time while main-

taining synchronization.

Additionally, firms must spread

the risks and rewards of collabo-

ration to solidify goal attainment.

Finally, firms must extend man-

agement practices beyond suppli-

ers to include suppliers' suppliers.

Suppliers' views on resource

needs and constraints, threats,

opportunities, and weaknesses

must be considered when setting

goals, objectives, and action plans

as they play increasingly vital and

irreplaceable roles in creating

end-customer value.

Most firms have

taken initial steps

toward virtually

integrating their

supply chains.

Relatively few firms,

however, have

achieved

full-scale

implementation.

Expansion of this

mega-trend is

currently slowed by

some highly

publicized failures of

contract logistics

relationships.

Cover Story


Absolute to Relative Value

Megatrend-7

The key to long-term

success is doing the

things that attract and

maintain the most profitable

customers and doing them

well. A traditional success

measure has been absolute

market share typically meas-

ured in gross sales dollars.

A more sophisticated ap-

proach to measuring success

may be the relative share a sup-

plier enjoys in terms of key

customer success and resulting

profitability the difference be-

tween revenues and cost. Many

firms act to increase sales in re-

sponse to market pressures

only to find that escalating

costs associated with the in-

creased sales fully erode the

marginal profits. The notion of

relative value is to grow a larger

share of the profitable revenue

available in a business arrange-

ment by a willingness to per-

form a broader range of

value-added services while en-

hancing marginal profitability.

Some enlightened firms are

Enhancing marginal

profitabilityThe notion of relative value is to grow a larger share of the profitable revenue available in a business arrangement by a willingness to perform a broader range of value-added serviceswhile enhancing marginal profitability.


beginning to accept and ex-

ploit this shift. They realize

that efforts focused on serv-

ing profitable accounts can

yield enhanced returns com-

pared to those obtained by of-

fering mediocre service to a

wide range of customers.

Such "average" service may

over-satisfy some customer

segments while under-satisfy-

ing other segments willing to

pay more for better service.

Often the result is losses in

both revenue and profit in

these marginal accounts.

Thus, the true measure of

successful growth may not be

the absolute size of dollar

sales as it is the relative share

of sales received for value

rendered.

Our estimate of the current

status of firms regarding this

trend is a meager I to 2 on the

ten-point scale. There is a

long way to go to implement

this trend within the next

decade. While there are many

changes that must occur for

this trend to materialize, there

are two that are particularly

critical.

First, a wider implementa-

tion and acceptance of activ-

ity based and segmental

costing is required. Logistics

information systems capable

of accurately tracking cost

components, assigning them

to the correct segments, and

producing credible reports for

senior management must be

employed. Sales and market-

ing involvement must be se-

cured, as they have to accept

the principle that more sales

and revenue do not necessar-

ily mean higher firm prof-

itability. Logistical practices

such as multi-customer trans-

portation consolidation,

cross-docking, mixing in-tran-

sit, and other operational in-

novations that improve

efficiency and enhance rela-

tive value must be adopted.

Second, the financial mar-

kets must begin to place more

emphasis on profit than mar-

ket share. While earnings per

share (EPS) and profitability

are very important measures

of performance, the financial

markets do place some em-

phasis on share. This forces

senior management to main-

tain share even when the mar-

ginal share is not profitable.

While visionary firms are be-

ginning to recognize this

change, the focus on relative

value will evolve quite slowly

as it requires major paradigm

shifts. The concept is easy to

understand, its implementa-

tion, however, requires major

changes in management phi-

losophy.

current status offirms regarding thistrend is a meager Ito 2 on the ten-point scale.There is a long wayto go to implementthis trend withinthe next decade.While there aremany changes thatmust occur for this trend to materialize, thereare two that areparticularly critical.

Cover Story


Information Hoarding to Sharing

Megatrend-8

Every decision-making cycle de-pends on finding the answers tothree core questions: How are we

doing? Why? What should we be doing?Scorecards and dashboards monitor thebusiness with metrics to find answers toHow are we doing? Reporting and analy-sis provides the ability to look at historicdata and understand trends, to look atanomalies and understand Why? Plan-ning and forecasting help you establish areliable view of the future and answerWhat should we be doing? Integratingthese capabilities allows you to respondto changes happening in your business.

The quality information offers insightsand lessons learned on leveraging yourinformation assets better in support ofyour most valuable human capital assets:the growing number of high-value deci-sion-makers. Given the right informa-tion-enabling technology and leadership,these decision-makers can become per-formance managers. Such managers de-

liver sustainable competitive advantageby growing revenue faster, reducing op-erational expenses further, and leverag-ing long-term assets better. Implicit inseveral of the mega-trends is the needfor supply chain participants to share in-formation.

The shift from a need to know mental-ity to relevant information sharing is adifficult transition for old school man-agers. Most, with years of experience inthe trenches, have learned the hard waythat information is power. It is becomingincreasingly clear, however, that thosewho hoard information can only exploitit - they cannot leverage it. The immedi-ate gains that are generated from such in-formation hoarding pale in comparisonto the cost savings and enhanced servicethat progressive firms find attainablethrough sharing relevant informationwith supply chain partners. The open de-ployment of information across the sup-ply chain is the catalyst that enables

Share...Learn...Grow...Given the right information-enabling technology and leadership, decision-makers can become performance managers.


effective integration. It serves asthe key that unlocks the power ofsupply chain integration.

Currently, the shift from informa-tion hoarding to information shar-ing is dependent upon technology.Primarily, the ease of use and lowcost of the Internet is driving rapidchange. This is presenting a diffi-cult transition for managers whoare measured and rewarded on tra-ditional metrics. As a result, thescore of the average firm is only 3to 4 on a ten-point scale. To ad-vance further on this continuum,four major shifts must occur.

First, effective information shar-ing is heavily dependent on trustbeginning within the firm and ulti-mately extending to supply chainpartners. Managers are slowlylearning to share information al-though some still believe that shar-ing forecasts, sales, inventories,costs, and promotional or develop-ment plans will compromise theirorganization's competitive posi-tion. This is particularly frustratingwhen a manager's view of the or-ganization encompasses only his orher own specific functional depart-ment. For this reason, informationis often not shared among depart-ments of the same operating unit.If managers do not share internallyits doubtful they will share infor-mation with supply chain partners.

The scope of shared information

usually expands as trust is estab-lished. Initially, such tactical data asshort-term forecasts and inventoryavailability may be provided to fa-cilitate resource planning and prod-uct flow. Once the benefits oftactical sharing are realized, firmstend to become more open to shar-ing sensitive information on costs,product development plans, andpromotional schedules. The auto-motive industry is a prime exampleof firms designating tier one leadsuppliers who in turn coordinateand sequence the work of second-ary suppliers. This supply chainstrategy has significantly reducedcost and time of automobile as-sembly. Such benefits are totally de-pendent on information sharing.Eventually, long-term plans andstrategies are revealed in order todevelop and integrate logisticsprocesses and resources across thesupply chains.

Second, many organizations willnot share forecast or planning dataunder any circumstances while oth-ers have adopted the practice ofselling it to a third party providerof competitive data such as Infor-mation Resources. Some retailers,for example, view point-of saledata as a valuable commodity theyown and from which they can ex-tract a profit. This is a short-termmentality. Managers must begin torealize that the efficiencies ob-tained through information sharing

substantially exceed the profits re-sulting from the sale of such infor-mation.

Third, organizations that view in-formation as a key resource man-age its exchange in a confidentialmanner to reduce conflict whenconducting business with compet-ing suppliers or in serving compet-ing customers. For example, anumber of manufacturers have es-tablished separate cross-functionalteams to serve competing massmerchants. The teams include per-sonnel from both organizations insuch areas as sales, marketing, fi-nance and logistics. Increasingly,shared confidential information isrequired to plan joint operations.To ensure that confidentiality ismaintained, there must be credibil-ity and trust between supply chainpartners.Information Quality, Rel-evance, and Timeliness have amajor impact on overall companybusiness performance. This meansthe integrity of computer files andoutputs must be very high.

Finally, information sharing maytake many forms. The most com-prehensive is the exchange of datafiles and provision of direct accessto databases. Shared employees, al-though not yet common, extendsthe process by providing a manage-rial conduit through which infor-mation flow between organizationscan be coordinated and translated.Information also can be sharedthrough third party logistics suppli-ers who assign dedicated employ-ees to shipper locations to ensurecoordination. A substantial in-crease in information sharing iscritical to enhanced supply chainintegration and performance. De-spite the historical inhibition, firmsmust begin to extend their willing-ness to share.

Currently, the shift from information hoarding to information sharing depends

upon technology. Primarily, the ease of use and low cost of the Internet is driving

rapid change. This is presenting a difficult transition for managers who are measured

and rewarded on traditional metrics

Cover Story


Training to Knowledge-Based Learning

Megatrend-9

In the foreseeable future the lo-

gistics process will remain

human centric. Effective man-

agement of the logistics process,

however, is complicated by the fact

that over ninety percent of all logis-

tical work takes place outside of the

vision of any supervisor. No other

employees within the typical busi-

ness enterprise are expected to do so

much critical work without direct su-

pervision as those that make logis-

tics happen. For example, an

unsupervised truck driver performs

almost all the value created by mov-

ing a product from a shipping loca-

tion to a customer destination.

Truck drivers, in fact, may spend

more time face-to-face with key cus-

tomer representatives than any other

company employee.

The truck driver may not even be

an employee of the firm that is mak-

ing the shipment to the customer.

Other examples include customer

representatives and inventory plan-

ners. There is a critical need in these

areas for employees that understand

supply chain dynamics and can use

Coping with

Human Factor

Implementing knowledge-based learning to effectively train employees is becoming critical.


information-based tools to develop

and implement effective strategies.

While many enlightened execu-

tives acknowledge that this mega-

trend is one of the most critical

they face, practice indicates that not

much progress is being made.

Those that are trying to implement

knowledge-based learning are hav-

ing problems finding the time and

the appropriate methods to effec-

tively train employees. Training

time is difficult to find due to the

manpower reductions that have

been forced on most firms.

It is difficult to find the appropri-

ate training approaches as they

must integrate across a number of

functional areas and incorporate

multiple technologies. The chal-

lenges of effective human resource

management are being complicated

by increased globalization. As a re-

sult, our assessment is that the av-

erage industry rating for this shift

is I to 2 on the ten-point scale. The

low rating on this assessment sug-

gests that there are significant

changes needed to achieve an envi-

ronment of knowledge-based

learning.

First, senior management must

improve capabilities to manage a

diverse workforce. Training must

shift from emphasizing individual

employee skill training to develop-

ing knowledge-based learning. This

means that skill development must

be placed in the context of the

overall process in terms of objec-

tives, dynamics, and measurements.

