How to leverage your supply chain as an instrument for value creation in the business

1. January 2011
Winning with your
Supply Chain
Strategies for creating value,
and preparing for the rebound
The past years have been volatile for many supply The signs are there that the much expected rebound
chains. Whereas before the steep and unprecedented will challenge and confront supply chains with
decline in demand, the creation of shareholder value higher demand, and this at unprecedented speed,
was significantly driven by a continuous quest for in smaller quantities, and in environments with
growth, business leaders in a ‘no growth’ environment less inventory and slack capacity. It is clear that
must focus on the remaining levers for value creation. uncertainty and volatility are here to stay and that
The mantra in many businesses has changed on very supply chain leaders will have to define and implement
short notice from a quest for growth into a quest strategies to manage the associated risks. But the
for cash, operating margin and asset efficiency, in an current and future volatile business environment
environment that is exposed to significantly higher also constitutes an opportunity to win for those
levels of risk and uncertainty than ever before. businesses that develop supply chain tactics to reduce
risk, or offset the risk levels in their supply chains,
Shareholder value drivers…in uncertain times
by incorporating additional agility and flexibility.
In this paper, we develop a point of view on what
Revenue
Not/Less available supply chain and business leaders in manufacturing
Growth
and consumer industries should do to create
Shareholder Operating value and to prepare for the much expected
Value Margin upturn in times of increased uncertainty.
Focus
Asset
20 Efficiency 22
15 35
30
34
80 72 77
65 68
36

2. everything that is structural in the supply chain: the
How does supply chain
distribution network, the manufacturing footprint,
asset allocation policies for products and customers,
management contribute to value
decision making about outsourcing, and aligning the
trading relations between the various entities in the
creation in the business?
supply chain to optimize additional variables such as for
instance tax in the equation. Overall, it’s all about doing
the right things, focusing on supply chain efficiency and
Supply chain management basically contributes to effectiveness.
value creation in the business through optimization
and alignment of structures, policies and processes: Processes contribute to optimal cost, cash, efficiency
and maximum profit by doing things right, conceptually
• by providing cost and cash optimal network structures and content-wise, by focusing on the flow of value to
at the level of the inbound supply chain, and in the customer and by delivering the aspired business
manufacturing and distribution (FOOTPRINT) results with as little waste as possible.
• by aligning processes in planning, sourcing, making
and delivering (PROCESSES) Aligning and optimizing the supply chain footprint and
• by aligning planning and inventory deployment processes, is very often an ideal starting point towards
policies that balance service, cost, inventory and supply chain excellence. It will deliver cost, cash and
capacity assets (BALANCE), and profit benefits to the business in aggregate, meaning for
• by providing TRANSPARENCY at a granular level of all customers and for all products at the same time.
customers and products, for portfolio management
and profitability improvement in the business.
Managing the supply chain for value creation in the business
Footprint Balance Transparency Processes
Operations strategy &
Strategy inventory deployment Cost-to-serve PLAN
tactics
Portfolio complexity &
Footprint & Network Balancing service mix, SOURCE/PROCURE
profitability management
assets and cost
Spend visibility & TCO
Strategic Outsourcing MAKE
Improving the balance by transparency
aligning influence factors:
service offering policies, Strategic sourcing and
Tax aligned
enhancing responsiveness supplier relationship DELIVER
supply chain
& reducing variability management
RETURN
The financial supply chain:
granular business performance improvement
The foundation of the supply chain: aggregate business performance improvement
Cost, profit & cash
The foundations
The supply chain footprint and the supply chain The next level
processes basically constitute the foundation or Finding the right balance and providing transparency
architecture of the supply chain. When they are for profitability management are competences that are
optimized and aligned, they ought to be robust for situated at a more granular level in the supply chain, and
the medium term, say the next 3-5 years. Footprint is are indicators for a more advanced type of supply chain
management in which cost and cash performance is
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3. further improved by optimizing profitability at the level all of this complexity was added in a profitable way,
of individual customers, products and product groups. and it is not uncommon to find out as a result of
a cost-to-serve initiative, that a significant portion
The balancing act of the profit potential - ranging from 30%-50% - is
Finding a balance is about making decisions where to eroded by unprofitable products and offerings. For
deploy inventory or slack capacity as a shock absorber companies with average supply chain maturity,
for the demand and supply side variability in the supply integrated Cost-to-Serve initiatives often show
chain. It is also about deciding how much buffer in potential to improve absolute EBIT% margin with a
terms of inventory or capacity is needed to balance range of an additional 0,5% - 2,0%.
