Supply Chain 4.

0: Emerging trends
in Sustainable Supply Chain

WORKING DRAFT
Last Modified 2/11/2019 1:55 PM SE Asia Standard Time
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3 objectives in value / supply chain of business

High
Delight
Segmented
Service

Supply
Chain
High Objectives High
Cash Profit
Flow Margin

Less or without Firefighting

1
Let me start with SC History

2
Historical Background

⚫ Inventory lot-sizing models

⚫ Time-series forecasting
⚫ Production Planning & Control
⚫ Purchasing
⚫ Sales & Distribution

All these functions have existed for a century !

3
The Transition (1970 – 1995)
⚫ Inventory models came under attack (70’s)
⚫ Enter MRP → MRP II → ERP
⚫ And from Japan, JIT, TQM, Kaizen, etc.

What happened thereafter?

➢ Need for
– Better coordination /integration of functions
– Shorter time to manufacture
– Globalization
– Emergence of IT

• Led to the evolution of… Supply Chain Management

4
Evolution

Supply Chain Management

Enterprise Resource Planning
Manufacturing Resource Planning
Material Requirements Planning
Lot-Size Models
Thumb - Rules
5
Typical entities in supply chain

Business
Partners

End
Suppliers 3PL Manufacturers 3PL Warehouses
Consumers

Traders Traders Distributors

Service
Traders Dealers
Providers

CFAs

Wholesalers

Retailers
6
Supply Chains to be functionally coordinated, globally
collaborated and should have the ultimate target
of satisfying customers at optimal logistics cost &
working capital ...

... without internal &

external firefighting!
7
Two Other Formal Definitions
The design and management of seamless, value-
added process across organizational boundaries to
meet the real needs of the end customer
Institute for Supply Management
Managing supply and demand, sourcing raw
materials and parts, manufacturing and assembly,
warehousing and inventory tracking, order entry and
order management, distribution across all channels,
and delivery to the customer
The Supply Chain Council

8
3 objectives in value / supply chain of business

High
Delight
Segmented
Service

Supply
Chain
High Objectives High
Cash Profit
Flow Margin

Less or without Firefighting

9
How do we quantify logistics costs reduction, inventory reduction and lost
sales reduction in CFO financing language

High Delight
Service

Value Chain
Challenges
High High
Cash Profit
Flow Margin

Less Firefighting

10
Finance Basics

PBIT is profit before interest and tax.

EBITDA stands for earnings before interest, tax, depreciation and amortisation.

Profit
Profit is the difference between a company’s sales, or ‘revenues’, and its costs. It is clearly
preferable to make a profit (sales more than costs) than a loss.

Gross Profit
At the top of any profit and loss account (or income statement) is the sales figure. This is
one of the most important figures in a set of accounts. Beneath the sales figure there is the
cost of sales figure. These are costs that vary with sales. Deducting these costs from sales
gives the gross profit figure. So if sales are £1m and the cost of sales is INR 750,000, then
the gross profit is INR 250,000.

PBIT or EBIT
Gross profit is calculated before overheads, or indirect costs, which do not vary with sales.
These include the costs of property and full-time staff. Gross profit less operating costs is
operating profit. This is also known as profit before interest and tax (PBIT) or earnings
before interest and tax (EBIT). PBIT is frequently used by creditors to measure a company’s
earning and paying capacity.

11
Logistics Costs Reduction translating to financing language

INR 1 reduction in logistics costs = INR 1 reflection EBITDA

1$ reduction in logistics costs = 1$ reflection EBITDA

12
Inventory Reduction translating to financing language

INR 10 reduction in inventory value = ?

What is weighted average cost of capital = ?

Weighted average cost of capital = 7 to 15%

INR 10 inventory value reduction = INR 10 * Weighted average cost of capital

= INR 10 * 10%

= INR 1 impact in PBT

13
Lost Sales Reduction translating to financing language

INR 10 reduction in lost sales = ?

Contribution Margin = 7 to 50%

Lets assume contribution margin = 20%

Lets assume INR 10 reduction in lost sales will bring INR 10 sales revenue !
Ideally, this is not the case !
Why ?

INR 10 reduction in lost sales = INR 10 * 20% contribution margin

= INR 2 increase in PBT

14
End-to-end perspective on supply chain management – Functions & Decisions
1 Supply Chain strategy

Understand market and value chain dynamics and define strategy with optimal cost and flexibility

4 Production management 3 Order and demand management

Translate market requirements into Ensure appropriate supply at low cost
asset optimizing production through accurate demand forecasting
requirements and manage the resulting and efficient order management with
constraints with optimized scheduling proper S&OP & control tower

5 Supply management
Ensure reliable supply
and integrate with
suppliers with right
inbound material stock
4
3 2 Service level management
Understand customer &
5 7 2 product requirements by
segment and serve
them accordingly with
right finished goods
6
stock

6 Distribution management 7 Supply chain processes/

& network configuration organization
Ensure reliable logistics and optimal material flow Create integrated processes to
in the inbound, intra & outbound network; and facilitate information flow supported by
configure network with optimal cost and flexibility a supply-chain-focused organization

Ensure sustainability and constant improvement in whole network

8 Supply Chain performance management and transformation through control tower

15
End-to-end perspective on supply chain management – Functions & Decisions
1 Supply Chain strategy

Understand market and value chain dynamics and define strategy with optimal cost and flexibility

4 Production management 3 Order and demand management

Translate market/ Lot
Batch requirements
Size ? into Ensure appropriate supply at low cost
asset optimizing production Optimal order size?
through accurate demand forecasting
Optimal plan
requirements & schedule
and manage ?
the resulting MTO,order
and efficient MTS, MTF ? with
management
Optimal
constraints withMTBF, MTTR
optimized ?
scheduling Forecasting
proper accuracy
S&OP & control tower ?
4
5 Supply management 3 2 Service level management
Ensure reliable supply Understand customer &
Optimal MOQ,
and integrate with FLS, Number 5 7 2 No one size fits
product for all by
requirements
& location
suppliers with rightof vendors? segment and serve
inbound
Optimal material stock inventory?
inbound them accordingly with
- Product, Customer
right finished goods
6 Segmentation ?
stock

6 Distribution management 7 Supply chain processes/

& network configuration organization
Ensure reliable logistics and optimal material flow Create integrated processes to
Optimal network, route, dispatch ?
in the inbound, intra & outbound network; and
Org Structure?
facilitate information flow supported by
Optimal
configure truck
network withtype, size,
optimal loading
cost and ?
flexibility S&OP ?organization
a supply-chain-focused

Ensure sustainability and constant improvement in whole network

8 Supply Chain performance management and transformation through control tower

BSC, KPIs, Metrics, Dashboards, War Room, ?

