Supply Network Optimization

1
Supply Network Optimization

• A Seminar for
• The Court of Experts
• February 21, 2003
• By
• Dan Shunk

Professor, Industrial Engineering Avnet Chair of
Supply Network Integration Arizona State
University Tempe, AZ 85287-5906 1-480-965-6330
dan.shunk_at_asu.edu
2
This is NOT ABOUT

• Installing an ERP System!
• This is ABOUT
• Competing in a Global, Highly Competitive
  Environment
• Strategic Core Processes
• Competitive Advantage
• Evaluating Real Value

3
The Focus of Competitive Advantage
Competitive Advantage comes from

COST
DIFFERENTIATION
4
Porters View of 21st Century Competitiveness
Rapid New Product Development
You only compete in two dimensions!
Operational Excellence
Source Strategy and the Internet, Michael
Porter, HBR, Mar, 2001.
5
Operational Excellencein the 21st Century

• It Used to Be, OE was described as
• Factory Excellence
• Competing on COST
• With Supply Chains
• In a LOCAL Space

• Today OE is described as
• Supply Network Integration
• and Optimization
• Competing on COST TIME
• In a GLOBAL Space

This requires LOCAL Excellence!
6
Supply Networks vs. Supply Chains
Wholesale Distributors
Suppliers
Retailers
Manufacturers
Customers
Information Flows
Source AMR
Goods Flow
7
The Key Issues Are

• Customer focus.
• Continuous cost improvement.
• Flexibility and responsiveness to opportunities
  and change.
• Strategic use of technology.
• Becoming an evolving and learning organization.

8
Supply Network Requirements

• Complex customer service demands.
• Agility in manufacturing.
• Greater product variety.
• Distribution infrastructure.
• Cost containment.
• Sustained profitability.

9
An Initial Definition
Equipment Requirements
Equipment Characterization
Critical Materials Availability
Materials Requirements
Front End Fab
Back End Assembly
Knowledge Flow
Information Flow
Product Flow

• Supply Network Optimization
• Optimizing the flow of product, information,
  knowledge and cash from your suppliers suppliers
  to your customers customers.

10
Terminology and Timeline
Bill of Material Processor Purchasing Logistics
Supply Chain Management Introduced,
Krajlic, 1983 Orlicky, Plossl,
Wight Introduce MRP I in 1985 (Material
Requirements Planning) Advanced Thoughts in
late 1980s on Closed Loop led to MRP
II (Manufacturing Resource
Planning) Enterprise View
Needed Introduced ERP-
(Enterprise Resource Planning)
1970s 1980s 1990s
2000s
11
Terminology and Timeline
Regular Old, Standard Commerce E-Commerce
M-Commerce C-Commerce (Collaborati
ve Commerce)
1970s 1980s 1990s
2000s
12
An Incredible Decade of Change
1992 1994 1996 1998
2000 2002
Source Accenture 2002
13
Trends in Supply Networks
Area
New Approach
Conventional Approach

• Focus
• Make-Buy
• Design
• Quality
• Business Relationship

Narrow focus on materiel procurement
logistics Reactive minimize cost Suppliers
Build to print Inspect quality
in Adversarial short term contracts
Wider strategic focus linked to future
growth Proactive linked to core competence Key
suppliers have major design responsibility Certify
supplier processes Cooperative long term
partnerships
(Source Lean Aircraft Initiative, MIT)
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Our High Tech Survey Results

• Accelerating pace of change and very short lead
  times - TIME is the game!
• Need for instantaneous transformation of
  information to knowledge.
• Outsourcing is changing the business models.
• Globalization of marketplaces.
• Demand stream visibility a necessity with
  effective information sharing on a global scale.
• Change and learning management.
• Extended enterprise collaboration.

15
Our High Tech Survey Results (cont.)

• Effective partnering and strategic alliances now
  an accepted methodology.
• Flexible, lean, agile manufacturing
• Available to Promise (ATP) visibility.
• Capacity to Promise (CTP) on its way!
• Extensibility, Flexibility and Scalability (EFS)
• Virtual, Agile Information and Execution Systems
  (VAIES)
• Key metrics
• on-time delivery - total inventory days
• cash-to-cash cycle - net asset turns
• order fulfillment lead time - ROCE

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What is Driving This?
Do You Agree?
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SNO Simplest Forms

• The atomic units of the enterprise

Supplier
Customer

• Ideally, the Customer wants
• Instantaneous fulfilment.
• NO Risk.
• Ability to instantly ramp.
• Ability to instantly manage e-o-l.

• Ideally, the Supplier wants
• Perfect forecast.
• NO Risk.
• Reuse of facilities and tooling.
• Postponement of customization
• until the last process.
• Stability of demand.

