Supply Chain Management A Strategic Lever for Business Success McKinsey's Supply Chain Management Practice
Five processes jointly determine supply chain excellence Order and demand management • Ordering policies • Sales volume planning • Order generation and fulfillment
Production management • Production planning • Capacity allocation
Production Sales
Supply management • Supplier management • Inbound flow management
Distribution management • Distribution network • Warehousing • Transportation
Service level management • Customer and service level segmentation • Service level performance measurement
Five processes jointly determine supply chain excellence Order and demand management • Ordering policies • Sales volume planning • Order generation and fulfillment
Production management • Production planning • Capacity allocation
Production Sales
Supply management • Supplier management • Inbound flow management
Distribution management • Distribution network • Warehousing • Transportation
Service level management • Customer and service level segmentation • Service level performance measurement
Supply chain management presents huge challenges Production management • Late and constant changes in schedule (externally/internally triggered) • Low delivery accuracy from factories
Order and demand management • No clear delivery date given to customers • No real order tracking • Very low forecasting accuracy
Production Sales
Supply management • Suboptimal supplier interaction due to instable production
Distribution management Distribution • High inventory levels, but nevertheless low service levels • Costly distribution network
Service level management • Very low service level • No idea of future breakpoints/expectations of customers
Optimized supply chain management presents huge opportuniti opportunities es
Production management
Order and demand management
4% lower production costs
65% reduction in thro throug ughp hput ut time
Production Sales
Supply management No stock-outs
Service level management Distribution management 40% lower inventory
> 5% additional sales
The impact of SCM on cost is greater than normally perceived
EXAMPLE
Percentage of sales Traditionally measured costs
Known, but not properly measured
Known, but not seen as logistics costs
Neither known nor measured
Also driven by supply chain 40-60
10 - 30 3 - 10 1-6 2-8 3-7 Warehousing, handling, and transportation
1-2 Inventorycarrying costs
Store handling
Obsolescence/ markdowns
Lost margin on missed sales
Total supply chain costs
Production/ purchasing costs
Four imperatives for successful SCM
Clear role and ownership structure
Seamless integration of all processes
Targeted use of modern technology
Continuous striving for high performance
"Do it right or don't do it at all"
"All together now"
"Do IT smart"
• Use SCM strengths
• Integration of
• Full transparency
• Steady increase
and integration
in performance, aspiration level
as a growth lever if you are superior
• Outsource processes if you are only mediocre
• However, never lose control over your key processes within your industry
operational processes within your company
• Virtual management of end-to-end SCM including outside partners
• Low transaction costs along all processes
• Focus on immediate business need
"The sky is the limit"
• New breakpoints evolving
• New business models demand dramatic change
The focus of the SCM architecture depends on your company's role along the value chain Product development
Manufacturing
Procurement, Sales
Examples
"Industry integrator"
• Automotive
"Brand player"
• Sports equipment • Fashion
"Contract manufacturer"
• PC assemblers
"Process specialist"
• Manufacturing subcontractors • Maintenance service providers
Understand the value chain's critical success factors end-to-end and your role within the chain
Supplier(s) Customers of your customers Customer(s)
Company
• Which player is driving the overall chain? • What is your role and advantage? • What does it mean for your SCM?