For example, a truck driver cer-

tainly must be skilled in all facets of

driving. However, they also need to

possess knowledge concerning

how they fit into the logistical

process and how to access expert

data warehouses, tracking capabili-

ties, and adaptive decision support

systems to resolve and prevent op-

erating problems. Some forms of

knowledge generation are as simple

as learning how to cooperate. Oth-

ers may require astute skills to iden-

tify emerging trends or observe

competitive superiority.

Second, it is becoming increas-

ingly clear that firms must build the

knowledge capabilities of key man-

agers and planners. These individ-

uals must be provided the

education and experience that en-

ables them to build an understand-

ing of the risks and benefits

inherent in supply chain integration

and the relationships between sup-

ply chain partners.

In a world where all logistics and

supply chain employees are rela-

tively high paid specialists, the

Firms that develop and maintain

broad-based supply chain man-

agers will exploit the winning for-

mula. Among all the mega-trends,

the development of effective

knowledge based learning systems

may be the least developed. This

represents a substantial challenge

and opportunity for the people re-

sponsible for developing and train-

ing personnel.

it is becoming in-creasingly clear thatfirms must buildthe knowledge capabilities of keymanagers and planners. These individuals must beprovided theeducation and experience thatenables them tobuild an understanding ofthe risks and benefits inherent insupply chain integration and therelationships between supplychain partners.

Cover Story


Reinventing Managerial Accounting to Value-Based Management

Megatrend-10

For decades firms have been

managed by the numbers.

Over the last ten years, how-

ever, managers have become suffi-

ciently aware of the limitations of

Generally Accepted Accounting

Procedures (GAAP) to be willing to

spend significant resources on man-

agerial accounting methods such as

activity-based costing. These meth-

ods improve managers' understand-

ing of the dynamics of integrating

internal and external functional ac-

tivities. They also provide the met-

rics managers need to support

strategic and tactical decisions.

Today managers seek to extend

measurement to assess how their

work drives stakeholder value. Re-

cent developments, driven in part by

widespread adoption of Economic

Value Added (EVA) and Market

Value Added (MVA), are resulting in

integrative frameworks to imple-

ment value-based management.

Value-based management is closely

related to the basic paradigm shift

toward financial sophistication. In

fact, value management is appropri-

ately viewed as the implementation

of financial sophistication. The key

is to identify and support activities

that create value as contrasted to

those that only increase revenue or

decrease cost.

This mega-trend has long been

Paradigm Shift towards

financial sophisticationValue management is appropriately viewed as the implementation of

financial sophistication. The key is to identify and support activities

that create value as contrasted to those that only increase revenue or

decrease cost.


recognized as particularly relevant

for operational managers. Unfortu-

nately, it has taken a considerable

amount of time and effort to gain

senior management's attention.

Current initiatives to link opera-

tions to value-based performance

are facilitated by commitment to

ERP implementation. The trend is

likely to take off now that supply

chain management concepts are re-

ceiving increased acceptance by the

financial community. Still, the aver-

age firm today scores only a 1 to 2

on a ten-point scale.

Although the drive toward value-

based management remains in its

infancy, managers are increasingly

forced to demonstrate how supply

chain practice and process changes

can affect the overall financial

health of their enterprise. Tradi-

tional performance measures do

not describe achievement in the fi-

nancial language spoken in the ex-

ecutive suite. Measurement systems

must enable managers to link sup-

ply chain performance directly to

financial performance.

There are three transformations

required to apply value-based man-

agement. First, firms must identify

and assign the benefits of specific

initiatives to the appropriate supply

chain partner. Activity-based cost-

ing approaches provide one way

for firms to measure performance

across functional areas and focus

on benefits associated with a spe-

cific activity or process. Total cost

and activity-based methods enable

firms to pinpoint the profitability

of specific products, customers,

and supply chains, as well as project

cost-revenue outcomes for differ-

ent programs and strategies. These

approaches enable managers to set

goals for specific actions and pro-

grams and to measure achieved

performance. They have the poten-

tial to relate customer sales and

profitability based on exact costing

of ordering practices and delivery

expectations. This precise cost in-

formation can be used to modify

supply chain practices. For exam-

ple, managers can work with spe-

cific customers to develop new

routines that simplify and stream-

line order placement, resulting in

better service as well as lower cost.

Second, there must be a change in

the way benefits are measured. A

few firms have adopted a compre-

hensive value model that incorpo-

rates operational excellence and

asset utilization perspectives to as-

sess value-based management deci-

sions. Key operational excellence

metrics focus on increased cus-

tomer service and lowest total cost

of ownership. The combination al-

lows the supply chain to respond

more precisely to specific customer

needs.

Customer service measurement is

associated with revenue and is as-

sessed by developing a set of

shared cross-functional and cross-

organizational measures to guide

and monitor work performed by

multiple supply chain partners as

they add value for the end-cus-

tomer. Lowest total cost of owner-

ship incorporates all basic product

costs as well as all supply chain

costs related to inventory financ-

ing, acquisition, processing, move-

ment, storage, handling, and

delivery.

Customer service

measurement is

associated with

revenue and is

assessed by

developing a set of

shared cross-func-

tional and cross-

organizational

measures to guide

and monitor work

performed by

multiple supply

chain partners as

they add value for

the end-customer.

Cover Story


Supply Chain design and analytics

Megatrend-11

With this level of visibility,planners and key decisionmakers can test scenarios

to determine how the network canbest address changes in the market,the business, or customer demand.They can define, select, and monitorkey performance indicators (KPIs)to get an integrated, comprehensiveview of performance, using prede-fined KPIs based on the supplychain operations reference model,which includes sourcing, planning,production, distribution, and returnsprocesses.

A 360° view of the business letsyou analyze forecast accuracy, mon-

itor the satisfaction of key cus-tomers, take snapshots of the globalcapacity and inventory status for aspecific product group, or comparethe performance of the top 10 sup-pliers. There are powerful Web-based customer and supplier toolsthat allow you to expose internalprocesses without deploying a costlyinfrastructure. That gives you andyour suppliers and partners the visi-bility needed to effectively monitorsupply chain activities, identify criti-cal events, and take the actions nec-essary to keep your entire supplychain process flowing smoothly. Youcan give customers faster and better

How do you

monitor your

supply chain activity?

Changing scenario of Supply Chain is forcing companies to redesigntheir supply chain model to keep pace with the market.


responses to inquiries regardingproduct availability and order andfulfillment status. With critical de-cision support, you and your part-ners can quickly adapt to customerdemand on an ongoing basis, re-sulting in shorter cash-to-cash cycletimes and a more responsive supplynetwork that helps keeps cus-tomers satisfied.

Analyze and Anticipate

SCM design and analytics are keycapabilities that make the solutionthe cornerstone of your adaptivesupply chain network. By perform-ing “what if ” analyses of global in-ventory based on total quantities,total dollar value, and terms ofcoverage range (days of supply),for example, you can anticipate in-ventory shortages. You can also an-alyze inventory levels and trends bylocation and product group. Youenjoy improved customer service,greater access to inventory acrossthe network, and the ability to real-locate and divert shipments in tran-sit. For new orders, you can obtaina global capacity status for a prod-uct group within the supply chainat the push of a button. You cananalyze global capacity utilizationand compare utilization of differ-ent plants and lines across time pe-riods.

Improve Visibility

How are suppliers performing?You can set the system to triggeralerts when a PO is received forless quantity than ordered, or if an“out of stock” situation is pro-jected. You can analyze vendor per-formance by products, latedeliveries, undershipments, andmany more KPIs. You also have a

window into warehouse operations.You can obtain a snapshot of keySKUs, analyze the top 10 slow-moving or fast-moving materialsfor a chosen warehouse, or analyzethe top 10 obsolete parts by valuein both a graphical and a more de-tailed report format. Are carriersmeeting their obligations? WithSCM design and analytics you cannot only see which carrier is meet-ing expectations, but also wherecarrier changes should occur due toan excessive rate of load-tenderingrejections. The solution providesvisibility into forecast accuracy forone, three, or six months aheadthat can be viewed as a combina-tion of categories, country, prod-ucts, and key accounts. You alsohave improved visibility into yourcurrent order situation, and cantrack invoiced sales quantity, salestarget, and existing orders. You cannavigate by key account, product,and country. There are SCM toolswhich enables a comparison ofsales target versus existing ordersby country or key account andidentifies areas where the sales tar-get might not be reached. The dis-tribution of existing orders bycountry or key account enables youto compare the current statusagainst overall company targets.You can also synchronize supplywith demand, these tools providesvisibility into sales quantities byproduct groups, and allows you tomatch demand with inventory aswell as with production. You cananalyze historical production leadtimes to fulfill demand as well ascurrent and historical inventorylevels.

Leverage Your Investment

With SCM design and analytics,you can leverage your IT invest-ments in supply chain managementthrough real-time information onsupply chain events that impactplans and Schedules, as well asbenchmark and performance indi-cators that help drive improve-ments. You can adjust plans,schedules, and transactions auto-matically and quickly through thetight linkage of event managementsolutions to planning and executionsystems. You can more effectivelymanage inventory across the net-work through an integrated viewacross businesses and disparatesoftware environments. Synchro-nization of the entire supply chainnetwork helps eliminate excess in-ventory and unnecessary capitalcommitment.

SCM Designing allows you tosuccessfully outsource non-coreprocesses through effective, real-time monitoring of supply chainprocesses. You can track operatingtrends against performance indica-tors to see where breakdownsoccur or improvements can bemade. You will spend less time fire-fighting by anticipating and manag-ing potential breakdowns in plansand schedules before they disruptoperations. And you have access toall the information you need to en-sure compliance with governmentmandates. Two of the importanttools which may come handy forSupply Chain Designing and Ana-lytics would be the Optimizationand Simulation Techniques:

1.) Optimization:

Use of Optimization and Simula-tion methodologies for supplychain network design has had a sig-

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nificant impact on developing cost-efficient capital investment and re-plenishment strategies across manyindustries. Supply Network designnormally utilizes optimization tech-nology, which develops a con-strained, least cost network. Anoptimization model can be con-strained by capacity limitations onfacilities, and also by limiting thelength of replenishment links. Thistype of constraint attempts to ad-dress time-based aspects of a sup-ply chain, normally by usingdistance as a surrogate for time.However, this type of constraint isa crude representation of leadtime, as many factors beyond justdistance contribute to a facility’stimely ability to react to a demandsignal. The power of using opti-mization technology on networkdesign problems is the technology’sability to effectively select fromamong thousands of options si-multaneously to determine a sup-ply chain structure. The macronature of this analysis best suits it-self to structural, location prob-lems. Within large organizations, acentral planning Teams usually isresponsible for commissioning aNetwork design analysis. This canbe accomplished by either in-houseresources, with specially licensed oreven proprietary tools, or througha consulting firm like ENETEKretained to perform some or all as-pects of the analysis.

