Supply chain management and the executive agenda

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Supply Chain Management and the
E ti A dExecutive Agenda
David Simchi-Levi
E-mail: dslevi@mit.edu
1
@
Professor, Massachusetts
Institute of Technology
What We’ll Cover …
• Research Motivation and Background
• Key Research Insights and Rules
Summary• Summary
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©Copyright 2010 D. Simchi-Levi

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Today’s Supply Chain Challenges
• Global supply chain with long lead times
• Rising and shifting customer expectations
• Increase in labor costs in developing countriesIncrease in labor costs in developing countries
• Increase in logistics costs
• Increase in risks
• Importance of sustainability
• Unprecedented Volatility
Senior management faces competition in an
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Senior management faces competition in an
environment that is uncertain, dynamic and
chaotic.
Identify links between supply chain strategies and the executive agenda
Ch t i th i t f ll i l h i tCharacterize the impact of excellence in supply chain management on
business and financial performance
1. Review the existing supply chain literature
4
g pp y
2. Interview executives from 14 companies
3. Online survey of CEO, CFO and CSCO

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Participating Companies
• 196 companies have participated
173 SCM sections complete
106 CEO sections complete
91 CFO sections complete
• 82 companies completed all three sections
SCM
• 30 Best-in-Class Supply Chains were identified
Cost
Inventory Turn
5
CFOCEO 82
Inventory Turn
Service Levels
Lead Time
Industry Characteristics
Flexible response
0 10 20 30 40 50 60
Cost efficient
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Insight #1: Increasing drive towards flexibility and
responsiveness.

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Summary• Summary
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Top 5 Focus areas for Best-in-Class Supply Chains
Reduction of customer lead times
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Reduction of total costs
Reduction of stock outs
Sales and Operations planning
Improvement of product or service quality
Reduction of customer lead times
FocusAreas
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Percentage of Companies

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Top 30 Best-in-Class Supply Chain Performance
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Insight #2: Significant difference between Cost-
Efficient and Responsive supply chain strategies
Cost-Efficient vs. Responsive Supply Chains
Cost-Efficiency Responsiveness
Primary goal Cost TimePrimary goal Cost Time
Supply Chain Innovation Process focus Product focus
Strategy High utilization High flexibility
Inventory Maximize turns Position inventory
Lead time strategy
Reduce but not at expense of
increasing cost
Reduce even if costs are
significant
Supplier selection strategy Total Landed Cost quality Speed qualitySupplier selection strategy Total Landed Cost, quality Speed, quality
Transportation strategy Low cost transportation modes Fast modes of transportation
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Supply Chain Flexibility: Definition
• The ability to respond, or to react, to change:
Demand volume and mix
Commodity prices
Labor costs
Exchange rates
……
• The objective is to
Reduce cost
Reduce the amount of unsatisfied demand
Improve capacity utilization
• With no, or little, penalty on response time
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Achieving Flexibility through….
• Product design
Modular product architecture, Standardization, Postponement,
Substitution
• Process design
Flexible work force, Cross-Training, Lean, Organization &
Management structure, Flexible contracts, Dual sourcing,
Outsourcing
• System design
Capacity redundancy Manufacturing strategy Distribution
Capacity redundancy, Manufacturing strategy, Distribution
strategy
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Flexibility through System Design
• Balance transportation and manufacturing costs
• Cope with high forecast error
• Better utilize resources
1 A
2 B
3 C
4 D
No Flexibility
1 A
2 B
3 C
4 D
2 Flexibility
1 A
2 B
3 C
4 D
Total Flexibility
©Copyright 2010 D. Simchi-Levi 13
ProductPlant
5 E
ProductPlant
5 E
ProductPlant
5 E
Case Study: Optimizing S&OP at Pepsi Bottling Group
Make Sell Deliver Service
Operates 57
Plants in the U.S.
and 103 Plants
Worldwide
7 Business units
in the U.S. each
responsible for
local demand
240,000 Miles are
Logged Every Day to
Meet the Needs of
Our Customers
Strong Customer
Service Culture
The Challenge:
• Shifting consumer preference
•From carbonated to non-carbonated drinks
•From cans to bottles
• Produced these products in limited plants
• Service problems during periods of peak demand
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Implementation: A Three-Step Process
• Step 1: Focus on Central Business Unit (3 plants,
22 warehouses in MI, MN, WI)
Start small to understand the intricacies of the process
Build confidence in model assumptions
• Step 2: Move on to more complicated regions (East
Coast – 20 plants, 125 warehouses)
• Step 3: Implement across all business units
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The Impact of Sourcing Flexibility
• Creation of regular meetings bringing together Supply chain,
Transport, Finance, Sales and Manufacturing functions to discuss
sourcing and pre-build strategies
Reduction in raw material and supplies inventory from $201 to $195• Reduction in raw material and supplies inventory from $201 to $195
million
• A 2 percentage point decline in in growth of transport miles even as
revenue grew
• An additional 12.3 million cases available to be sold due to
reduction in warehouse out-of-stock levels
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To put the last result in perspective, the reduction in warehouse out-of-stock levels
effectively added one and a half production lines worth of capacity to the firm’s
supply chain without any capital expenditure.
Rule #1: A small investment in flexibility can
make a significant impact on supply chain
performance.