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SNO Feasibility

• Not even thinkable five years ago.
• Fundamental advancements make feasible now
• Enterprise LEAN processes that focus on value
  add!
• Enterprise STANDARD PROCESSES that allow
  consistency of operation across organizational
  lines.
• Enterprise INTEGRATION and COLLABORATION tools
  that facilitate global communication.

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What SNO Might Look Like
Firm
Supplier
Customer
Strategic Planning
Collaborative Strategic Plg
Strategic Business Planning
Long Range Planning
Long Range Planning
Long Range Business/Capacity Planning
Planning
Dmd/Supply Planning
Dmd/Supply Planning
Collaborative Planning
Collaborative Planning
Demand and Supply Planning
Collaborative Supply Scheduling Management
Collaborative Supply Scheduling Management
Integrated SN Detailed Scheduling
For Factory/Materials/Warehouse/Transportation
Scheduling
Integrated Factory, Materials/Warehouse/Transporta
tion Execution
Execution
Factory Execution
Factory Execution
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Creation of a Structure

• Three tiered approach
• Internal Integration.
• External Collaboration.
• End-to-End Synchronization.

Functional View Supplier
Firm Customer
Plan Schedule Execute
1 Internal Integ.
3 Ultimately End - to - End Synchronization
2 - External Collaboration
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Creation of a Structure

• Three tiered approach
• Internal Integration.
• External Collaboration.
• End-to-End Synchronization.

Functional View Supplier
Firm Customer
Plan Schedule Execute
1 Internal Integ.
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To Start My Definition of Lean

• Toyota as the catalyst
• James Womack as the cultivator
• Lean Thinking, Womack and Jones
• Lean Aircraft Initiative and Lean Automotive
  Initiatives as the Think Tanks
• Lean Enterprise Model as the Catalogue
• My Definition
• Perform in the optimum value-added manner each
  step of the development and delivery process for
  a product or a service to optimize the total
  value chain.

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What Lean Has Achieved!

• Product Development
• Cycle Time Down 50
• Man-hours Down 50
• Software Development Cost Down 50
• Prototypes Made with No Tools
• Engineering Changes After Release Down 50

• Product Realization
• Assembly Touch Hours Down 49
• Non-conformance Costs Down 70
• Inventory Reduced 90
• Assembly Cycle Time Down 47
• Fab Costs Down 50
• Parts Lead Time Down 69

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Enterprise Level Roadmap
Entry/Re-entry Cycle
Long Term Cycle
Focus on the Value Stream
Develop Lean Structure Behavior
Adopt Lean Paradigm

• Map Value Stream
• Internalize Vision
• Set Goals Metrics
• Identify Involve Key
• Stakeholders

• Build Vision
• Convey Urgency
• Foster Lean Learning
• Make the Commitment
• Obtain Senior Mgmt.
• Buy-in

• Organize for Lean Implementation
• Identify Empower Change Agents
• Align Incentives
• Adapt Structure Systems

Detailed Lean Vision
Initial Lean Vision

Environmental Corrective Action Indicators
Short Term Cycle
Lean Transformation Framework
Decision to Pursue Enterprise Transformation
Detailed Corrective Action Indicators
Focus on Continuous Improvement
Create Refine Transformation Plan

• Monitor Lean Progress
• Nurture the Process
• Refine the Plan
• Capture Adopt New Knowledge

• Identify Prioritize Activities
• Commit Resources
• Provide Education Training

Enterprise Strategic Planning

Enterprise Level Transformation Plan
Implement Lean Initiatives
Outcomes on Enterprise Metrics

• Develop Detailed Plans
• Implement Lean Activities

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LESAT The Lean Enterprise Self Assessment Tool
Massachusetts Institute of Technology
Research Sponsored By LAI
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Creation of a Structure

• Three tiered approach
• Internal Integration.
• External Collaboration.
• End-to-End Synchronization.

Functional View Supplier
Firm Customer
Plan Schedule Execute
1 Internal Integ.
2 - External Collaboration
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Collaboration / Disintermediation

• Is collaboration likely?
• YES , strong likelihood at 3.93 out of 5
• Do we collaborate well today?
• Absolutely NOT!!
• Why collaborate?
• Driven by the competitiveness in the global
  market.
• Is disintermediation likely?
• YES, strong likelihood at 3.50 out of 5
• Easiest to disintermediate
• Cash Flow and Material Flow easiest
• Information and Knowledge Flows tougher

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Migration to Standard Processes

• Standards Lead to Less Need for Collaboration
• If know what others
• are doing, then no need
• to formally share
• knowledge.

Ref www.supply-chain.org
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An Irish Food Industry Example

• Dawn Fresh wishes to compete in the
  ready-to-eat market in Europe.
• Issue is Shelf Life for Fresh products.
• Approaches
• Extend shelf life thru new, vacuum processes.
• Extend shelf life thru supply network
  optimization.
• Value to this industry
• Perception this could have a major (gt10) market
  share impact.

