Supply Chain Planning Leading Practices

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Copyright (c) 2008 Accenture All rights reserved You may only use and print one copy of this document for private study in connection with your personal, non-commercial use of a Supply Chain Academy course validly licensed from Accenture This document, may not be

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Note: interactive elements such as activities, quizzes and assessment tests are not available in printed form

Supply Chain Planning: Leading Practices

Introduction

Why are leading practices important?

Leading edge companies are using supply chain planning (SCP) capabilities to reduce costs,

enhance revenue and yields, and achieve other operational benefits Such companies pull ahead

of their competitors with significantly reduced costs and/or increased yields Supply chain leaders put increased pressure on competitors to implement leading SCP practices as well

A company may choose to use a subset of leading practices that best meets their industry profile

and company needs Following are four leading practices that differentiate a company's supply

chain planning capabilities:

Global SCP

The emergence of a global economy has driven companies to rethink their competitive strategies

and globalize their supply chains The impact on the supply chain can lead to increased

lead-times and planning complexity Global SCP practices allow companies to take advantage of the

benefits of globalization while managing the risks and complexities across the supply chain

Collaboration

With increased pressure to reduce lead-times and become more cost competitive, companies can eliminate inefficiencies with trading partners by sharing information and integrating processes

Known as collaboration, we define it as "the sharing of information among trading partners and

across enterprises for the purpose of developing a joint plan of action, and then working together

to execute that plan."

Financial Optimization

Companies are looking for techniques to optimize the cost of delivering value to customers

Financial optimization strategies help various supply chain entities achieve the common

objectives of satisfying the final customers and obtaining dominant market share in a

cost-efficient manner

Postponement

A strategy that delays product differentiation until a point further along the supply chain Supply

chain inventories have a direct impact on company profitability Companies are increasingly using postponement to manage inventory levels while improving customer order fill rates We will

explore the impact of postponement strategies on SCP processes

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Objectives

After completing this module, you should be able to:

• Discuss how businesses have responded to new challenges by using supply chain

planning concepts

• Describe the leading practices in supply chain planning, including Global SCP,

collaboration, financial optimization, and postponement

• Identify and discuss the benefits of leading practices

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GLOBAL SUPPLY CHAIN PLANNING

Overview

The emergence of a global economy is forcing companies to rethink their competitive strategies

Many companies are embracing global initiatives that allow them to:

• Pursue new markets

• Achieve greater economies of scale

• Leverage unique aspects of different countries and cultures

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Business Drivers of Globalization

Other factors that have impacted globalization include:

• Tax laws and labor costs have created opportunities for companies to remain cost

competitive with dispersed manufacturing and distribution For example, pharmaceutical companies realize significant tax benefits for manufacturing drugs in Puerto Rico In addition, the Internet has increased alliance and partnership opportunities by bringing together companies that were either previously unknown to one another or

geographically dispersed

• Trade agreements have had a significant impact on organizational supply chains

Implementing trade agreements in Europe, e.g., via the European Union (EU) or the European Free Trade Association (EFTA), as well as the opening of Eastern Europe to free markets has created newfound business opportunities Similarly, NAFTA has made significant advances toward integrating the North American marketplace It has

eliminated tariff and non-tariff barriers; enhanced the ability to operate carriers across borders; liberalized foreign investment; and standardized customs initiatives and local content rules

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Impact of Globalization on Supply Chains

Global supply chain entities are much more geographically dispersed This has created some

challenges for global companies, including:

• Vertical Disintegration - The impact of trade agreements allows companies to

outsource competencies and operations globally This leads to vertical disintegration and

a greater need for information sharing in the form of collaboration—a positive byproduct

• Increased Lead-Times - Consider the impact of manufacturing computer chips in

Taiwan and assembling the final product in the United Kingdom This substantially increases the lead-time for available material and impacts the company's supply chain

• Increased Complexity of Planning - Globalization increases the complexity of planning

