Yesterday, IBM published its 2009 annual report. In the Letter From the Chairman, IBM lays out its growth opportunities for 2010. It lists fours strategic areas for investment. Analytics and Smarter Planet are two of those four areas.
For Analytics, there is great amount of data available and organizations who take advantage of this information will unlock tremendous value. The letter notes:
IBM is moving quickly to capitalize on this promise. We have built the industry’s premier analytics practice, with 4,000 consultants, mathematicians and researchers, as well as leading-edge software capabilities
Of course, this fits with the opportunity IBM sees with its Smarter Planet initiative. In fact, the letter points out some benefits retailers have seen.
Four leading retailers have reduced supply chain costs by up to 30 percent, reduced inventory levels by up to 25 percent, and increased sales up to 10 percent. They’ve done so by analyzing customer buying behaviors, aligning merchandising assortments with demand and building end-to-end visibility across their entire supply chain.
A good example of how this IBM strategy comes together is through our shelf space optimization solution. In this solution, we help retailers place their products in the right place in the store-- from how the store should be laid out, how much space should be given to each products, and where the products should be on the shelf (for example, determining which products are at eye-level). This solution leverages our advanced optimization capability (to determine the placement), our advanced statistical capability (to predict and analyze detailed sales data), and our rules technology (to maintain the system since different regions and stores may be unique in their requirements).
A recent article in The Wall Street
Journal discusses the benefits of a foldable shipping container. This would be a big innovation in shipping.
Inbalances in supply and demand means that shipping companies must pay
to get their empty containers back to where customers want them.
importance of moving empty containers is simple:
a huge expense, a huge headache for the industry," says Neil Davidson
of London-based Drewry Shipping Consultants. The net cost of moving
empties is around $7 billion a year, say analysts.
foldable container would reduce the cost of shipping the empties.
However, these foldable containers cost around $4,000, or twice the cost
of the standard containers. And, the technology
has not yet proven robust enough for the realities of "heat, cold and
salt water of the high seas, and the rough handling of
Right now, the industry is not standing still.
IBM's ILOG Optimization solutions are being used to optimize the return
of the empty containers. The goal of the optimization is to get empty
containers to where they
are needed at the lowest cost. Of course, the containers do not have to
return from where they started and there are options for leasing or
buying new containers.
The problem can be difficult when you
start to consider such things as the different container types, the
capacities of ships, the costs of different modes of transportation, and
the long ocean shipping times.
Besides reducing costs, the
shipping companies using this technology
are seeing benefits in customer service by having the needed empty
containers in the right place at the right time and having the ability
to quickly re-plan when conditions change.
commitment to Analytics and Smarter Planet, provides additional benefits to this problem:
First, since there is variability in demand and supply, it is important
to correctly set the safety stock levels for empty containers at key
locations. Second, it is important to track and trace the containers so
you have better visibility but also to know when a container needs to
be replaced or repaired.
According to an article in Businessweek, "Companies from Tiffany & Co. to Home Depot Inc. are restocking
shelves in a move that will boost economic growth and may keep the
recovery on track through 2010."
The questions many retailers are asking is "what should I restock with?"
Today, we recorded an educational webinar with SC Digest on shelf space optimization-- a great way to answer the question about how to stock your stores. The objective is to keep customers happy at every single store with the right products and, in turn, drive up revenues and profits.
SC Digest will keep the Webinar available for 12 months for viewing. You just need to register to watch it. Click here for the link.
IBM is committed to Analytics and a Smarter Planet and this solution fits nicely with this strategy:
For example, it allows retailers, CPG, chemical, wholesalers, transportation and manufacturing companies to make smarter facility location decisions, smarter territory assignments, smarter sourcing and production planning decisions, and smarter seasonal build strategies.
Many customers confronted with unprecedented risk and volatility in their business, now use IBM ILOG LogicNet Plus XE as a regular part of their business to make better decisions . Ever expanding Integration capabilities makes this easier to achieve.
The new release continues with our tradition of providing industry leading features combined with ease-of-use. Some of the new release features include:
- Enhanced capabilities for modeling manufacturing processes and inventory
- Enhanced ease-of-use though new mapping capabilities, and expanded reporting.
