1. Thinking About Financial Management in Supply Chain Management Presentation to: American Society of Military Comptrollers Mini-Professional Development Institute Washington, DC 29 March 2005
Robert E. Mansfield, Jr., Brig Gen (Ret), USAF
Supply Chain Engineering
Altarum Institute
Ann Arbor, MI

2. My Background Retired Brigadier General, USAF (Jun ’03)
34 yrs. In Logistics (Supply, Plans, Transportation)
Assignments:
AF Logistics Transformation and Supply Chain Integration
AF Director of Supply
Commander, Defense Reutilization and Marketing Service
Director, Distribution Warner Robins ALC
Chief, USEUCOM Joint Movement Center (DS/DS, etc.)
Supply Squadron Commander, Keesler AFB, MS
Education:
BSBA, University of Arizona
MS, Acq Log Mgmt, AF Institute of Technology
Program Managers’ Course
Air War College
Combined Air Warfare Course
Recently, Practice Area Leader, Supply Chain Engineering
Altarum Institute, 50+ yr old Non-profit for Research and Innovation, Ann Arbor, MI USA

3. Purpose Give an Appreciation of the Financial Imperatives in
What is a supply chain and why do we care about it?
How does a supply chain function as a system?
Why is an integrated supply chain important?
How can we address the system nature of the problems inherent in a supply chain?
What’s financial management’s role in supply chain management?
Give an Appreciation of the Financial Imperatives in
Supply Chain Management

4. Why do we care? Most of any product is made by the supply chain
Boeing makes only 24% of F/A-18
Boeing makes only 15% of its missiles
Lower tiers in the supply chain tend to be less sophisticated than Primes
Less costly due to lower wage scales and increased specialization, but
Less use of advanced technology
Less capable of using advanced business processes
Supply chains continue to become a more global network of members
Trading partners operate in multiple networks
Supply chains are systems that have independent properties
Supply chains are complex, dynamic systems
Every investment and operational decision cause favorable and unfavorable effects to ripple through the network
Supply chain improvements can have unintended consequences
Lean practices can reduce waste, but increase the brittleness of the supply chain to surge and disruption
Cost savings to minimize inventory can be offset by the costs to finance the remaining inventory (credit risk)

5. Multiple Independent Frims
What do those suppliers do?
They make:
Engines
Avionics
Canopy
Landing gear
Control surfaces
Radar
Tail
. . . and more . . .
The prime mostly designs and assembles the system
Most major system suppliers operate the same way
Increasingly, the prime (and its supply chain) will be responsible for life cycle support

6. Core Competencies Are Important
Why doesn’t the Prime just make everything itself?
Suppliers are specialists
They’re better at knowing and designing the product
They’re more efficient at making it
Primes are specialists at integrating the whole system
Core Competence – something you are very very good at that distinguishes you from your competition

7. Simple Supply Chain Definition
The flow of product, information, and cash from your supplier’s supplier to your customer’s customer (and back)
A Management Concept for Managing the Flows
& Processes of the Supply Chain Network

8. Integrated Supply Chain Management
Plan
Deliver
Source
Maint.
Deliver
Deliver
Source
Make
Source
Make
Deliver
Source
Suppliers’ Supplier
Customer’s Customer
Supplier
AF Logistics Processes
Customer
RETURN
AF SUPPLY CHAIN
Distributor
Manufacturer/
Vendor
Inventory Control Point,
Maintenance Facility
Distribution Depot
Retail Supply,
Maintenance,
In-theater dist
Warfighter
& Warfighter’s
Weapon Systems
The definition for Supply Chain Management is quoted from Council of Logistics Management 22 Mar 99.
The depiction of the supply chain based on the Supply Chain Council definition
Note the recent addition to the model ‘return’. This reflects the ‘reverse logistics’ aspect that characterizes military logistics. The slide also shows that the commercial definition of supply chain management is also applicable to the DoD and the AF.
An integrated process that begins with planning the acquisition of customer-driven requirements for material and services and ends with the delivery of material to the operational customer, including the material returns segment of the process and the flow of required information in both directions among suppliers, logistics managers, and customers.
Source: DoD Supply Chain Integration Guide, DUSD/L&MR (SCI), LMI 2000

