Microsoft PowerPoint - 2A Optimizing Global Supply Chains.ppt

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Optimizing Global Supply Chains

Minimizing Diminished Value Risk

Chains

© 2008 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC

Risk

John Brockwell, Vice President, Global Supply Chain Practice LeaderApril 2008

The extended Global Supply Chain is creating dilemmas for both Nations, Enterprises and Consumers

Supplier

ComponentsManufacturing

2© 2008 JPMorgan Chase & Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC

Distribution

Customer

Consumers

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The Dilemma for a Nation

−Nations need to protect their economy and provide security for their citizens• Security

– Proliferation of weapons of mass destruction: Nuclear, Chemical, Biological– Terrorism

• Health: Disease, Bio-terrorism, Safety• Environment

– EU is addressing through several initiatives (RoHS, WEEE, REACH)• Intellectual Property• Impact of imported goods on local industries

−Nations need to make global trade easier in order to be competitive• Balance of Trade


– Sell products globally & employ citizens– Buy goods at lower cost to improve citizens buying power & standard of living

• Foreign Investment• Inflation• Currency Exchange

The Dilemma for an Enterprise

− Enterprises need to embrace global trade in order to be competitive

• Incredible growth opportunities in emerging markets• Sourcing advantages

– Lower labor and natural resources cost– Expertise– Proximity to markets

− Enterprises need to manage the risk of the extended supply chain

• Total landed costs and supply chain service level attainment– Exposure to fuel price increases and volatility– Increased transit times and number of hand-offs

• Increased working capital requirements in the extended supply chain– Days Inventory Outstanding, Days Sales Outstanding, Days Payable Outstanding

• Increased exposure to government compliance and tax regulations


• Intellectual Property protection• Currency imbalances

– Is the sourcing or fulfillment decision still good if the currency exchange varies 10%? How about 20%? 30%?

• Political, Economic, Natural Hazards, Health Epidemics and Terrorism• Corporate Social Responsibility (Child or Slave Labor, Labor conditions, Environmental impact

of manufacturing process and of end-product)

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The Dilemma for the Consumer

For any given purchase these factors change in importance

• Safety• Quality

P i• Price• Support local/national industry vs. offshore sources• Organic• Recyclable• Carbon neutral• Corporate Social Responsibility of Brand

– Child and slave laborL b C di i


– Labor Conditions– Environmental impact of manufacturing process and end product– Ethics

Is Green a differentiator for your product or service?Will it be consumer demand or government regulations that drive Green into your industry

first?

Half of U.S. consumers consider at least one sustainability factor in selecting consumer packaged goods (CPG) items and choosing where to shop for those products, according to new survey.

A new British Telecom survey finds that just 3% of U.K. consumers believe that businesses are "fully open and honest" about what they are really doing to operate more sustainable and one third think


Source: Sustainable Brands Weekly January 10, 2008

operate more sustainable, and one-third think companies exaggerate their efforts in order to score brownie points among potential customers

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Nations, Enterprises and Consumers are demanding increased visibility and transparency in the supply chain in order to mitigate risk


Supply Chain Management Integrates Procurement, Logistics, Manufacturing and Customer Fulfillment

Why do the different disciplines need to be integrated? − Companies that align their operations to satisfy customer requirements

efficiently have competitive advantage because they use less inventory, have lower costs and more profitlower costs and more profit

Much of the SCM focus has been on the costs of the individual elements of the supply chain, procurement, freight, manufacturing, distribution etc.

Missing delivery requirements causing product availability problems can reduce revenue far in excess of the supply chain costs

This “Diminished Value” is an important concept because it brings total SCM optimization into play, including the sales price

The customers expectations define how the supply chain must perform and


p pp y pthey expect levels of product availability exceeding 99%

Supply chain management starts with understanding and quantifying Customer’s needs

The Customer’s needs are translated into service level requirements that define the physical and financial supply chain

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Understand the Customer’s Requirements

Distributors/Dealers

I d t i l

Customers

MaterialsSuppliers

InboundLogistics

Manufacturers Distribution OutboundLogistics

Retail

Direct toCustomer

Service /Spare Parts

Distributors

Direct Mail

Internet

OEM

Industrial


1. Begin with understanding Customer’s expectations of price, sensitivity to service levels and the most appropriate measurements (e.g., deliver to promise) = price erosion impact as the result of time and place failures

2. Capture current costs, service levels, performance metrics, inventory levels, and import and export compliance posture

3. Identify gaps in business processes and information flow that create customer satisfaction problems, add cost and cycle time to the business process and impact inventory value

Failure to meet customer’s product availability needs often have significant “Diminished Value” impact

Selling Season Expected Price

Service Level Requirement

For On Time Delivery

Raw Materials &

Components

Inbound LogisticsManufacturing

Outbound Logistics and Inventory Investment Risk

For On Time Delivery

Late Shipment

Dim

inished Sales

Diminished Profit due to Higher Product,

Storage Cost, Inventory

Obsolescence and Write-downs

Product &

Diminished Price


Time

Components

Selling Season Start Selling Season End

75% reduction in priceIn Season Out of Season

Product & Distribution

CostsForecasting

Does not include lost revenue and profit from product service and follow-on sales

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“Diminished Value” is not an abstract concept


Can you protect and proactively generate improved sales and reduce “diminished value”?