16
PC Industry Supply Chain
Tracing back the screen you stare at for the bulk of your time
Strategic
Production innovation Operations Customer relations
focus

Software
companies Global logistics
companies
▪ FedEx, UPS,
BAX Global
Components
makers
▪ Storage Contract Final
▪ Semicond- manufac- customers
Companies
uctors turers/OEMs PC companies Distri- Resellers
▪ Large
and product
flows
▪ Mother- ▪ Asian ▪ Direct (Dell, butors
▪ Retail
enterprises
boards (Mitac, FIC, Gateway) ▪ Ingram ▪ Consumers
▪ VARs
▪ Flat-panel Acer …) ▪ Indirect (IBM, Micro, ▪ SMEs
▪ Integrators
displays ▪ U.S. (SCI, Compaq, HP, Tech
▪ Other Solectron ..) Toshiba, Apple) data ▪ Dealers

Components
Local
distributors
assemblers
▪ (Arrow, ▪ (White box)
Avnet)

Activities R&D Manufacturing Assembly Distribution Sales, service, support

17
Cisco’s Value Network

2. Orders are automatically

transmitted to suppliers or
scheduled in the Cisco
Providers
production system
Cisco
3. Contract 2
manufacturers 1. Customers 80% of
build and ship 60% orders are configured
3 1 and submitted via
of units direct to
customers Cisco's Web site
4
4. Cisco production Customers 6
configures only highly
complex orders 6. Service 70% of
technical support
5 calls do not require
5. Consolidation human intervention
centers Cisco
operates just three
centers worldwide

18
Global Apparel Value Chain
Tracing back the dress you are wearing
Apparel
Textile companies manufacturers Retail outlets
North America All retail outlets
US garment factories
Department
(designing, cutting,
stores
sewing, buttonholing,
Cotton, Fabric ironing) Brand-named
Natural wool, Yarn (weaving, apparel
fibres silk, (spinning) knitting, companies Specialty stores
etc. finishing) Domestic and
Mexican/Caribbean
Basin subcontractors
Mass mer-
Asia chandise chains

Oil, Asian garment Overseas

Synthetic Petroche- Synthetic contractors buying offices
natural Discount chains
fibres micals fibres
gas

Off-price, fac-
Domestic and Trading
tory outlet, mail
overseas companies
order, others
subcontractors
All retail outlets

Raw material Component networks Production networks Export networks Marketing

networks networks

19
Globally Dispersed Manufacturing
An Illustration: How Li & Fung Limited Might Make a Dress

Product Design QC & Shipping

[Hong Kong] [Hong Kong]

Yarn Spinning Weaving Stitching

[Korea] [Taiwan] [Indonesia]

Zippers+…
[Japan+…]

20
How Many Countries Does It Take to Make a Coat?
To make this jacket for the U.S. market, Hong Kong garment producer Li & Fung ordered
materials from factories in five countries and had them delivered to Thailand, where the jacket
was stitched together. Using a network of Web sites, Li & Fung stays in touch with its worldwide
suppliers and can compress the time it takes to get items into stores
Taiwan, which specializes in making
China, the world’s largest material for outdoor clothing,
producer of cotton, made the liner produced the shell and fleece

Thailand, a leading
exporter of imitation
fur, ringed the hood
Germany, which gave
the world the snap
Japan, the globe’s biggest producer of stainless fastener in the 1880s,
steel for zippers, put its teeth in this zipper sent the snaps
21
22
Two types of KPIs

Lag KPIs Lead KPIs

Lead Output
Compliance KPIs

Lead Process
Compliance KPIs

23
Three important lag KPI’s

Is the customer Customer On Time In Full (OTIF)

happy? % (Perfect Order)

Are we happy Supply Chain Costs as % of

with our financial COGS (End-to-end supply chain
performance? cost)

Does our Inventory Days (Working Capital

stakeholders will unlocked)
gain long term
confidence ?

24
Example: Inventory lag vs lead

Lead Output Every SKU has a target

compliance – doing inventory range and
the right thing actual inventory should
be in that range
▪ Inventory norms
compliance - 50% of
SKU-locations within
target range of We produced too much
inventory norms or too early. Why?
Lag KPI
▪ Budget compliance -
$2.3bn = 37 days Total inventory is 1%
of inventory Did demand surprise
under budget
us or did we not
▪ Excess inventory - replenish in time? Why?
20% over
▪ Low inventory - 30%
under Why did we not see
the end-of-life for these
▪ Obsolete inventory - items coming?
$130m in obsolete
inventory

25
55 KPI’s cover all processes and performance dimensions
Order and demand Production Supply Distribution
SC integration
Performance management management management management
dimension