2.) Simulation:

Less understood is the impact dy-namic simulation modeling canhave on determining the success ofa particular network design inmeeting its operating objectives.Here we provide an understanding

of the methods and appropriateusage of a dynamic simulationmodeling tool coupled with a logis-tics network optimization tool. Wewill discuss how coupling thesetools can provide insight into thestructure of a supply chain, as wellas the robustness of that structurethrough immediate testing via dy-namic simulation modeling.

Simulation modeling allows time-based, execution-level events to berepresented, analyzed, and under-stood. Simulation provides a richenvironment for experimentingwith different approaches to oper-ating strategies that may be effec-tive. Until recently, simulation hasextensively been used to examinemanufacturing operations for re-moving throughput bottlenecks,improving operating efficiencies,testing sequences of operations,material handling design, etc. Moreinstances of utilizing simulationtechnology on broader supplychain issues are being reported.Within the context of supplychains, simulation allows closeanalysis of inventory positions,their deployment and how they areaffected by changes in downstreamdemand signals, and the reorderpolicies in place to respond tothose signals. Synchronizing plan-ning cycles and production sched-ules with up- and down-streamsupply chain partners, as well asunderstanding capacity utilizationissues in response to closer cou-pling of supply chains are issuesthat can be addressed with simula-tion modeling.

As we investigated different op-erating policies within the ware-house structure proposed by the

optimization models, we foundthat in certain instances that wewould not be able to achieve theservice levels we had intended.This learning from the simulationmodeling fed back into the opti-mization model, in terms of newconstraints required to determine afeasible warehousing structure.That, in turn, created a new sce-nario to test within the simulationenvironment. In the course of thework, we realized that an easierprocess to move back and forth be-tween the two technologies wouldbe useful.

Simulation is the tool to study in-teractions in context of high vari-ability of input variables. SupplyChain and Logistics is very muchsubject to this variability becauseof the interactions with the “exter-nal” environment which often can-not be controlled. Simulation hasturned out to be one of the megatrends as simulation helps handlevariability and explore the "tails" ofdistribution, these not so frequentevents which account for 80% ofthe losses

What is strategic network de-sign about?

Network design is the planningactivity for the strategic level whichdetermines the optimal productportfolio, the production locations,the production capacities and theoptimal distribution network aimedat delivering the products at theminimal cost while guaranteeingthe target service level. Networkdesign focuses on the location-spe-cific aspects of a supply chain, suchas the location of production andwarehousing facilities to best meetcustomer demand replenishment


locations. Included in that analysisis determining not only the loca-tion, but also the replenishmentlinkages from a facility to its down-stream supply chain partners. Usu-ally, network design time horizonwill be 6 months to 5 years. Net-work design or Supply Chain de-sign is not about line scheduling ornext week delivery. Network designis the strategic planning activitywhich determines the backboneproduction and distribution sys-tems as well as the optimum prod-uct flows across this network.

Using network design tools andquantitative methodologies, peoplecan answer the following questions:

• Which product must beproduced in which unit ?

• Where should I build aNew DC ?

• Where to locate the inven-tories and how much to guaranteea certain service level ?

• What is the most carbonefficient network ?

• Is it better to build on de-mand or to build on stock?

• What is the impact ofadding a new product in my SupplyChain?

• What if I reduce my prod-uct portfolio complexity in termsof total cost, customer service andinventory level across the supplychain?

• At which stage of the sup-ply chain should I hold safetystock? What about sharing this costwith my suppliers and customersand optimize the overall inventorylevel?

But beyond answering thesequestion, scientific planning canhelp decision makers rank the dif-ferent scenarios and options tomake better decisions.

Most important decisions aremade at the strategic level and willhave huge consequences for thecompany. If the location of a pro-duction unit or a DC is not opti-mum, however good may be themanagers to slim down their costsand lean their operations, they willnever make this unit profitable.

Which techniques to use?

Usually, we distinguish differentlevel of planning: strategic, tacticaland operational. Basically, the dif-ference between each is the timehorizon, driving then different de-cision processes:

• Strategic: 1 year to 5 years,depending on the industry dynam-ics.

• Tactical: 1 month to 1 year

• Operational: 1 day to 1month

For each of these time horizons,

the main driver to choose one tech-nique or another is the level of un-certainty about the market.

It is well documented that:

• for the strategic level, un-certainty is maximum. Given thatuncertainty is maximum, the bestoption is to study a limited numberof different scenarios with differ-ent market conditions : prices, mar-ket production capacity, long termdemand trends… That’s the do-main of network design, invest-ment decisions, new productlaunch study, optimal product flowdefinition across the chain…In thiscontext, the number of potentialsupply chain is huge, the combina-tion of possible flows can be veryhigh (millions of possibilities). Thespace scale is the country, the con-tinent, the world.

• For the tactical level, uncer-tainty is quite high: demand will bevolatile but production capacitiesare considered set, prices stable.Production capacities variabilitycan be also considered: break-downs… That’s the domain of dy-namic simulation: a whole year of

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operations, simulated minute afterminute, can be performed. Deci-sions about stocks are made at thatlevel: safety stocks location, inven-tory replenishment policies defini-tion, back-up scenarios definition.Detailed investment right sizingcan be performed using simulation.The space scale is the plant, theproduction unit.

• For the operational level,variability is often considered null.Everything is set: production is al-located, demand is well known…that’s the domain of very low leveldecision making: production se-quence optimization, choice oftransportation assets,… The spacescale is the plant, the specific pro-duction line.

In this article, we will considerboth strategic and tactical levels,because that’s where the big chunkof savings is.

Supply Chain costs optimizationthrough network design, stockright sizing and intensive simula-tion along the supply chain

Strategic Level Planning:

How to perform strategic net-work design?

To go simple, the purpose ofstrategic design is to minimize thetotal cost of the supply chain undercapacity constraints.

Capacity constraints types are:

• Transport constraint:min/max volume of producttransported on a lane, max numberof transportation assets, max leadtime between different points ofthe Supply Chain

• Production constraints:

min/max production for eachproduct in each plant for differentperiods of the time horizon, maxnumber of units in use… Produc-tion of by products included(waste, CO2…)

• Warehousing constraints:max volume/quantity stored ineach warehouse

• Flow conservation: any-thing coming in a node of the net-work is either stored, transformedor goes out of the node.

• Demand constraints: allthe customers must be deliveredthe exact quantity they order dur-ing each period under considera-tion in the model.

Typology of cost is very wide andcan be almost infinite. Can be men-tioned:

• Variable Production costs:per unit, including economies ofscale if producing beyond a certainthreshold decreases the unit pro-duction cost.


• Fixed production costs: perplant, per production line…

• One shot Investment cost,closing costs

• Transport cost: per unit,per transport asset…units can beexpressed per kg, per m3/ per unit,per container…

• Storage costs, handlingcosts, loading/unloading costs

• Financial costs attached tothe inventories

• Fees and taxes per prod-uct…

• CO2 costs.

The approach will be to build amathematical model representingthe current and potential supplychain, with all its products, byproducts, production sites, distribu-tion sites… relevant for the deci-sion making process. Then tounderstand the constraints on thesupply chain (target service level,max capacity of each plant, trans-port lane…) and quantify preciselythese constraints. Costs will be en-tered into the model. Specific at-tention must be dedicated to thesecosts because often one knows thetoday’s costs but what if produc-tion increases by 30% ? Whatabout the costs of new transporta-tion lanes not used currently ?

Once all these data gathered, wewill solve the mathematical prob-lem about minimizing the total costwhile respecting the constraintsenumerated before.

For our chance, it can be provenmathematically that there is onlyone single supply chain with mini-mum cost.

If building such models was chal-lenging a few years back, it is nowquite simple and fast thanks to newtools available on the markets.These tools, network design soft-ware, enable a well trained analystto build a supply chain models in acouple of weeks, to optimize thesupply chain network in a coupleof days and produce alternativescenarios in minutes.

These software embed data trans-formation tools, optimization en-gines, reporting systems,cartography engines to representthe supply chain on maps…

Usual results of a network designproject for an industrial companyor a distribution company?

Usually, expected savings resultsin a well managed company reach4% to 7% of the Supply Chaincosts. In specific situations wheredistribution, inventories can be re-duced by 50% or more. The net-work design can be also coupled toa tax optimization scheme thoughthe transit in a more “tax friendly”zone with appropriate producttransformation and pricing transfermechanism. In this case, costs canbe reduced by much more than 7%of the overall Supply Chain costswhen including the taxes.

Tactical Level Planning:

How to perform tactical SupplyChain planning?

Pretty much the same techniqueas in the strategic area can be used.The main difference lies in the ex-pected higher variability of de-mand, which can be quantifiedfrom the past and or anticipated. Inthis stage, since demand is consid-

ered variable, we will tackle theissue of the inventory dimension-ing.

Basically, inventories are set up totackle different problems:

• Production rules involvingbatch production…

• Longer supply lead timethan committed delivery lead time

• Supply uncertainty & De-mand uncertainty

In the case of inventories due toinconsistency between supply leadtime and committed delivery leadtime, these inventories are easy todefine, if measured in days of de-mand: the inventory must cover thedifference of due dates.

Regarding the inventories to copewith demand uncertainty, alsocalled safety stocks, things are a bitmore complex; traditionally, everystage in the supply chain builds upits own safety stock to guarantee agiven service level. It can be math-ematically demonstrated that thisapproach is not optimum and tendsto build up too much inventory inthe supply chain. Even better, onecan show mathematically that it ispossible to reduce the overall valueof safety stock in the chain whileincreasing the service level of thefinal consumer (final consumer de-pends on the definition of theperimeter of the supply chain). Thekey point is here not the total quan-tity of safety stock but the totalvalue of the safety stock. The moredownstream in the chain, thehigher the value of the products is,so the more costly it is to holdsafety stock but the closer to thecustomer to guarantee a given serv-

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ice level. On the contrary, the moreupstream safety stock is accumu-lated, the lower the value of thesestocks. The mathematical challengeis to find the optimum locationsand quantities of different prod-ucts and components to hold in thesupply chain to guarantee the targetservice level for the final customer.In many cases, the overall value re-duction of safety stocks in thechain can exceed 30% of the initialsafety stocks while increasing theservice level from 80% to 96% forinstance. This performance isachieved through reducing thesafety stocks in the intermediatenodes f the Supply chain while in-creasing them in the final stage ofthe supply chain to increase theservice level for the end customer.

