creating agile supply chains in chemical industry
DESCRIPTION
A case study on how to create a more agile supply chainTRANSCRIPT
A BUSINESS - ENGINEERING
JOINT RESEARCH CENTER
AT LEHIGH UNIVERSITY
Creating Agile Supply Chains in the Chemical Industry
Stephen P. Crane
Director Supply ChainAir Products
Bethlehem, PAMay 14, 2008
Adapt Supply Chain Networks from Selling What I Make, to Making What I Sell
Who is Air Products?
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Air Products in Brief
Global supplier of gases, chemicals, equipment, and health care services
FY07 revenue ~$10 billion
Serving customers in technology, energy, industrial and healthcare markets
One of the safest large-scale chemical companies
Operations in more than 30 countries
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Performance Polymers
Worldwide Leader in Co-Polymer Dispersion Technology, Serving Adhesives, Nonwovens, Coatings, and PSA markets
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Performance Polymers Dimensions
$630 million global business
Multi regional (NA, Europe, Asia)
6 Plants (4 NA, 1 Europe, 1 Asia)
230 Products
1,800 Ship-to Customer Locations
3,500 Planning Combinations (Material-Ship-to-Primary Source Plant)
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Why focus on supply chain agility?
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
“Supply Chain variability is one of the chief threats to profit margins, and in some industries, this can be as high as 100%”
Source: David Caruso, AMR Research, “Demand-Driven Supply Networks: SCM Done Right” (November, 2003)
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Oil Price Volatility
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100
4Q03
1Q04
2Q04
3Q04
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Cru
de
Oil
WT
I ($/
Bar
rel)
1998 2008
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Natural Gas Price Volatility
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154Q
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D /
MM
BT
Us
1998 2008
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Stock market reactions on days when supply chain glitches are reported
Delays in product development: -10%
Ramp-up and rollout problems: -11%
Production problems: -10%
Quality problems: -9%
Parts shortage in manufacturing: -7.5%
Potential Impact on the Unpredictable
Source: DePree College of Management Georgia Institute of Technology
“In the real world, you a have to be ready for the unexpected”
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
What is supply chain agility?
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Agile: “quick in movement or nimble”
Agility is exceptional nimbleness to respond rapidly and appropriately to unpredictable changes in demand or supply
Agility is not a single function concept, it extends from one end of the supply chain to the other
What is Agility?
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Characteristics of Agile Organizations
They are demand driven rather than forecast driven
They substitute information for inventory
They manage processes not just functions
They leverage the capabilities of their network partners
They employ time-based key performance indicators
They postpone the deployment of inventorySource: Cranfield University School of Management
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Agility is all about managing in the face of variability
Identify sources of variability and determine their relative negative impacts
Eliminate or reduce variability wherever possible by changing supply chain design, processes, policies, and business rules
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Four Levels of Process MaturityL
evel
of
Mat
uri
ty
Agility
Level 1Functional Optimization• No formal synchronization• Vulnerable to variability and
risks• No provision for contingencies
Level 2Cross-Functional Plan Optimization• Clearly defined global
objectives and metrics• Constraints optimized and
synchronized• Plans become invalid when
variance occurs• Ad hoc monitoring process
Level 3Closed-Loop Performance to Plan• Strive to the make plan
happen within each
function• Embed early-warning
sensors in the execution
process• Corrective actions remain
at functional level• Waterfall-oriented process
Level 4Real-Time S&OM (Sales and Operations Management)• Continuous cross-
functional synchronization • Service level offerings
based on experience for a
menu of options• Rapidly evaluate multiple
scenarios of plans for
profitable decisions• Shift from S&OP paradigm
to a “living dashboard”
Source: Supply Chain Leader / April 2007
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
How Can Companies Organize to Enable Agile Supply Chains?
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Agile Organizations
Agile organizations establish synchronized inter-organizational processes, designed to enable a rapid response to shifts in demand or supply
Processes and systems that facilitate real-time- transfer of information and plans among multiple functions
Cross-functional synchronization is especially critical, with shared goals and metrics that support agility
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Synchronized Planning
Synchronized Planning is primary process that aligns different functions to a single synchronized plan which optimizes company performance, not just functional performance
Functional organizations have responsibility to deliver on their sub-plans understanding their plans can compromise the overall plan and hurt the entire company
Agile companies live and die by their plans
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Fast Escalation
Variability presents new threats and opportunities beyond the bounds of any plan
When opportunities arise, agile companies respond quickly if they have designed processes in place
Escalation processes are defined on basis that most situations occur multiple times
With defined processes, determining the appropriate course of action is easier, faster, more effective than making decisions on the fly
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Performance Measurement of Plans
One obstacle to taking appropriate action when variability occurs is adherence to “local” metrics
Agile companies coordinate each function’s plan performance in achieving the overall synchronized plan objectives
Did each function’s plan aid or hurt achievement of the overall plan?
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Agility Requires Keeping Commitments to Overall Plans
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Keeping Commitments to Plan
Plans in typical companies are “dead on arrival”
They’re out of sync with demand conditions or violate supply constraints
Agile companies ensure plans are valid and synchronized across functions continuously monitoring plan execution
Every function commits to it’s own sub-plan and provides early warning if deviation occurs
Enables corrective actions to be taken rapidly
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Constraint-Optimized Planning
Typical process for generating a plan is constraint-insensitive
Agile companies use the latest information on constraints in their planning process
They consider multiple scenarios to arrive at realistic, optimal plans – fast
Agile companies create a plan in one-tenth the time it takes to execute it
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Proactive Monitoring / Analysis of Threats
Once a plan is rolled-out, it is subject to threats
Plan owners are expected to take quick corrective actions to ensure their commitments to the synchronized plan holds
Preferred actions are those that can be taken unilaterally
Such actions reduce the element of surprise and variability for the rest of the business
When a plan has to change, it’s important to collaborate and communicate quickly to all functions
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
How Has Performance Polymers Increased Supply Chain Agility?