Service 1. % of first commit 7. Production OTIF 9. Supplier OTIF % / 14. Dispatch plan OTIF %
+/- 1 day of request date % Perfect orders in % of 15. Delivery accuracy +/-
• Reliability
2. Order changes 8. Production total 1 day of confirmed
3. Confirmed orders planning 10. PO vs GRN deviation date
cancelled accuracy %
4. Unconfirmed order 11. Billing Cycle/ vendor
portfolio payment terms
5. Forecast accuracy 12. Accounts Payables
6. Forecast bias 13. Non order invoice
• Time (leadtime) 16. Customer requested 19. Average 20. Average supply LT 21. Average delivery
LT production LT LT
17. Order confirmation
LT
18. Order fulfillment LT
• Adaptability 22. Billing cycle 24. Purchase order automation 25. Customer order automation
23. Accounts Receivables (Manual orders %) (Manual orders %)
Cost 26. Order-processing 27. Changeover 28. Inbound logistics 30. Out-bound logistics spend 32. Spot contracts
cost costs for spend on on contracting costs
emergency contracting 31. Warehousing and intra-plant 33. IT cost
orders 29. Spot purchase transfers spend on 34. Management and
costs contracting planning cost
Working 35. Inventory days (work in 38. Inventory days norms 41. Inventory days 43. Cash-to-cash
capital progress) compliance (raw materials) norms (finished cycle time
36. Inventory accuracy compliance products) compliance 44. Inventory
37. Production BOM 39. Inventory accuracy 42. Inventory accuracy accuracy
accuracy 40. RM BOM accuracy
Complexity/ 45. Number of SKUs 47. Number of production 49. Number of ship-to
Size 46. Number of SKUs locations locations
with 80% volume 48. Number of regions 50. Number of ship-to loca-
with operations tions with 80% volume
Financials 51. Net external sales (value) 54. Return (EBIT) in percentage of fixed assets (cash
52. Cost of goods sold savings)
53. Return (EBIT) in percentage of sales (cash 55. Working capital
savings)

26
 Along with cross functional team, 3 key areas with various measures is required
to excel in supply Chain
Service Cost

Service ▪ Customer OTIF % ▪ SC direct costs

level ▪ Order to Commit % SC costs – Transportation
▪ Commit to Supply % – Warehousing
▪ Supplier OTIF% – SCM admin, overhead, IT
▪ Production OTIF % ▪ SC Indirect costs
▪ Dispatch OTIF % – Obsolescence
▪ % returns from customer – Discount for aged inventory
What makes a ▪ % damage in warehouse/transport – Lost sales
good Supply Chain? ▪ Lost sales / Out-of-stock % – Returns/Damages
▪ Opportunity loss %

1 Service ▪ Total order fulfillment lead time ▪ % inbound on ex-works / FOR cost
Lead- Transport
time ▪ Customer requested lead time ▪ % outbound on ex-works / FOR cost
▪ Production lead time ▪ % mode-mix for inbound, intra-plant,
2 Cost
▪ Supplier lead time outbound
▪ Dispatch lead time
3 Inventory/Capital Outsourci ▪ Outsourcing ratio – transport
ng ▪ Outsourcing ratio – warehouse

Capital costs

Forecast
▪ Forecast accuracy ▪ Inventory days/value finished goods
▪ Forecast Bias Inventory ▪ Inventory days/value WIP
▪ Inventory days/value raw materials
▪ Inventory days/value spare parts
▪ Confirmed orders cancelled ▪ FG Inventory age distribution
Volatility ▪ Share of order changes in frozen ▪ Inventory accuracy%
horizon
▪ Plant capacity utilization

27
Costs in Value Chain

Procurement Cost 50-70

Production Cost 15-25

Logistics Costs 6-18

Warehousing Costs 1-4

Inventory Carrying Costs 1-3

Admin Cost 3-6

Total Value Chain Cost 100

28
Starting point – industries differ in their supply chain maturity and performance

Service level –
Supply chain cost OTIF to request Order lead time Inventory
Percent of COGS Percent Days Days

1 Retail 6.0 96.0 n/a 47

2 Automotive 6.0 96.0 10 47

3 Consumer
7.0 95.0 10 36
electronics

4 Pharma 7.0 97.0 8 154

5 Chemicals 7.0 91.0 10 66

6 Consumer 9.0 92.0 9 60

7 High Tech 8.0 82.0 49 45

8 Basic
8.0 89.0 35 76
materials

29
Supply chain
excellence pays off
10-15% higher product
availability

20-40% lower inventory levels

5-15% supply chain cost

reduction

1.4% to 3.0% points ROIC

increase

30
Supply Chain Decisions

Decisions

Temporal Functional

• Procurement
• Strategic
• Production
• Tactical
• Operational • Logistics
32
 SCM Functional Decision -
Procurement Decision
Procurement must provide material of

of the Right Quality

from the Right Source

at the Right Price

of the Right Quantity

at the Right time 33

SCM Functional Decision - Production Decision

QUALITY MANPOWER MANAGEMENT

•Managing Workforce
•Managing quality
•Job Design
•Quality Control •Performance Measurement
and Improvement & Improvement

PROCESS DESIGN
•Process Selection
•Service Operations Design
•Choice of Technology
•Process Flow Analysis
•Layout of Facilities
INVENTORY MANAGEMENT
•Independent Demand
•Materials Requirement Planning
•Just-in-time

CAPACITY PLANNING AND

SCHEDULING
•Forecasting
•Aggregate Planning
•Scheduling Operations
•Project Planning 34
 SCM Functional Decision –
Logistics Decision

⚫ Manage incoming ⚫ Monitor stock, ⚫ Handle finished goods

parts & materials materials, inventory ⚫ Monitor distribution
⚫ Dispose off waste & channel
by-products

35
 Facility
Structure Communications
Warehouses, & IT
Factories, Technology base,
Processing Centres, Trained manpower,
Distribution Centres, Good infrastructure,
Retail Outlets and and Technology
Offices life-cycle

Inventory Components
of Logistics Transportation
Inventory turnover ratio,
Obsolescence, Rail,
Locked up capital, Warehousing Truck,
Uncertain lead times and & Packaging Air,
External factors Housekeeping, Water and
Packaging costs, Pipeline
Retrieval time and
Damage during storage
Automation

