. Kearney 70/0026_Dec29/jz *
Challenges facing the pan-European supply chain
Discussion paper
Shanghai, December 29th, 2002
1
. Kearney 70/0026_Dec29/jz *
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 *
Four major challenges need to be mastered to establish a pan-European supply chain
Overview
“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 *
Redesign of network
. Kearney 70/0026_Dec29/jz *
Three types of replenishment concepts reflect needs of short lead time, optimal factory utilization and high product availability
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)
… 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 *
Key drivers for redesigning a network are service requirements, inventory policies, planning basis and shipment characteristics
Today
Shipment forecast
Order
Order quantity
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 *
The ideal physical network consists of one stock level between factory and POS
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)
Redesign of network
Notes: (1) This level may not exist
(2) Local warehouses and/or transshipment point
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 *
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
. Kearney 70/0026_Dec29/jz *
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
As is Costs
Modeled
Costs
Redesign of network
Client
Example
. Kearney 70/0026_Dec29/jz *
In- versus Outsourcing
. Kearney 70/0026_Dec29/jz *
The ever increasing level of outsourcing reflects concentration on core competencies
In- versus Outsourcing
Specialists
Manufacturing Companies
Respondents That Have Outsourced
Chemical
Industry
Core
Competences
Source: . Kearney survey
Sheet:
Total logistics
Inventory management
Invoicing
Order handling
Value-added activities
IT
Transportation management
Internal distribution/warehousing
Transportation
Plan 2003
Current
. Kearney 70/0026_Dec29/jz *
Companies like the cost effects from outsourcing, but fear losing control
Reasons for Outcourcing
Reasons Against Outcourcing
The role of outsourcing
Source: . Kearney survey
Sheet:
Access to other markets
Make cost visible
Access to outside expertise
Increase cost variability
Improve service
Reduce cost
East
West
Sheet:
Access to other markets
Make cost visible
Access to outside expertise
Increase cost variability
East
. Kearney 70/0026_Dec29/jz *
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 *
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 *
Consolidation of supplier relationships
. Kearney 70/0026_Dec29/jz *
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 *
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 *
An uniform and consistent methodology is a must to consolidate pan-European supplier bases
Consolidation of supplier relationships
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
220,000
Pallet throughput
220,000
75,000
Manual
Manual or automated warehouse
Automated
Manual
Manual
Moderate
Amount of extra handling
Low
High
Moderate
High
Competition for warehousing in location
Low
Moderate
High
UK
Country
France
Belgium
Sweden
Sheet:
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
Fixed
Fixed operating costs
Variable handling
Management fees
. Kearney 70/0026_Dec29/jz *
Best practice for tendering process
. Kearney 70/0026_Dec29/jz *
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 *
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$/ Plt-throughput
Total Cost US$/plt
Size of warehouse in 000 plt-throughput .
Sheet:
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
East
West
North
. Kearney 70/0026_Dec29/jz *
“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
Sheet:
1st Qtr
2nd Qtr
3rd Qtr
4th Qtr
East
West
North
. Kearney 70/0026_Dec29/jz *
Benefits
. Kearney 70/0026_Dec29/jz *
Savings of more than 10% can be realized by establishing a pan-European supply chain
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%
Sheet:
Current
New volume (Base)
+ new production
+ new network
+ procurement
Administration
Plant warehousing
3rd party warehouses
Trunking
Delivery
. Kearney 70/0026_Dec29/jz *
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 *
Fixed storage cost drivers cover the defining criteria of physical operations such as size and location
Benefits
Cost Reduc-tion
Opportunities/Factors to Review
Cost 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 rent
Property 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 operation
Security
40
25
25
10
Fixed Storage Costs
1