service requirements with cost and cash. Finding an
optimal and profitable balance between these very often Businesses that invest in supply chain competences to
conflicting requirements is probably one of the most ‘Balance the Dynamics’ or to ‘Provide Cost-to-Serve
important supply chain competences in businesses that Transparency’ are leaders in an evolution towards a
are exposed to volatility. more advanced type of supply chain management in
For companies with average supply chain maturity, which business performance is improved by fine tuning
it is not uncommon to reduce total inventory the supply chain at a granular level. It is a clear example
levels by 5-20% with a service improvement or a of what is commonly referred to as ‘the Financial
cost reduction on top, by optimizing the planning Supply Chain’, and constitutes a transformation to
and inventory deployment tactics at the level of a more mature type of supply chain function in the
individual products, product groups, distribution business, reaching out to, and facilitating the business
channels and customers. performance improvement dialogue with the Finance
and with the Sales & Marketing functions. Research
Creating transparency conducted by Insead and Stanford University on the
Creating Transparency is about supply chain link between Financial and Supply Chain Performance,
professionals delivering cost-to-serve transparency indicated that companies with higher levels of supply
to the business in order to facilitate profitability and chain maturity also outperform their competitors
portfolio complexity decisions at the granular level of financially.
products and customers. Cost-to-Serve in this respect
is a collective term for methodologies that reveal the
true cost of processes and activities in manufacturing
(Cost-to-Make), Logistics (Cost-to-Fulfill), and selling Supply Chain Leaders show
(Cost-to-Sell), by using pragmatic activity based costing
principles in a supply chain and commercial context. significantly higher Market
At the inbound side of the supply chain, this cost
transparency could be called Cost-to-Own (or more Capitalization Growth Rates
commonly known as Total Cost of Ownership), which is
an important lever to enhance spend and cost efficiency. (Insead/Standford University , The link between Supply Chain
Granular Cost-to-Serve transparency is generally used and Financial Performance)
to define priorities for cost reduction and process
improvement initiatives, to make decisions about A regional consumer business company was able to
product and customer portfolio’s and to develop and realize significant profitability improvements by applying
implement service offering policies and trade terms that the above mentioned principles. Through alignment
drive customer behavior in a way favorable to overall of planning policies and parameters in line with
business profitability. volatility in supply and demand, significant inventory
reductions were achieved in several countries with
In the current uncertain business environment, stockholding responsibility. An alignment initiative of
methodologies that align the supply chain at the lot sizes in the factories at the various levels within the
granular level (individual products and customers), product hierarchy (recipies, semi-finished products,
probably comprise the biggest opportunity for profit and finished products) revealed potential for longer runs,
cash improvement. The rationale is that in the past especially for those products that triggered a major
years with relatively high growth rates, companies portion of costs in changeover and product waste.
have added significant amounts of complexity in Several unprofitable SKU’s were rationalized following
terms of products and service offering policies. Not a Cost-to-Make and Cost-to-Serve initiative. Overall this
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4. company was able to significantly reduce unprofitable demand volatility, supply uncertainty, currency exchange
SKU’s, changeovers, and waste, resulting in a reduction risk etc.). In a perfectly predictable world without supply
of manufacturing cost by 10%, in inventory by 40%, chain risk, there is no need for flexibility and hence the
and in an absolute EBIT% margin increase by 1,5%. value of flexibility and agility enhancing investments is
limited.
Risk and Flexibility: communicating vessels
Impact of the current
volatile and uncertain Supply Chain
Flexibility
Enhancement
environment on
supply chain value Supply Chain
Risk Reduction
creation:
understanding risk,
and the value of Flexibility however comes with a cost, as it very
often means adding slack and redundancy in a
flexibility. focused and useful way. More and more companies
however, look at it as an option that creates
value to the business, and that creates more
value the more volatile and uncertain the business
The most relevant learning of the current downturn environment becomes.