36
 SCM Functional Decisions
⚫ Logistics decisions

⚫ Materials Management Decisions (Inbound)

⚫ Sales forecasting
⚫ Order processing
⚫ Inbound transportation

⚫ Physical Distribution Decisions (Outbound)

⚫ Configuration of distribution facilities
⚫ Location of facilities
⚫ Mode of transport
⚫ Vehicle routing

37
SCM Temporal Decisions
⚫ Three levels of temporal decisions

◼ Location-allocation decisions ◼ Outsourcing

◼ Demand planning ◼ Supplier selection

Strategic ◼ Distribution channel planning ◼ Information technology selection

◼ Strategic alliances ◼ Pricing

◼ New product development ◼ Network restructuring

◼ Inventory control
◼ Material handling
◼ Production / distribution
Tactical ◼ Equipment selection
coordination
◼ Layout design
◼ Order/freight consolidation

◼ Vehicle routing/scheduling ◼ Record keeping

Operational
◼ Workforce scheduling ◼ Packaging

38
 Conflicting Objectives
in the Supply Chain

1. Purchasing
• Stable volume requirements
• Flexible delivery time
• Little variation in mix
• Large quantities
2. Manufacturing
• Long run production
• High quality
• High productivity
• Low production cost
39
Conflicting Objectives
in the Supply Chain
3. Warehousing
• Low inventory
• Reduced transportation costs
• Quick replenishment capability
4. Customers
• Short order lead time
• High in stock
• Enormous variety of products
• Low prices

40
 Exercise: Conflicting Objectives
Objectives Implications

High revenues through: S

u Higher
Sales and Customer
p Service
Marketing
High levels of product p
availability l Lower
y
c
Cost-effective production through: h
More Disrupting factors in
a
Production production
i
High capacity utilization n
Long production runs Fewer
Few set-ups

Reduce investments and costs

Finance and through: Higher
accounting
Inventories
Fewer facilities
Lower inventory levels Lower

Source: Magee, Copacino, Rosenfield, Modern Logistics Management, Wiley, 1985.

Cross functional team is required to move to best-in-class supply chain
organization

Sourcing
Production
Planning Warehousing
Distribution
Sales

Supply chain changes often are a team effort and therefore require a
transformation approach because
▪ Cling together swing together – one cannot solve the issue alone
▪ Changes in one affect others
▪ Entire "gang" moves at the speed of the slowest member – no overnight or
individual solution

42
43

Today we are in SCM 4.0

43
Challenges to keep in mind while consulting SC !!

Accelerating pace of technology

Shorter and tougher business cycles

Expanding and demanding consumer base

Converging wages and increasing costs

Digital and big data

44
Challenges to keep in mind while consulting SC !!
Accelerating pace of technology

45
Disruptive technologies have made more hardware accessible to drive Supply
Chain improvements

Examples
▪ Bar-code scanners (360 degree retail,
Readers – 1D, 2D, rugged, healthcare
(Data
collection)
▪ RFID readers

▪ ASRS / shuttles
Material
handling /
▪ Conveyers (roller, belt, chain)
automation ▪ Pick to light / voice
▪ Sorters, A-frames, Robots
▪ Location (GPS)
Sensors
▪ Traffic – flows
▪ Environmental condition ex. Temperature
▪ Short distance – Bluetooth
▪ Satellite
Cameras
▪ In-store operations, shelf / consumer
monitoring
▪ Traffic control

46
Leveraging existing life streaming video technology to improve CAMERAS
on shelf availability
Camera at shopping
cart scans shelfs on
customers tour
Branch manager
receives information
about out of shelf
and visited aisles

Improvements
▪ Shelf availability increases
▪ Wrong placed products/broken
package can be detected
immediately
▪ Information on which aisles are
visited – leveraged to improve
planogram

47
Challenges to keep in mind while consulting SC !!

Shorter and tougher business cycles

48
Within 4 years, LED bulbs prices will have dropped by over 80%
Average LED replacement lamp retail pricing trend (60W A-lamp)
USD/lamp

May 2010: Philips introduces

60 world's first 60W-equivalent
LED bulb at USD 60

"High-quality LED bulbs in the popular 60-watt

category will fall to about USD 10 by the end
of this year, a price that will be a 'breakthrough'
for LED lighting"
Ed Crawford, CEO Philips Lighting,
cited in MIT Technology Review, April 2013
23
18
14
8
10
5

2010 11 12 13 16E 2020E

49
Challenges to keep in mind while consulting SC !!

Expanding and demanding consumer base

50
Dawn of a NEW ERA in retail
The true story of leading Chinese e-tailer Taobao/Tmall in Nov 11th 2013

Sales
400M people Million RMB
visited Taobao and 35,000
35,000
Tmall, equivalent every 30,000
US man, women, child 30,000
(and their pet)
25,000

20,000 19,100
$US3.3M paid for a
15,000
13.3 carat diamond ring
10,000
6,700
5,000
RMB 35bn sales 100 1,000
0
completed, more than
total retail sales in HK 55’’ 00:06 01:00 13:00 21:00 23:59
for the entire November

SOURCE: Media Research 51

…where the laws of retail don’t apply anymore
Volatile demand SKU complexity Fragmented delivery
Million RMB in one day No. of SKU per store No. of end-points1

>1,000,000

x20 530 x22 700,000 x250

27 ~4,000
30,000

Average Promotion
Central mart Yixun
1 In Shanghai

52
Challenges to keep in mind while consulting SC !!

Converging wages and increasing costs

53
Rising labor cost of classical manufacturing outsourcing countries …
Cross-sector manufacturing labor hourly wage
USD
Developed countries, 2014
Germany 44.8
8 Switzerland 57.6
US 36.1 Russia
Japan 35.2 Malaysia
South Korea 19.9
6 Argentina
China
Turkey
4
Thailand
Mexico
2 Egypt
India
Indonesia
0
2007 12 2018

SOURCE: The Economist Intelligence Unit 2013 54

Challenges to keep in mind while consulting SC !!