Outsourcing of complete processes to experts
EXAMPLE
• Order processing • Customer analysis • Inventory analysis
Originating channel Call center Data center
On-line
ERP connection
• • • •
Fleet management Returns/collection Reverse logistics Sorting
Warehouse/processing center Local delivery
• • • •
Order receipt Customer management Call center management Track and trace
• Warehouse operations • Inventory management • Picking and packing
Transport
Distribution
Four imperatives for successful SCM
Clear role and ownership structure
Seamless integration of all processes
Targeted use of modern technology
Continuous striving for high performance
"Do it right or don't do it at all"
"All together now"
"Do IT smart"
• Use SCM strengths
• Integration of
• Full transparency
• Steady increase
and integration
in performance, aspiration level
as a growth lever if you are superior
• Outsource processes if you are only mediocre
• However, never lose control over your key processes within your industry
operational processes within your company
• Virtual management of end-toend SCM including outside partners
• Low transaction costs along all processes
• Focus on immediate business need
"The sky is the limit"
• New breakpoints evolving
• New business models demand dramatic change
Thanks to SCM innovations, companies such as Dell have managed to reinvent their industry • Superior customer relationships – Customer segmentation by size/region/ need (key buying factors) – Extensive customer knowledge building
• Make-to-order production – Lead-time-based manufacturing model configured for order-specific production – Flexible manufacturing units – No obsolescence costs
• Virtual integration of suppliers – Few selected partners for long-term relationships – Real-time information sharing (forecasts, production planning) – On-line inventory management
SCM and customer interaction – consider the possibilities for different value offerings to customers Customer(s) Demand planning
Your company Inventory mgmt
Purchasing
Value offering point Demand planning
Inventory mgmt
Inventory mgmt
Value offering point
Distribution
Manufacturing
Sourcing
Product delivery from stock
Order penetration point Call-off
Value offering point Demand planning
Order penetration point
Vendor-managed inventory Distribution
Manufacturing
Sourcing
Order penetration point Direct customer response/ make-to-order
Call-off Distribution
Manufacturing
Sourcing
EXAMPLE ASSEMBLY
SCM and production – timeline management has a major impact on production costs Order checking
Planning production sequence
Frozen zone
Production freeze period • Optimal sequence • Minimal cost • Good due date performance
Time line management
∼
30
• Check feasibility of orders based on clear rules between Sales and Production
• Specify volumes
3-5
10
• Introduce strict filters to prevent unclear orders
• Specify final product mix
Time Days
0
• No changes, fixed sequence
• Production sequence is "frozen"
• Optimal processing of production orders
Four imperatives for successful SCM
Clear role and ownership structure
Seamless integration of all processes
"Do it right or don't do it at all"
"All together now"
• Use SCM strengths
• Integration of
as a growth lever if you are superior
• Outsource processes if you are only mediocre
• However, never lose control over your key processes within your industry
operational processes within your company
• Virtual management of end-to-end SCM including outside partners
Targeted use of modern technology "Do IT smart"
Continuous striving for high performance "The sky is the limit"
• Full transparency
• Steady increase
and integration
in performance, aspiration level
• Low transaction costs along all processes
• Focus on immediate business need
• New breakpoints evolving
• New business models demand dramatic change
Translate technologies into transformation levers to exploit potential Advanced IT technologies
Supply chain improvement levers
Communication and access • Cheap, standardized communications platform: Internet • Off-the-shelf mobile communications
Automated material identification • Standardized barcodes • Remotely readable transponders
Advances in optimization algorithms • Constraint capacity planning • Hybrid simulation and optimization approaches
Automated transactions • Product data • Delivery notes • Orders/purchasing • Invoices orders
• and future Transparency of current supply chain status • Demand/orders • Material flow • Customer order • Resources confirmations Automated planning and optimization • Feasible plans • Optimized plans
E-technologies have a major impact on SCM, especially for customer and supplier interaction
SCM challenges
SCM challenges
• Capture customer
• Globalization
profiles for forecasting and segmentation
of supplier network
• Changes in
Pro-
batch size, duction lead times, mgmt. and nature of contracts
Supply mgmt.
e-purchasing
• Coordination of supply chain information transfer
Demand/ order mgmt.
• Smaller batch sizes
• More make-toorder
Distribution mgmt.
• Improve
e-sales quality of information flow to enable inventory tracking and real-time reporting of order status
Service level mgmt.
