Supply Chain Strategies to Create Value Presented by: Harold Anagnos January 2006 Presented by: Harold Anagnos January 2006 Presented to:

Outline Create Supply Chain Value Create Value Through Speed Create Value By Aggregating Tailoring Value Creation

Creating Supply Chain Value Surplus = customer value - cost of production and delivery to customer’s door The Challenge How to manage chain to grow surplus Surplus = customer value - cost of production and delivery to customer’s door The Challenge How to manage chain to grow surplus

Where You Find Value in the Chain Overstocking: Amount available in excess of demand (liquidate, make obsolete, hold) Understocking: Amount at hand not enough to meet demand (lost future and present sales, lost margins) = Supply Demand

Key to Matching Supply & Demand When would you place your bet? A B C D A.A month before horse race? B.Monday before horse race? C.Morning before horse race? D.Lead horse an inch from finish line?

Push / Pull Version of Chain Push ProcessPull Process Procurement, Manufacturing and Replenishment Cycle Customer Order Cycle Customer Order Arrives

Demand, Uncertainty & Forecasting  Forecasts are usually wrong  Good forecasts include measure of error in forecasting (like standard deviation)  Forecast horizon must be at least for as long as lead time. The longer the horizon, the less accurate the forecast.  Aggregate forecasts are more accurate than details ones

Create Value With Speed Shorten time of INFORMATION and PHYSICAL flows material 1.Reduce replacement lead times 2.Increase re-order frequency 3.Reduce supply uncertainty 4.Reduce INFORMATION need to capture and fulfill demand.

Structure of Supplier Portfolio Tailoring to Quick Response!! STRATEGY Volume based dual sources Product based dual sources Models family of products dual source PRIMARY SOURCE Fluctuations Unpredictable products, small batches Newer families SECONDARY SOURCE Stable demand Production of large batches Older, stable ones

Creating Value Through Aggregation What are Pro’s and Con’s of Two Systems? SYSTEM A (De-Centralized) SYSTEM B (Centralized)

Value by Aggregation at  Geographic Aggregation:One location in USA; Three world-wide  SKU Aggregation:Postponement via component commonality  Geographic Aggregation:One location in USA; Three world-wide  SKU Aggregation:Postponement via component commonality Manufacturing of Common Components Final Assembly and Delivery Customer Calls Order

Value Creation Through Tailoring Aggregation Think of the supply chain of the insurance industry - matching premium collections to paying claims. (reserves to payouts) Tailor the allocation of risk to various players based on capabilities Speed and aggregation are reserves to be used in case of uncertainty Tailor the use of these reserves

How Benetton Tailors Aggregations with Risk Sharing Thread Cut Cloth/FinishSale No postponement. Cheap unit cost. Postponement. Unit cost more expensive. Raw Materials Hold Materials

Order quantities by color:  100R  100B  100G Order quantities by color:  100R  100B  100G Ordering Recommendations to Supply Locations 7 Months1-3 Months 2 Weeks In AdvanceIn AdvanceIn Advance 7 Months1-3 Months 2 Weeks In AdvanceIn AdvanceIn Advance Up to 30% color adjustment (no change in total):  70R  70B  160G Up to 30% color adjustment (no change in total):  70R  70B  160G Up to 10% in any color  Holding colored thread, cheaper but have long lead times  Safety stock held and manufactured on demand  Only flexible capacity is owned by Benetton Up to 10% in any color  Holding colored thread, cheaper but have long lead times  Safety stock held and manufactured on demand  Only flexible capacity is owned by Benetton