Discussion paper
Shanghai, December 29th, 2002
Challenges facing the pan-European supply chain
. Kearney 70/0026_Dec29/jz 2
Executive summary
Overview: The pan-European supply chain faces four major challenges: Redesign of
network, in-versus outsourcing, consolidation of supplier relationships and best practice
tendering
Redesign of network is driven by forces outside of the supply chain. These external forces
could be, ., consolidation of manufacturing base or change in service requirements
In- versus outsourcing: Outsourcing provides strategic advantages, but it does not solve the
problem
Consolidation of supplier relationships: Trust and transparency are key for establishing
long-term partnerships with suppliers
Best practice tendering: Insight about key performance drivers of operation will guarantee
a successful tendering process
Benefits: Applying best practices to resolve these issues can lead to significant competitive
advantages
. Kearney 70/0026_Dec29/jz 3
Four major challenges need to be mastered to establish a pan-
European supply chain
Overview
1. Redesign of
network
2. In-versus
outsourcing
3.
Consolidation
of supplier
relationship
4. Best practice
for tendering
process
• Rationalize
European
manufacturing
locations and
capacity
• Radically change
service level to
strengthen
competitiveness
• Consolidate assets
and free cash to
finance growth
• Expand
management
capacity in core
business area
• Optimally use
economies of scale
for supply chain
• Reduce in-house
administration to
manage interface
to service
providers
• Ensure
transparency and
consistency of cost
and performance
• Ensure optimal
target setting and
performance
commitment
“Quick Win” versus
strategic advantages
One-time benefit
versus continuous
improvement
Creating a pan-European Supply Chain
Main
driver
Decision-
making
criteria
Benefits
. Kearney 70/0026_Dec29/jz 4
Redesign of network
. Kearney 70/0026_Dec29/jz 5
Type 1: Lead time
driven
Market managed
replenishment (MMR)
Type 2: Optimal factory
utilization
Factory managed
replenishment (FMR)
Type 3: High product
Region managed
replenishment (RMR)
Three types of replenishment concepts reflect needs of short lead
time, optimal factory utilization and high product availability
… produces
based on market
replenishment plan
… replenishes
markets based on
mutually agreed rules
… produces
based on regional
replenishment plan
… coordinates all
replenishment
activities
… defines
replenishment plan
(control total chain
inventory)
… defines inventory
levels and develops
sales forecast
… defines inventory
levels and develops
sales forecast
… defines sourcing
and monitors
inventories
… defines sourcing
and monitors
inventories
Factory ...
Region ...
Market ...
Redesign of network
. Kearney 70/0026_Dec29/jz 6
Today
•Shipment forecast
•Order
•Order quantity
Key drivers for redesigning a network are service requirements,
inventory policies, planning basis and shipment characteristics
Redesign of network
•100% mindset
•Market level
•Factory level
Agreed service level is ...
Inventory policies at ...
Mid-term planning is based on …
Shipments are triggered by …
Shipment quantity according to ...
FMR
•Depot/brand inventory
target and lead time
•Chain level
•Sales forecast
•Market demand
•Replenishment needs and
factory optimization
Client Example
. Kearney 70/0026_Dec29/jz 7
2-3 inventory levels 1 inventory level 2 inventory levels 1 inventory level 1 inventory level
Factory warehouse
with inventory
Market stock
in 1 or 2 stock levels
before POS
Factory warehouse
with all inventory
“Parcel Service”
from factory
warehouse
Factory warehouse
with inventory
Stock at 1st level
“regional”
warehouse
Buffer at factory (. 2-5 days)
The ideal physical network consists of one stock level between
factory and POS
Redesign of network
Notes: (1) This level may not exist
(2) Local warehouses and/or transshipment point
Warehouse
Factory
1st level
Warehouses
Local Warehouses/TP1)
POS/PORS
Warehouse
Factory
POS/PORS
Warehouse
Factory
Local Warehouses/TP2)
POS/PORS
Buffer
Factory
1st level
Warehouses
POS/PORS
Warehouse
Factory
Local Warehouses/TP
POS/PORS
Stock at 1st level
“central” in-market
warehouse
Stock at 1st level
“regional” in-
market warehouse
Typical
Situation
Scenario 1
“Factory
Warehouse”
Scenario 2
“Factory and regional
warehouse”
Scenario 3
“Central
Warehouse”
Scenario 4
“Regional
warehouse”
. Kearney 70/0026_Dec29/jz 8
Combined scenarios will balance inventories and transport costs
Pros
• Low transportation costs
• Short lead times to POS
Cons
• Medium stock planning
• Medium stock level
• Medium transportation planning
• 2 handling steps for part of the volume
between production and POS
Scenario 5
“Combinations”
Redesign of network
Warehouse
Central
Warehouse(s)
Local POS
POS
POS
Central
warehouse of A-
customers
Transshipment
point
Direct delivery
full-truck load
Daily replenishment
half/full pallets only
No storage,
buffer only
Example
Warehouse
Factory
1 level
Warehouse(s)
POS/PORS
Transshipment
. Kearney 70/0026_Dec29/jz 9
The approach is to identify sequential changes based on the existing
model and as is costs
1
2
3
4
5
1
2
3
4
Current
New network volumes ...