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Gartner Predictions on Collaborative E-Commerce

• Through 2005, large companies will coerce
  trading partners into collaborative
  relationships those that are successful will
  also drive for win-win relationships. (p 0.8)
• Through 2004, standards, technology immaturity
  and trading partner trust issues will hamper the
  rapid adoption of SCM collaboration models. (p
  0.8)
• Through 2005, most collaboration will be one
  off interactions that are developed only with
  close trading partners. (p 0.7)
• Through 2005, enterprises that fail to engage
  trading partners in supply chain management
  implementation before deployment will spend 50
  more in rework and in engaging trading partners.
  (p 0.8)
• Through 2005, enterprises that apply a
  one-size-fits-all collaboration program will fail
  to gain a sustainable market advantage. (p 0.9)

Source Gartner
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What Game Are You Playing?
Mass Production

• Mass
• Customization
• Complexity
• Product Platforms
• Change Mgmt.
• Time Critical
• Knowledge Sensitive

Hi Lo
Product Volume
Almost All Focus Here Today
Job Shop
Niche Production
Lo
Hi
Product Mix
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We Will Need to Redirect to Compete Tomorrow
Mass Production

• Mass
• Customization
• Complexity
• Product Platforms
• Change Mgmt.
• Time Critical
• Knowledge Sensitive

Hi Lo
Product Volume
My Bias for Tomorrow
Job Shop
Niche Production
Lo
Hi
Product Mix
33
Mitigating the Bull Whip Effect
Source Dr. Hau Lee, Mgmt. Science, 1997.
34
Option 1 - Improve Demand Stream Visbility
Demand
Demand
Demand
Time
Time
Time
35
Option 2-Postpone the Customization
Demand
Demand
Demand
Time
Time
Time
Run Vanilla as long as possible - Allows
smoother flow. - Allows inventory mitigation to
be muted. - Requires products to be
redesigned Modular design Segregated
custom features.
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Highlights Key Collaboration Issues

• Poor Demand Stream Visibility - still 1 need.
• Poor Collaboration - capitalistic view limits
  willingness to share knowledge.
• Poor Agility - minimal ability to fundamentally
  shift production capabilities given fundamental
  market triggers.
• Poor Trigger Identification - minimal work in
  this area to date.

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Bottom Line

• Are Companies Willing to Collaborate?
• Executives say YES - But
• Somehow in a capitalistic society-
• We must understand how to make more money by
  sharing information / knowledge than by hording
  it!
• We are NOT there today!

38
Creation of a Structure

• Three tiered approach
• Internal Integration.
• External Collaboration.
• End-to-End Synchronization.

Functional View Supplier
Firm Customer
Plan Schedule Execute
1 Internal Integ.
3 Ultimately End - to - End Synchronization
2 - External Collaboration
39
How They Must Share Tomorrow

• Share Design Knowledge for New Product
  Development
• Share Forecast Knowledge for Order Fulfillment

This would have been worth 25 b Last Cycle.
ECM
Distributors
EMS
OEM
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Sophisticated Optimization Engines

• Two Leading Engine Providers
• One increasing market share
• The other struggling.
• ILOG - www.ilog.com
• Engine for SAP, Oracle, JDEdwards
• Up-and-coming engine provider.
• i2 - www.i2.com
• Struggling business base at this time.

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A Success Example

• Kenworth Truck Plant
• Phase I
• Began assembling 8 trucks per day.
• Leaned the Four Walls
• After 18 months hit 22 trucks per day!
• 275 Improvement
• Same workforce!

• Kenworth Truck Plant
• Phase II
• Started at 22 trucks per day.
• Leaned the Enterprise
• After another 18 months we were at 42 trucks per
  day!
• 191 Improvement
• Same workforce!

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Bottom Line

• Think 50
• 50 Cost Reduction
• 50 Time Reduction
• Now what is that strategically worth?
• If your company can and others cant?
• If your competition can and you cant?
• If we can create a Game Plan, would they listen?

43
Recommended Readings

• Bull Whip, Dr. Hau Lee, Management Science,
  1997.
• Mass Customization, Joe Pine, 1997.
• Clockspeed, Charles Fine, 1997.
• Lean Enterprise Self Assessment Tool, MIT, 2001.
• CIO Magazine, Nov. 15, 2002, Hersheys
  Bittersweet
• Gartner Group, Nov. 12, 2002, Knowledge
  Management
• Supply Chain Management Review
• Next Generation Manufacturing Project, TEAM,
  1997.
• Second Toyota Paradox, MIT Sloan Management
  Review, Spring 1995.