9. Supply Chain Integration
External
Suppliers
Contract repair
OEMs
Planning and Policy HQ
Pentagon
OEM Supplier
Distributors
Base Supply
DLA
3PL
ALC/OEM/CLS Provider
Inventory Management
Material Planning
Procurement
Transportation
Providers
Commercial
Military
Worldwide Customers
Bases
Forward operating locations
Organic Maintenance Provider
Depots
Air Logistics Centers
Supply Chain Community Integrated Information Flow
Planning
Forecasting
Inventory Mgt
Order Mgt
Repair Status
R&M Data
Tech Data
PDM
Workflow Mgt
Systems Engineering
Shipping Status
Program Mgt
Document Mgt
Kit Management
Business Mgt
Configuration Mgt
Risk Mgt
Warranty
Administration
Business Links
The picture depicts and end state that endeavors to promote greater integration across the supply chain
KPMG Consulting has advised AFMC that this is where the Command should strive to be in less than five years.
This “end state” was developed through extensive interviews with senior military and civilian AFMC leaders both past and present.
AFMC is moving forward with Supply Chain Management to reach this end state.
AFMC is instutionalizing Supply Chain Management within the command.
A Supply Chain Management Master Plan and Change Management Plan have been established.
Customer oriented metrics such as Backorders, Issue Effectiveness, Stockage Effectiveness, MICAP hours, and MICAP incidents, are now being used.
Supply Chain Managers are now an accountable position within the AFMC. Several seminars and conferences on Supply Chain Management have been held. I
nitiatives such as the Constraints Analysis Program identified areas for improvement in the AFMC Supply Chain .
This “end state” is where AFMC must be if it wants to remain an effective and efficient supplier of support to the warfighter. This “end state” will not be easy to achieve. It requires that the principles of Supply Chain Management be fully implemented into AFMC processes.

10. Achieving an Integrated Supply Chain
Stage One: Functional Independence
Sales
Suppliers
Purchasing
Material
Control
Production
Distribution
Customers
Stage Two: Functional Integration
Suppliers
Materials
Management
Manufacturing
management
Distribution
Customers
Stage Three: Internal Integration
Suppliers
The 10 Spares Campaign initiatives are all part of an effort that endeavors to promote greater integration across the supply chain.
As depicted here, there are four stages of supply chain integration…
Full Enterprise integration is the key to achieving the desired end state
In that mature state; materiel support requirements, funding support, supplier information, customer requirements, and corporate knowledge will all flow transparently throughout the supply chain
Materials
Management
Manufacturing
management
Customers
Distribution
Stage Four: External Integration
Suppliers
Internal Supply
Chain
Customers
Weapon System Availability
Material
Information
Money
Flows
Source: Adapted from Professor Martin Christopher, 1998

11. Supply Chain Integration Imperative
“… reengineering individual processes is not enough to secure a competitive edge in an environment characterized by constant change, globalization, and intense competitive pressure. What is needed is effective coordination of all parties involved in the supply chain for product or service delivered; … a framework for designing and implementing effective supply chain management practices, across multiple locations and companies.”
- Izak Duenyas
Professor of Operations Management
University of Michigan
DoD’s Product/Service is Weapon System Support

12. End Products and Customers are Different
Defense Supply Chains Are Different
End Products and Customers are Different

13. Thinking About Ultimate Military Customer Service
“Customer – a person or organization who receives a good, service, or information” - APICS Dictionary, 10th ed, 2002
“The only entity that puts money into a supply chain is the end customer. Until the end customer decides to buy a product, the rest of us are shuffling his money back and forth among supply chain members” – Handfield & Nichols, Supply Chain Redesign, 2002
But “who” is the customer of the DoD Supply Chain?