For example, a significant challenge for companies migrating to Eastern Europe is collecting and entering freight rates into their modeling tools for transportation planning

o Increased Nodes in the Network - The number of facilities increases and hence the number of nodes in the network increases This more complex network makes it challenging to collect and calculate facility data across countries (e.g., cost accounting is not standardized across the globe)

o Multiple Non-integrated Cultures - Companies must adapt to very different business cultures, work ethics, and problem solving approaches

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Global SCP as a Response

Some companies have addressed these new challenges with global supply chain planning

Global SCP is the process of performing supply chain planning globally rather than locally or

regionally In the early stages of supply chain planning, SCP consisted of creating plans locally

Factories created their production plans and "threw them over the wall" to other entities Some

companies learned early that this silo-based process was very inefficient and began to plan

regionally However, regional planning also had its shortcomings because it considered only

regional entities and did not take global demand and supply into account The leading practice

today is to plan at a global level, considering global demand and the entire set of global

supply options in the process In this topic, we consider the impact of global SCP in four

dimensions: processes, supply chain configuration, information systems, and organization

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Impact on Processes

Global SCP implies a single planning model for the organization; that is, a single demand plan

that is used to drive the other planning activities This single global SCP model is visible to all

participants; any change to the plans is reflected globally and enhances communication between

entities, reducing the chances for supply-demand mismatches In a global supply chain planning

model:

• Supply chain planning determines the requirements for each plant, and each plant is then responsible for production according to those requirements

• Strategic procurement is performed centrally as well During regional planning, each plant

or region is responsible for procuring its own materials Several plants could be buying materials from the same supplier but are not able to negotiate optimal volume discounts

With a single procurement entity, the organization is now in a much better position to negotiate such discounts and get more favorable pricing policies

Example Regional Planning

A large high-tech manufacturer employs a global constraint-based planning model across more than 20 factories, producing over 30,000 products Demand includes all customer orders and forecasts The company generates a production plan that takes into account all customers and products globally All factories worldwide then use the plan to

manufacture product

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Impact on Supply Chain Configuration

Supply chain configuration is impacted when organizations consider facilities locations, service

levels, and factory types As a company globalizes its business operations, for instance, it could

find that there are multiple factories producing the same goods Also, the cost of production in

one country may be significantly lower than current production costs in a different country Hence,

it might make financial sense to close down one or more facilities

It is also critical for global organizations to configure their supply chains to ensure world-class

service to their customers A company could use different supply chain configurations for serving

different products or product lines

Another distinguishing element of supply chains is factory type

• Specialized factories are used for products that have a consistent demand pattern

Production optimizes the use of resources and labor

• Flexible factories, capable of turning various products around quickly, are used for

products with unstable demand patterns Such factories require extensive capital investment and often require a well-trained and educated set of labor as well This also dictates the location of such factories and hence impacts supply chain configuration

acceptable service level produces the established products

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Impact on Information Systems

In a single global SCP model all decision makers must have visibility into the relevant parts of the model, including changes made to any plan—buying, production, material, and promotion plans,

as well as demand forecasts To facilitate the sharing of information, companies are developing

information systems that are tightly coupled across geographic locations

A single global SCP model must consider information from all its global entities, requiring a

standard format from which to send and receive information Technology enablement is therefore

crucial to global visibility and must provide the following core capabilities:

• Standardization - Maintaining regional consistency so that software upgrades, rapid

deployment, and common reporting and support are possible

• Architectural Performance and Stability - Deploying applications that provide adequate

response times and reliable service

• Post-deployment Maintainability - Putting in place simple and effective processes that

provide consistent technical support and maintenance, global standardized training, and timely upgrades

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Impact on Organization

Cultural Differences - Global companies conduct business in multiple countries with different

business and ethnic cultures, and even different business ethics cultures Business practices that are commonplace and acceptable in one country may be frowned upon in another To be

successful globally, companies must adapt to different cultures

Organizational Realignment - Global SCP invariably requires some organizational realignment

