Intelligent Supply Chain Management Strategic Supply Chain Management i2 U Intelligent Supply Chain Management Course Module Five: Strategic Supply Chain Management

Supply Chain Management Key Processes Fully Integrated top-down directions Fully Integrated bottom-up feed back _ + Strategic Supply Chain Planning Sales & Operations Planning Number of decisions Specificities by industries Impact of decisions Length of Planning horizon Master Supply Planning Inventory Planning Demand Planning Production Distribution Procurement Transportation We will now begin our journey into the pyramid of Supply Chain Management processes, by addressing the very top of the pyramid, that is to say the Strategic Supply Chain Planning process. Supplier Scheduling Production Scheduling Transportation Scheduling Inventory Deployment Demand Fulfillment _ + Reaction to changing supply conditions Supply Chain Execution Monitoring

After Completing This Module, You Are Expected to: Understand the key business objectives of the Strategic SCM process Identify decisions that are typically made in the Strategic SCM process Identify Strategic SCM key enablers and their resulting business value Identify Strategic SCM excellence criteria

Strategic Supply Chain Planning Process Positioning operational tactical strategic scheduling buy make move store The Strategic Supply Chain Planning process is positioned at the very end of the planning funnel because it deals exclusively with the long-term horizon. Its focus is not to manage supply chain operations on a daily, weekly or monthly basis, but rather to question whether a company is operating with the right physical supply chain and is servicing the right customers with the right products. sell hours days weeks months year +

Types of Strategic Supply Chain Planning Decisions Opening of Plants & Logistic facilities Plant & Distribution Network Rationalization Merged Companies - Combining Networks Service Territory Assignment Distribution Network Replenishment Design Strategic Modal Selection (based on Service Requirements, Cost) Transportation hubs creation and location Capacity Expansion/Contraction (labor, equipment, building) Supplier Rationalization (improve inbound efficiencies) Postponement Strategy Evaluation New Product Introduction New Markets/Customer Evaluation Strategic Marketing and Product Pricing Decisions Facility Missions As such, it focuses on answering questions like the following: Should the company open new plants or logistics facilities to support a new demand stream? How can a plant and distribution network be rationalized when two companies have merged? How many distribution centers does the company need to have and where should they be optimally located to provide the most cost effectiveness in terms of transportation costs, inventory carrying costs and production costs? How does the company assign service territories if it has different distribution centers; how many transportation hubs - e.g., cross-docking facilities – does the company need and where should they be located? How does the company make decisions regarding capacity expansion or contraction in terms of labor, equipment, building, etc.; what is the impact of changing the mission of facilities? To make these types of decisions, companies must be able to perform simulations that can assess the overall profitability or cost effectiveness of specific scenarios. These simulations are generally performed at an aggregated level; therefore the planning data that are extracted from the legacy systems to support the tactical and operational Supply Chain Management processes are typically NOT used as input for the Strategic Supply Chain Planning process. Consequently, simulations do not require much integration effort, because the data on which they are based is limited in scope and are generally available in stand alone spreadsheets. The key enabler for optimizing this process is a simulation tool that supports fast and accurate financial simulations applied to a supply chain environment.

Components of a Strategic Supply Chain Management Solution Modeling capabilities to represent Supply Chain scenarios This slide shows on the left hand side a library of modeling capabilities, which is a central capability that simulation tools need to have. These modeling capabilities must allow geographic positioning of facilities, products, and processes, definition of the transportation costs between two supply chain entities, as well as the production costs and the inventory carrying costs. In addition to this, the simulation tool must also be capable of considering fixed costs, like the cost of opening a new distribution center or shutting down a plant. The ability to consider fixed cost in the financial optimization is made possible by the combination of linear programming (LP) and mixed integer linear programming (MILP) solvers. (These solvers are discussed in more details in the Sales & Operations Planning module). With such a simulation tool, a company can create theoretical Supply Chains of the future by positioning Supply Chain units in the geographical space and assess the overall resulting profitability of serving a market demand by running the financial optimization solver.

Components of a Strategic Supply Chain Management Solution Graphical view of resulting product flows As a result of a financial optimization, it is possible to identify and visualize the product flows that are analyzed as being the most cost effective. This graphical representation facilitates the decision making process on how to link demand regions to specific supply sources.