EXAMPLE ASSEMBLY
On-line ordering – improving connectivity with low transaction costs From …
Customers
To …
Subsidiaries
Phone
Fax Individual IT Plant/ warehouse
• Long order process – Data inconsistency – No strict time line • Expensive order administration process • Irregular input for production
Customers
Subsidiaries
@
On-line ordering along standard format • Product code • Quantities • Delivery week
Plant/ warehouse
• On-line order status tracking – Supply availability – Shipment status • Regular weekly planning cycle • Four times faster order confirmation • Inventory reduction of 40% due to better forecasting
The traditional approach and thinking regarding IT tools in SCM does not necessarily lead to success
Traditional approach Software: Select and implement software
• "Follow the crowd
Processes: Adapt processes to software
• Assume that "best-
with AI, CIM, MRP, of-breed" software ERP, APS, XML ..."* automatically enforces best-practice processes
Results: Hope for results
• Rely on promised results
• Argue for strategic investment
* AI: Artificial Intelligence; CIM: Computer Integrated Manufacturing; MRP: Material and Resource Planning; ERP: Enterprise Resource Planning; APS: Advanced Planning Systems; XML: Extensible Markup Language
The better way to e-enable the supply chain
Traditional approach
Software: Select and implement software
Processes: Adapt processes to software
Results: Hope for results
"Lean eSCM" approach
Results: Anticipate impact
Processes: Keep it simple
Software: Go for lean IT solutions
• Identify the 3 - 6 key • Start with integrating • Create flexible IT potentials along the entire supply chain
jobs • Connect them by • Translate IT into real simple processes and simplify the transformation remaining process levers steps
architecture
• Concentrate on a few core functionalities
• Prototype the solution and roll it out fast
Four imperatives for successful SCM
Clear role and ownership structure
Seamless integration of all processes
Targeted use of modern technology
Continuous striving for high performance
"Do it right or don't do it at all"
"All together now"
"Do IT smart"
"The sky is the limit"
• Use SCM strengths
• Integration of
• Full transparency
• Steady increase
as a growth lever if you are superior
• Outsource processes if you are only mediocre
• However, never lose control over your key processes within your industry
operational processes within your company
• Virtual management of end-to-end SCM including outside partners
and integration
• Low transaction costs along all processes
• Focus on immediate business need
in performance, aspiration level
• New breakpoints evolving
• New business models demand dramatic change
EXAMPLE ASSEMBLY
Continuous striving for operational excellence Performance comparison/gaps 100 15 - 25% Personnel
35 - 40% 60 - 75%
Capital
Material
Other Client company
Process Process effective- efficiency ness
Factor costs
Best competitor benchmark
Best-ofbest benchmark
Theoretical limits
New business models and breakpoints are creating discontinuities in supply chain performance Disintermediation (e.g., copper industry) Manufacturer
Wholesaler
Retailer
Mass customization Toyota Home
Customer
Coil batches – Value-added services – Call-off Copper.com
Event-based demand Order volume
• Dedicated
9 basic product lines, unlimited customized options Lead time and life cycle – time competition Automotive OEM industry leaders
"Every product delivered within 4 days"
Mobile phone industry leaders
"New products every 9 months"
promotions
• Increasing new product launches
• Difficult to predict Time
outcomes
How to act – lessons learned
Step 1 Set aspiration and direction
Step 2 Prioritize levers and design solution
Customer requirements
Step 3 Manage the solution
Processes
Step 4 Monitor performance
Supply Chain KPI
Rules
Efficient, fast,and transparent order processing Optimizing production costs •Frozen period •Sequencing
Reliable demand planning integrated with production planning
Organization
Business strategy
IT
Clear customer service level segmentation
Operational performance
Skills
Incentives
ROI
• • • • • •
Focus on setting direction of supply chain transformation STEP 1: SET DIRECTION
STEP 2: DESIGN THE SOLUTION
STEP 3: MANAGE THE SOLUTION
STEP 4: MONITOR PERFORMANCE