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Standardized Work Processes
Integrated Sales & Operations Planning Process
Supply Chain Planning (APS)
Supply Chain integration
Supply Chain Network Simplification
KPI Measurement
Collaboration Processes
Transactional Automation (orders, pricing)
Business Rules
Approaches to Increasing Supply Chain Agility
Global Work Processes
MetricsMetricsFollow the Money!Follow the Money!
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Sales & Operations Planning
Combines all business plans into one integrated plan
Monthly process
Reviewed by management at an aggregate level
Reconciles demand and supply plans at detail and aggregate level and linked to operating plan
What the business plans to do over near/intermediate term covering an 18- month horizon to:
– Plan for resources
– Execute business plan/strategy
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Plan Supply Chain
P1 Plan Supply Chain
P1.1 Aggregate Demand
P1.2 Aggregate Supply
P1.3 Balance Demand & Supply
P1.4 Issue Supply Chain Plans
Sales & Operations Planning
Raw Material Planning
Inventory Planning
Master Production Scheduling
Distribution Planning
Financial Planning
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Supply Chain PlanningAdvanced Planning Systems (APO)
Air Products ERP Platform is SAP
SAP R/3 Single Instance
– Go-Live August 2003
– Global Release strategy developed through 2008
APO (Advanced Planner & Optimizer) v4.1
– Scope included deploying Demand Planning (DP) and Supply Network Planning (SNP) modules
– First APO forecast generated in October 2003
– APO planned orders passed to plants for production scheduling
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Centralized planning, local execution
Forecast generated monthly for 18 months - Target 85%
Supply plan generated monthly for 18 months
Planned orders passed from APO to plant for execution - Production Plan Target 85%
APO re-plans demand every night based on new sales orders and generates supply requirements for 60 days
APO generates 18 month raw material forecast
Supply Chain PlanningAdvanced Planning Systems (APO)
(This approach integrated planning with execution)
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Supply chain complexity increases costs, reduces supply chain agility and responsiveness
Developed cost-to-serve model to understand profitability
Rationalized plants, warehouses, products, assets, and customers
– Plants 40%
– Warehouses 80%
– Products 55%
– Customers 65%
Supply Chain Network Simplification
“20 % of products generated 80% of the profits, but only 49% of the revenue”
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Product Rationalization History
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60
70
1 2 3 4 5 6 7
# D
isco
nti
nu
ed
0
100
200
300
400
500
To
tal # Pro
du
cts
# Discontinued Total # Active
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Large number of transactions involved small quantity, packaged orders (15% of volume, ~30% of transactions)
Established national distributor network for North America
Transferred customers purchasing only packaged products to distributors
Transferred ~68% of ship-to customers to distributor network
Adherence to distributor business rules critical for delivering low cost to serve for this segment
– Full truckload orders– Extra lead time requirements
Sales orders decreased by ~40%, distribution costs decreased by ~50%, and packaged inventory decreased by 95%
Distributor revenue grew 2-3 times market growth rate
Distributor Channel Expansion (NA)Use Distributors for Package Customers
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Standardized KPIs
Supply chain planning• Forecast Accuracy %
– Forecast Value Added
• Production Plan Adherence
• Inventory DOS
• Inventory Accuracy %
• Master Data Accuracy (APO, production, customer)
Operational Performance• On-stream
• Efficiency
• Non-prime inventory
• Off-grade
Financial• Financial Forecasting
Accuracy
• Cash-to-Cash cycle time
Purchasing/Fulfillment• % Orders Received on Time
• On-Time delivery
• % Perfect Order Fulfillment
Customer• % Complaints closed by
target date
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Forecast Accuracy
40
50
60
70
80
90
100
% F
ore
cast
Accu
racy
World Class Performance
2003 2007
50% Improvement
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Production Plan Adherence(Supply Planning Accuracy)
50
60
70
80
90
100
Pro
du
cti
on
Pla
n A
dh
ere
nc
e (
%)
38% Improvement
2004 2007
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Financial Forecast Accuracy
30
40
50
60
70
80
90
100
Dir
ec
t P
rofi
t A
cc
ura
cy
(%
)
21% Improvement
2004 2007
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Where We Are TodayThe Benefits
Established standardized supply chain processes that integrate all functions
Improved integration with suppliers, customers, and service providers
More accurate capacity plans developed based on real world constraints and variability
One volume forecast aligned w/ all business plans
– Financial, Supply Chain, Operations, Commercial, and R&D
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Force Majeure CaseSo how agile was our supply chain?
From May-October 2007, 4 suppliers announced force majeures in NA/EU
Supplier allocations ranged from 80-10%
Competitors cutoff many customers
Established daily S&OP meetings
Calculated run-out dates for raw materials by plant
Procured materials from all around the world
Implemented “force majeure” surcharge
Gained several $ million in new business
“We were so impressed how you maintained uninterrupted supply of product during the force majeures”
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Improved Financial Performance
– Inventory reduced by 25%
– Net Asset Investment down by 25%
– Profitability increased by 80%
– ORONA improved from 5% to 13%
“All these benefits have been easier to achieve due to increased supply chain agility”
Where We Are TodayThe Benefits
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“ Creating Agile Supply Chains in the Chemical Industry”
APCI 2008, Creating Agile Supply Chains in the Chemical Industry
Conclusion
“The only sustainable competitive advantage any company can have is the ability to consistently react to market opportunities faster than the competition. A company’s products, engineering, proprietary manufacturing processes/technologies or even a powerful brand simply no longer ensure long term, sustainable advantage”
But those who can build superior agile and responsive supply chains have a real chance