Let’s consider the following ex-ample:

An industrial company is runninga production chain made of thefollowing units with the followingsourcing times:

A 3 echelons supply chain ismade of a final assembler assem-bling components from different

suppliers. Each must decide howmuch safety stock to handle for agiven service level to the end cus-tomer on the far right. Quoted alsothe transport lead time between 2plants and the commited servicetime by each plant to its down-stream customer. Each supplierquotes also its processing time andthe product value as estimated byits controlling department. To min-imize the overall safety stock value,the question is:

• Who should bear safetystock?

• How much?

This question can be summarizedby: what should be the committedcustomer service time for eachplant? Indeed, let’s consider a com-pany whose processing time is 32days. If the processing time is 32days and the committed servicetime is 20 days, the company willhave to hold 12 days of inventoryand the corresponding safety stock.The usual approach in which eachactor estimates the necessary safetystock to hold at its stage would leadto an exaggerated quantity of

safety stock in the overall supplychain, whatever may be the finalcommitted service time quoted bythe last production stage:

In a pure pull system, the laststage would quote a customer serv-ice time of 77 days. No inventorywould be necessary. In a pure pushsystem, the last stage would hold77 days of inventory and the re-lated safety stock.

For every committed service timeto the final customer, we computedthe optimal safety stock allocationalong the supply chain and com-pared this result with the usualsafety stock setting when each pro-duction step sets its own safetystock targets. Differences can behuge as it can be see here belowwhere the red line shows the totalsafety stock when no optimizationis done and the green one the op-timized safety stock.. For instance,for a committed service time of 40days (the average service time inthe Indian Pharmaceutical busi-ness), the difference in safety stockwould be close to 30% of thesafety stock if computed locally byeach actor.

Use of simulation for tacticalplanning and investment ca-pacity fine tuning

If in the tactical supply chain

planning, uncertainty is mainly

driven by the demand uncertainty,

there may be other sources of un-

certainty: process times, availability

of equipments, complex interac-

tions with flows sharing limited re-

sources (people, equipments…)

making complex to precisely know

the overall system capacity. In these


conditions, simulation can be of

great help.

Simulators help managers to

measure the consequences of these

different sources of uncertainty in

the production chain.

Let’s consider here below the ex-

ample of a container terminal in

Turkey : container business is

booming in Turkey. A company is

building a new container terminal

close to Istanbul in order to follow-

up the container market demand.

This company is already running

another car export business, cars

from the Renault Plant located

close to the port and an import of

steel slab for a neighboring plant.

When considering the different

product flows, capacity computa-

tion is not simple:

• the different product flows

share some common resources

(roads, custom tolls, weigh

bridges…), interactions of traffic

are multiple because of the lay-out

of the installation…

• Arrival of truck is not con-

stant, nor during the day, nor dur-

ing the week:

• Weighing time and custom

control times are very variable:

• Boat arrival is very unstable

because of the crossing of the

Bosphorus where many boats are

queuing.

Simulation process

The overall operations have been

simulated:

• Arrival of the boat

• Loading/unloading of the

container

• Traffic of the trucks on the

container terminal

• The parking capacity

• The workload of every

crane

Each and every equipment work-

load was recomputed for every day

of operation:

Using simulation, is was now pos-

sible to check that:

1. The current lay-out pro-

posed was not optimal and could

not absorb peak traffic

2. No new investment was re-

quired: changing the lay-out to

make it more flexible was enough

to absorb the different traffic

peaks.

3. Investment saved versus

contemplated countermeasures: 4

M$

The example of the shipping and

port businesses is a good example

of this difficulty to assess precisely

system capacity: handling capacity,

port capacity,…

If cutting edge in the logistics in-

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dustry, simulation has been exten-

sively used in manufacturing. Man-

ufacturing plants are under the

pressure of ever diversifying prod-

ucts and shrinking production re-

sources. Different products should

share the same resources to mini-

mize the production costs. Lean

manufacturing initiatives are also

terminating the once comforting

production stocks. So today, man-

ufacturing engineers should be

more precise and accurate when

considering a new production line

or reconfiguring the materials flow

inside the plant.

Simulation can help the engineers

to go through otherwise expensive,

time wasting and production dis-

turbing experiments in a virtual

computer model of their plants.

They can observe the possible re-

sults of a Kaizen, or addition of a

new equipment or reassigning

workers and shifts. After detecting

the bottlenecks in the simulation

model, they can further improve

their idea by several iterations such

as doing necessary changes in the

model and re-running it to see the

new results. By doing so, engineers

can always implement a mature and

bullet-proof idea to the shop floor.

They have the chance to validate

their new ideas by using an exact

copy of their real world environ-

ment.

Production engineers are plan-

ning to change the layout of an as-

sembly line into a flexible assembly

cell which will operate according to

the lean production principles.

However rather than rushing to

shop floor to make the changes,

engineers can simulate the current


and future states and compare the

outputs to precisely calculate the

benefit.

The simulation model can quan-

tify the utilization of workers to see

if the assembly line is properly bal-

anced. Simulation can also measure

the walking distance and accumu-

lating work in process so that engi-

neers will be aware of the level of

non value added work.

Use of simulation in ware-houses :

Very similar to manufacturing

plants, simulation offers many ben-

efits to warehouses. With the aid of

simulation, logistics engineers can

calculate how a new picking or re-

plenishment strategy will affect the

service levels or the utilization of

reach trucks. Since logistics opera-

tions are exposed to much more

variation when compared to pro-

duction, it’s crucial to monitor the

behavior of the system during ex-

tremities. Simulation is the only

tool for precisely calculating the ef-

fect of variations.

For example, engineers can pin-

point the congestion zones.

Or present their ideas to decision

makers and shareholders in easy to

understand 3D format. 3D is espe-

cially important when designing

and simulating automation systems

such as conveyors, sorters or pal-

letizers.

Conclusion

Designing supply chains requiresnot only hindsight, but also fore-sight to understand where costs,time, and ultimately, the consumerare headed. It’s necessary to super-impose what the future is going tobring to you as a result of the sys-tem that you’re going to build. Inthis short article, we have showndifferent techniques and ap-proaches to optimize supply chaininvestments and operations. We de-

Cover Story


liberately chose to look first at thestrategic level (network design,…)because that’s where the big moneyand big savings are. Managers, be-cause they are often stuck in day today operations, tend to look atthings the opposite, starting fromtheir daily experience to extrapolatestrategies. The difficulty lies in en-larging the picture and in thinkingbroader to understand the marketinteractions, in defining a businessstrategy and then from this analy-sis, in determining the optimal sup-ply chain and production/distribution system. The supplychain must be tailored to the busi-ness strategy, not the opposite. Theweight of history is often impor-tant and people try to adapt analy-sis to their current supply chain totheir analysis and not the opposite.

After analyzing the gap between

the current supply chain and the

target strategy, investments and

needs can be deduced. Once the

big picture is clear (number and lo-

cation of plants, DCs…), tactical

planning will optimize safety

stocks and fine tune capacities and

investment requirements using, for

instance simulation. The last stage

will be to optimize daily operations

with tools such as Warehouse Man-

agement Systems, ERP, bar codes

or RFID systems. But that is defi-

nitely the extreme stage of the

analysis. That’s not where a com-

pany will make the difference.

But these techniques, to be prop-erly put in practice, require prlimi-nary steps to be taken, especally :

• A good view on the busi-

ness through extensive data collec-

tion and proper data management:

costs, level of inventories, lead

times, point of sales data…

• A clear definition and shar-

ing of accountability between the

different partners in the chain, and

of course, a fair risk sharing strat-

egy: if every part of an Airbus

A320 are ready for assembly but a

screw is missing, the plane will not

take off.

• And more important, a

skilled and well trained staff which

understands the dynamics of the

business, not only broadly, but the

very detailed interactions from pro-

duction, to distribution, data gath-

ering.

Send your comments to:

[email protected]

The difficulty lies in enlarging the picture

and in thinking broader to understand the

market interactions, in defining a business

strategy and then from this analysis, in de-

termining the optimal supply chain and pro-

duction/ distribution system. The supply

chain must be tailored to the business strat-

egy, not the opposite. The weight of history

is often important and people try to adapt

analysis to their current supply chain to their

analysis and not the opposite.


Months go by for a

3PL to win a con-

tract with a com-

pany but it can take a few sparks

to break the same contract….

Never the less, SLAs, SOPs,

should not go into a Box file or

archived on a computer and for-

getting… Yes opened only when

there is a problem…. SLAs are

not reference guides? Are they

…… What does a 3PL fail

most of the time on Processes

or People? We tend to forget

that they are providing us

SERVICE….. So does process

drives people or vice versa be-

tween 3PL and a Customer,

PEOPLE and ONLY PEOPLE

DRIVE PROCESSES?

Technology is not THE an-

swer; it is part of the answer.

E.g. we have $ 2 Million ERP

Software or a Tailor-made WMS

(Warehouse Management Sys-

tem) but we tend to fail as it all

depends on Data Entry and RF

/ Interface issues. Bottom line is

if we enter in Junk / wrong in-

puts, imagine the reports / out-

put? Half the time discussions

are spending on why Physical

Inventory is not matching with

Trust the

expertise3PL is a two-way traffic where the firms haveto be a good listener and always evaluate whatbest their partner can do and what con-straints he has. 3PL provides Service not justin managing physical movement of goods butalso key “inventory” & “customer fulfillment”

Melvis Furtado

Originally from India,

has been working for

the last 15 years with

4 MNCs (Kraft Foods,

Unilever ME, Philips

ME & EMI Music /

Virgin Records in

Supply Chain and

Logistics Roles across

ME, Check his profile

on linkedin

http://www.linkedin.co

m/in/melvis

He can be contacted at

[email protected]

Invited

Invited


System? If 3PL follows the SLA

and SOP, There could be more

light in the tunnel. e.g. Physical

check/counts Check and Audit at

Import Level / Docks before

putaway, Stagging area random

checks, perpetual inventory

check, Change of shift / Moves

checks. How will a Warehouse

Supervisor who is 2nd Shift

check if an operator has moved

the Pallet to a different location

as a result can’t trace it in a 10000

Pallet location warehouse?

Well, Some 3PLs have not fully

stepped up to meet the exact

needs of customers. Some have

become too focused on “manag-

ing” tasks, not processes and on

serving the parent companies

core business, and have missed

opportunities to present value.

After all, he knows to customize

the needs of each customer. It

enables firms to manage a critical

part of their supply chain by pro-

viding visibility and integration

across multiple enterprises. They

manage with the three key ele-

ments of process, people and

technology. Users of a 3PL can

focus on core competencies and

better manage and utilize com-

pany assets and resources, as to

inventory and personnel.