Components of a Strategic Supply Chain Management Solution Total costs and profits for each scenario evaluated But the most important output of such a financial optimization is a recap of the profits and costs related to a specific Supply Chain scenario. By comparing several simulations of this type, companies are able to identify the most profitable scenario. Needless to say, this type of simulations almost never leads to immediate action, because the decisions recommended by the financial optimization have in most cases significant organizational implications.

Inventory Strategies Determination of where inventories must be positioned within the Supply Chain, by identifying an optimal trade off between : impact on the cost (higher cost for carrying finished goods) degree of flexibility (higher flexibility in transforming raw material into alternate finished goods) level of responsiveness (higher responsiveness by keeping finished goods) Another domain of Strategic Supply Chain Management is the choice of inventory strategies, which define how a company will operate its Supply Chain -- whether it will favor a build-to-order model, an assemble-to-order model, or a make-to-stock model. If it decides on a make-to-stock model, it must also decide the inventory deployment strategy -- whether the inventories will be kept at a single central location or kept in regional warehouses, or both. Inventory strategies obviously depend on a large number of factors, and will never directly be the result of a recommendation made by a decision support system. Nonetheless, simulation tools specifically devoted to this goal can prove important to help fine tune the best inventory strategy, by helping companies reach an optimal trade off between three conflicting objectives: The impact on the cost of the selected inventory strategy, (obviously the highest cost is a a make-to-stock strategy). The degree of flexibility (the highest flexibility is offered by a build-to-order strategy because it doesn’t anticipate the usage of raw materials in specific end products). The level of responsiveness requested by the marketplace (obviously the highest degree is obtained by keeping finished goods as close as possible to the customers).

Strategic Supply Chain Planning Key Enablers and Related Business Benefits LP & MILP solvers for least cost solution Easy simulation capabilities on Supply Chain physical modification Easy modeling environment Global costs related to Supply Chain structure This slide is meant to be a synthesis of the module. It summarizes the key enablers required to fully optimize the Strategic Supply Chain Planning process and the related business benefits. The first key enabler is to use a simulation tool that integrates both LP and MILP solvers to generate a least cost / maximum profitability scenario while adequately considering fixed costs in the financial optimization. The second key enabler relates to the ability to perform easy simulations. This is essential, because it is often necessary to quickly evaluate different scenarios to be submitted to senior executives for decision. The resulting business benefit is on the global costs related to the supply chain structure and its overall profitability. In short, this process generates few decisions but has maximum impact.

Strategic Supply Chain Management Excellence Criteria Every time significant changes impact long-term demand or supply (mergers, divestitures, new markets) the company uses appropriate simulation technology to review its physical Supply Chain network. Such simulations enable comparisons among different scenarios and identify the least cost/highest margin solution. Supply Chain production and distribution strategies (e.g., make-to-stock, assemble-to-order, centralized or decentralized inventories) are defined considering customers’ delivery lead time expectations, together with costs that would be incurred in maintaining downstream inventories. This “meeting point” with the customer is actively being pushed upstream (e.g., moving from make-to-stock toward assemble or make-to-order) through improvements in procurement, manufacturing and distribution velocity, as well as in product and manufacturing process redesign. The demand inputs used for these simulations come directly from the strategic plan The constraints and costs used during the simulation are accurate and exhaustive The Supply Chain models used for evaluating different scenarios can be built quickly The profit maximization calculations adequately consider variable and fixed costs To wrap up this module, let us review the list of excellence criteria. The first criterion highlights the necessity to perform a Strategic Supply Chain planning process every time a significant change impacts long-term demand or supply. The second criterion stresses the need for companies to aggressively look for ways to improve the velocity of their Supply Chain, in order to operate it as close as possible of a build-to-order model, because of the major improvements it provides in terms of flexibility and inventory costs reduction. The third criterion focuses on the necessity to use demand inputs for the simulation that come directly from the business plan of the company. The fourth criterion emphasizes the need to use accurate and exhaustive constraints and costs for the simulation process. Finally, the last two criterion do not require any additional comments as they have been thoroughly analyzed previously.