14. The Customer of the DoD Supply Chain Is…..
ENEMY

15. What makes a supply chain, as opposed to a bunch of suppliers?
Supply Chains
What makes a supply chain, as opposed to a bunch of suppliers?
Decomposition of processes in a hierarchical chain
Could be a complex network with any individual supplier taking multiple roles.

16. Plan Source Make Deliver Return
SCOR Level 2
Plan
P1 Plan Supply Chain
P2 Plan Source
P3 Plan Make
P4 Plan Deliver
P5 Plan Return
Source
Make
Deliver
Suppliers
S1 Source Stock Products
M1 Make-to-Stock
D1 Deliver Stocked Products
Customers
S2 Source MTO Products
M2 Make-to-Order
D2 Deliver MTO Products
S3 Source ETO Products
M3 Engineer-to-Order
D3 Deliver ETO Products
Source Return
Deliver Return
R1 Defective Product
R1 Defective Product
R2 MRO Product
R2 MRO Product
R2 Excess Product
R2 Excess Product
Enable
Plan Source Make Deliver Return
Establish and Manage Rules
Assess Performance
Manage Data
Manage Inventory
Manage Capital Assets
Manage Transportation
Manage Supply Chain Configuration
Manage Regulatory Compliance
Process Specific Elements, Aligns SC/Financials, Supplier Agreements

17. The Problem with Supply Chains
What might make it more costly and more difficult to do things in a supply chain as compared to inside a single organization?
Transaction Costs
It costs more to do almost anything across an organizational boundary
Distance almost always increase costs

18. Four Supply Chain Cost Drivers
Transaction costs have drivers

19. Supply Chain Transactions
Moving material and information is more costly and time consuming in a supply chain
The fact of having to pay someone for their product leads to enormous costs
The sales, purchasing, and payment processes do not exist for internal transactions
Perceived risk is higher
Commitment is lower
Moving materials
Physical distance is usually greater
Trust is lower, so handoff requires greater level of inspection
Exchanging information is difficult and inaccurate
Dissimilar systems, processes
Different cultures, expectations, jargon

20. Supply Chain Processes
Processes affect transaction costs
e.g., purchasing process
What information is required when submitting a bid?
Do terms and conditions change for every RFQ?
Important processes include sales, purchasing, engineering, receiving, supplier development, ++?

21. Supply Chain Relationships
Relationships affect processes
If I trust you, I might have a process with no incoming inspection
If I trust you, I might have very few terms and conditions that have to be written down
If I have a longstanding relationship with you, I may not go out for other bids

22. System Effects
The system as a whole behaves in ways that are not easily predicted from the way the parts of the system behave
E.g., demand amplification in the supply chain - “bullwhip effect”
A supply chain is not just a bunch of suppliers – it has its own behavior

23. Implications of Cost Drivers
Increasing Difficulty

24. Some Examples
To show how the extended supply chain is often the source (and the solution) of many cost and cycle time problems
To show some of the types of interventions that can make significant improvements in the operation of a supply chain network

25. Manufacturing Assembly Pilot (MAP)
GENERAL
MOTORS
FORD
CHRYSLER
Johnson Controls
Atwood Automotive
Lear Favesa
Douglas & Lomason
R. R. Spring
Rockford Spring
Collins & Aikman
Milliken & Company
Specialty Screw
Dudek & Bock Spring
Textileather
Technotrim
Canadian Fab
Source: Automotive Industry Action Group

26. MAP (2)
Purpose
Reduce transaction costs in the supply chain through the use of EDI (electronic data interchange)
Reduce cycle time by faster flow of information
Seats are delivered JIT to assembly plants – 2-4 hours notice, depending on location
Assembly plant sends weekly, monthly, 5 month forecasts
Discovered that in order to take advantage of EDI, had to change business processes to take advantage, e.g.:
Johnson Controls sent forecasts weekly to its suppliers on Wednesday
Atwood sent forecasts to its suppliers on Tuesdays
This added a full week to the cycle time for Atwood’s parts suppliers