Let’s have a look below:

(1) A 3PL can not just be

successful with Infrastructure,

SOP, SLAs, KPIs, WMS, RFID,

following processes but having

the right people with a positive at-

titude as People drive the

processes & long term strategy to

maintain the business principles

& vision. Does a professional

3PL provider ever understands a

business needs of customer

based on his product line or just

Power point presentations and

Excel calculations are done to se-

cure the business ?

(2) A 3PL should not just

look at Storage, Throughput or

Handling in/out of a customer,

but seriously look at adding value

to the business by branching out

in Value Added Services and ad-

vising solutions to customers,

looking at bringing in technology

into the good movement mecha-

nism. All we look is how much is

the Teus coming in per month

and how much is going out on

trucks or can we make some

money on Pallets?

(3) Cost of Storage has risen

drastically. Also, costs of having

a warehouse today is more like a

real estate investment boom.

Storage in 3PL lunch discussions

is not where the money is as its

still in cents does not reach the

USD $. Oops cool room costs

are going up very smoothly……

(4) Handling in / Handling

out costs vary based on cus-

tomer’s volume and throughput

but is this costs to balance your

financial module of a 3PL

provider? Or is there any other

dimension to the business? Or is

it that a customer who keeps 40%

Outsourcing is a viable option / solution tomost companies. Why do companies out-source has various reasons. Some increaseshareholder value, reduce costs, business

transformation, improve operations, over-come lack of internal capabilities, keep upwith competitors, gain competitive advan-

tage, improve capabilities, increase sales, im-prove service, reduce inventory, increase

inventory velocity and turns, mitigate capitalinvestment, improve cash flow, turn fixed

costs into variable costs and other benefits,both tangible and intangible.


stocks is a bad customer as his han-

dling out is low….. ?

(5) Value Added Services: Co

packing and adding value to products

is what the future of Distribution.

Today just everyone is talking about

starting this and does it sound easy?

Or it’s just the calculation of man

hours, or getting a Dulsco daily

waged staff to sticker your product

in 8 hours and u give me additional

overtime? Or is it the ink in the

date coding machine? Or is it the

table and space used in the co pack-

ing area which benefits that one can

unstuffy a 20ft box to do the job?

Or is it good salesman spirit that

scope of work is identified with the

customer & Sales persons takes the

job just to make the kill or reduce

the margins so that business does

not go their competition.

(6) HR / Resources plan-

ning’s : Losing a staff after 6

months of training is the biggest

loss so why don’t we invest in right

people who is the most integral

part of the business. Due to infla-

tion there is a huge movement of

skilled personnel leaving one or-

ganization to another and other

reasons are motivation levels...

(7) Equipments: Reach Truck

=} VNA operations has been the

trend, Is technology & Investment

going hand in hand in terms of

going for the right equipment but

neglecting the fact that the flooring

was not right and not proper atten-

tion was given at the time of con-

structions.

(8) Electricity / Fixed costs :

Rising every 6 months in the last 2

years

(9) Transportation trends /

KPIs: Do we Manage Drivers and

Equipment well enough to just pick

and load / measure time taken to

Deliver or there is lot more?

(10) New trends in spotlight,

One has to consider

(11) Is 3PL really having its im-

pact? If yes why are companies leav-

ing one and joining another is it just

the attitude or service levels or

prices?

3PL is like Clay modeling….

Mould your partner the way you

want and you will happy with the re-

sult. One should know what he

wants and what he can get. Some-

times are Wants are hitting the roofs

and to fulfill this our partners bend

backs and fall eventually…. A Clear

Process should be drafted and always

remember for me Practical Commu-

nication and Positive “Think out of

the box” attitude matters…

Hope we all collectively look at the

risks


[email protected]

3PL is like Claymodeling….

Mould your part-ner the way you

want and you willhappy with the

result. Oneshould know

what he wantsand what can heget. Sometimes

are Wants are hit-ting the roofs and

to fulfill this ourpartners bendbacks and fall

eventually….

Invited


The ultimate success of

supply chain Opti-

mization and simula-

tion, however, is determined by

a combination of the analyst's

skills, the chain members' in-

volvement, and the modeling ca-

pabilities of the simulation tool.

This combination should pro-

vide the basis for a realistic

model, which is both transpar-

ent and complete. The need for

transparency is especially strong

for supply chains as they involve

(semi)autonomous parties each

having their own objectives. Mu-

tual trust and model effective-

ness are strongly influenced by

the degree of completeness of

each party's insight into the key

decision variables. Ideally, visual

interactive simulation models

present an important commu-

nicative means for realizing the

required overview and insight.

Unfortunately, most models

strongly focus on physical trans-

actions, leaving key decision

variables implicit for some or all

of the parties involved. This es-

pecially applies to control struc-

tures, that is, the managers or

systems responsible for control,

their activities and their mutual

attuning of these activities. Con-

trol elements are, for example,

Supply Chain

Opti-Simulation

UnwiredSimulation is often regarded as theproper means for supporting decisionmaking on supply chain design. Owingto its inherent modeling f lexibility,simulation is often regarded as theproper means for supporting decisionmaking on supply chain design.

Mr. Tolga Yanasik,VP- Turkey and Middle East ,

ENETEK S.A.R.L. CEO of

Dijitalis Ltd.

Mr. Tolga prior to joining

ENETEK Business Consulting

worked in managerial roles at

Bogazici Yazilim a Software

firm for several years. Later on

went on to form his own com-

pany Dijitalis Ltd. A Digital

Manaufacturing Technology

Co. providing custom solutions

in Simulation and Industrial

Engineering solutions, and also

engages in software sales. He is

an Industrial expert in Produc-

tion Simulation & Optimiza-

tion Models for the

Automotive industry, training

now Fiat, Renault and Volk-

swagen experts from Turkey

and South Africa.

.

He can be contacted at:

[email protected]


dispersed over the model, are not

visualized, or form part of the

time-indexed scheduling of

events. Owing to its inherent

modeling flexibility, simulation is

often regarded as the proper

means for supporting decision

making on supply chain design.

Owing to its inherent modeling

flexibility, simulation is often re-

garded as the proper means for

supporting decision making on

supply chain design.

Perhaps no word other than

“Optimal” gets tossed more

around in supply chain

In a general layman’s sense, it

tends to mean “make it a lot bet-

ter,” or “as good as we can

achieve under the present circum-

stances.” As in, “We’re going to

optimize our safety stock levels,”

or “We optimized the layout in

our distribution center.”

But there is also a mathematical

notion of “optimization,” and

whether the above examples re-

ally qualify under that concept de-

pends on the tool sets used. This

mathematical notion of optimiza-

tion is at the heart of many – but

not all – of the supply chain soft-

ware applications that profess to

“optimize” some process or deci-

sion, from supply chain network

design to pick face slotting and a

lot of situations in between.

On top of all that, there is re-

newed interest in supply chain

“simulation” at multiple levels;

and new concepts for the supply

chain that straddle optimization

and simulation approaches, such

as “stochastic optimization" that

add to the confusion for most of

us.

There are hundreds of places

where supply chain software goes

beyond automation of processes

to helping users make better de-

cisions. The most basic approach

to this is the use of “heuristics,”

in which business rules or algo-

rithms are executed by the system

to make or recommend a deci-

sion. Relatedly, heuristics are

often used as a pre-process, even

in a true optimization-based pro-

gram, to break the problem down

a bit to make it easier for the op-

timizer to find a solution. Opti-

mization-base programs, such as

those usually found in supply

chain network planning, trans-

portation planning, inventory op-

timization, factory scheduling,

etc. use well-known mathematical

techniques such as linear pro-

gramming and its cousin con-

straint-based optimization to

scientifically determine the “best”

result.

Why Simulation?

Due to the Bullwhip effect, a

poor plan can easily propagate to

the whole supply chain areas. The

impact of a poor plan on the

overall business is huge. It causes

cycles of excessive inventory and

severe backlogs, poor product

forecasts, unbalanced capacities,

poor customer service, uncertain

production plans, and high back-

log costs, or sometimes even lost

There are hundreds of places where supply

chain software goes beyond automation of

processes to helping users make better de-

cisions. The most basic approach to this is

the use of “heuristics,” in which business

rules or algorithms are executed by the sys-

tem to make or recommend a decision.

Invited


sales. Although the ERP and

SCM solutions provide lots of

benefits to industries, it is too

costly to use those solutions for

academic research. Discrete event

simulation permits the evaluation

of operating performance prior

to the implementation of a sys-

tem: It enables companies to per-

form powerful what-if analyses

leading them to better planning

decisions; it permits the compar-

ison of various operational

alternatives without interrupt-

ing the real system; it permits

time compression so that timely

policy decisions can be made.

Most of simulation tools are de-

signed as interactive tools to be

used by a human planner not as

real time decision-making tools,

which are directly linked to con-

trol system to dispatch tasks. Sim-

ulation tools aid human planner

to make a right decision by pro-

viding information. However,

human planner should be able to

interpret and modify the plan in

order to achieve better supply

chain performances.

Benefits of supply chain simu-

lation are as follows:

1.) It helps to understand the

overall supply chain processes

and characteristics by

graphics/animation.

2.)Able to capture system dy-

namics: using probability distri-

bution, user can model

unexpected events in certain

areas and understand the impact

of these events on the supply

chain.

2.) It could dramatically mini-

mize the risk of changes in plan-

ning process: By what-if

simulation, user can test various

alternatives before changing plan.

What are the Data require-

ments for Supply Chain Mod-

eling?

In supply chain, decisions taken

are usually classified as strategic,

tactical, or operational. Strategic

decisions are related to the com-

pany’s strategy and are long term

(2-5 years) with involvement of

the most partners in the supply

chain. Tactical decisions are mid

term (a month to 1 year). Opera-

tional decisions are short term,

which are related to the day-to-

day activities. Tactical and opera-

tional decisions are taken in

individual area of the supply

chain (e.g. plant and warehouse).

They deal with issues in demand,

procurement, production, ware-

house and distribution. We devel-

oped a framework on metrics for

the performance evaluation of a

supply chain. They also distin-

guished the metrics as financial

and nonfinancial so that suitable

costing method can be applied.

Selection of performance meas-

ures is depends on the organiza-

tional goal.

Most of simulation tools are designed asinteractive tools to be used by a humanplanner not as real time decision-makingtools, which are directly linked to controlsystem to dispatch tasks. Simulation toolsaid human planner to make a right deci-sion by providing information. However,human planner should be able to interpretand modify the plan in order to achievebetter supply chain performances.