“Diminished Value” happens when circumstances cause a reduced selling price, lost sales and/or significant cost increases, resulting in a drop in total transaction value

Understanding a product’s seasonality is critical• “season” is not a calendar term but a window of sales and profit opportunity

– Seasons can be years – telecommunication, computer, aerospace– Seasons can be hours – service contracts guaranteeing product

availability in hours

Diminished Value can happen for many reasons:− Back to school children's clothing arrive 1 week after the peak sales season =

55% price markdowns are required − Late delivery of hospital X-Ray and MRI equipment resulted in penalties - 15%

lower price


lower price− Out of stock shoes result in customers going to competition amounting to over

$2,000,000 a day in a 3,500 store chain --- value $640 million annually− Lead based paint is used in toys costing millions in sales ($100M+), defaults on

contracts, lost Sales (> $150M), inventory write-downs ($42M), restocking (0), potential health liability law suits and damage to the brand

Diminished Value occurs every day when there are time, place and product delivery failures in the supply chain

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Risk of “Diminished Value” is much greater when the supply chain is global

Domestic sourcing and sales− Customer service levels− Tiered delivery service levels

f l d d

Global sourcing and sales fulfillment− Customer service levels by country− Tiered delivery service levels by country

and global contracts− Manufacturing to single country standards− Multiple local suppliers − Missing or wrong data does not stop the

supply chain

and global contracts− Multiple country importing and exporting

regulations− Extra-territorial regulations− Multiple country free trade agreements− Multiple country supply chain security and

safety issues− Inspections – government or private− Manufacturing to multiple country and

customer standards− Multiple country suppliers conforming to


Multiple country suppliers conforming to free trade agreements

− Missing or wrong data can stop the SC− Few ports of entry represent potential high

risk failure points

Managing global supply chains requires we employ different skills

Import ProcessesClassify HS #’sSubmit Pre-EntryGenerate DocumentsBinding RulingsFile Duty DrawbackMinimize DutiesPerform Liquidation

Export ProcessesClassify ECCN #’sScreen OrdersDetermine Licensing Apply for LicensesGenerate DocumentsSubmit SEDTrack/Trace Shipment

Forwarder ProcessesSelect CarriersBook CarriersConsolidate FreightTrack Shipments

Carrier ProcessesTransport GoodsTrack ShipmentsOn-time arrivalsBulk Breaking

Broker ProcessesPre-EntrySubmit EntryClear Customs

Exporter/SellerExporter/Seller International International CarrierCarrier

Importer/BuyerImporter/BuyerForwarderForwarder BrokerBroker

Export ProcessesClassification Jurisdiction DeterminationEAR/ITARScreen OrdersDetermine Licensing Apply for LicensesGenerate DocumentsSubmit Export DecEd cation & Training

Import ProcessesClassify HS #’sImport Data MgmtManage Doc CreationBinding Rulings (BTI)Manage FTAsManage Duty RecoveryManage CoODeclare Goods ValueEd ti & T i i

Track Shipments Resolve Issues Manage Brokers


qAssist TrackingEducation & TrainingInvoice AdjustmentsPost Entry InfoInbound Landed Cost

pEducation & TrainingDeemed Export MgmtLanded Cost Modeling

Trade Management Professionals

Education & TrainingDeemed Export MgmtLanded Cost Calc.MetricsImport Data review - 10+2Trade Logistics MgtSupply Chain Security and Safety

Education & TrainingPost Entry ProcessingSupplier ManagementMetricsTrade Logistics MgtSupply Chain Security and Safety

Supporting

Technology

Government

Export Declaration Import Declaration

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Global trade management costs are small as a percentage of the value of the goods traded

Trade Management Affects

•Revenue Cost of Goods Sold Inventory •Revenue, Cost of Goods Sold, Inventory, Development Expense, Sales and General Administration (SG&A), Days Purchases Outstanding, Days Sales Outstanding

• Operational staffing

• Supply Chain Flow - Defects in the Trade Management process can and do stop the

supply chain

Trade Management Costs

•People

•Processes

•Technology


Typically for large companies < .1% of goods value traded

Supply Chain Management Affects almost every line item in the Financial Reports

Income Statement

Revenue +

Revenue enhancing logisticsProduct availability matched to customer needsStockout elimination programs

- Cost of Product -

Gross Profit ++

- Expenses -

Net Earnings Before Tax +++

Stockout elimination programsLogistics based sales channels -catalog, TV, Internet, home delivery etc.