Big data

55
EIGHT FACTS OF BIG DATA (1/2)
If you stacked a pile of CD-ROMs … it would stretch
1 on top of one another until you reach
the current global storage capacity
8o,ooo km
beyond the moon
295 exabytes
for digital information …

Every hour, enough information Side by side, they'd

2 is consumed by Internet traffic scale Mount Everest
to fill 7 million DVDs 95 times 84o,56o m
The world's
3 5oo,ooo+ … to fill 5,955 football fields
data centers are large enough ...

4 By 2020…………….. 1/3 data will be stored or have passed through

the cloud

56
EIGHT FACTS OF BIG DATA (2/2)

5 By 2020, IT departments
will be looking after
10x more servers

6 By 2020, IT departments
will be looking after 50x more data

7
By 2020, IT departments
will be looking after
75x more files

8
We have produced more data
in the last 2 years … 3,5oo,ooo,ooo,ooo,ooo,ooo,ooo
2010 2012

57
Challenges to keep in mind while consulting SC !!

Accelerating pace of technology

Shorter and tougher business cycles

Expanding and demanding consumer base

Converging wages and increasing costs

Digital and big data

58
Few players who has not coped with basic innovative and digital supply chain
have seen the greater downfall ! Traditional
Disruptors players
Traditional players Description of disruption market entry downfall
North American video rental shop chain with 60,000 9,000 stores
employees and 9,000 stores
▪ 2002 - Redbox with automated rental kiosks
enters the market 8 years
▪ 2007 - Netflix introduces online streaming
▪ 2010 - Blockbuster files for bankruptcy
Closed down

bookstore chain with 20,000 employees and 1250 $4.1B

stores revenue
▪ 2007 Amazon launches the e-book reader Kindle
▪ 2010 Borders responds with its competitor, Kobo 3 years
▪ 2011 Borders files for bankruptcy after $1B
yearly income drop over 4 years
$2.8B revenue

Global leading cell phone provider with 35% market 35% market
share in a crowded space share
▪ 2007 Apple releases the first smart phone
▪ 2008 Anroid’s open sourced mobile device
2 years
platform enters the market
▪ 2012 Nokia’s market share has dropped 10x down
to 3.5% 3.5% market
share

59
While disruptors are seeing success, established leaders are undertaking major
innovation transformations of their own
Industry disruptors Established leaders

Retail #1 $80b 23% #3 $12b 22%

eCommerce Online 5 year eCommerce Online 5 year

site in USA sales CAGR site in USA sales CAGR
Online retailer leveraging big data and advanced analytics for Online retail business leveraging advanced analytics for pro-duct
merchandising, marketing and product suggestions (e.g., suggestions (e.g., recommendations based on consumer’s
industry-leading recommendations engine) previous shopping, search, and social media behaviour)

Autom- 27k 500k 9% 18%

otive

Vehicles sold Vehicle sales Revenue Online traffic

in 2014 target in 2020 growth in last from phones &
5 years tablets

Pioneer in connectivity and semi-autonomous technology in Car manufacturer implementing digital initiatives ranging from
automotive industry (e.g., latest informatics system and customization of CDJ to single board driver assistance
maintenance upgrades sent directly via Cloud to vehicle) controller system

Finance 20-
$1b+ #11 50% 90%
40%
Loans Loan Forbes Digital sales in Commercial
delivered APR promising Co. 2014 payments through
digital channels
Small business lending site leveraging big data analytics and non- Renowned as the leader in digital banking, after building a digital
conventional data to achieve loan decisions within minutes and commercial onboarding platform focused on automated
better risk assessment with score technology focused on integration of external data sources and “easy to use”
health of business not credit score of owners functionality. The “build it and they will come” approach had
rapid success at switching walk-in customers to digital users

60
What can SC 4.0 “digital” and “predictive” achieve?
Lower-
Better
planning cost, safer
operations
decisions
Using more data and Simplifying and, where
better analytics to create feasible, eliminating what
insight and make better humans do that is rework or
decisions – e.g. what low-value add – e.g.,
do we maintain when, automatically generating
what is the optimal schedule reports, automating
dangerous or strenuous
tasks
Service level
enhancement
by better
technology
Existing and new
technologies becoming
cheaper and more
accessible – e.g. low-cost
data storage, internet of
things, math innovations,
advance in human-
machine interfaces
61
Supply Chain 4.0 Innovation & digital curve Physical flow Planning SC strategy
spread across various cycle stages Performance management Order management Collaboration

Adoption rate 18 Closed-loop planning 31 Predictive maintenance and 43 Advanced Warehouse Resource 49 Smart public and personal parcel lockers
augmented reality maintenance Planning & Scheduling
1 Autonomous container 19 Dynamic end-to-end network assistance 50 Automated replenishment
optimization and warehouse 44 GPS-based map generation &
2 Human-free container ships design 32 ATP based on real-time customer location determination 51 Vehicle tracking and data mining
constraints 45 Asset utilization & yard manage-
3 Fully autonomous (driverless) 20 Data mining and automated 52 AGV solutions for
root-cause analysis for 33 Real time point-of consumption ment for logistics assets internal transport
truck
performance management inventory tracking 46 Onboard units for economic driving
4 Ergonomic exoskeletons
53 Online order Broad
34 Predicting optimal delivery monitoring
21 Range imaging sensor systems 47 Advanced Transport Management use
5 Automation of planning/ times
Software (TMS) and dynamic
machine-learning 22 Fully automated ITEM picking / 35 Information platforms routing and load identification
Robotics
6 Augmented reality assistance 36 Smart shelves 48 AGV-based goods-to-man
for truck driving and delivery 23 Real-time performance solutions
activities transparency and target 37 Smart packaging
adjustment
7 Drones for delivery 38 Online auction of logistic
24 Real-time re-planning capacity
8 Real-time and mobile S&OP
25 Uberization of transport 39 Location and condition control
9 Micro-segmentation
26 Gesture and motion tracking 40 Predictive analytics in demand
10 Automated profit-optimization in planning
planning 27 Wearable user interfaces /
Smart glasses 41 Fully automated CASE picking/
11 Early warning system for SC Robotics
risks and deviations 28 Optimizing shipping by 53
42 Use of demand probability
influencing customer order
12 Nearly autonomous truck and distributions
behavior
truck convoying systems
29 Analytical evaluation of manual
13 Cloud logistics platform inputs to demand forecasts
52
14 3D printing for slow movers 30 No-touch order processing
44 51
15 Joint planning in cloud 50
43 49
46 48
16 Predictive shipping 38 42 47
34 45
17 Delivery to trunk of car 25 29 37 41
16 31 33 35
15 19 21 24 28 36 40
30 32
23 27 39
7 10 14 18
6 11 20 22 26
8 9 13 17
1 2 3 4 5
12