+ new production ...
+ new network ...
+ new procurement
Volume factor
Production factor
Network factor
Procurement factor
As is Costs Modeled
Costs
Redesign of network
Client
Example
. Kearney 70/0026_Dec29/jz 10
In- versus Outsourcing
. Kearney 70/0026_Dec29/jz 11
The ever increasing level of outsourcing reflects concentration on
core competencies
In- versus Outsourcing
Specialists Transportation
Internal distribution/
warehousing
Transportation management
IT
Value-added activities
Order handling
Invoicing
Inventory management
Total logistics
Manufacturing
Companies
Respondents That Have Outsourced
Chemical
Industry
Core
Competences
Source: . Kearney survey
. Kearney 70/0026_Dec29/jz 12
Companies like the cost effects from outsourcing, but fear losing
control
Reasons for Outcourcing
Access to other
markets
Make cost visible
Access to outside
expertise
Increase cost
variability
Improve service
quality
Reduce cost
Chemical companies
72%
Confidentiality/
Intellectual pro-
perty protection
More expensive
than in-house
Required capa-
bilities not
available
Loss of control
Reasons Against Outcourcing
The role of outsourcing
Source: . Kearney survey
. Kearney 70/0026_Dec29/jz 13
Outcourcing of transportation and logistics services provides
infrastructure advantages
The role of outsourcing
Infrastructure Sharing of assets Sharing of networks Sharing of technologies
Risk and capital
sharing
Availability Control
•Ships
•Tanks
•Terminals
•Pipelines
•Truck fleets
•Terminal density
•Distribution points
•Cross-docking points
•Transportation
partners (regions,
products, sizes)
•Service partners
•Scheduling
•Tracking and tracing
•Navigation
•Electronic document
exchange/processing
Benefits
Examples
. Kearney 70/0026_Dec29/jz 14
Four key success factors need to be ensured in advance: Never
outsource operational problems to service providers
Key Success Factors for Outsourcing
Feasibility
• Check availability of competent service providers
with enough capacity
• Verify possibility to transfer knowledgeable
operators to 3rd party
• Set feasible targets for outsourcing
Dependency
• Loss of competence and experience acquisition
• Loss of qualified employees long term
• Convenience to exchange service providers
• Limited power to influence service providers if low
volume
Administration cost
• Fine tune interface
• Install information management
• Eliminate functional redundancies
• Reduce multiple stages in value chain
• Limit transformation cost end ensure benefit
tracking
Management/controlling process
• Share productivity gain
• Maintain and sustain quality and service level
• Understand and define performance measurements
• Ensure transparency of key cost/performance data
• Install performance controlling for service providers
The role of outsourcing
. Kearney 70/0026_Dec29/jz 15
Consolidation of supplier
relationships
. Kearney 70/0026_Dec29/jz 16
The goal of enhancing supplier relationships is to reduce labor
costs, ensure shared resources and improve productivity
Consolidation of supplier relationships
Targeted savings opportunities
Productivity
improvement
Shared
resources
Labor cost
reduction
• Redesign handling process, implement a new incentive system, etc.
• Share handling resources (labor, forklifts, etc.) and stocking capacity with other
warehouse operations in surrounding area to compensate for business fluctuations
• Adapt compensation of current staff to market level
• Limit overtime by introducing flex-time
. Kearney 70/0026_Dec29/jz 17
Establishing mutually beneficial and long-term partnerships calls
for trust and transparency
Open book
Fair profit margin
Activity- and cost-based charge with performance target (ABC)
Flexibility (shared resources)
Continuous improvement
Consolidation of supplier relationships
. Kearney 70/0026_Dec29/jz 18
An uniform and consistent methodology is a must to consolidate
pan-European supplier bases
Consolidation of supplier relationships
Fixed storage
Fixed operating costs
Variable handling
Management fees
Total US$ mil.
