supply chain best practices
Post on 20-Jan-2015
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Supply Chain Best Practices
Issues that are driving and will drive companies
byTom Craig
tomc@ltdmgmt.com
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Best Practice Topics
1) Metrics2) Inventory velocity3) Cycle time compression4) Lean logistics5) Technology6) Supplier performance7) Segmenting supply chains
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Set the Stage
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SUPPLY CHAIN MANAGEMENT
--FOUNDATION--Applies regardless—
of industry Make to Stock and Make to Order
Runs from suppliers doors through to your customers’ doors or your stores
ProcessInternalExternal
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3 Supply Chains & Flows
ProductInformationFinance
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Supply Chains
Flow is important for supply chainsIs not ONE supply chainAre series of supply chains – supply
chains within supply chains
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Big Guys and SCM
Link supply chain to corporate strategy“Optimize” inventory and service with Best Practices
(these tie together)--inventory velocitycycle time compressionlean logisticssupplier performancesplinter supply chains
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Complex and extended real supply chain
Why firms wants control
Are chains within chains
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Additional supply chain challenges
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Market strategy competitive differentiator
27%
Cost center necessary to conduct business
25%
Customer servicecompetitive differentiator
30%
Lower performing companies are 3 times more likely to view their supply chains as cost centers.
Cost savings opportunity area to helpfund R&D or business expansion
18%
Supply Chain as Competitive
Differentiator
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The Opportunity for the Best
Best in ClassBest in Class organizations have organizations have clear competitive clear competitive advantages over advantages over Industry Average & Industry Average & Laggards.Laggards.
Laggards Industry Average Best in Class
Organization
Silo-based supply chain operations with little synchronization and collaboration across departments; moving toward more business unit or regional oversight
Moving toward a more centralized supply chain management organization but most activity is still decentralized into business units and regions
Central supply chain management organization established with executive who has end-to-end supply chain responsibility; strong cross-functional metrics in place
Knowledge
No budgeted projects for visibility improvement
Actively working to improve end-to-end and plant floor to top floor visibility
End-toend supply chain visibility in place with strong strides being made toward plant floor to top floor visibility
Technology
Spreadsheets and home grown Access database solutions are common for supply chain planning; legacy or heavily customized supply chain execution applications
Advanced supply chain technology solutions deployed for a handful of key supply chain management functions; lack closed-looped integration between planning and execution
Extensive use of advanced supply chain technology with closed-loop integration between planning and execution
Performance Metrics
Forecast accuracy at the family product level is below 61%; Perfect Order percentage is 85% or less; Logistics costs as a percent of sales is greater than 10%
Forecast accuracy at the product family level is 61% to 71%; Perfect order percentage is 86%-90%; Logistics costs as a percent of sales is 7%-10%
Forecast accuracy in the product family level is 71% or better; Perfect order percentage is 91% or better; Logistics costs as a percentage of sales 6% or less
LaggardsLaggards Industry AverageIndustry Average Best in ClassBest in Class
OrganizationOrganization
KnowledgeKnowledge
TechnologyTechnology
Performance MetricsPerformance Metrics
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Benefits of Best
Revenue Lift• Customer service enhancements• Product quality improvements• Increased quality availability
Reduced Supply Chain Costs by 10 to 15%• Operational efficiencies• Process enhancements• Procurement savings
Reduced Working Capital Requirements by 20 to 30%• Inventory reductions• Reduced cycle times
Reduced Supply Chain-Related Capital• Capital asset transfer• Enhanced asset utilization• Capital procurement savings
Revenue Revenue EnhancementEnhancement
Operating Operating Cost Cost ReductionReduction
Working Working Capital Capital ReductionReduction
Fixed Capital Fixed Capital ReductionReduction
Invested Invested Capital Capital ReductionReduction
Profit Profit EnhancementEnhancement
Shareholder Shareholder Value Value EnhancementEnhancement
Shareholder Shareholder Value Value EnhancementEnhancement
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Walmart
Private labelsBuying direct Expanding leveragingMore control of supply chain (going
upstream)
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Walmart
Take control of deliveries from suppliers (with its fleet--price cuts greater than what freight costs suppliers—and possible warehouse inefficiencies for suppliers)
Consolidating its purchasing with suppliers (Pepsi and potatoes)
Orders $1Bil in supply chain savings (produce)
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Retailers
Will Walmart expand their efforts to other products/categories?