Failure

1 2 3 4 5 6 Cycle
Vision Technological pre- Innovation Pilot use Selective Broad use stages
requesites developed developed use (or failure)

62
Few industry lags well behind other industries on supply chain innovation
maturity

Advanced incum-
DIGITAL MEDIA bents and estab-
lished “startups”
constitute the
new normal

Tipping
AUTO & RETAIL
point
MATERIALS & TRADITIONAL
METALS Mainstream MEDIA
customers
UTILITIES adopt

Advanced
incumbents start
adapting to the
new model Laggard
incumbents die
Early adopters
start embracing the
new models
Innovative startups
create disruptive
New trends business models
emerge
Digitally nascent Emerging or on the adoption curve New normal
Time

63
Digital SC Compass that maps top 20 SC innovation 4.0 Value
Driver
levers to the 6 main value drivers SC 4.0
Lever
Micro- Predictive
Dynamic segmen- analytics in
network tation demand Closed-loop
configura- planning planning
tion
Supply chain Automation
cloud of knowledge
work
End-to-end/ Advanced
multi-tier profit
connectivity optimization

Reliable on- Scenario

line order Service
Service planning
monitoring
Agility

Real-time re-
Automation of
planning Capital
Capital Cost
Cost warehousing

No-touch Autonomous
order pro- and smart
cessing vehicles

Automated Human-
root cause machine
analyses Digital Smart interfaces
performance logistics
manage- On-line planning
ment In-situ 3D algorithms
trans- printing
parency

64
9 innovations to focus on now
Innovations with most favorable aggregated score across 6 dimensions
Res-
Res- Res- pondents
pondents pondents expecting
Time to expecting expecting disruptive Dis-
Cycle stage broad use failure high impact change agreement1
Innovation today Years Percent Percent Percent Quartile

Predictive analytics in planning and operations Selective use 4 0 69 45 1.0

Online order monitoring Selective use 3 0 79 21 1.5

Real-time planning Pilot use 4 2 69 41 1.8

Automated replenishment Selective use 4 0 68 26 2.0

Vehicle tracking and data mining Selective use 4 0 60 28 2.3

Real-time performance transparency and target adjustment Pilot use 4 0 75 27 2.0

Advanced Transport Management Software (TMS) and Selective use

dynamic routing and load identification 5 0 65 38 2.8

Location and condition control Selective use 5 0 58 21 1.8

Data mining and automated root-cause analysis for Pilot use

performance management 4 1 59 39 3.3

1 1 = low disagreement, 4 = high disagreement; sorted degree of disagreement into quartiles for each survey question and took average disagreement
quartile across questions

65
There are 7 innovations that respondents identified as game-changers
Average impact potential along low-high and optimization-disruptive axes

7 game-changers
▪ 3D printing for slow movers
▪ Nearly autonomous truck and truck convoying systems
▪ Fully autonomous (driverless) trucks
▪ Automation of planning / machine-learning
▪ Cloud logistics platform
▪ Joint planning in cloud
▪ Information platforms

66
The size of the prize – applying SC digital and predictive levers with deeper
understanding of 3 key ingredients bring huge potential to get unlocked in
all supply chain categories
Key drivers
Lost sales ▪ Predictive analytics
(service) ▪ Shortened lead time
-50% ▪ Demand shaping
-65-75% >-75% ▪ Real-time planning

Transport ▪ Automation of
-10-15% -15-30% transport
and ware-
housing cost -30-50% and logistics
Service
▪ Uberization

Agility
SC -5-10% ▪ Automation of
admin cost everything in the
Capital Cost SC back-office
-50-80%
-75-90% ▪ SCaaS – Supply
Chain as a Service

Inventories ▪ Auto replenishment

-20-50%
▪ E2E visibility to
-35-75% the shelf
-50-80% ▪ Predictive analytics
Baseline Basic Advanced Visionary
(SC3.0) (SC4.0)

67
INTELLIGENT WAREHOUSING AND PACKAGING
New forms of human machine interaction
Augmented reality
Ubimax apps on
Google Glass
Description ▪ Applications on Google
Glass show location-based
instructions to workers (e.g.,
directions where to put
items to in picking )
Possible ▪ More efficient warehouse/
I4.0 service processes
application ▪ Virtual training of workers
▪ Remote assistance
maintaining forklifts
SOURCE: Festo; Ubimax, Fetch
Exoskeletons Advanced robotics
Festo ExoHand Fetch
▪ Exoskeleton emulates ▪ Convergence of AGVs to
physiology of human hand cover the transport and
▪ Can support straining robot arm to handle the
manual movements (worn products
as glove) and transmit
human hand movements to
robot hand
▪ Remote picking of products ▪ Supporting picking
– picker sits in remote ▪ Production line
location and directs robots replenishment
▪ Enabling of remote handling ▪ Automatic picking
of dangerous goods
68
Segmentation

