April 4-6, 2005, Disneyland HotelAnaheim, California USA Leveraging IT Investments Through Improved Supply Chain ManagementJim Culliton- Manager, Supply Chain Solutions; Hitachi Consulting
Agenda • Common issues with Supply Chain Management • Supply Chain Design and Optimization • Links with ERP and APS • SCDO as part of Overall Operations Planning Process • Assessment of applicability of Network Design and Inventory Optimization • Expected ROI • How to execute and SCDO strategy • Case Studies • Summary
Key Learning Points • What is Network and Inventory Optimization and what problems does it help solve? • How does it related to ERP and APS system? • What situations is it applicable to? • What are the different approaches to Network and Inventory Optimization?
Hitachi Consulting and Hitachi Ltd. • Hitachi’s IT and Business Consulting arm • Created through the acquisition of Grant Thornton’s, Arthur Andersen’s and other consulting businesses • Over 20 years of successful engagements • U.S. based executive team with headquarters in Dallas, Texas • 16 offices in the U.S. including Dallas, Washington D.C., Denver, Philadelphia, New York, Los Angeles, Atlanta, Seattle, Chicago and Boston • Over 1000 professionals across all U.S. locations • Hitachi provides access to capital and global clients • Hitachi Consulting focuses on key markets • Industrial, high-tech and discrete manufacturing • Energy & communications • Consumer products, distribution, and retail • Hitachi Consulting offers a complete range of global solutions • Enterprise Applications • Customer Solutions • Technology Solutions • Strategy and Business Improvement • Supply Chain • Hitachi is one of the world’s leading global companies with approximately 322,000 employees worldwide • Founded in 1910 • Revenues of $64B • 320,000 employees worldwide • Almost 1/3 of Hitachi’s worldwide revenue is from information technology and telecommunications • Owns approximately 75% of Hitachi Consulting • Over 1,000 integrated and subsidiary companies • Hitachi is a leader in delivering global technology solutions • 9th largest Development and Integration Services ($3.1B) • 11th largest Professional Services ($4.6B) • 13th largest IT Services ($6B) • 17th largest Outsourcing Services ($800M) • The “i.e. HITACHI Plan” was a strategic plan initiated to transform Hitachi from a manufacturer to a solution provider. It articulated the need to build a world-class IT and business consulting business, of which Hitachi Consulting is a core element.
Supply Chain Design and Optimization The majority of a supply chain’s lifecycle value is determined by the design • Upfront decisions include: • Inventory Levels • Inventory Locations • Assembly network • Distribution network • Raw material and packaging suppliers • Desired raw material, WIP, and FGI availability • Desired raw material, WIP, and FGI costs • In-house vs. contract manufacturers • Logistics suppliers Supply Chain Design and Optimization 80% Operational Tactical Strategic APS 20% MRP / ERP Decisions Solutions Value
How Companies Tackle Inventory Policies Today One rule of thumb is to sprinkle a little inventory at every stage to spread risk Other companies elect to hold inventory as close to the customer as possible (high FGI) Some companies hold inventory right before a value added mfg step
Still further, companies often look at inventory policy as a “local” activity Decisions in Isolation COMPONENT SUPPLIERS END CONSUMERS COMPONENT PLANTS ASSEMBLY DISTRIBUTION CUSTOMERS • Given a desired service level for customers or downstream supply chain partners, the challenge in the past has been to determine how much inventory should be maintained at a particular location • Even if this is done well and your local service objectives are met, it will come at a greater “global” cost, represented by inventory, carrying costs, expedite costs, etc.