is about understanding how risk impacts supply chain Making decisions under uncertainty and understanding
performance and more in particular how this impact the value of flexibility has its roots in real-options
can be reversed by balancing or offsetting risks with theory. This theory makes explicit that flexibility is more
supply chain flexibility and agility. Risk and flexibility in important when uncertainly and volatility are high. And
this respect have to be seen as communicating vessels more specifically it provides a framework to estimate
or forces that have to be balanced. The requirement to the value of flexibility. In footprint optimization or
enhance and invest in supply chain flexibility and agility, asset rationalization programs for instance, lacking
and the business value that derives from it, is directly the capability of being able to appraise the value of
correlated to the level of residual uncertainty and related flexibility, leads to suboptimal decision making. Scenarios
risks a supply chain is exposed to (e.g. in terms of with additional flexibility in terms of volume, product
4

5. mix or network flexibility would only be burdened with often boils down to an increased level of integration
the additional cost of the flexibility without being able or regionalization of the supply chain. In mature
to account for the value that derives from it. Especially in business environments, integrating or regionalizing the
environments with a lot of uncertainty, this will give rise supply chain provides opportunities to take advantage
to suboptimal decision making at the level of preferred of consolidated services and synergies, to drive out
footprint scenarios. redundancy and increase efficiency. In addition, more
With uncertainty and volatility expected to stay, integrated supply chain structures are more capable to
what are the options for supply chain leaders? Using leverage network flexibility potential.
the analogy of the communicating vessels, there are
two potential strategies: Network flexibility
• Managing and reducing supply chain risk: e.g. At the level of the supply chain network, it is often
• starting a formal supplier risk management about making the hidden flexibility transparent by
program integrating information from around the network
• increasing demand planning accuracy based on a holistic view of the supply chain. Hidden
• Managing and enhancing supply chain flexibility: e.g. flexibility in practice can take different forms: alternative
• investing in additional tooling and assets to sources of supply, alternative locations to manufacture
enhance mix flexibility on a production line, and to deliver. In complex and interdependent
• finetuning deployment tactics at a more granular supply chains (complex routings, multiple steps with
level, and doing it more frequently interdependencies, limited slack capacity and excess
inventories), the transparency and the flexibility
The section below will provide more examples on leveraged by a central supply chain entrepreneur brings
how supply chain risk can be reduced or supply chain added value by supporting better decision making in
flexibility can be enhanced. short and medium term sourcing, product and customer
allocation, and inventory deployment tactics throughout
the network. In general the experience is that supply
How to reduce risk and enhance chain integration promotes more (cost and cash)
optimal and faster decision making by leveraging hidden
flexibility in the supply chain? network flexibility. This effect is particularly strong in
intensely volatile environments with many degrees of
freedom to manage.
Very often, leveraging this hidden network flexibility and
Enhancing flexibility and reducing risk can be achieved creating a centralized supply chain function requires a
in different ways. It can be done within the supply chain redesign of the business model. Therefore it is complex,
network, within the 4 walls of the operational units, and but it is often less expensive than building additional
within supply chain management processes. flexibility within the walls of individual operational
facilities in response to market demand, supplier risk,
In the current uncertain times, managing the supply currency exchange and commodity price volatility.
chain is all about managing for cash with a strong focus
on inventories, and cost reduction in the business. On the Inbound side of the Supply Chain, the
And most businesses across a variety of industries contemporary Supply Management environment is
have started with the obvious things, by streamlining characterized by a newly discovered recognition that
their G&A, by aggressively tackling external spend, by some of the major risks an organization faces may
streamlining their organizations etc. come from the supplier base. Proactive management
of these risks can demonstrate the strategic perspective
There are companies however, that have realized that and value, as well as the professional competence
there is an opportunity to go beyond the obvious by of the Supply Management function. The increasing
taking a multi-tiered approach to the downturn. These dependence on suppliers makes the traditional ‘laissez
companies take advantage of the current restructuring faire’ approach dangerous, and has caused leading
friendly environment (suppliers, unions, regulators, enterprises to start investing in Supplier Relationship
employees, etc.) to take an extended enterprise view Management (SRM),a discipline that ensures the
and redesign their business model. In the more mature enterprise actively manages its relationships with
and low growth business environments, this very strategic suppliers.
5

6. Reducing lead times
Within the 4 walls of operational or manufacturing facilities, flexibility can be enhanced by investing in additional
tooling or assets to enhance product mix flexibility on existing manufacturing assets, by negotiating more flexible
labor or supplier agreements, or by investing in lead time reduction efforts. Reducing supply chain lead times
through enterprise lean six sigma efforts for instance, very often allows moving the decoupling point or the push-pull
boundary in the supply chain, physically to more upstream levels. This typically results in a situation where relatively
a larger part of the supply chain can be planned against firm orders instead of uncertain forecasts. At the same time,
decisions in the supply chain that need to be taken based on uncertain forecasts can be delayed to a later point in
time when the quality of the forecasts is typically higher. Lead time reduction is a powerful lever to reduce risk and
rigidity in supply chains and to make them more flexible and responsive.