69
Supply chain segmentation

Basic beliefs
▪ One-size fits all does not meet requirements for anyone, you
need to understand the differences between
– Products (e.g., Value density, life-cycle, demand)
– Customers (e.g., Volume, strategic importance)
Governing principle – Supply (e.g., Production, Supplier, leadtime)
Segmentation should ▪ Understand the driver of performance and cost to define the
add value to the supply right segments
chain but not increase
▪ Don’t stop at the first stage – segmentation effects the whole
the complexity cost
supply chain from customer to supplier
significantly
▪ Be pragmatic, not perfect – segmentation needs to drive
feasible solutions and each segment needs to be large
enough to have impact
▪ Segmentation should be seen as an ongoing effort: Re-
segment on a regular basis (e.g., annually)
▪ Different horizons of segmentation should be considered (e.g.
strategic vs. tactical)

70
3 steps need to be followed when segmenting a supply chain to
define the optimal setup
Step 1 Step 2 Step 3
Segmenting
Identify performance and Define supply chain Derive supply chain
a supply chain
cost drivers segments strategy per segment
Detailed ▪ 1.1 List all segmentation ▪ 2.1 Segmentation ▪ 3.1 List supply chain
steps drivers Methodology elements
▪ 1.2 Select key drivers for ▪ 2.2 Define segmenting ▪ 3.2 Define strategy for
supply chain requirements terminology supply chain elements
and cost
▪ 1.3 Identify breakpoints of
key drivers to define
segment boundaries
▪ 1.4 List all driver
combinations possible

71
Example 1 – Segmentation for CPG Company based on Volume
and Variability

Understanding in business context

Product Segmentation Segment Strategic objective for supply chain
Develop a cost efficient and reliable SC
which acts as a backbone and creates an
A Runners
overall advantage for client

Build a SC to respond rapidly to

A High B High Volume
Repeaters promotions with a cross-functional
Volume High B
& Promos process which limits induced variability
Low Variability
Variability
D C Low Create a modular SC which can enable
Low Volume Volume accelerated ramp up and ramp down
High NPDs /
Low Variability C
Variability Strangers

Avoid cluttering of the main SC by

Overlay growth on Slow & evaluating the importance of these SKUs
these segments D Steady and focus only on the high margin ones

72
Demand Planning and Forecasting

73
SCM improvement potential with better forecasting ILLUSTRATIVE

▪ Better production scheduling/

capacity management
▪ Faster order fulfillment times
▪ Better product transitions/faster
time to market
Time ▪ Short supplier response times
(faster accommodation of
unexpected changes)

Cost Quality

▪ Lower inventory carrying costs ▪ Lower returns on product

▪ Minimized risk of product obsolescence ▪ Better customer service levels
▪ Avoid opportunity cost of back ▪ Tighter process control and procedures
orders/missed orders ▪ Avoid quality issues associated with
▪ Lower physical distribution costs scrap, obsolescence, etc.

74
What is the use of mean forecast error ?

Ideal value = 0;

MFE > 0, model tends to under-forecast

MFE < 0, model tends to over-forecast

Mean Forecast Error = (Actual – Forecast)

75
What is the use of mean absolute deviation ?

Model tends to slightly over-forecast, with an average absolute error of X units.

Model tends to slightly under-forecast, with an average absolute error of X units.

Mean Absolute Deviation (MAD) = ABS (Actual – Forecast)

76
Let us calculate weighted mean absolute percent error (MAPE)

Weighted Mean Absolute Percent Error (MAPE) =

77
1 3 major steps in statistical base forecast creation

Build-up volume logic approach

Forecast component
▪ Segment portfolio and fix the
1a
forecast accuracy
1 Statistical base
▪ Maintain successions
1b
▪ Derive statistical forecast:
1c
2 NPI –i Identify the forecast level
(SKU-Customer level)
–
ii Remove unnecessary
seasonality from data
3 Promotional uplift
– Clean historical data
– Select and utilize statistical
iii
4 Market intelligence model

Built-up FC

78
Demand planning solution overview – point solutions
Strengths Weaknesses
▪ Market leading statistics software ▪ Rather expert tool; complex for
▪ Most sophisticated, but also more complex less sophisticated user
statistical forecasting functions
▪ Recently nice user interface, data man-
agement and workflow functions added
▪ Market leading demand forecasting ▪ Lack of advanced statistical
software analyses
▪ Advanced statistics functions ▪ Not well suited for non demand
▪ Recently nice data management and planner users, e.g. sales
workflow functions added
▪ Excel based user interface ▪ Only basic statistical functionality
– Easy to use ▪ Not the cheapest solution
– Fast
– Offline planning
▪ Excellent solution for manual, collaborative
planning and S&OP
▪ Fast implementation by “Software as a
Service” offering

79
Inventory Planning

80
 Transport/delivery
Inventory is a necessary evil in most supply chains Demand/order

Raw material Component Finished

inventory inventory goods
inventory
I want the
min. 10 days min. 6 days products
in 3 days

Final
Supplier Production
customer

Inventory is necessary to… Inventory is costly because…

▪ Present “ready-to-buy” products to the
customer (e.g., grocery retailing)
▪ Decouple “supply/production” from customer
demand (in particular, differences in lead
times)
▪ Buffer against uncertainties in supply
and demand
▪ Enable efficient production/transportation
lot sizes
▪ It ties up working capital
▪ It needs to be stored (storage costs)
▪ It can depreciate in value over time (for some
products, like mobile phones, very quickly)
▪ Storing products over long time periods can
cause spoilage/damage (in particular for
products with shelf-life constraints)
▪ Inventory can hide shortcomings in own
operating system (e.g., unreliable machinery)

1 The cost of inventory can be extremely high for goods that depreciate in value quickly (e.g., computer chips)
81
Rock/boat analogy: Often, inventory can be reduced significantly only once
inefficiencies in operations are addressed

