David Simchi-Levi talked about volatility and flexibility in the supply chain, putting a definition around those terms, and trying to quantify the impact of flexibility, as a foundation for helping companies understand how they can invest in flexibility in their supply chains.
David noted the IBM ILOG supply chain applications, which include Strategic Supply Chain Design & Planning (LogicNet Plus, LNP; Inventory Analyst, IA; Product Flow Optimizer, PFO; Transportation Analyst, TA); as well as more tactical-level planning, e.g., for safety-stock setting for ERP (Inventory Planning); and Production Planning and Detailed Scheduling (Plant PowerOps, PPO).
Today's supply chain challenges are well known: global supply chains with long lead times, combined with rising and shifting customer expectations. In addition, as global manufacturing costs rise in different regions (increasing labor costs, e.g., in China by about 20% annually over the past five years versus 3% in U.S.), the optimal supply chain five years ago may longer be applicable.
Logistics costs also have been increasing as a percentage of cost of goods sold, rising 15% as a percentage of GDP in the U.S. from 2003 through 2007with rising oil costs, rail capacity pressure, truck driver shortages and security requirements. Transportation costs have increased 47 percent in the last five years, but inventory costs have also increased, by 62 percent in the same time period, e.g., due to longer supply chains (more inventory in motion and more safety stock to meet more demanding customers). David also noted that one strategy that companies have used in the face of higher transportation costs, larger shipment sizes (to take advantage of economies of scale), have had the effect of increasing inventory costs.
Risk levels have increased in the supply chain, a result of successful implementations of Lean, outsourcing and offshoring. Lean supply chains make it more difficult to meet high service levels with less inventory, while outsourcing/offshoring creates more opportunity for disruption in the supply chain. Sustainability also has become more important - less so as oil prices have declined, but that is likely to change as oil prices increase again. At the same time, the supply chain has seen unprecedented levels of volatility, e.g, as a result of commodity price volatility (e.g., high volatility in price of oil in 2008, with 39 days when the price of oil changed 5 percent or more from its previous day close).
David posited that flexibility is one of the top supply chain capabilities in which companies can invest to increase their ability to respond to all the above challenges. Flexibility is the ability to respond to change, e.g., demand volume or mix, labor cost, exchange rates. The objective is to reduce costs and reduce the amount of unsatisfied demand and improve capacity utilization, with no or little penalty on the service-level side. Flexibility can be achieved through Product Design (a focus in the high-tech industry, especially, e.g., a modular, Dell-like product architecture, standardization, postponement, substitution); Process Design (e.g., flexible work force, Lean, flexible contracts [e.g., options contracts], outsourcing, dual sourcing); or System Design (e.g., capacity redundancy, manufacturing strategy, distribution strategy).
Focusing on System Design, David looked at an example focusing on balancing transportation and manufacturing costs, coping with high forecast error and utilizing resources more effectively. The goal is to achieve all (or most of) the benefits of "full flexibility" with a small investment that provides a small level of flexibility. David ran through two case studies of flexibility.
The first case study focused on a manufacturer in the food and beverage industry. Initially, the company employed a dedicated manufacturing strategy, with each product family manufactured in one of five domestic plants, and manufacturing capacity was in place to target 90 percent line efficiency for projected demand. The company had five manufacturing plants with varying average labor costs, and eight DC locations. The company was focused around manufacturing costs, e.g., by producing high-volume product in its lowest-cost facility. To analyze the benefits of adding manufacturing flexibility to the network, the company analyzed scenarios that provided for varying degrees of manufacturing flexibility, up to full flexibility, where each plant could produce each product line, and everything in between. An analysis of plant to warehouse shipping costs showed, of course, that full flexibility produced lower transportation costs, but an analysis of the impact on total supply chain costs showed that just investing in a little more flexibility (by adding flexibility at all plants to produce two product lines) produced 80 percent of the benefits of flexibility with less impact on manufacturing costs, while avoiding the higher costs of investing in full flexibility (ability to produce all five product lines at each plant). But the company also wanted to understand the impact of potential changes in demand volume, so they considered three different scenarios based on growth for different product lines. In each case, adding the minimal level of flexibility outperformed the baseline and even "full flexibility" in terms of KPIs like demand satisfied, shortfalls, cost/unit and average plant utilization.
In further analyzing the benefits of adding a small amount of flexibility, David noted that in the above example, the full benefits of what he calls "2 flexibility" (ability to have each plant product two product lines) are possible when there is a "long chain" that connects all the plants in the company's network, such that a change up or down in demand for a given product will not cause a disruption in the company's ability to meet that demand. This example requires much more in-depth explanation that is possible here, but I hope to be able to write about this phenomenon later.
David also ran through a case study of optimizing S&OP at a bottling company operating 57 plants in the U.S. and 103 plants worldwide, driving 240,000 miles a day to meet customer demand. Implementing the flexibility described above, the company created a process that brought together sales, supply chain, marketing, manufacturing in collaborative planning process. Results: The company reduced raw materials and supplier inventory from $201 million to $195 million; saw a 2 percent decline in the growth of transport miles even as revenue grew; and added 12.3 million cases available to be sold due to reduction in warehouse out-of-stocks, adding up to the equivalent of adding 1.5 production lines without actually any investment in plant.
David also spoke about redundancy in the supply chain and the challenges and benefits of scenario analysis for optimizing a supply chain network and setting supply chain strategy. He discussed a case study involving a manufacturer of consumer packaged goods. The company had 40 manufacturing facilities, but was looking to rationalize its plants while also managing risks in its supply chain. The company looked at how many plants they could close without impacting their ability to meet demand and came up with a plan to close several plants that would result in savings of $40 million to the bottom line. However, this plan left plants very distant from customers, resulting in a higher lead times. In addition, the attendant higher levels of plant utilization left the supply chain exposed to higher levels of risk from disruptions. The challenge for the company was to build into the model scenarios that take into account different sources and levels of risk, based on the number of plants that the company ultimately would decide to maintain. David noted that the optimal solution in terms of total supply chain cost was not necessarily the optimal solution in terms of risk management. He pointed out that total supply chain cost is invariably "flat" around the optimal strategy, so the company could look at closing a fewer number of plants than the "most optimal" solution in order to mitigate risk.So, in summary, a small amount of flexibility can often provide large benefits, supply chain costs are flat around the optimal strategy, and positioning inventory effectively can make a big impact through taking advantage of risk pooling.
|Supply Chain authority Andrew Reese is Editor of Supply & Demand Chain Executive. He has been invited by IBM PR to attend this show as a blogger and speaker. Like all other speakers, Andrew will receive all speaker benefits including travel and board.