Lead Time Reduction
Information flow
Raw material supplier Manufacturers / Assemblers Retailer End - User
Material flow
Push Pull Buy to order
Push Pull Make to order
Push Pull Assemble to order
Push Pull Make to stock
Push Pull Ship to stock
Decoupling point
Demand upstream Demand downstream
from decoupling point from decoupling point
= uncertain forecast = firm orders (mainly)
Frequently rebalancing supply chain tactics
Another good practice in a volatile environment is to rebalance the supply chain tactics more frequently at the level
of planning and portfolio policies. For instance, a lot of supply chains currently have more slack capacity that can be
used as a buffer for (demand or supply) uncertainty rather than using inventory for this purpose. This requires taking
a more frequent view at planning and service offering policies and to rebalance them more regularly in order to trade
excess inventory for slack capacity and release cash out of the supply chain. In a volatile supply chain environment,
regular alignment of planning and service offering policies reduces the risk of experiencing service problems and of
carrying excess inventory.
Process flexibility
Supply chain management processes also have a high potential of contributing to either reducing risk or enhancing
flexibility in the business. When cash is king, the importance of an effective S&OP process is paramount. But while
the process seems widely adopted nowadays, recent studies showed that the value delivered often remains limited.
In times of greater uncertainty, the following practices typically improve the value of the S&OP process: increasing
the frequency, doing mid-cycle sensitivity checks, accelerating the S&OP process, developing multiple demand/supply
scenarios, more pro-activeness and collaboration with customers and suppliers, and the incorporation of risk factors.
6

7. A global manufacturing company used the S&OP Risk and Flexibility: communicating vessels
process initially to increase transparency and trust
between Sales & Marketing and Production, making Supply Chain Volatility
everybody work with the same set of planning numbers.
Typically, the Sales department would prepare monthly
sales forecast figures supported by a strong Sales plan
n
tio
including promotional actions and the Manufacturing
Ma
Ac
rk
department would take this set of figures to review
tive
et
E.G.
eti
De
the Master Production Plan and highlight any capacity • Lead Time Reduction
mp
m
• Re-balancing tactics
an
issues. But as the market volatility increased in the
Co
Supply
d
• Managing supplier risk
past months, the quality of the forecast deteriorated. Chain
• Aligning processes, Flexibility
The increased uncertainty called for a new way of event management Enhancement
working in the monthly S&OP process. One set of • Enhanced intra & inter
firm collaboration
forecast figures, as best as they could be, was no E.G.
longer enough to prepare the company to serve its • Volume Flexibility
Supply Chain • Mix Flexibility
clients with the required service level at an acceptable risk reduction • Supply Chain Integration
cost. The solution consisted in developing multiple – Business Model
Cu
demand plans, with associated probabilities. These Redesign
rre
ce
• Multi-scenario planning
Pri
different demand scenarios were then studied by the
cy n
ity
Exc
Supply side of the company, leading to multiple supply
od
ha
mm
plans. One scenario was chosen as the most probable
ng
Co
e
one and followed by the company. Would the market
circumstances change, the company was prepared to
switch to an alternative plan more in line with the new
reality. Supplier Risk
Winning with your supply chain
in uncertain times
The above mentioned practices are examples of what Summarizing the top initiatives that will enable you
companies are doing today to mitigate the impact of to win with your supply chain in these uncertain
increased risk and to enhance flexibility in their supply times, brings us to the following items:
chains. It can be done at the level of the network, the
operational facilities and at the level of supply chain • balancing planning and service offering policies at the
policies and processes. The bottom line is that these granular level of products and customers
practices mitigate business risk, enhance flexibility and • providing Cost-to-Serve transparency
therefore increase the value of the firm. • applying strategies to reduce risk at the level of the
network, the policies and processes in the supply
By embracing the concept of the granular and financial chain
supply chain and by managing risk and enhancing
supply chain flexibility, there is a clear opportunity for With state of the art Supply Chain, Pricing, Finance and
businesses to win in the current uncertain environment, Tax capabilities, Deloitte has gained extensive experience
and sustain their supply chains as a critical asset and covering a full range of services across the whole value
differentiating factor for success towards the future. chain to manage supply chain risk and complexity, and
enhance profitability at a granular level in the business.
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8. Contacts
For more information, please contact:
Stefan Van Thienen Kobe Naesens Paul Delesalle
Partner Manager Director
Supply Chain Strategy & Supply Chain Strategy & Supply Chain Strategy &
Operations Operations Operations
+ 32 476 22 01 03 + 32 475 30 07 44 + 32 476 49 50 08
svanthienen@deloitte.com knaesens@deloitte.com pdelesalle@deloitte.com
For further information, visit our website at www.deloitte.be
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© January 2011 Deloitte Consulting
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