For example, prior to global SCP, multiple planners were likely responsible for planning and

buying material, or for developing demand forecasts for their regions With global SCP, planning

is done centrally Companies must therefore redefine individual roles and responsibilities

Collaborative Global SCP - It is equally important for organizations to involve all regions in the

design and implementation of global supply chain models One company solved the problem by

creating a global user council (GUC) for their global supply chain implementation, responsible for

establishing global requirements and defining and shaping the global solution over time The

counsel includes recognized business leaders, subject matter experts, key stakeholders, and IT

representatives from each site/region This globally implemented solution has helped the

company realize their ambitious supply chain vision of centrally managing all shipment orders to

local sites, with local sites no longer responsible for creating orders and managing inventory

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Benefits of Global SCP

Global SCP impacts a company in several ways Responding to these impacts is a costly

process, both in terms of money and resources Despite this, companies realize benefits that

make it worthwhile, such as:

Better Solutions

A global planning model allows for global optimization and leads to better solutions, such as

reduced lead-times and greater order fill rates

• Factory A (Region 1) 100 this week, 100 next week

• Factory B (Region 2) 100 this week, 100 next week

Consider the fill rates shown—the numbers are Available-To-Promise (ATP) quantities Assuming

a regional planning and ordering model, Region 1 can only view the ATP quantities from Factory

A, and Region 2 can only view the ATP quantities from Factory B Suppose there is an order for

150 units to be delivered this week, and 150 to be delivered next week If either Region 1 or 2

receives the order, they cannot fulfill the order, and it may have to be backordered or lost On the

other hand, in a global planning (and ordering) model, both regions have access to the entire

table and that same order is fulfilled

Improved Performance Management

Information sharing, visibility, and data availability lead to efficiencies and facilitate performance

management in the extended end-to-end supply chain—including common training, processes,

systems, metrics, and culture Trading partner performance can then be measured by the overall

value the partner contributes to supply chain effectiveness For example, partners can measure

their distributors on overall stocking and inventory effectiveness

Increased Procurement Leverage

Global planning, made possible by an effective SCP model, allows the organization to understand the volume of business it does with each supplier, i.e., direct and indirect materials In a regional

model, different regions may be procuring the same items from the same suppliers, but in small

quantities By aggregating such purchases, the organization has better leverage to reduce its

procurement costs They may also extend this leverage to include other products and services,

e.g., transportation

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Topic Summary

• Among the drivers for business globalization are the emergence of a global economy and the Internet, international trade agreements, tax laws, and labor laws

• Globalization impacts supply chains in numerous ways, such as: increased lead-times

and planning complexity; a larger number of network nodes; and the need to integrate multiple cultures and business practices

• Organizations are using global supply chain planning as a means to respond to these

challenges Global SCP implies a single planning model for the organization that considers global demand and supply options to optimize the company's supply chain plans Some companies have integrated information systems, streamlined business processes, and overhauled supply chain configurations to meet customer needs

• Global SCP has helped leading companies reduce long lead-times, increase customer

order fill rates, and realize additional savings—e.g., through increased procurement savings and transportation leverage

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COLLABORATION

Overview

Companies must effectively connect with customers and suppliers to retain competitiveness

Without collaboration, buyers often surprise sellers with cancelled orders or with order quantities

inconsistent with forecast; sellers continue to surprise buyers with unmet delivery commitments or short quantities This happens when buyers and sellers do not share information about their

plans This sharing of information is known as collaboration

Over the past ten years, many companies have invested substantially within the "four walls"

(within their own organizations) as a result of Enterprise Resource Planning (ERP) and SCP

initiatives They are now realizing that extended trading partner collaboration is also imminent and

a key driver to realizing benefits In fact, of 105 companies surveyed by Meta Group, 51 percent

are currently engaged in some type of collaboration, 19 percent are in the piloting stage, and 25

percent are either planning or interested.*

*Market Study: Meta Group, The State of Collaboration, 2001

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What is Collaboration?