Will other retailers copy the programs?Taking total control of its total supply chain
(de facto vertical integration—throwback to Standard Oil and US Steel?) (does it change role for suppliers?)
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You
Do you have a supply chain strategy (or do you just react?)
Is it tiered by market segment and/or customers (or is it one size fits all?)
How much do you spend annually on SCM—inventory, sourcing, transport, warehousing, people, technology, etc?
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Your Supply Chain
Do you know how well it performs?Do you measure? (Or is it by complaints or
chargebacks?)
How much do you expedite/fight fires?What metrics do you use to measure?Do you look at it as a process or in functional
terms or tasks– freight, warehousing?
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LSPs
Do you initiate best SCM practices?How do you develop/lead best practices?
Way to create value propositionHigher marginsGreater customer retentionSeparate from other commodity service providers
Way to gain share
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Best Practice
Metrics
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Metrics
Metrics for sake of metricsGood vs bad from my article
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Are They Really Metrics?
Financial measures—used as performance metrics
Internal SCM KPIsWarehousing—orders pickedFreight costsEtc.
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Question—Which Are You
Are you focused on freight and other logistics costs? (misdirection)
--or--Are you focused on your supply chain and
how well it performs?
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Key Metrics
Customer orders DELIVERED complete, accurate, on time (customer service / chargebacks)
Purchase orders DELIVERED complete, accurate, on time (critical to your SCM success)
Inventory turns
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Metrics--More
Measures that are strategic and complement company direction
Time it takes from “sales order” through to payment is received from customer
• SCM has a key role in that PROCESS whether existing product, new product development, etc.
Inventory turns or the corollary of how long inventory is in the supply chain
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Best Practice
Inventory Velocity
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Ask
Are you inventory rich and cash poor?How often does your inventory turn (Raw, WIP,
Finished Goods)? Why does it not turn faster?How long does it take from when you know
you need to reorder until the material is received? Why does it take so long?
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Inventory
Raw, WIP, finished goods Buffer against uncertainty Inventory rich and cash poor More uncertainty (time) means more inventory Turns represent time company goes unpaid More warehouses means more inventory with safety
stock (square root of the number of warehouses) Too much—more than capital tied up and the
opportunity cost; becomes part of the company portfolio
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Inventory
Out of stock of needed products—customer service problems
Too much of products that sell slowly or almost not at all
Impact of long lead times on levels?Inventory rich and cash poor?
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Inventory Turns
Is both a problem and a symptomReflects how fast company is paid (like a salary)Aggregate turns and Breakdown
A B C and ….product categorymarket segmentrevenue and profit contributionsdomestic vs imports
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Inventory/Time Measures
Days in inventory – Cost of Goods Sold / 365 DaysCan understate total inventory in the supply chain–
excludes inventory that is on order and inventory in transit Manufacturers and wholesalers—over 60 days of
inventory Retailers—over 90 days of inventory Factor in what is excluded makes it 25% more
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Increase Inventory Velocity
Multi-step program Align with business strategy Key metric--Perfect Order--orders delivered
complete, accurate and on-time Purpose/Direction
Manage and reduce total supply chain costs Increase inventory velocityCompress cycle timeNeed for Lean success
Provides structure, platform and integration for new processes internally and externally with suppliers
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Inventory Velocity
How fast inventory moves through the supply chain
Is more than “turns”Shows as days of inventory on hand
Flaw because it excludes product on order and/or in transit
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Inventory Velocity
Recognizes emphasis is beginning of supply chain with suppliers
Transit time is one factorAvoid stopping inventory (lean)Supplier performance is key
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Inventory Yield
Time is very importantIssues with demand planning and timeInternal “battles can create discord to create
inventory yield maximization and minimize supply chain costs, inventory and time--Procurement looks at low product price and Transport looks at low freight price
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Inventory Yield Maximization
Yield Maximization—used to sell airline seats and hotel rooms
Is a “right” time to sellView inventory is same wayToo little inventory—lost salesToo much inventory—mark down and fire
salesInventory can go stale
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Best Practice
Cycle Time Compression
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Cycle Time
Time to convert a sales / replenishment / purchase order into finished product that is at the customer or at the store Ties to scope of supply chainRemember effect of time on inventory
Cycle time often exceed demand planning credibility and capability
Supplier performance is key