1. Set aspirations: run/rebalance, redesign, or innovate 2. Think customer breakpoints and theoretical best practices and not only competitive benchmarks 3. Think end-to-end 4. Systematically segment the supply chain according to logistics criterions 5. Focus on the key 3 - 6 improvement levers (and not 10 - 20) 6. Think pilot (microcosm) and not big bang 7. Use cross-functional teams of star line managers and provide top-management leadership
8. Design key performance indicators (KPIs) and potential organizational changes up-front
Companies have different aspirations for transforming their supply chains Innovate Supplier(s) Consumer(s) Retailer(s)
Redesign Company
Run and rebalance
Aspiration Better execution of current SCM design to improve competitiveness Context
• Current SCM design
Redesign supply chain to improve cost and/or increase growth
Current design does not supports strategy support strategy and/or • Room for improvement is inefficient in key processes
Change the game by innovating across the industry value chain Industry discontinuity • Tap latent demand • Redefine roles • Change cost structure
The supply chain should be designed around the customer breakpoints Buying probability depending on delivery time in percent
Does not buy Does probably not buy
Market Research – consumer good example 1 5
1 8
Breakpoint 8
44
Does buy
94
1
61 94
91
1-2
48
34
2-4
5 4-8
Delivery time (weeks)
6 >8
Service level where customer buying behaviour does change significantly – delivery time of about two weeks in this example
Prioritize levers and design the solution STEP 1: SET DIRECTION
STEP 2: DESIGN THE SOLUTION
STEP 3: MANAGE THE SOLUTION
STEP 4: MONITOR PERFORMANCE
1. Set aspirations: run/rebalance, redesign, or innovate 2. Think customer breakpoints and theoretical best practices and not only competitive benchmarks
3. Think end-to-end 4. Systematically segment the supply chain according to logistics criterions 5. Focus on the key 3 - 6 improvement levers (and not 10 - 20) 6. Think pilot (microcosm) and not big bang 7. Use cross-functional teams of star line managers and provide top-management leadership
8. Design key performance indicators (KPIs) and potential organizational changes up-front
Thinking end-to-end helps control "noise" in the system
Flow of demand information through the supply chain
Regional warehouses
Retailers
Customers
Central production
Reasons
• Unfavorable
Quantity 4.000
reorder algorithm along the chain
3.500 3.000
• No synchronization
2.500
of available market information
2.000 1.500 1.000 500 0 1 2
3 4 5 6 7 8
Jan
Feb
Mar
Apr
9 10 11 12 May
Jun
1 2
3 4 5 6 7 8
Jan
Feb
Mar
Apr
9 10 11 12 May
Jun
1 2
3 4 5 6 7 8
Jan
Feb
Mar
Apr
9 10 11 12 May
Jun
Time
Different supply chain types have different characteristics Supply chain types
Supply chain characteristics
Examples
• Short life cycle • High seasonality
• Fashion apparel • PCs • Toys
"Replenishment"
• Multiple products • Inventory-driven
• Retail • Spare parts
"Engineered"
• Significant product variety • Customized/make-to-order
• Medical systems • Engineering goods
"Promoted"
• Seasonal • Forecast/event-driven
• Consumer packaged goods • Pharma (some products)
"Process"
• Long lead times • Large batch sizes
• Chemicals • Basic materials
"Fashion"
Focus first on the 3 to 6 key improvement levers for supply chain transformation Supply chain type "Fashion" Physical costs Forecasting r e v e l n g i s e d y e K
Product launch management Complexity reduction Response time Order management Demand management
"Reple"Engineered" "Promoted" nishment"
"Process"
A company should systematically segment its supply chain along clearly defined criterions
EXAMPLE
Example: Inbound logistics in assembly industry High
Predictability/ forecastability Low
Low High High
Low
Material flow intensity
Supply chain flexibility
Supply chain segment Characteristics
"Make-to-order" • No stock • Order-specific supply Efficient, quick order management
"Directly forecastdriven" • Supply depends directly on forecast Well-defined planning processes and forecasting models
"Inventory replenishment" • Supply via inventory buffer/warehouse Optimal replenishment parameters /algorithm
Six typical key levers to improve the supply chain 4 Optimizing production • Frozen zone • Lot size • Sequence • Accuracy
3 Efficient, fast, and transparent order processing 2 Reliable demand planning integrated with production planning
Production management
Supply management
5 Optimizing inventory levels and distribution network