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When to focus on Cost-Efficiency? Responsiveness?
Insight #3: Companies that focus on Market share
and Revenue growth emphasize responsiveness,
in particular reducing stock outs and lead times
When to focus on Cost-Efficiency? Responsiveness?
• SKU Proliferation
Innovative vs. Functional Products
• Different types of Customersyp
Individual consumers vs Corporate
• Multiple channels
Stores vs. Online
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Product Type: Functional vs. Innovative
Low High
Functional Innovative
Product variety
Low High
Product life cycle Long Short
Forecast accuracy High Low
Obsolescence Risk Low High
Cost of lost sale Low High
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Channel Type: Retail vs. Online
L Hi h
Retail Online
Product Variety
Low High
Customization Limited High
Forecast Accuracy High Low
Volume by Product High Low
y g
PC-DirectPC-Retail
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Functional Products Innovative Products
Strategies for Innovative vs. Functional Products
Efficient
Supply
Chain
(Push)
onsive
pply
hain
Pull)
Match
MatchMismatch
Mismatch
Resp
Su
Ch
(P
Mismatch
Marshall L. Fisher, Harvard Business Review, March-April 1997
Retail Channel Online Channel
Strategies for Online vs. Retail Channels
Efficient
Supply
Chain
(Push)
onsive
pply
hain
Pull)
Match
MatchMismatch
Mismatch
Respo
Sup
Ch
(P
Mismatch

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A Portfolio of Supply Chains: The PC Industry
Fulfillment Supply Chain
Private Consumers
Retailers
Public Sector
Enterprise
Assemble-To-Order
No-Touch
Low-Touch
Planning
OrderFulfillment
Procurement
Logistics
Manufacturing
pp y
PCs
Notebooks
Servers
Portfolio of ProductsPortfolio of Customers
23©Copyright 2010 D. Simchi-Levi
A Portfolio of Supply Chains: The Gap Inc.
Banana
Republic
Gap
Old Navy
Low Cost
Fashion
Casual
Planning
OrderFulfillment
Procurement
Logistics
Manufacturing
Rule #2: Different brands channels and
Portfolio of Brands
24©Copyright 2010 D. Simchi-Levi
Customer Value Proposition
Rule #2: Different brands, channels, and
product characteristics may require different
supply chain strategies.

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How does CSR affect supply chain strategy?
Internal standard operating…
Environmental policy
Corporate Social
Responsibility (CSR)
Product or service design for supply chain
Product or Service lifecycle management
Network redesign to support faster time to
market
Forecast accuracy
Supply Chain Innovation
0% 20% 40% 60% 80%
Responsibility for social needs
Brand image benefits
Customer value
Shareholder value
Compliance to regulatory…
p g
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250% 10% 20% 30% 40% 50% 60% 70% 80%
Launch of new products or services
Introducing new channels of distribution
Sustainability and CO2 footprint initiatives
Insight #4: Strong correlation between CSR and
innovations in the supply chain
The Nestlé Story
• Nestlé entered India in 1961
• It set up its first milk processing facility at Moga in the
State of Punjabj
Provided technical assistance and education to improve milk
productivity and quality
Established milk collection points and chilling centers,
Installed farm cooling tanks,
Provided the transportation to pick-up milk at the farms and
d li th t th ilk i f ilit
deliver them to the milk processing facility.
Delivered veterinary medicines and helped the village women
learn good dairy practices.
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The Nestlé Story – The Impact
• This program grew from 180 farmers in 1961 to 95,000 in
2005 and from 4 milk collection centres to 1700 during
the same time period.
• It provided employment, higher income, and a higher
standard of living not only to the farmers but to the entire
rural community.
• This business model was not a “charity” – it allowed
Nestlé to establish a unique supply chain and generatedRule #3: Corporate Social Responsibility can
create tangible business opportunity and
a new stream of revenue in a challenging market.
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create tangible business opportunity and
value.
Links between SC Strategy, Business & Financial Performance
• Business Performance Indicator (BPI)
Revenue, Market Share, Customer Satisfaction and Return on
Equity
• Financial Performance Indicator (FPI)
Return on Equity, Return on Assets, Total Assets Turnover,
Inventory Turnover, Operating Cash Flow, Net Working Capital
to Assets, Operating Margin, Debt to Equity Ratio, and Total
Debt RatioDebt Ratio
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Links between SC Strategy, Business & Financial Performance
• 62% of the BIC supply chain companies
achieved above average BPI compared with
43% of the remaining companies
• 40% of the BIC supply chain companies
achieved above average FPI compared with
24% of the remaining companies
Insight #5: Strong link between supply chain
strategies and business and financial
performance.
Different Ways to Compete in Retail
Customer Value
Proposition
Example Operations Strategy
High Fashion
content at a
bl P i
Zara Speed to Market
reasonable Price
Customer
Experience
Dell Direct
Responsiveness through
Configure-to-Order
Product Innovation Apple
Efficiency through outsourced
manufacturing and logistics
Rule #4: The operations strategy that a company
d l t b t d th l iti
Everyday Low
Pricing
Wal-Mart Cost Efficiency
Product Selection
and Availability
Amazon
Efficient and reliable Order
Fulfillment
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deploys must be centered on the value proposition
that the firm provides to its customers.

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• Summary• Summary
Key insights and Rules
• Increasing drive towards
flexibility
Si ifi t diff b t
• A small investment in flexibility
can make a significant impact on
l h i f
Insights Rules
• Significant difference between
Cost-Efficient and Responsive
supply chain strategies
• Companies that focus on Market
share and Revenue Growth
emphasize responsiveness
• Strong correlation between CSR
supply chain performance
• Different brands, channels, and
product characteristics may
require different supply chains
• Corporate Social Responsibility
can create tangible business
opportunity and valueStrong correlation between CSR
and innovations in the supply
chain
• Strong link between supply chain
strategies and business and
financial performance.
opportunity and value
• Operations strategy must be
centered on the value proposition
the firm provides its customers.
32

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Your Turn!
For information about my
latest book, see
www.operationsrules.com 33

Supply chain management and the executive agenda

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