Collaboration involves the strategic and tactical sharing of information between trading partners

for the purpose of developing a joint plan of action, and then working together to execute that

plan By sharing information and integrating processes, trading partners strive to eliminate

inefficiencies Plans are shared more and more throughout the supply chain as a result of

collaboration

Example

Marketing is considering whether to run a promotion for certain products, with the potential for a 10 percent lift in sales Using SCP simulation capabilities, the company runs a feasibility check to determine if they have the internal manufacturing capacity to meet increased demand Although internal manufacturing capacity is available, the plan runs up against a constraint on the availability of a key component from one of their suppliers in the Far East Supply Planning immediately shares the new plans with the vendor who is able to modify its supply plan to resolve the constraint, making it possible for Marketing to plan the promotion In this case, collaboration between trading partners removes the "silo-based" approach to SCP in which different entities in the supply chain generate plans in isolation without considering the effect on other functions

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• Manufacturing Collaboration - sharing information to enable real-time joint decision

making so that manufacturing produces exactly what is needed when it is needed

• Logistics Collaboration - coordinating logistics providers to align

transportation/fulfillment activities with supply, manufacturing, and demand

• Design Collaboration - R&D and Operations working jointly, and with suppliers and

customers, on design issues

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Demand Collaboration

Prior to developing the demand forecast for a business, trading partners share information such

as:

• What their customers, e.g., retailers, think they can sell to consumers

• More specific sales information, e.g., what specific colors are popular at a particular store

versus what colors are still sitting on the shelf

For demand collaboration to be effective, vendors and customers jointly develop a business plan

They collaborate on demand forecast, promotions, and order forecast, as well as generate

purchase orders (customer) and sales orders (vendor) Exceptions are identified automatically

and both parties are notified electronically

By engaging in such collaboration, companies can increase demand forecast accuracy and

quickly resolve any demand discrepancies They can also use this information to lower inventory

levels and improve customer service and sales

Type of Collaboration Type of Information

Shared Benefits

Demand Collaboration Sales Forecasts,

Promotional Plans, of-Sale (POS) Data, Business Goals, Orders, Inventory

Point-• Increase accuracy and trust in forecasts

• Solve demand discrepancies upfront

• Improve customer service

• Increase sales

• Lower inventory levels

• Provide internal and external visibility and hence improve responsiveness of supply chain

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Supply Collaboration

Companies on the leading edge of SCP often share relevant information with their suppliers to

respond to unforeseen circumstances and perhaps avert a small or large production catastrophe

If the company knows a supplier's available capacity, for instance, they can plan for unforeseen

demand In turn, they should share their order and replenishment plans with suppliers so that

they can plan accordingly In addition, if the company's plans change, they should immediately

provide the suppliers with updated visibility

Type of

Collaboration

Type of Information Shared

Benefits

Supply

Collaboration

Inventory Status, Capacity

Availability, Order and

Replenishment Plans

• Enhanced supply visibility and rapid response to unforeseen supply constraints

• Optimized relationships with multiple suppliers resulting in:

o Preferential allocations from a supplier during times

An overseas shipment consisting of critical subcomponents has been delayed Plants in Illinois,

California, and Pennsylvania urgently need those components to continue production Logging

into a newly designed system, the manufacturer looks at a partner suppliers' available inventory

and determines that there is enough inventory to support immediate needs Despite the fact that

these items have to be air-freight, which increases costs, the manufacturer makes the decision to

procure the materials and continue production

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Manufacturing Collaboration

Many consumer electronic manufacturers, known as Original Equipment Manufacturers (OEM),

outsource much of their manufacturing to other companies, sometimes known as an Electronic

Manufacturing Services (EMS) Since the OEM is the supplier of the final product to the

consumer, they cannot afford any surprises in the orders that they place with the EMS The OEM

operates under the assumption that the product will be available on the dates they have

requested it from the EMS, unless they hear otherwise

Leading SCP companies now model the EMS in their OEM planning systems as if the EMS is

one of their own facilities The OEM also plans the production at the EMS facility They

automatically identify exceptions and electronically notify both parties

Shared Benefits

Manufacturing

Collaboration

Manufacturing Orders, Material Availability, Capacity Availability, Bills

Of Material, Engineering Change Orders

• Enables firms to get out of the reactive

"fire fighting" mode of operation

• Improves return on assets because company is able to outsource non-core competency work