Distribution management
Order and demand Service level management management
1 Clear customer service level segmentation along customer groups
6 Performance measurement using KPIs along the entire supply chain
A "microcosm" approach with appropriate organization is crucial STEP 1: SET DIRECTION
STEP 2: DESIGN THE SOLUTION
STEP 3: MANAGE THE SOLUTION
STEP 4: MONITOR PERFORMANCE
1. Set aspirations: run/rebalance, redesign, or innovate 2. Think customer breakpoints and theoretical best practices and not only competitive benchmarks
3. Think end-to-end 4. Systematically segment the supply chain according to logistics criterions 5. Focus on the key 3 - 6 improvement levers (and not 10 - 20) 6. Think pilot (microcosm) and not big bang 7. Use cross-functional teams of star line managers and provide top-management leadership
8. Design key performance indicators (KPIs) and potential organizational changes up-front
Problems should be tackled in smaller pieces with a fast iterative approach to achieve tangible results Scope of solution
Design
Detail
Scope of solution
Do
Design Design
Time Value
Detail
Design
Detail
Detail
Do
Do
Do
Time Value
Time
Time
Fast implementation within a "microcosm" – a small but "end-to-end" slice of the supply chain containing all key participants
Customer A Logistics
Sales company
Factory
Supplier Y, Z
Purchasing manager Production manager Logistics manager Customer A
Sales manager, sales reps for customer A IT central support
Production planning manager
Sales administration manager
Suppliers Y, Z
Strong leadership team and cross-functional working teams are critical for success of SCM transformation
EXAMPLE
Steering committee
• CEO • CFO • Head of manufacturing • Head of purchasing • Head of marketing • Head of sales SCM team leader Senior manager (cross-functional experience)
Purchasing subteam
Manufacturing subteam
IT architecture subteam
Marketing subteam
Product design subteam
Ongoing monitoring to ensure success STEP 1: SET DIRECTION
STEP 2: DESIGN THE SOLUTION
STEP 3: MANAGE THE SOLUTION
STEP 4: MONITOR PERFORMANCE
1. Set aspirations: run/rebalance, redesign, or innovate 2. Think customer breakpoints and theoretical best practices and not only competitive benchmarks
3. Think end-to-end 4. Systematically segment the supply chain according to logistics criterions 5. Focus on the key 3 - 6 improvement levers (and not 10 - 20) 6. Think pilot (microcosm) and not big bang 7. Use cross-functional teams of star line managers and provide top-management leadership
8. Design key performance indicators (KPIs) and potential organizational changes up-front
Four measures of accuracy need to be checked to improve supply chain process efficiencies INFORMATION FLOWS
Sourcing plan
Production plan
Orders (dispatch plan)
Forecast
1. Forecast accuracy 2. Production accuracy 3. Sourcing accuracy 4. Dispatch accuracy MATERIAL FLOWS
Sourcing
Production
Sales
• Key success factors: assign responsibility for type of accuracy to an individual person in each case
• Experience suggests that performance improves as soon as these four types of accuracy are monitored regularly
Dispatch
Overall supply chain performance should be calibrated using output indicators
1
Product availability to meet customer requirements
Service level indicators
2
At the lowest possible cost to the system
3
Inventory indicators
EXAMPLE
In the shortest possible time to increase flexibility
Lead time indicators
Lost/deferred sales
Inventory
Order cycle times
Percentage of total sales
Weeks
Days
22
6.5
28
86%
62%
Target =3
2.5 Target =6
3
Target =0
Baseline*
5 months later
75%
Baseline*
* Before beginning supply chain improvement effort
5 months later
7 Baseline*
5 months later
Summary: Four steps towards successful supply chain transformation STEP 1: SET DIRECTION
STEP 2: DESIGN THE SOLUTION
STEP 3: MANAGE THE SOLUTION
STEP 4: MONITOR PERFORMANCE
1. Set aspirations: run/rebalance, redesign, or innovate 2. Think customer breakpoints and theoretical best practices and not only competitive benchmarks
3. Think end-to-end 4. Systematically segment the supply chain according to logistics criterions 5. Focus on the key 3 - 6 improvement levers (and not 10 - 20) 6. Think pilot (microcosm) and not big bang 7. Use cross-functional teams of star line managers and provide top-management leadership
8. Design key performance indicators (KPIs) and potential organizational changes up-front