Network Design and Inventory Optimization Overview • What is the total supply chain cost, including inventory related costs, for a given end-to-end supply chain structure? • What are the tradeoffs of time vs. cost in evaluating new inventory deployment strategies • Postponement • In-house versus contract manufacturer • Domestic versus off-shore • New suppliers versus current suppliers • VMI and SMI strategies • Demand and supply risk pooling strategies • Cost optimal safety stock levels and locations for an end-to-end supply chain • S&OP weekly, monthly, quarterly updates to inventory targets • Service level evaluation on inventory and total supply chain cost • Evaluation of demand, cost, and time changes on total supply chain cost
Network Design and Inventory Optimization Overview • Strategic Value • Facility number, sizes, and locations • Service level vs inventory investment • In-house versus outsource • Domestic versus off-shore • Postponement and delayed differentiation strategies • New product evaluations, including total landed cost analysis • Vendor managed inventory and supplier managed inventory initiatives • Tactical Value • Make better decisions regarding inventory mix and placement • Optimize FG, WIP, and raw material stocks to improve upon traditional inventory policies • Understand and quantify drivers of inventory related costs • Understand and quantify impact of uncertainty and interdependencies in the supply chain • Understand and quantify trade-offs of capacity, efficiency, and inventory • Make time phased plant and warehouse sourcing decisions
Network Design Supply Chain Design Inventory Optimization Production Planning Advanced Planning and Scheduling • The impact of network design on all costs including inventory related costs • Vendor & outsourcing decisions • Postponement Strategies • Lean, Six Sigma Supply Chain Design • Production schedule • Capacity utilization • Pre-build targets (anticipatory stock) • S&OP • Network infrastructure design • Transport lanes • Factory locations • Distribution center locations • End-to-end supply chain inventory policy • Safety stock locations • Safety stock levels • S&OP • Order management • Available to promise • Production execution • Automated data exchange • Shipping management Annual SCDO as part of Overall Operations Planning Process Quarterly- Seasonal Monthly Weekly Daily
Typical Benefits • Service level improvements of 25-30% • Reductions in total inventory investment by 30-50% while increasing customer service levels • Increases in inventory turns by over 20-25% • Strategic supply chain visibility across multiple organizations-enabling faster, more collaborative decision-making • Better utilization of space at plants, warehouses and stores
High Inventory Optimization Both IO and ND Ability to Control SC Processes Network Design Neither Low High Complexity of Supply Chain Assessment of applicability of Network Design and Inventory Optimization
Assessment of applicability of Network Design and Inventory Optimization • Ability to Control Supply Chain Processes • Limited control- gaps in inventory planning process between planning and execution, poor inventory visibility and accuracy • Basic Control- legacy transactional systems and spreadsheets used for planning and execution, little systemic integration across supply chain • Control with pure pull systems or ERP – basic MRP and inventory planning functionality in place, but lack advanced planning and execution ability • Control with Advanced Planning and Scheduling- using APS for forecasting and all levels of inventory and replenishment planning, target safety stock levels and locations are determined outside of APS • Supply Chain Complexity • Less than five company owned facilities (mfg, dist, etc). Limited customer base. North America focused in sales. Limited supply base. Limited number of options of where to source, make, and distribute products. • 5-10 company owned facilities. Global focus of sales and operations. Multiple options of where to source, make, and distribute. • 10-20 company owned facilities. Outsourced processes in addition to company owned processes. Complex sources of supply, many customer classes, many skus. • 20+ company owned facilities. Greater complexity of supply, customers and skus
SCDO Execution Strategy Options • Business case development through a proof of concept pilot project: Companies take a subset of products and/or supply chain structure and compare optimized results to current structure and processes. This approach limits the risk of investment in new technologies and processes, while identifying and quantifying the value proposition for deploying new SCDO technologies and processes. • Software acquisition, training, and implementation: Companies that have sophisticated operations research, business strategy, and knowledgeable IT personnel may wish to undertake SCDO in-house with minimal outside help. • Use outside consultancy as “outsourced SCDO arm” of the organization: Some companies may not have nor wish to acquire resources necessary to deploy new SCDO processes and technologies. These companies may use consultancies on an ongoing basis to implement SCDO best practices across the organization, without the organization acquiring software or adding resources
How to execute an SCDO strategy For any of the options chosen above, a standard project approach can be used: • Benchmark technology and current SC metrics, processes, and practices – to create a base case for future comparison. • Identify the segment of business with the largest improvement potential based upon business goals – service, inventory, logistics, etc. – Usually an organization has a particular area of concern and a specific metric they are falling short on. • Apply appropriate SCDO tool given the current state - Given the matrix of complexity and ability to execute, the appropriate SCDO tools will be deployed. • Determine process changes to internally develop SCDO expertise if it will be kept in house – Identify changes in roles, performance criteria, structures, and processes. • Create a roadmap for a repeatable process that ties to operational systems. • Expand and iterate across supply chain to provide continuous improvement.
Case Studies • A household-name data storage company reduced total inventory investment by 20 percent while improving service levels by 28 points with a postponement strategy that effectively balanced offshore labor savings with local customization. • A $10 billion industrial equipment manufacturer increased market share and service levels while lowering inventory by 30-40 percent, overcoming the challenges of a 50 percent spike in demand during the busy season, and products that take months to configure, by optimizing the way inventory was pooled in its nationwide dealer network. • A multi-billion dollar consumer electronics manufacturer that identified and implemented savings of over $200 million in supply chain costs by evaluating new supply chain design structures. • A household-name consumer adhesives manufacturer aligned inventory with tiered retail service agreements to improve customer service while increasing turns and lowering safety stock by 20 percent
Summary • What is Network and Inventory Optimization and what problems does it help solve? • How does it related to ERP and APS system? • What situations is it applicable to? • What are the different approaches to Network and Inventory Optimization?