Cost & expense saving logisticsJust-In-Time or Continuous Flow distribution techniquesCarrier contract managementDuty minimization programsAutomation, goods tracking & handling

Investment optimization logistics


16© 2006 JPMorgan Chase and Co. All rights reserved. JPMorgan Chase Bank, N.A. Member FDIC.

Balance Sheet

Inventory -Fixed Assets -

Investment optimization logisticsInventory reduction - vendor managed inventory, quick response, etc.Order cycle time reduction programsAsset productivity enhancement programs - 3rd party logistics, multi-function DCs, etc.

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Sourcing and Fulfillment decisions are often based on unrealistic assumptions about process capability

The Perfect Order

Supplier’s Order Fill Rate 100%

Supply Chain On-Time Delivery 100%

Sales Discount or Markdowns 10%

Supplier 100% Quality (No Rejects)

Supply Chain Accurate Paperwork 100%


The Actual Order

Demand Actuals to Plan 90% (+/-)

Order Fill Rate 90%

On-Time Delivery 90%

Real World variability eats into profits

The Actual OrderGlobal supply chain

processes must be close to 99% reliable to

achieve high customer satisfaction

Impacts

Increased Time and Variability

Demand Forecast Deviation from Plan

Order Lead Times

Quality (No Rejects) 90%

Accurate Paperwork 90%

Discount or Markdowns 50%

satisfaction


Order Lead Times

Transit Times

Increased Costs

Transportation (More Expedited Freight)

Increased Inventory Levels

Cost of Lost Sales or Cost of Stock-Out

Profit Margin Erosion

Possible Market Share Loss

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Q. How can you achieve the 99% product availability demanded by customers?

Domestic factory to the store, 3 days at 95% reliability

1 day 2 days 18 days 1 day 3 days


International factory to the store, with 5 hand-offs and each leg 95% reliable for a total of 25 days. 0.95x0.95x0.95x0.95x0.95 = 77.4% reliability

Irregularities in goods flow like cargo cut-offs or customs delays can result in full days added to the supply chain, causing expedited freight and increased inventory

A. Increase Inventory and use of expedited freight

Variability of Import Processing

Trading Across Borders

Region or EconomyDocuments for Time for export Cost to export (US$ per Documents for Time for

importCost to import

(US$ perRegion or Economy export (number) (days) container) import (number) import (days)

(US$ per container)

Australia 6 9 930 6 12 1,120Brazil 8 18 1,090 7 22 1,240Canada 3 7 1,385 4 11 1,425China 7 21 390 6 24 430Germany 4 7 740 5 7 765Hong Kong, China 4 6 525 4 5 525India 8 18 820 9 21 910Poland 5 17 834 5 27 834Russia 8 36 2,050 13 36 2,050Singapore 4 5 416 4 3 367Taiwan, China 7 13 747 7 12 747United Kingdom 4 13 940 4 13 1 267


United Kingdom 4 13 940 4 13 1,267United States 4 6 960 5 5 1,160

World Bank Ease of Doing Business 2007

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Physical supply chain – managed inventory

Integration of financial optimization techniques with Supply Chain processes improves operational performance

Building a reliable Supply Chain

Forecasting – procurement – production – shipment – delivery/reconciliation

Procurement – risk mitigation – credit – fulfillment – payment/settlement

Supply chain Management

Revenue Management

Expenditure Management


Financial supply chain – managed cash

Integration of Physical Supply Chain information with Financial Supply Chain processes improves financial performance

Supply Chain processes can be designed to minimize “Diminished Value” risk

Analyze important transaction information− Order information: – assortment, sizes, quantity, quality, critical data

quality and availability, ship date etc.− Goods movement information: - condition of goods, time and date of

key way point arrivals and departures

Report variances from the planned order− assortment, sizes, quantity, quality, trade data (goods passport), ship

date etc− condition of goods, time and date of key way point arrivals and

departures

Recommend best possible actions − Expedite emergency stock by air


Expedite emergency stock by air− Expedite missing information to a broker or forwarder− Arrange inspection of damaged goods before shipment

All of this implies “smart” supply chains that have timely information, supply chain control and we know the value of our alternatives for each transaction

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Let’s illustrate the risk mitigation capability of a smart supply chain to reduce “Diminished Value”

If a Retail Order could talk; Order 2676 has arrived at the vendor 5 days late− No action will result in 2 weeks late delivery due to shipping schedules resulting in missing the

first two weeks of the season’s sales with significant impact on sales and gross profit− Optimal Action: shipping the first two weeks volume (20%) by air will allow product

availability for the first two weeks of the season− Notification:

• SCM Manager, Procurement Manger, Controller− Action Time Window – 6 hours − Order Recovery Analysis:Impacted Order Report

Order 2676 Thanksgiving Center

PieceForecast Sales

ValueImpacted

OrderDiminished Value Risk

Optomal Action Case

Optimal Action

SavingsAction

ROI

Cost of Defect -

Diminished Value

Action Cost $ 125,000


The cost of the defect needs to be calculated and corrective action taken for future orders

Max Revenue 2,969,938$ $2,321,813 $ (648,125) $2,969,938 $ 648,125 -$ Max Gross Profit 1,444,938$ $ 796,813 $ (648,125) $1,319,938 $ 523,125 318.5% 125,000$ Min Revenue 1,871,938$ $1,528,813 $ (343,125) $1,871,938 $ 343,125 -$ Min Gross Profit 346,938$ $ 3,813 $ (343,125) $ 221,938 $ 218,125 74.5% 125,000$ Max Inventory Loss

Future trends demand flexible “smart” global supply chains that support operations

Supply chain security programs− Failure to plan and develop secure supply chains will result in

significant disruptions when supply chains are threatenedg p pp y

Environmental and Safety regulatory concerns− Failure to incorporate the regulations in supply chain processes

can expose companies to disruptions, seizures, significant fines and inventory write-downs

Intense competition for demanding global customers− Customers in all global markets are demanding high product


g g g pavailability and reliability, creating intense competition and high risk of “diminished value”

Security, Environment and Customers Demands create significant risk to inventory value, we have a choice, to let it happen or manage it with flexible supply chains

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The many risks of diminished value are growing but can be managed by focusing on four key areas

The Customer: Understanding the customer satisfaction economics − When, where and what must the customer have to be satisfied?− The season price erosion curve by product− The supply chain inventory investment, costs and expenses for each transaction− The indirect significance of the product, accessory sales and service drag

Global Trade Management: Learn the processes and language of global trade and make it work for you− Classification− Country of Origin− Valuation− Free Trade Agreements and duty minimization


g y− Export Licensing− Business relationship screening and Supply chain security processes− Etc…

The many risks of diminished value are growing but can be managed by focusing on 4 primary areas

Integrate the Physical and Financial Supply Chain: Focus on supply chain process reliability, efficiency and quality − Low process reliability causes supply chain managers to achieve high reliability by

building inventory buffers and expediting product to save sales or reduce costsg y p g p− Design supply chain processes for global operations so safety, health, security and

quality standards that are country explicit, verified and achieved− Design logistics processes with flexibility that allows recovery from exceptional

situations

Measure - Inspect What You Expect: Integrate supply chain activities with performance metrics that allow rapid response to exceptional situations and optimal decision making− Measure the relevancy of an activity – how big or important − Measure the defects and take root cause corrective action – define and count


defects− Measure the efficiency to assure you are constantly improving – cycle time, cost per

transaction− Use “real time” measurements necessary to detect and take corrective actions using

highly flexible processes that minimize diminished value

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Global Trade Management Supply Chain Best Practices Executive Checklist

Global Strategy: Are you preparing your global supply chain to accommodate future business growth and multi-governmental security and product safety regulations?

Global Management Practices: Do business units manage to global goals, measurements and incentives to achieve the best results for the company globally?

Optimized Business performance: Are the supply chain strategy and operations aligned and quality Optimized Business performance: Are the supply chain strategy and operations aligned and quality measured with the sales channels to optimize global client satisfaction, sales, product costs and expenses?

Operational Risk and Recovery: Are global operational and compliance risks regularly identified, reviewed and are risk recovery plans in place?

Global Sourcing: Are your products sourced to meet customer or internal service requirements for landed cost, quality and availability 99% of the time with optimized inventory?

Global Customer Fulfillment: Are customer service requirements in all sales channels quantified and the supply chain delivering at 99%+ reliability with defect measurements and root cause analysis?

Inventory Management: Do you have visibility to inventory and costs throughout your extended global supply chain and have the ability to analyze and react to inventory “diminished value” threats?

Logistics Flexibility: Is there flexibility in your logistics contracts to allow for different service levels and


Logistics Flexibility: Is there flexibility in your logistics contracts to allow for different service levels and the ability to speed-up or slow-down inbound inventory?

Metrics and Continuous Improvement: Is information accurate, available, measured and continuous improvement practiced throughout the global supply chain?

Regulatory Compliance: Are your regulatory compliance programs communicated, documented, staffed with oversight by executive management?

Working Capital Optimization: Is your company an industry sector leader in working capital utilization (accounts payable, inventory, and accounts receivable)?