Derek Nelson, the product manager had this to say:
"Early response to the new release has been very positive. The improved ease-of-use and ease-of-integration is helping LogicNet Plus become a standard part of many company's on-going planning processes. Furthermore, this release features some innovative new technology. We are excited to see the continued IBM investment pay off with a substantial new release for our customers. As always, if you have feedback on the product, we would be happy to hear from you."
The coverage of the oil spill in the gulf is starting to focus on BP's lack of a plan in the event of major oil spill.
This reminds us in Supply Chain about the importance of contingency plans. Do you have a back up plan in case something happens in your supply chain? For example, a warehouse, plant, or supplier is no longer available, a port closes, or a border shuts down.
Although problems with the supply chain are hopefully not as globally bad as a major oil spill, it is still important to you and your organization. A supply chain disruption can cause significant loss of revenue, loss of market share, decreased shareholder value, and lost customers. A supply chain disruption is not pleasant for the managers within the firm.
And, it is no longer acceptable to say that you couldn't have foreseen the problem. With modeling tools like LogicNet Plus, leading companies are building and maintaining models of their supply chain. Well in advance, these firms are using the models to develop contingency plans for a wide variety of problems. When something happens, a plan is in place and can quickly be adjusted to meet the needs of the situation. The ease-of-use, robustness, and ability to integrate LogicNet Plus make all this possible.
In one case we are familiar with, a fire at a neighboring plant shut down production. The company was able to quickly determine the best course of action.
An article in DCVelocity provides some great insight into how Whirlpool and Maytag combined their supply chains. Whirlpool purchased Maytag in 2006 and promised the investment community $400M in savings over the first 3 years.
According to the article, $40M of savings per year was going to come from logistics-- freight and warehousing costs. This reminds us how important it is to get these decisions right. And, in Whirlpool's case, the article reported that they were able to overachieve and hit a savings of $66M in the current year.
How they got off to a fast start:
One of the first steps was to determine what inventory was on hand in
both operations so that Whirlpool could determine what to do with it.
The company acquired ILOG's LogicNet Plus suite of network design and
planning software so it would have a tool in place that
could import and crunch data once the deal was finalized (regulations
did not permit the managers to have access to Maytag-specific data until
the acquisition closed).
"When the deal was completed on March 31, 2006, we were in the
starting blocks ready to go. We had our tools in place and people in
place, and we had our own data. We were then prepared to bring in the
The network optimization with LogicNet Plus allowed Whirlpool to determine which distribution centers to close, which new sites should be built, and what the local cross dock network should look like.
We have seen this type of result many times over the years. When a firm grows through an acquisition, having a high-quality network optimization tool allows it develop solid plans for the new network. This creates a foundation for additional improvements and helps a company meet the goals of the acquisition.
In an article in today's Wall Street Journal with the same title as this post, the authors argue that the economic conditions in this recovery are going to be different than the years prior to the recession. Specifically, they mention that capital is going to be much more expense to come by; globalization will continue to put pressure on margins, and rising world demand will drive up commodity costs.
A key part of the article argues that companies will have to learn to finance their growth and investments with their own cash flow.
We are seeing how companies are now adjusting to this reality:
More companies are implementing advanced inventory optimization to reduce inventory to free up working capital for other parts of the business. And, this is not a one-time exercise. These firms are making inventory reduction an on-going part of the business. Our inventory optimization solutions are allowing firms to uncover new strategies to reduce inventory and allow them to maintain optimal inventory levels by integrating this technology with their ERP systems.
This map shows a classic network design case. This client was producing most of its product in northwest Mexico with some product coming from the Virginia plant.
Like many firms, they were just distributing product from the plant where the product was made. The baseline map shows the current situation.
They wanted to do an analysis to determine a better distribution strategy. The result on the right shows the optimal distribution strategy. Thy shipped full trucks loads from the plant in Mexico to the warehouse in Virginia and then on to the customer.
This solution has much more expense in transportation from the plant to the warehouse. However, this is more than offset by the savings on shipments to customers. The optimal solution resulted in $5MM in savings (about a 25% reduction in transportation costs).
Although this case looks rather simple, it wasn't clear at the start whether the best solution would have one warehouse in the center of the country, two warehouses not located at the plants, or a third warehouse. And, it wasn't clear how the country should be split. And, finally, with a lot at stake in terms of savings, and moving capabilities, it is important to do a robust study to make sure you have covered all the angles.