Procedures for the Simulation

study of Supply Chain:

__ Understanding supply chain

processes understanding the busi-

ness process and industry charac-

teristics and planning processes

1.) Design scenario most of the

time it is not reasonable to model

every details of the supply chain.

It is a good idea to focus on the

problem areas.

2.)Data collection

3.)Performance measures

4.) Define target (what is near

optimal) for each performance

measure

5.) Define termination condi-

tion

6.) Evaluation of supply chain

policies/strategies show a simple

supply chain model and example

data requirements for the supply

chain modeling, respectively.

Some of the questions the users

might have……

1.)Which supplier policy is

achieving best delivery perform-

ance under given demand pat-

tern?

2.) Which supplier policy is

most robust under demand fluc-

tuation?

3.) Which is the most cost

saving inventory policy under

given demand pattern ?

4.)How would profit can be im-

pacted by adding xx % more ca-

pacity?

5.) What is the trade-off be-

tween delivery performance and

inventory cost when building

more inventory?

6.) What is the impact of infor-

mation accuracy on the manufac-

turing performance (e.g. cycle

time, order fill rate)

Many researchers are investigat-

ing the possibility of creating a

simulation-based real time sched-

uling system that will be able to

monitor the system status and

make decisions in real-time. To

have the capability, it is desirable

to have

(1) capability to interface with

legacy databases to obtain infor-

mation

(2) hardware and software pro-

cessing capability to run simula-

tion within very short time- at

least, pseudo in real time

(3) capability to interface with

the control system to assign tasks

and receive feedback on system

status and performance.

What are the Long term ben-

efits of Supply Chain Opti-

mization and Simulation?

Throughput improvements:

Better coordination of material

and capacity prevents loss of uti-

lization waiting for parts.

1.)Cycle time reduction: By con-

sidering constraints as well as its

alternatives in the supply chain, it

helps to reduce cycle time

2.) Inventory cost reductions:

Demand and supply visibility

lowers the requirement of inven-

tory levels against uncertainty.

Ability to know when to buy ma-

Many researchers are investigating the

possibility of creating a simulation-based

real time scheduling system that will be

able to monitor the system status and

make decisions in real-time.

Invited


terials based on the customer de-

mand, logistics, capacity and

other materials needed to build

together.

3.) Optimized transportation:

By optimizing logistics and vehi-

cles loads.

4.) Increase order fill rate: Real-

time visibility across the supply

chain (alternate routings, alternate

capacity)enables to increase order

fill rate.

5.) Analysis of the supply chain

management can help to predict

propagation of disturbance to

downstream.

6.)Increase customer respon-

siveness: Understanding the capa-

bility to delivery based on

availability of materials, capacity

and logistics.

Optimization versus Simula-

tion

Supply Chain optimization

technologies are in use in thou-

sands of companies, and we’ve

actually noted a bit of an upsurge

in interest over the past year or so

(more on that soon). But there

are some things optimization isn’t

so good at.

Optimization is generally based

on some fixed estimate of de-

mand over a given time frame.

You can alter that demand esti-

mate and run a different scenario

to compare the impact on the

recommended solution, but opti-

mization in general is not good at

handling highly variable demand

or system inputs.

Optimization is also considered

to be a “black box” approach,

taking inputs, crunching the

numbers, and presenting a solu-

tion. It’s often hard for the user

to really understand the interplay

of various factors, and how the

supply chain “system” whether

that’s a network or a factory

works as a whole.

That is where “simulation” can

come into play. In simulation, a

model of the system is built

again, whether it’s a conveyor sys-

tem in a DC or a supply chain

network. Rules are created often

still through programming, but

increasingly with at least some

level of system configuration that

describe how the system should

work.

The key is that demand or other

key inputs aren’t static, but are

more dynamic. Demand can be

estimated or based on actual his-

tory at a daily level. For individual

plants or DCs, it could be on an

almost minute- by-minute basis.

Running the simulation then al-

lows the analyst to see the behav-

ior of the supply chain system

over time, as these inputs change.

It may allow bottlenecks to be

identified that would be missed in

an optimization program that

gives the best total answer but

misses supply chain or opera-

tional glitches along the way. But

to find the “optimal” answer, the

Optimization is also considered to be a

“black box” approach, taking inputs,

crunching the numbers, and presenting a

solution. It’s often hard for the user to re-

ally understand the interplay of various

factors, and how the supply chain “system”

whether that’s a network or a factory works

as a whole.


analyst has to observe what has

occurred, make some hypotheses

about the dynamics of the “sys-

tem,” change a factor (for exam-

ple, add some more inventory, or

another packing station), and see

what happens.

The benefits: better ability to

understand the impact of dy-

namic events, better total system

understanding, and (increasingly

important today) risk mitigation.

But these benefits come at some

cost

The objective of supply chain

is to meet customer demand for

guaranteed delivery of high qual-

ity and low cost with minimal

leadtime. To achieve this objec-

tive, companies need to have bet-

ter visibility into the entire supply

chain of their own plans as well

as those of their suppliers and

customers. Companies today

should be agile enough to adjust

and rebuild plans in real time, to

take care of unexpected events in

the supply chain. These needs

have propelled the application of

discrete event simulation for an-

alyzing entire supply chain

process. In this article, we re-

viewed the benefits, functionali-

ties and data requirement of the

supply chain, which needed to

prepare for the modeling of sup-

ply chain through optimization

and simulation. Efficient supply

chain management can be

achieved through careful consid-

eration of capacity and material

information. Companies today

want to reduce inefficiencies in

their business processes and to

redesign their business processes

in order to achieve world-class

business performances. Some of

inefficiencies can be found from

the company, some of them are

caused by their suppliers and

some of them are caused cause

by both. Simulation can help

companies become more aware

of their supply chain dynamics

and efficiency. When developing

simulation models of a supply

chain, first of all a good under-

standing of the overall supply

chain is most important. Good

understanding of the business

characteristics (e.g. performance

measures, make-to-stock or

make-to-order) is also essential

since every industry has different

business characteristics and sup-

ply chain management processes.

It is better to focus on the prob-

lem area based on the specific

scenario. Setting proper perform-

ance measures is another impor-

tant task.


[email protected]

In this article, we reviewed the benefits,

functionalities and data requirement of the

supply chain, which needed to prepare for

the modeling of supply chain through op-

timization and simulation. Efficient supply

chain management can be achieved

through careful consideration of capacity

and material information. Companies

today want to reduce inefficiencies in their

business processes and to redesign their

business processes in order to achieve

world-class business performances.

Invited

How to cut cost?

There are basically 3 ways to cut

costs: transfer the problem to

your supplier and get better

prices, be more efficient in your

Supply Chain –stock reduction,

new distribution networks, bet-

ter use of assets, minimize losses

(time, material) and a 3rd one not

explored often, review your product

offer through a Redesign To Cost ap-

proach (RTC). These 3 different ap-

proaches bring in general savings

ranging respectively in 3-5%, 2-10%

and 15-35% of the total cost.

Let’s see what more Mr. Thibault

says in an exclussive interview with

Log4scm.

What is RTC?

Redesign To Cost is a very ef-

ficient Cost Cutting Approach

consisting of reviewing the very

detailed design and specifica-

tions of the products to relax

the too constraining ones and in

“Approach

RTC while

cutting cost”

Redesign To Cost (RTC), a very efficient CostCutting Approach consisting of reveiwing thevery detailed design and specifications of theproduct, can save 15-35 % of your total cost.Mr. Thibault Quiviger shares his ideas howto go for it with Log4scm.


Mr.Thibault, an Ex-Army

Officer from the French

Army and Prior to setting his

company in 2004, worked

primarily in Arcelor (now

Arcelor-Mittal) and he

worked in various capacities

from Quality Division and

then went on to Supply Chain

and Network Design, and

later on for different indus-

tries, from heavy industry

companies –Steel & Mining,

Oil & Gas to Retail busi-

nesses, specializing in re engi-

neering their Distribution

Networks, Investment Plan-

ning and Production Alloca-

tion and also developing

Quality Model Builder based

on Machine Learning Algo-

rithms and then Supply Chain

Modeller for the European

industry.

He founded his own firm and

expanded his company ex-

pertise to Operations Simula-

tion and Operation

Excellence with 2 new Re-

gional offices in India and

Turkey. In early 2009, he has

been appointed Associate

Professor at the Technical

University of Compiègne,

France for Industrial Network

Design for the Mechanical

Engineering Department.

You can reach to him at

[email protected]


optimizing the product range

offer.

How can RTC be compared to

other Cost Reduction Ap-

proaches?

Indeed, our experience in Eu-

rope has shown that 85% of the

product cost is frozen during the

design phase. The so efficient and

popular lean approahces,6 sigmas

and network design projects act-

ing only on less than 15% of the

product cost. Indeed, during the

design phase, the focus is much

more centered on fulfilling spe-

cific marketing requirement than

optimizing the total cost (sourc-

ing + manufacturing + distribu-

tion). Marketing requirements are

often too stringent, asking for

functionalities not valued by the

customers. And because design

Engineers like complexity, they

will tend to propose complex de-

signs or complex manufacturing

processes, regardless of their

cost. Most engineers prefer de-

signing their own system than re

using an existing system proved

reliable or produced in such

quantities that its unit cost will be

always much smaller than any

new system designed from

scratch.

Which are the potential costs

to be cut?

Sources of cost easy to cut are

plethoric: choice of materials

(plastic vs steel, steel grade, thick-

ness), the shape of the product

(so easy to draw complex but

costly to produce shapes with

CAD software today), tolerances

(too narrow tolerances = very

high production costs) or func-

tionalities not valued by the cus-

tomers or by the targeted

customer segment (is a camera

necessary on any cell phone?).

Reviewing specifications and sec-

ondary functions on products

lead to an average savings of 30%

on the unit prices while guaran-

teeing the same level of customer

satisfaction.

But beyond the product specifi-

cations,

What could be the effects of

Product Range on RTC ?

It is necessary to consider the

product range to optimize the

trade-off between product diver-

sity aimed at satisfying the identi-

fied distinct customer clusters

and the induced

production/sourcing complexity

in the Supply Chain.

For instance, a car maker real-

ized that its AC system power was

30% higher compared to its

peers. Aligning specs led to a 25%

cost reduction on the AC system.

A payment terminal producer re-

duced the resolution of its printer

head from 8 dots/mm to 4

Outsourcing is a viable option / solution tomost companies. Why do companies out-source has various reasons. Some increaseshareholder value, reduce costs, business

transformation, improve operations, over-come lack of internal capabilities, keep upwith competitors, gain competitive advan-

tage, improve capabilities, increase sales, im-prove service, reduce inventory, increase

inventory velocity and turns, mitigate capitalinvestment, improve cash flow, turn fixed

costs into variable costs and other benefits,both tangible and intangible.