A
14,000
Defining Criteria
Warehouse capacity/pallet
B
19,500
C
7,500
D
Cost Breakdown of Four Categories (in % of Total Cost)
Example
Warehousing
220,000Pallet throughput 220,000 75,000
ManualManual or automated warehouse Automated Manual Manual
ModerateAmount of extra handling Low High Moderate
HighCompetition for warehousing in location Low Moderate High
UKCountry France Belgium Sweden
. Kearney 70/0026_Dec29/jz 19
Best practice for tendering
process
. Kearney 70/0026_Dec29/jz 20
Improvement opportunities can be realized by initiating a series of
actions
Planning improvements:
• Reduce overtime by matching staffing with activities (. standard weekend staffing)
• Renegotiate requirements and charges for additional activities
• Ensure visibility of inbound shipments to contract warehouses
Improvements in productivity by unbundling variable handling rates, identifying barriers to
efficiency, and attempting to reduce impact where possible
Reduction in operator profits - margins are hidden in numerous charges - once unbundled, a
fair return can be negotiated
Example: warehousing
Best practice
. Kearney 70/0026_Dec29/jz 21
The savings estimate for warehousing is based on a review of each
single warehouse
Best practice
Example of a pan-European Warehousing Network: Total Cost US$/ Plt-throughput
Finland
Spain
N. Irland
Ireland
Belgium
Italy
UK1
UK 2
Sweden
Denmark
France
UK 3
UK 4Total Cost
US$/plt
Size of warehouse in 000 plt-throughput .
. Kearney 70/0026_Dec29/jz 22
“Should costs” are estimated by conducting a detailed review of
each contract, activity and invoice practice
Best practice
Example of a pan-European Warehousing Network: Variable Cost US$/ Plt-throughput
% of mixed case handling
Denmark
UK 4
Belgium
Ireland
UK 2
Sweden
Italy
UK 3
France
UK 1
N. Ireland
Should cost area
. Kearney 70/0026_Dec29/jz 23
Benefits
. Kearney 70/0026_Dec29/jz 24
Savings of more than 10% can be realized by establishing a pan-
European supply chain
Delivery
Trucking
3rd party warehouses
Plant warehousing
Administration
Savings relative to base 0 (-4%) +4-5% 11-18%
79%
100% 104%
95%-96%
82%-89%1
2 3
4
5
Network savings
4-5% Procurement savings
7-13%
. Kearney project experience
Benefits
12%-13% 12%-13%
14%-17%
18%-19%
33%-34%
. Kearney 70/0026_Dec29/jz 25
Warehouse consolidation is a key driver to reduce inventories
Benefits
Warehouse stock
(MDM)
Sept. ‘97 = 350’
Oct. ‘95 = 737’
July ‘96 = 547’
Aug. ‘96 = 529’
Sept. ‘96 = 490’
-34%
Shortage
Sept. ‘97 = 150 articles
Oct. ‘95 = articles
July ‘96 = 645 articles
Aug. ‘96 = 443 articles
Sept. ‘96 = 396 articles
-82%
Repair time
Sept. ‘97 = 15 days
July ‘95 = 58 days
July ‘96 = 25 days
Aug. ‘96 = 25 days
Sept. ‘96 = 24 days
-59%
Reorder time
Sept. ‘97 = 25 days
July ‘95 = 102 days
July ‘96 = 40 days
Aug. ‘96 = 39 days
Sept. ‘96 = 39 days
-62%
Deliverability
Sept. ‘97 = ca. 97%
Oct. ‘95 = ca. 50%
July ‘96 = ca. 91%
Aug. ‘96 = ca. 94%
Sept. ‘96 = ca. 92%
+
Client example: computer/
electronics industry
. Kearney 70/0026_Dec29/jz 26
Fixed storage cost drivers cover the defining criteria of physical
operations such as size and location
Benefits
Cost
Reduc-
tion
Opportunities/Factors
to ReviewCost Drivers
Typical Cost
Items
5-7%• Review rental
agreement with landlord
in detail
• Benchmark against
altemative sites in area
• Size, M2
• Location/market dynamics
• Building type (standard or
high-bay) and age
Rent
• Determine whether any
appeals are outstanding
• Same criteria as that for rentProperty
rates/taxes
• Depreciation time period
• Rate used
• Initial cost of equipment
Fixed
equipment
depreciation
(. racking)
10%• Leverage customer’s
buying power in local
area if appropriate
• Size of operation
• Nature of supplier
agreement
Utilities
(Heat, light
water)
20%• Leverage customer’s• Size of operationSecurity
40
25
25
10
Fixed
Storage
Costs