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Cycle Time Compression
Recognize need for product till sales paid by customer
Subsets—such as time from recognize need (before PO is issued) until product delivered to you
In Lean, time is waste
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Best Practice
Lean Logistics
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Lean SCM
Similarity with Lean principlesPull vs pushInventory reduction (reduce waste)Cycle time compression (reduce waste)
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Lean Logistics
Extending it beyond domestic and factory walls (end to end)
WasteUnnecessary, additional timeUnnecessary, additional inventoryStopping or waiting on the flow of inventory and
information (add no value to final product or value for customer)
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Lean
Assess entire supply chain as to where time is spent and whyLook especially at internal
Smaller orders/more frequency from suppliers
Do not store--cross dock at port or DC
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5R’s (Rights) of Lean SCM
Right ProductRight QuantityRight ConditionRight PlaceRight TimeAnything that does not contribute to the
5Rs is waste
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Examples of SCM Waste
Over supply--Supplying product at a faster rate than customer requires, having it ahead of demand. Bringing in large quantities of product without matching demand creates excess inventory and can cause write-down and fire sales to draw down inventories—and revenues and profits.
Transportation. Unnecessary or slow movement of product adds no value (for lower freight cost). This can include movement of inventory between company facilities.
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SCM Waste
Movement. Any unnecessary movement of product or people during their work is to be avoided. This may be seen in warehouses or in special operations such as kitting.
Defective Service or Product. Poor quality, rework, or scrap because it does not meet the customer requirements adds no value.
Over processing. This is doing more than is necessary.
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SCM Waste
Inventory. Firms have more finished product, raw materials, or work in process than the absolute minimum. This includes inventory in transit, regardless of whether it is treated as inventory when it is delivered or not; it is still inventory regardless of such transaction nuances.
Waiting. Delays in previous supply chain steps cause unnecessary waiting of people or equipment. Inventory at warehouses reflect waiting.
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Becoming Lean
Realize cause-effect impacts. Distinguish problem from symptom of a problemHigh freight cost can be a problem or a symptom. Inventory can be a problem or symptom of a problem
Ask customers about how well your supply chain operates
Comprehend the complexity of supply chains with multiple suppliers in multiple countries, distribution centers and customers
Assess time—especially internal—for waste
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Best Practice
Technology
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Technology--IS
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Process Enabler
Manage the “buy” evenImportant tool to deliver complete,
accurate , on time
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Technology
Supply chain execution tool for—integrationend-to-end global visibilitydealing with complexityissue PO and changes to POexception management
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Supply Chain Technology
Much more than online “track and trace”Not about the container—about what’s in
the container It’s about the PO
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Best Practice
Supplier Performance
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Supplier Performance
SCM success starts hereKey to:
reduced cycle timeincreased inventory velocityimproved inventory turnsremoving wastebetter demand planning
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Importance
Supplier performance is critical to—SCM successInventory velocity and turns improvementCycle time compressionLean SCMCosts, such as expedited freightAnd more
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KRALJIC MODEL
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Supplier Performance
Start with Procurement StrategyIt’s about “price” and MUCH MOREInclude
Supplier rationalizationSupplier collaborationSupplier developmentSpend management and compliance
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Best Practice
Segment Supply Chains
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One Size Does Not Fit All
Is not one approach to SCM for all industries and all businesses
Should be multiple approaches used by a companyFor A vs B vs C itemsFor Tier 1 vs Tier 2 vs Tier 3 customers
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Different Approaches
Segment use of speed--transport modesWhere/how inventory is positionedSegment integration—internal and
external Cannot be everything to everybody
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Develop multiple supply chains
Move away from monolithic supply chain approach
Splinter/multiple supply chain approachesreduce static/noise with better focusincreased flexibility and responsivenessenables better demand planning
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Types of SCM Splintering
Master/prioritize/differentiate by--product demand, volatility, velocity where made or sourcedwhen sold in quarter or yearmarket segments
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Nothing will come of nothing
King Lear Act 1, Scene 1
Doing the same thing over and over and expecting the same results.
Einstein’s definition of insanity
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