Invited


dots/mm, reducing cost of the

equipment by 21%. A small car

maker replaced its in house devel-

oped breaking system and re used

the system of a competitor: cost re-

duction of 48%. For sure, all these

action require intensive analysis of

the specifications, of the suppliers

offer and potential sourcing diver-

sification while meeting customer

needs (and not design engineer

pride)

Do Marketing Heads need to

Optimize Product Diversity?

Marketing teams tend to define

distinct specifications for the differ-

ent customer clusters and customer

needs they have identified. Tempta-

tion is high then to customize each

and every product for every cus-

tomer. But mass customization is

extremely complex and often ex-

tremely costly. Basically, customers

prefer a full option car than a car

with the limited options they could

afford! This reality can lead engi-

neers to the opposite direction, over

simplifying the product offer

aligned on the most demanding

customer needs, generalizing every

option for every customer. Leading

to expensive production costs. If

the first problem of over cus-

tomization is often found in many

industries in their infancy stage, the

“platform” strategy pushed too far

is every day more common in the

industries which understood the

risks of over customization. The

right balance is in between: defining

the right number of “generic” plat-

form enabling economies of scale

and differentiating enough the

product features to fit the market

needs at the cheapest cost for every

customer segment identified.

Could you elaborate it with an

example?

For example, proposing an inte-

grated camera for the low range cell

phones in India has been rejected

by Nokia because most people

would not pay for it, too expensive

while it has been generalized in Eu-

rope to achieve economies of scale

pushing costs down cost enough to

propose it for every European cus-

tomer.

A harness makers split its single

harness offer between high and

middle range customer to build

them with cheaper components for

the middle range: savings achieved

= 21%...

These examples show that the

product range optimization requires

a systematic and quantified pros

and cons approach to achieve the

best trade-off between cheapest

cost and Supply Chain complexity

management costs.


[email protected]

The first problemof over cus-

tomization isoften found in

many industriesin their infancystage, the “plat-

form” strategypushed too far is

every day morecommon in the

industries whichunderstood the

risks of over cus-tomization. Theright balance is

in between:defining the right

number of“generic” plat-form enablingeconomies of

scale and differ-entiating enoughthe product fea-

tures to fit themarket needs at

the cheapest costfor every cus-

tomer segmentidentified.

Invited


The new industrial paradigm

with a new demand clustering

between high end market seg-

ments proposing top quality, technol-

ogy advanced products and the low

end market segment featured by ro-

bust, reliable, economical and cheaper

product is complicating the task of the

mid segment players who need to

adapt their production system to be

able to lower their costs. The recog-

nized overvaluation of the Euro over

the competing currencies, specially the

Dollar and Yen has been forcing the

European automotive companies to

look for alternate production countries

to be closer to the emerging markets

but also close to Europe for re import-

ing part of the production.

This new paradigm is shifting the

center of the industrial organization

from the plant to the management of

supplies and dispatch. Whereas histor-

ically, automotive companies have im-

posed their suppliers to be located

next door, the pressure imposed on re-

ducing their cost led many of them to

shift production to LCCs(Low Cost

Countries), complicating the supply

coordination. Unfortunately, few Eu-

ropean components makers had the

resources to invest massively in intel-

lectual capital centered on Supply

Chain management and the new prob-

lems it was posing: distant sourcing,

coordination issues, induced stocks,

lead time lengthening and higher lead

time volatility, forecasts instability for

Back to Old Nightmares

Mastering Time

Yan Lehunchec is Vice

President in charge of

Cost Reduction and

"Product competitive-

ness" at ENETEK, and is

based in Belgium. He

holds a Master in Indus-

trial management from

the French Military Engi-

neering school ENSI-

ETA. Yan has extensive

experience in the cost

cutting Sector. Formerly

Partner at H&Z, the lead-

ing German consulting

firm specialized in cost

reduction, he joined

Enetek to develop the

branch "product competi-

tiveness", focusing on

Product re design to

Cost, Value Analysis and

Purchasing Optimization.

He can be contacted at

[email protected]

This new paradigm is shifting the center of the

industrial organization from the plant to the

management of supplies and dispatch.


longer time ranges, transport

costs inflation…

The new industrial footprint of

the car makers is going to lead

them to tackle these issues and

adopt a more systemic point of

view. This is the right time to

build this knowledge and take the

full advantage of lower produc-

tion costs countries.

This evolution is a revolution:

The change of paradigm in the

product segmentation between

high end and low end products is

forcing many industries to local-

ize their production base in low

cost countries. Nonetheless, if in

the mid term local markets will

develop in these countries, the re-

quired investment at the start-up

is by far exceeding the local mar-

ket absorption capacity and most

part of the production is sailing

out back to more advanced coun-

tries, specially the EU.

This distance between the in-

dustrial base and its market makes

the logistics critical and enhance

its importance so far relegated as

a simple commodity, a so called

“service provider” with infinite

capacity.

In a context where logistics in-

frastructures are more and more

difficult to develop, especially in

the developed countries where

building permits can demand

years of intense lobbying before

acceptance because of the envi-

ronmentalist pressure, companies

which will have not integrated

these constraints in their indus-

trial strategy will faced with unex-

pected supply costs, stock

build-up and difficulties to dis-

patch their production, specifi-

cally when resorting to maritime

shipments.

The comeback of an old trou-

ble maker: Time

As already mentioned, so far

suppliers, car makers and destina-

tion markets where living symbi-

otically in very close areas. Time

had been cut to its shortest ex-

pression: 0 delay. The new indus-

trial footprint is inoculating again

the time related problems which

had been overcome during the

past 25 years: induced stocks,

higher safety stocks, flexible pro-

gramming to adapt not only to

demand variability but also to

variable operational constraints…

Solutions are not easy: it will re-

quire precise quantification of the

different well known levers in-

cluding product range simplifica-

tion, better demand management,

production site flexibility, sequen-

tial site specialization, new ship-

ping and dispatch strategies.

Other strategies may be chal-

lenged: is mass customization de-

mand feasible when logistics lead

times are inflated from days to

weeks because of logistics con-

straints. How to overcome these

problems by implementing a late

differentiation stage?

If well known on the small scale

of the plant, these strategies are

more complicated to implement

at the Supply Chain level. Indeed,

after massively delegating the

shipping and dispatch functions,

most industrial organizations

have lost insight in the logistics

market. As already mentioned,

because these markets have long

been seen as commodity markets,

these logistic providers are often

lacking the knowledge and analyt-

ical underpinning which would

The new industrial footprint is inoculating

again the time related problems which had

been overcome during the past 25 years:

induced stocks, higher safety stocks, flexi-

ble programming to adapt not only to de-

mand variability but also to variable

operational constraints.

Invited


enable them to understand these

issues, let alone proposing right

away innovative solutions to their

customers problems they do not

necessary deeply understand (be-

cause most often, the solution will

be again a mix of logistics solu-

tion, adapted production rules…

This new situation demands a

holistic approach and a systemic

view on the whole Supply Chain.

Few companies have these skills in

house after 20 years of intensive

resorting to external suppliers and

consultants. With Zero stock poli-

cies, closeness of component sup-

pliers and abundant cheap

logistics suppliers, car makers had

virtually eliminated 2 branches or

2 variables of the complex system

ruling Supply Chain efficiencies.

The eruption of time lags and

long lead time is re introducing

these 2 forgotten pillars of the

system and re introducing exoge-

nous complexity and variability.

Industrial companies and car

makers in particular need to re-

build these Supply Chain analyti-

cal skills which are not lost but

may be scattered within the com-

pany. They should dedicate efforts

in building a task force in charge

of analyzing these issues, able to

quantify precisely the trade-off

strategies and chose the optimal

set of actions fulfilling the com-

pany’s objective under well recog-

nized and accepted pattern of

risks.

The market and industrial land-

scape has been changing dramati-

cally during the past 15 years:

companies are searching for

cheaper production places to

compete in a global market. This

change of paradigm for compa-

nies, especially for the automotive

sector should trigger a new way of

thinking and a deeper understand-

ing of the way companies in dif-

ferent sector must manage their

Supply Chain. This will require

smart dedicated teams focusing

on Supply Chain issues across the

different functions (Supply, pro-

duction, logistics, demand…).

These people will acquire a broad

understanding of Supply Chain

dynamics and will be able to adapt

faster to the next Industrial para-

digm. Companies should consider

these skills as part of their core

skills now. Or at least, build suffi-

cient in-house understanding of

these issues to be able to pilot

studies carried out by external

partners.

Indeed, the people able to un-

derstand the systemic complexity

of the new international value

chain will be in position tomorrow

to adapt to an ever ending chang-

ing world..


[email protected]

The market and

industrial landscape

has been changing

dramatically during

the past 15 years:

companies are

searching for

cheaper production

places to compete

in a global market.

This change of

paradigm for com-

panies, especially

for the automotive

sector should

trigger a new way

of thinking and

a deeper

understanding of

the way companies

in different sector

must manage their

Supply Chain.

Invited


Analytics An Investment strat-egy paying in the long run…..

Some companies, whose Sup-

ply Chain excellence has been

recognized, have been investing

in Supply Chain analytical team

for years. The Consumer Goods

Companies, specially Unilever

and Procter & Gamble, have set

up already 10 years ago such

cross functional team dedicated

at modeling, quantifying and im-

plementing optimal Supply

Chain strategies. Unilever, for in-

stance, has a dedicated team of

10 people in the UK, in charge

of leading this kind of study and

giving services to any organiza-

tion within the group. This team

has built a strong analytical skill

in the fields of Supply Chain op-

timization, Supply Chain simula-

tion, stock management,

capacity optimization, demand

management…

These technical profiles are not

only very needed in the short

run, but they are also necessary

in a longer term. Indeed, the

people who will have integrated

these skills are obvious candi-

dates for higher management

positions. They will have under-

stood how factors interplay, how

to sort complexity issues and

spot immediately and intuitively

the problem for a given situa-

tion. No position today in many

companies can offer such a sys-

temic understanding of the mar-

ket dynamics, of the production

constraints. The people who will

have been working on large scale

Supply Chain modeling projects

can relate lead time issues, cost

issues, production capacities and

demand… These are rare pro-

files. Many experimented peo-

ple, in their 50s have acquired

this understanding, intuitively.

