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Supply Chain Transformation

Supply Chain Strategy & Transformation

Supply chain management is a key discipline to balance supply and demand and provide differentiated customer service. Big value potentials can be captured in a seamless integration of all parts of the value chain, especially in multi-divisional corporations. Many companies in the industry have yet to capitalize on the competitive advantages of integrated supply chain management.

On the one side integrated companies often neglect potentials in their internal or intra divisional supply chains. Internal supplier-customer relationships are often treated stepmotherly leading to inefficiencies and increased inventories providing an opportunity for value generation. On the other side the industry sometimes lacks the application of supply chain concepts common to other industries.

Overall the industry typically has high inventories partially a result of information deficiencies between the different parties in the supply chain. A closer integration through state of the art demand planning and forecasting processes forms the basis for all value capture in the supply chain such as

StepChange has the transformational and strategic expertise to support clients in improving their supply chain capabilities. StepChange conducts supply chain balance assessments to quickly identify potentials. Our proven approach and experience can help you capture these potentials and develop a transformational plan to achieve supply chain excellence. Reference projects have helped clients define and transform their supply chain strategies to achieve increased performance at lower costs.

Supply Chain Planning

The market leaders are redesigning their planning processes and the market losers are seeing inventory levels rising and/or machine efficiencies falling due to shorter cycle times.

In today's commodity environment, low production costs are a prerequisite for survival. Real competitive advantage is obtained by offering shorter lead times, smaller order-size requirements and a high level of reliability. The key to market leadership lies in integrating all key functions; demand planning, raw material management, production planning & scheduling and logistics management.

Many companies have been reviewing traditional functions and silo approaches, but many of the projects have not delivered the anticipated success. In our view, successful planning projects require a holistic and integrated approach undertaken on three levels — where each level has a different planning time horizon and a different frequency of activity.

At a strategic level, reliable demand forecast is used to allocate products and markets to available capacity in order to balance demand & supply, optimize cost on a corporate level and provide input for the sourcing process. Lack of matching between statistical forecasts and sales outlook would be an example.

At a tactical level, orders are allocated to machines while taking the availability of raw material and inventory positions into account. Forecast based (= demand) capacity reservations are converted into customer-order-based machine orders (= supply). The aim is to balance demand & supply on an individual site and machine level to reduce time & material losses and to optimize inventory positions. The information also provides the basis for optimizing transport planning and raw material management. Most companies still rely excessively on manual processes for highly repetitive planning tasks, as well as manual interfaces across functions (e.g. planning vs. order management).

On an operational level, final production schedules are sequenced as transport capacity and raw material is replenished. The desire is to meet due date quotations and hence achieve high-delivery reliability and customer satisfaction. Lack of statistical attention to supply variability (downtime) is best practice, therefore only inventory (= material buffer) is incorporated to balance production efficiency (=output) and working capital optimization.

Supply Chain management is all about information transparency and integration. All excellent Supply Chains have two things in common: process integration at each planning level, and a high degree of automated system support. The value is created by connecting and aligning the key functions of sales, logistics, production and sourcing.

StepChange Consulting has the experience and resources to support your company in the development of the business case, solutions and implementation for Supply Chain transformation. Reference projects have helped clients define and transform their supply chain strategies to achieve increased performance at lower costs.

Supplier and Raw Material Management

Most companies have undergone several waves of procurement performance improvement. An overwhelming amount of publications and knowledge is available on the topic of supplier management, strategic sourcing and procurement transformation. That said, there is still (or again) value to be captured by linking the procurement functions closer to supply chain value potentials.

Improvement efforts in the past have focused on the optimization of the supplier structure and spend in each category. Once-off implementation is frequently considered concluded. A typical statement heard is "we have completed a lot of projects in procurement — there are no additional potentials to be gathered." Looking closer and re-applying the principles of strategic sourcing still provides value. The key levers for value capture are "price", "process" and "usage" in the total cost of ownership (TCO) triangle.

The price dimension is the natural focus area in procurement. Over the years price negotiations have become a lot more sophisticated on both sides of the table. Gains on the demand side now tend to be offset by surcharges for non-standard services on the supply side, and vice versa. Pricing instruments, especially in combination with volume consolidation and article consolidation, have generally been applied, although opportunities still exist with more sophisticated pricing approaches — e.g. index-related pricing, or application of financial instruments for commodity and raw materials with fluctuating market prices.

The "process" and "usage" dimensions often leave value uncaptured as procurement functions are not always organizationally integrated into supply chain management. Deriving value with these two dimensions requires a deep understanding of the supply chain & production processes and an openness to share information & knowledge across departments (areas).

Process opportunities still exist in the reduction of inventory levels, transportation costs and the administrative procurement process. Capturing these potentials is often difficult because procurement functions have gained more responsibilities but have frequently become so strategic that operational potentials are lost.

Material usage is still regarded as one of the least important levers by the procurement decision makers. The common assumption is that production owners know best what materials to use as raw materials. Looking for substitute materials with similar characteristics is mostly left to the production function. Yield is as important as a pure pricing consideration to capture value. The question needs to be asked, however, whether similar end product characteristics can be achieved with different raw material input, allowing for a broader range of materials to be taken into consideration in the procurement process.