▪ Large inventory levels can

Rock = Problems Inventory hide problems in a supply
chain

Supply
Rejections
Planning
Issues
BOM Accuracy
Forecast
error Equipment
breakdowns (✓)
▪ If inventory levels are
reduced without addressing
Rock = Problems Inventory
the underlying problems, the
entire operation can take


Forecast damage
Supply Planning Equipment
BOM Accuracy error
Rejections Issues breakdowns

▪ Hence, inventory reductions

often need to be
accompanied by operations
improvements
Supply
Rejections
Planning
Issues BOM Accuracy
Forecast
error
Equipment
breakdowns
✓
82
Optimizing and managing inventory effectively is a key driver to cost reduction
and enhanced Return On Capital Employed (ROCE)

▪ Manufacturing R&D
▪ Material
▪ Distribution SG&A Cost
▪ Transportation
▪ SG&A (Tax Efficiency) COGS Profit

Total
Profit

Revenue Growth
▪ New service offerings
▪ Improve service level Sales
ROCE
▪ New sales channels
▪ Improve forecast accuracy

Capital
AP Turnover

Inventories AR
▪ Accounts Receivable Capital
Inventory
▪ Fixed Assets Employed
▪ Working Capital Cash

Fixed Assets

83
Addressing the underlying drivers to improve performance and reduce
inventories is an important component of the answer

Stock turn equation: drivers for high stock turns

Market-,
Stock
turns = Supply
flexibility + Plant
flexibility + Rational risk
management + demand-
management
X
Process
discipline

▪ Inbound ▪ Frequent ▪ Standardized ▪ Challenge of ▪ KPI

supply alignment of safety stock forecast dashboard
models, e.g. demand and calculation based on ▪ Monthly
JiT, VMI production plan ▪ Risk manage- demand/ escalation on
▪ Contracting ▪ Synchroni- ment end-to- supply top mgmt.
strategies, zation of end on brand transparency level
e.g. volume production basis ▪ Consistent ▪ Training and
and lead time steps ▪ Revolving S&OP support by
flexibility ▪ Short replen- update to process SCM task
▪ Real time ishment lead follow life- force
information times cycle

84
Even though there are several types of stock, such target stock
levels are calculated as the sum of cycle and safety stocks
Typical
inventory layers Description
▪ Average inventory level between two order/production cycles ("sawtooth"), used to
Cycle stock
meet expected customer demand in cycle

▪ Buffer inventory to protect against uncertainties (actual demand exceeds expected

Safety stock
demand or supply does not arrive in time)

▪ Inventory en route between shipment and delivery location, moving via truck, rail,
In-transit
air, ocean or another transportation mode

▪ Work-in-process (or progress) inventory: materials are not yet in their final finished
WIP
good form, but are either being produced, or further processed

▪ Extra inventory put in to accommodate seasonal patterns when production is not

Seasonal stock
sufficiently flexible (e.g., motorbikes production)

Forward ▪ Inventory built up in anticipation of future event such as industry shortage or

purchase stock expected price increases

Reserve stock/ ▪ Inventory on hand, but reserved or "tagged" for specific customers (e.g.,
facing stock presentation quantities/facing stock in retail or special customer specifications)

Sludge ▪ Error in inventory level due to system, human, or other errors

85
Safety Stock Calculation

d = average demand

lt = Lead time in months

σlt = Standard deviation of lead time

σD = Standard deviation demand

z = Safety factor

Service level Z
95.0% 1.65
99.0% 2.33

= NORMSINV(0,99) in Excel

2
Safety stock = z  lt   d2 + d   lt2

86
Cycle Stock Calculation

▪ Cycle Stock

▪ = Average Demand During Lead time

▪ = (Average Demand per month * Lead time in month) /2

87
Six building blocks to institutionalize the best practices in
inventory excellence
1
Data
transparency,
6 benchmarking and 2
standardization

Tools & Systems and

Resources Processes

Building
5 Blocks 3

Capability Metrics and

building Accountability

Organization
design

4
88
Production Planning and
Optimization

- Line balancing
Reminder on Takt time

What is it?
▪ Takt is the time interval between completed
products which must be achieved in order to
achieve customer demand.

Why use it?

▪ Takt is used to measure customer demand
relative to the operating time of the
production system.
▪ It displays demand in useful units which
allows us to quickly see what the cycle time
should be for each step of the process in
order create a flowing and balanced process.

90
To satisfy customer demand on average a part must be produced every Takt

Parameters to take into account

▪ Time available (TA)
▪ Customer demand (CD)
Time available
Takt time =
Customer demand

▪ Takt can be calculated for single products or for

product groups going through a same line.
▪ The same period of time needs to be taken for
time available and customer demand.

91
Staffing calculation CORRECTION

▪ Takt time : 40s

▪ Total worksequence without waiting time : 38s
▪ A rough comparison between worksequence and Takt time might
suggest that 1 operator is enough to meet demand
▪ However, considering the additional transportations between
different workstations and the inherent variability in process, this
one-worker balancing is not achievable
▪ In general, a well-balanced line has a balancing ratio between 80%
and 90% where:

𝐿𝑜𝑎𝑑 𝑇𝑜𝑡𝑎𝑙 𝑜𝑝𝑡𝑖𝑚𝑖𝑧𝑒𝑑 𝑤𝑜𝑟𝑘𝑠𝑒𝑞𝑢𝑒𝑛𝑐𝑒

𝐵𝑎𝑙𝑎𝑛𝑐𝑖𝑛𝑔 𝑟𝑎𝑡𝑖𝑜 (%) = =
𝐶𝑎𝑝𝑎𝑐𝑖𝑡𝑦 𝑇𝑎𝑘𝑡 𝑡𝑖𝑚𝑒 × 𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑝𝑒𝑟𝑎𝑡𝑜𝑟𝑠

92
End

93