Here is excerpt from the review on the MIT Press website:
Simchi-Levi identifies the crucial element in a company's success: the link between the value it provides its customers and its operations strategies. And, he offers a set of scientifically and empirically based rules that management can follow to achieve a quantum leap in operations performance.
Flexibility, says Simchi-Levi, is the single most important capability that allows firms to innovate their operations and supply chain strategies.
David Simchi-Levi is the founder of LogicTools which is now part of the IBM ILOG Optimization and Supply Chain Solutions group. He is still actively involved in IBM.
This group offers solutions in network optimization, inventory optimization, detailed production scheduling, routing, container optimization, shelf space optimization, and other areas that can help companies implement the ideas from his book.
“Supply chain strategy is very hard to get your arms around,” Smith agrees, “in part because it never really ends.”
At first, he said that there also isn’t really a right or wrong answer for a supply chain strategy, implying there may be several paths to the same goal, but then he qualified that thought: “It doesn’t have to do with all the tactical stuff we need to get done every day to run our businesses. A strategy is not about describing how we keep getting boxes out the door. It’s a 3, 5 or 10 year lookout that is coordinated with your business so that the supply chain is servicing the business effectively.”
Key to that is a chief supply chain officer that is able to articulate and sell that strategy to the top. “If you can demonstrate to the CEO or CFO that you have a good plan that is going to add to the bottom line, you’ll go a long way. Let’s face it, today the top lines are shrinking for most companies. If you can show how supply chain can add profit to the bottom line, you’ll get their attention.”
This quote reminded us of the value of continually evaluating your supply chain and being able to prove the value to upper management. We have seen many firms using our network optimization (LogicNet Plus XE) and inventory optimization (Inventory and Product Flow Analyst) solutions just for this purpose. That is, these solutions were used to keep the supply chain strategy current and to provide optimization- and fact-based proof of the value.
Bajaj, Head – Solutions and SCM Strategy at AFL’s Logistics Division
said: “AFL chose IBM’s iLOG software for several reasons, chief among
them – robustness, post-purchase support and a clever user interface
that makes data modelling both simple and secure. This unique
combination of AFL’s domain expertise in logistics and iLOG’s superior
design and modelling capabilities, have helped us unlock significant
value in our clients’ supply chain metrics.”
quietly, IBM is building a formidable portfolio of supply chain
software solutions that has the potential to shake up the existing
Also, the article noted IBM's existing solutions in network optimization, inventory optimization, and factory scheduling and that "IBM
has been very aggressive in promoting these solutions, such as by
adapting them for new opportunities into the retail sector."
The website highlights why the concepts from the book are important. For example, Jim Champy, the coauthor of Reengineering the Corporation says:
"Companies today are faced with an increasing number of choices in
operational and supply chain strategies. This book goes beyond just
showing how to make the right operational decisions. It makes the
critical link between operations and providing more value to customers.
It's a must read for anyone involved in operations and strategy."
Also, a key concept discussed is the fact that many companies offer different value propositions through different channels or brands. These different value propositions imply that the company may have different supply chains. However, the company cannot simply operate their supply chains separately. They need to take advantage of synergies where it makes sense. Click on the S&OP video in this link for more information
IBM released its 2010 Global CEO study, Capitalizing on Complexity. "Previously, CEOs have consistently identified change as their most
pressing challenge. Today, CEOs are telling us that the complexity of
operating in an increasingly volatile and uncertain world is their
primary challenge. And, a surprising number of them told us that they
feel ill-equipped to succeed in this drastically different world."
One of the key insights is the CEO's desire to build operational dexterity: "CEOs are mastering complexity in
countless ways. They are redesigning operating strategies for ultimate
speed and flexibility. They embed complexity that creates value in
elegantly simple products, services and customer interactions."
This focus on "speed and flexibility" fits well with our recent work on flexibility and the ILOG Optimization and Supply Chain solutions. For example:
manufacturing firms are looking to determine which plant should make which product
retailers are looking to build in flexibility with better flow path strategies and better shelf space planning,
plant managers are looking for advanced scheduling optimization to create more day to day flexibility
shipping companies looking to create flexibility by quickly and cheaply getting empty containers back to the correct location
inventory planners are building better flexibility and responsiveness by maintaining correct inventory levels and identifying the root causes of inventory issues.