Optimizing TCO is a multidimensional task that needs to be continuously monitored, also requiring the appropriate reporting mechanism.

The StepChange team is experienced in auditing your procurement function along all dimensions because of our deep cross-functional and industry specific experience. Based on our industry knowledge and operational experience we understand the supply chains of strategic materials and key spend categories to help transform the procurement approach and achieve sustainable savings of up to 5-15% of spend.

Inventory Reduction / Working Capital Improvement

Excess inventories can be found all along the industry supply chain pointing to imbalances between demand and supply and restricted visibility. The challenge on the one hand is to reduce the volume of inventory held by all partners in the supply chain, and on the other hand, to determine the right level for each inventory position.

The basics of supply chain management are not new, yet companies still perform quite differently against the target of inventory optimization. Missing inventory management methodologies, a lack of information, as well as dispersed and uncoordinated roles and responsibilities have a significant negative impact on inventory levels of raw material, semi-finished goods, finished goods and spare parts. Lack of coordination, information and trust between suppliers and customers lead to duplication of inventory positions in the chain.

Most companies have recognized the importance of this topic, yet employ different levels of sophistication within the industry with only a few companies achieving the highest level. The different levels can roughly be described as follows:

Clear definition of target inventory service levels, material segmentation, integration of demand forecasting data and the set-up of meaningful supply chain metrics are crucial elements to achieve "best in class" inventory management.

StepChange Consulting can support you in achieving the highest level of sophistication in the inventory management process.

Transportation Management and Sourcing

Transportation costs are a main factor influencing overall costs to serve ranging from 5-15% of product costs in the industry. Transportation is considered a topic many companies have optimized to such an extent that not much can be improved. The high degree of competition in the logistics industry, a continuous focus on transport rates and improved logistics KPIs are often cited as reasons for only having marginal improvement opportunities left. There are however a number of levers driving the total transportation and logistic costs. Therefore, a lot of opportunities exist to improve services and reduce costs in this area.

Beyond the common concentration on the price per tonnage kilometer, it is necessary to look at the whole process influencing total logistic costs. Significant improvements can be made in terms of total transportation costs if parameters, such as total transportation time, planning processes, storage requirements, transport networks and modes can be altered.

There are different operational, organizational and strategic opportunities to improve Logistics through:

This shows that there is still room for improvement within logistics. In today's competitive environment an integrated and holistically managed logistics process is the basis for increasing customer service levels, ensuring high delivery reliability and subsequently reducing transport costs.

Overall it is necessary to take a greenfield approach to transportation and logistics from time to time — especially with the ongoing consolidation in the logistics industry and new and more consistent availability of global services. It is necessary to consider all parameters that drive total transportation requirements and constraints. Releasing some of these constraints will provide a broader basis for optimization and endorse long term market success.

StepChange has vast experience in defining logistics strategies, redesigning transportation management processes and structures and sourcing the appropriate logistics partners. The results have yielded overall logistics savings of up to 20%.

Logistics Structures - Distribution Network Optimization

Customer demand for ever higher service levels, such as shorter cycle times, smaller order sizes and increasing product ranges, has led to spiraling complexity in the distribution networks over the past years. Warehouses, distribution centers and transport routes have been established to satisfy the growing customer requirements.

Traditional wisdom has been to locate storage facilities near each cluster of important customers in order to provide the agreed service levels. Over time, this has resulted in a proliferation of storage facilities and excess inventory. Company distribution networks are often the result of historic growth driven by local sites or even by individual customer service levels.

The missing holistic view of the company's distribution network creates redundancies and inefficiencies. Isolated optimization efforts to improve transport routes, increase truck utilizations and minimize inventory levels on a single site basis does not necessarily fit with an optimized warehousing and distribution network for the whole corporation. Individually optimized distribution networks can lead to higher logistics costs for the whole system. Site or divisionally optimized networks typically carry higher inventory levels than networks optimized on a company level.

A review of the existing distribution network should be based on guaranteed service levels and the total demand and supply information for the whole corporation. A comprehensive view on the Supply Chain and total Supply Chain costs per customer is necessary to align product portfolio, product allocation, selection of transport means, and route planning to the appropriate distribution type (e.g. warehouses, cross-docking locations, overnight deliveries, etc.).

Optimization on a group level will result in reduced working capital through consolidated inventories, lower transport rates through consolidation of spend, increased truck utilization enabled by combined shipments, and improved reliability and delivery accuracy perceived as increased customer-service levels.

Significant changes in the warehousing and distribution landscape typically impact organizational and performance measurement areas as most decision makers are acting from a local perspective and are measured against local performance and optimization. An alignment of the performance system is required in order to achieve the desired benefit.

StepChange has extensive experience in Logistics strategy definition and transport sourcing. We have helped companies redefine their warehouse network structure and source the best fitting logistics partners. Improvements have yielded overall logistics savings of up to 20%.