• Lowers manufacturing costs

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Logistics Collaboration

Efforts to collaborate with customers and suppliers are only successful if the product is delivered

to customers when they want it To reduce the uncertainty in this process, some companies also

engage in collaboration with their logistics providers, sharing their demand plans so the logistics

providers can ensure transportation capacity is available when needed The logistics providers

share their resource availability with the manufacturers so that the manufacturer can use the

information in quoting accurate delivery dates to customers

Shared Benefits

Logistics Collaboration Demand Plans, Inventory

Status, Transportation Resource Availability

• Decrease in order-to-ship cycle times

• Decrease in days-on-hand inventories

• Service levels in retail channels at plan

Example

Suppose a customer places an order and wants to know the delivery date The manufacturer

looks up the transportation information and provides the customer with options, such as:

• The order can be delivered in seven days, and will be shipped by truck

• The order can be delivered in two days, will be air-flown to the nearest location, and

shipped by truck from there

The customer decides to air-fly the product to receive it five days earlier The manufacturer is

able to provide an accurate delivery date because their logistics providers have shared their

resource and capacity availability

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Design Collaboration

In this type of collaboration, Operations and R&D work together, with suppliers and customers, on design issues Customers provide information on new product requirements, and suppliers

provide information on the cost of materials for the new product Operations ensures that new

products are designed in a manner that ensures effective sourcing and 'quality manufacturing.'

The manufacturer and R&D are responsible for ensuring the manufacturability of the design as

well as the product specifications

Collaborative design helps companies reduce product development cycle times because

suppliers, designers, and customers work from the same data, and they can quickly integrate

feedback into the development and manufacturing cycle Furthermore, companies identify

preferred suppliers early in the process, which will eventually lead to reduced material and

• Suppliers, designers and customers work from the same data, documentation, and drawings

• Feedback is obtained rapidly from the field and is integrated into the development and manufacturing cycle

• Product development cycles are dramatically reduced by integrating suppliers and customers into the development process

• Procurement transaction and material costs are reduced by centralizing and

standardizing preferred supplier information, component data, and supplier performance

• Early collaboration avoids costly and consuming engineering change orders (ECO)

time-Example

Consider a manufacturer that wants to introduce a new 13" television The manufacturer is not

sure whether or not the television should have a built-in DVD player Due to their proximity to

consumers, retailers understand consumer wants and needs Both the retailer and the

manufacturer have a common objective—satisfy consumer requirements Unless the

manufacturer and retailer collaborate during the design process, the end result is unlikely to

accomplish this Collaboration between these trading partners helps them design a product that

more accurately represents customer requirements

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The Leading Edge of Collaboration

While most companies collaborate in one form or another, trading partners benefit more or less

depending on the extent of that collaboration "Leading Edge" companies involved in advanced

collaboration achieve more significant benefits than those lower on the continuum, referred to as

"Basic" and "Progressive."

Demand Collaboration

Collect customer's monthly sales

forecast and compare it to internal

forecasts at sales & operations

(S&OP) planning meeting

Access the customer's weekly or daily sales data electronically and use it 'as-is' to provide input to internal demand planning process

Suppliers and customers jointly develop a business plan by collaborating on demand forecast, promotions and order forecast They compare one organization's initial plans with the other's—including previous plans and actual results—so they can manage variances in real-time Companies also participate in sharing long term and mid-term forecasts with their suppliers to provide visibility into longer-term plans

Supply Collaboration

Share quarterly or monthly material

replenishment forecasts with a

supplier and ask whether they will

be able to provide the material

E-mail weekly material replenishment plans and forecasts to a supplier and address exceptions with them on weekly a conference call