27. How the Supply Chain Affects Cycle Time
Coordination reduces cycle time:
Seat Hardware Supply Chain
Source: Automotive Industry Action Group

28. Extrapolating the Results: Total Anticipated Savings
MAP Project: Industry-wide Savings
Extrapolating the Results: Total Anticipated Savings
Low
Expected
Best
Total Anticipated
Savings:
$396M
$1,068M
$1,739M
Cost Savings Per Car :
$26.42
$71.17
$115.92
Talking Points
Savings are adjusted to a per car rate on this slide.
Support Information
To arrive at the per car savings, the total industry-wide savings was divided by 15 million, approximately the amount of cars and light trucks that were produced domestically in 1995.

29. Supply Chain Value Stream Management Project
Worked with Boeing F/A-18 program to reduce cost and cycle time in the supply chain
Focused on Nose Landing Gear supply chain as a system
Conducted analysis of the supply chain as a whole
Visited each company with team from Prime, 1st tier system supplier, & Altarum
Analyzed each company individually and the supply chain as a whole
Worked on opportunities for improvement both with individual suppliers and with groups of suppliers

30. Boeing F/A-18E/F Lean Supply Chain Project
APPROACH
Develop Lean analysis methods that can be applied to aerospace value chains
Conduct value chain analysis for F/A 18 landing gear
Implement changes
Measure impact
Prepare Guidebook
LEVERAGED EFFORTS
$320K cost share
Working with Pathways for deployment and tech transfer
BENEFITS
Reduce landing gear cost by 10% over 3 years
Reduce landing gear lead time by 25%+
F/A-18 E/F Nose Landing Gear

31. Nose Landing Gear Assemblies
Retraction Actuator
Shock Strut
Drag Brace

32. Lead Time Reduction (sum)
Projected sum of lead time for studied parts based on plans.
Overall delivery time has reached 48 week goal (driven by critical path)
Lead time reductions also lead to cost and quality improvements
Projected lead time is based on full implementation of improvement opportunities
Lead time is not quoted lead time but rather value stream lead time within each organization

33. Supply Chain Inventory Reduction (sum)
Supply chain inventory is the number of pieces being produced (batch size) within each organization or the number of pieces as planned inventory
Fewer $$’s improves supply chain cash flow and enables cost reductions to be realized without impacting margins

34. The Role of Finance in the Supply Chain
Traditionally SCM focuses on eliminating waste in logistics functions- -reduce inventory (mass) and cycle time (velocity)
The supply chain is more logistics
Essential to the supply chain is cash: cash is turned into goods that are sold to generate more cash
Information sharing and coordination is important to both material movement and finance
Levels, locations and status (WIP) of inventory
Payment terms
Electronic Payment
Currency conversion (Cash flow is international)
Integrated financial measures for the supply chain network
Return on Investment (ROI)?
Return on Invested Capital (ROIC)?
Total Cost of Ownership (TOC)?
Translating Supply Chain Improvements into Financial Terms

35. Short Bibliography – Finance & The Supply Chain
Chopra, Sunil, Supply Chain Management: Strategy, Planning and Operation, Prentice Hall, Upper Saddle River, NJ, 2001.
Cooper, Robin and Regine Slagmulder, Supply Chain Development for the Lean Enterprise: Interorganizational Cost Management, Productive Press, Portland, OR, 1999.
Handfield, Robert B. and Ernest L. Nichols, Jr., Supply Chain Redesign: Transforming Supply Chains into Integrated Value Systems, Prentice Hall, Upper Saddle River, NJ, 2002.
Seuring, Stefan, and Maria Goldbach, eds., Cost Management in Supply Chains, Physica-Verlag, Heidelberg, GE, 2002.
Walker, William T., Supply Chain Architecture: Blue Print for Networking the Flow of Material, Information and Cash, CRC Press, Baca Raton, FL, 2005.