They may have more difficulties

in quantifying precisely these re-

lationships or the potential

trade-offs available. In any case,

the wave of retirements to come

Corollary of

Supply Chain

AnalyticsUnnikrishnan

Director-Operations (Asia

Pacific & Middle East),

Enetek S.A.R.L.Unnikrishnan primarily worked

with a Canadian International Trade

firm and later on with Johnson and

Johnson Medical, Analytics Divi-

sion for the Asia Pacific Region. He

assumed senior responsibility with

ENETEK, for the Asia Pacific &

Middle East Region.

Unnikrishnan, is an expert energiz-

ing professional, who has lead sev-

eral MNC Organizations in Medical

Device, Pharma, Port Operators to

Steel Co. And Automotive sectors

to higher levels of performance &

Customer Satisfaction in the Logis-

tics & SCM Sector, by using his ex-

tensive Global Exposure &

Qualifications in Supply Chain, In-

ternational Business, and other Cor-

porate functions for developing &

implementing the right IT- driven

Supply Chain Breakthrough Strate-

gies.

He can be contacted on:

[email protected]:+919960626888


in the industry will dramatically

deplete this layer of people able

to make the right decisions.

This situation is valid for any in-

dustry. Even for the old “indus-

tries”. The recent flare up of

commodity prices has changed

the old balance between produc-

tion/transport costs leading

many commodity players to re

consider their production and

distribution footprints. If true for

the commodity markets, it is even

more valid for the other players

when climbing up the value

chain.

The steel plant of ArcelorMittal

Ghent, Belgium, for instance is

an excellent example of how

even in a mature industry, com-

panies can make a huge differ-

ence by training intensively their

smarter profiles on Supply Chain

issues. ArcelorMittal Ghent, for-

merly Sidmar, has set up an ana-

lytical team 15 years ago. This

team was in charge of leading im-

provement projects using inten-

sive optimization and simulation

tools in and outside the company.

Beyond the technological and

successful projects these people

have implemented, the interesting

point lies in the fact that this “op-

timization school” was used as a

fast track for many recognized

high potentials of the company

who were spreading then in man-

agement positions after 3 to 5

years in this constantly renewed

team. The consequence today, 15

years after implementing this

management process at a single

plant in Belgium: ArcelorMittal,

the steel giant, is run by these

smart Flemish guys in Europe. A

single plant is providing the vast

majority of the top managers of

ArcelorMittal in Europe. They

are recognized as better man-

agers, as having a deeper under-

standing of Supply Chain issues,

even by the French people

trained in the so called “Grandes

Ecoles”.

Are companies OutsourcingSupply Chain Analytics?

As the expertise of outsourcing

providers has improved—and

confidence in their expertise has

grown—companies have begun

to outsource increasingly sophis-

ticated functions, such as spe-

cialty design and manufacturing.

Now, a handful of forward-

looking companies are off-

shoring the analysis of supply

chain data to help make better

operating decisions. By tapping

into the analytical skills of lower-

cost countries with a well-edu-

cated workforce—such as

India—companies are getting

valuable insights from data that

had once been too voluminous or

too complex to deal with quickly

and in a cost-effective manner in-

house.

Unlike traditional outsourcing

and offshoring, which always

carry a degree of operational and

financial risk—and in some cases,

disappointing results—outsourc-

ing supply chain analytics is virtu-

ally risk-free. It's relatively easy to

implement, requiring no ex-

change of people, processes or

systems. It's also flexible. Instead

of being locked into multi-year

contracts, most companies simply

subscribe to a data-analytics serv-

ice on an as-needed basis. Out-

sourcing providers in India are

able to spread one highly skilled,

low-cost expert across three or

four accounts, for far greater

leverage than an individual com-

pany could achieve on its own.

Which are the critical areas inSupply Chain that would re-quire Analytical approach?

Managed supply chain services

can rapidly improve business re-

sults, especially in the closely

aligned areas of demand manage-

ment and inventory optimization.

By collecting and analyzing point-

of-sale data, along with data on

inventory levels throughout the

supply chain, product seasonality,

the effect of promotions in dif-

Unlike traditional outsourcing and off-

shoring, which always carry a degree of oper-

ational and financial risk—and in some

cases, disappointing results—outsourcing

supply chain analytics is virtually risk-free.

It's relatively easy to implement, requiring no

exchange of people, processes or systems. It's

also flexible.

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ferent regions and competitive

data, companies can manage de-

mand far more effectively by

quickly reacting to market

changes and competitive actions

to increase revenue. The insights

gained can help companies target

promotional spending to "shape"

demand and make better deci-

sions about when and how to re-

plenish inventory.

A flexible demand forecastingmodel that regularly tunes itselfto changing market conditionsgives companies better guidanceon how much inventory to keepand which channels and regionsto distribute it to, based on buy-ing patterns in the marketplace.These insights, in turn, help com-panies maintain the right—that is,minimum—level of inventorythroughout the supply chain, formajor cost savings. Also, focusingon the right inventory strategycan have a huge impact on serv-ice levels or availability, affectingrevenue and market share.

These insights can be especiallyvaluable for companies with alarge number of SKUs. For in-stance, one large manufacturer inthe high-tech industry offered10,000 different types of compo-nents. Keeping the right numberavailable to meet changing cus-tomer needs was an ongoingnightmare. But by outsourcinganalysis of its sales data, the com-pany discovered that 10 percentof its products—dubbed the Aproducts—resulted in 90 percentof its shipments. Another groupof products—C products—wasrarely ordered at all. Also, the or-dering patterns varied widely bycustomers. Certain customersgave four to six weeks of leadtime for delivery, while others

wanted shipment within threedays of placing an order. Basedon these insights, the companydecided to focus on keeping thehigh-demand components instock at all times.

The manufacturer also decidedto follow an inventory deploy-ment strategy that aligned withcustomer order lead times—forshorter lead times, following amake-to-stock model, and forlonger lead-time demand, adopt-ing a build-to-order model withperiodic inventory target recom-mendations. Customer-servicelevels on these high-demandproducts soared. By contrast, Ccomponents were only finishedand shipped when a specific cus-tomer order came in. This seg-mentation strategy led toenormous cost savings andgreatly simplified inventory man-agement—benefits that the com-pany wouldn't have realizedwithout outsourcing.

Better data analysis can also pin-point problems that might havegone unresolved before. Oneconsumer electronics companyhad just started selling a new

Electronic gadget in a discountstore chain. The companyshipped five weeks of inventoryto the store's distribution net-work, then sat back and waitedfor the revenue to roll in. Butsales were far lower than ex-pected. Working with data onsales per store, per region, theAnalytical Team discovered thatin the two regions that usuallyhad the highest sales, the Elec-tronic Gadget had only reachedthe discount store's distributioncenters, not the stores them-selves. In fact, the retailer had anundiscovered execution issue.When the service providershowed the retailer the analyticsthat revealed the log jam, thestore quickly corrected the prob-lem. Sales doubled in those re-gions over the next three weeks.This level of analysis—and thespeed with which it was done—would have been impossible withthe company's existing staff andexpertise. Managed supply chainservices can rapidly improvebusiness results, especially in de-mand management and inventoryoptimization. Analytics for Sales& Operations Planning and Sup-

Managed supply chain services can rapidlyimprove business results, especially in de-mand management and inventory optimiza-tion. Analytics for Sales & OperationsPlanning and Supply Chain Network Designhave emerged as important tools for achiev-ing better decision making. They help man-agers extract intelligence from the large andgrowing databases created by Enterprise Re-source Planning and other transactional soft-ware systems.


ply Chain Network Design haveemerged as important tools forachieving better decision making.They help managers extract intel-ligence from the large and grow-ing databases created byEnterprise Resource Planningand other transactional softwaresystems. Timely and penetratingintelligence is especially needed intoday’s volatile business environ-ment.

What are the initial steps to-wards Supply Chain Analytics?

With shrinking product life cy-cles, ongoing cost pressures andgrowing variability in customerdemand, the supply chain mustbe more agile and effective thanever before. Yet many companieshave been disappointed in theirsupply chain software, often aftermaking major investments in timeand money. Add to this the factthat the granularity and frequencyof information are increasingfrom such sources as POS datacapture, market research, the In-ternet and RFID. Subscriptionoutsourcing is a way to improvesupply chain planning and effec-tiveness quickly, at a reasonablecost. Getting started can take aslittle as two months, so time-to-results is far faster and less costlythan implementing yet anothersoftware program or developingthe needed skills in-house, whichtakes even longer because of the

steep learning curve involved.

Supply Chain Analytics usuallystarts with a needs-analysis stage,where the Analytical expertsseeks to understand the company,its supply chain and its data.Based on its findings, the serviceprovider creates a customizeddata-analysis program designed tomeet the company's needs. Typi-cally, the program focuses on aspecific problem or goal, such aspreventing lost sales, increasinginventory turns or improvingpromotional effectiveness. Thesegoals are then linked to improve-ment in a specific supply chaincompetency, such as more accu-rate forecasting or better inven-tory management. Then, theprovider integrates with the cus-tomer's data sources and deter-mines how often to receive data,in what format and so forth. Thisprocess takes about two months.Then, the data-analysis service isup and running, and new insightsbegin to accrue.

Are there any Data sharing is-sues while employing Analyti-cal firms?

Although starting up a data-analysis program is relativelystraightforward, a company mayfind that getting its employees totrust and use the findings will be

a challenge. Change managementand changing the way peoplework is always hard. Strong exec-utive sponsorship is usuallyneeded to ensure that the new in-sights are acted on. Another hur-dle for some companies isbecoming comfortable giving outproprietary data. However, mostAnalytical Consultancy firmshave strong security measures inplace and will sign Non-Disclo-sure Agreements(NDA’s) up-front.

At some point, many compa-nies elect to bring the data-analy-sis service in-house in a"co-sourcing" arrangement,where the Analytical ExpertTeam integrates with the clientteam and teaches them theneeded data-analysis skills.

Outsourcing data analysis holdsgreat promise for companies thatwant to reach the next level ofsupply chain effectiveness quickly,at a relatively low cost. By sup-porting better planning, demandforecasting and inventory man-agement, this new category ofout-sourcing is delivering majorreturns to the companies thathave tried it.

People and processes for ex-ploiting these analytics are neces-sary for their successfulapplication. A critical require-ment is the creation of new busi-ness entities comprised ofknowledge professionals who as-sist managers with overlappingresponsibilities in making intelli-gent, integrated decisions. Busi-ness process changes wouldexploit analytics over the years atseveral junctures.


[email protected]

Outsourcing data analysis holds great prom-

ise for companies that want to reach the next

level of supply chain effectiveness quickly, at

a relatively low cost. By supporting better

planning, demand forecasting and inventory

management, this new category of out-

sourcing is delivering major returns to the

companies that have tried it.

Documents

Global Supply Chain Mega Trend Interview