Advanced Planning and Scheduling (APS) system with links into a supplier's ERP system that enables real-time (or close) confirmation of production plans, and inventory and order status

Manufacturing Collaboration

Place monthly manufacturing

orders and issue engineering

change orders as needed

Manufacturing maximizes asset utilization by participating in sales and operations planning meetings

Manufacturing operates from lean inventory and ensures that it has complete visibility into any changes to the demand plans It also shares any changes to such plans with external manufacturers

Logistics Collaboration

After building shipments from

orders, shipper contacts carrier to

tender the shipment

Shipper shares order forecasts and shipment plans with carrier and its trading partner

so they can both use the information in their own planning processes

Supplier and customer jointly collaborate with the carrier to create a logistics plan, share order and shipment forecasts, and execute shipment tenders, pickup, delivery, payment, and performance management activities

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Design Collaboration

R&D periodically collects

consumer/market insights about a

product when designing the next

generation of the product

R&D shows prototype product designs to suppliers and/or customers and solicits design feedback

Collaborative Product Commerce (CPC) system enables customers, suppliers and manufacturers to simultaneously collaborate on a product's design online

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Benefits of Collaboration

Collaboration reduces costs, increases asset utilization, and improves customer service and

revenues In addition, collaborating partners can achieve the following quantitative and qualitative benefits:

Reduction of Order to Cash Cycle Time

• Decreased cycle time for communication and decision making

• Faster reaction to unexpected changes in demand or supply

• Ability to meet end-customer needs, increasing revenue and market sharec

Insight into Trading Partner Strategic Plans

• As a supplier, facilitates synchronized focus with customers

• As a manufacturer, visibility to changes in suppliers' capacity or priorities

Optimized trading partner relationships

• Increased accuracy in demand forecast

• Reduced inventory requirements across the supply pipeline due to accurate, timely

• Decreased order-to-ship cycle times

• Ability to meet planned service levels from logistics partners

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Creation of Benefits Through Collaboration

Each type of collaboration drives supply chain activities that generate different types of benefits

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Companies may engage in one or more types of collaboration The greater the collaboration

between companies, the greater the benefits for all trading partners Some benefits from

collaboration include:

• Insight into trading partner strategic plans Optimized trading partner relationships

resulting in increased demand forecast accuracy, lower inventories, and improved service levels

• Reduction of order-to-cash cycle time

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FINANCIAL OPTIMIZATION

Overview

Manufacturers often face the business problem of allocating scarce resources while meeting

customer demand Most companies must make trade-offs, allocating these scarce resources to

optimize business objectives While finding the optimal solution to supply chain planning

problems is not always possible, companies use financial optimization techniques to accomplish

this

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Drivers for Financial Optimization

Companies today are looking to financial optimization to stay ahead of the competition and

increase shareholder value Solutions that merely generate profit are not necessarily sufficient; if

competitors use optimization techniques to increase their throughput and hence increase profit

margins, they will realize greater benefits Other reasons companies use optimization techniques

include:

Low Margin Business

Many businesses operate with razor-thin margins If they can determine how to identify and serve their most profitable customers, they will achieve greater margins For instance, financial

optimization is very prevalent in commodity businesses

Varying Cost of Resources

In many capital-intensive organizations, the cost of goods sold (COGS) is significantly influenced

by the resources utilized during production For example, a motorcycle manufacturing facility's

paint-shop could have two different painting resources—one that uses older technology and

another that uses newer technology The cost of production using the older resource is usually

significantly higher than using the newer resource Using financial optimization techniques, the

manufacturer would be able to determine how to optimize the use of multiple resources

Asset Optimization

Some industries prioritize the optimal use of assets over managing inventories For example, the

production process in the paper industry consists of essentially two steps: first, cut trees and

convert them into paper; and, second, imprint the paper, cut it to the right shape and size, and

then use it, e.g., by putting it onto a juice carton The capital investment in the machines as well

as the stopping-and-restarting costs is very high, while the carrying cost of excess inventory is

relatively low Hence, the paper industry's number one priority is continuous use of the machines

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