Supply Chain Management

A Strategic Lever for Business Success

McKinsey's Supply Chain Management Practice

Five processes jointly determine supply chain excellence

Order and demand management Ordering policies Sales volume planning Order generation and fulfillment

Production management Production planning Capacity allocation

Production Sales

Supply management Supplier management Inbound flow management

Distribution management Distribution network Warehousing Transportation

Service level management Customer and service level segmentation Service level performance measurement

Source: McKinsey

Supply chain management presents huge challenges

Production management Late and constant changes in schedule (externally/internally triggered) Low delivery accuracy from factories Order and demand management No clear delivery date given to customers No real order tracking Very low forecasting accuracy

Production Sales

Supply management Suboptimal supplier interaction due to instable production

Distribution management High inventory levels, but nevertheless low service levels Costly distribution network

Service level management Very low service level No idea of future breakpoints/expectations of customers

Source: McKinsey

Optimized supply chain management presents huge opportunities

Production management 4% lower production costs

Order and demand management 65% reduction in throughput time

Production Sales

Supply management No stock-outs Distribution management 40% lower inventory

Service level management > 5% additional sales

Source: McKinsey

The impact of SCM on cost is greater than normally perceived

Percentage of sales Traditionally measured costs Known, but not properly measured Known, but not seen as logistics costs Neither known nor measured

EXAMPLE

Also driven by supply chain 40-60

10 - 30 3 - 10 1-6 2-8 3-7 Warehousing, handling, and transportation 1-2 Inventorycarrying costs Store handling Obsolescence/ markdowns Lost margin on missed sales Total supply chain costs Production/ purchasing costs

Source: McKinsey

Four imperatives for successful SCM

Clear role and ownership structure "Do it right or don't do it at all"

Seamless integration of all processes "All together now"

Targeted use of modern technology "Do IT smart"

Continuous striving for high performance "The sky is the limit"

Use SCM strengths

as a growth lever if you are superior

Integration of
operational processes within your company

Full transparency
and integration

Steady increase
in performance, aspiration level

Outsource
processes if you are only mediocre

Low transaction
costs along all processes

New breakpoints
evolving

Virtual management of end-to-end SCM including outside partners

However, never
lose control over your key processes within your industry

Focus on
immediate business need

New business
models demand dramatic change

Source: McKinsey

The focus of the SCM architecture depends on your company's role along the value chain
Product development Manufacturing Procurement, Sales Examples

"Industry integrator"

Automotive

"Brand player"

Sports equipment Fashion

"Contract manufacturer"

PC assemblers Manufacturing
subcontractors Maintenance service providers
6

"Process specialist"

Source: McKinsey

Understand the value chain's critical success factors end-to-end and your role within the chain

Supplier(s) Customers of your customers Customer(s)

Company

Which player is driving the overall chain? What is your role and advantage? What does it mean for your SCM?
Source: McKinsey 7

Outsourcing of complete processes to experts

Originating channel Call center Data center

EXAMPLE

Order processing Customer analysis Inventory analysis

Fleet management Returns/collection Reverse logistics Sorting

On-line

ERP connection

Warehouse/processing center
Local delivery

Order receipt Customer management Call center management Track and trace
Transport Distribution

Warehouse operations Inventory management Picking and packing

Source: McKinsey

Four imperatives for successful SCM

Clear role and ownership structure "Do it right or don't do it at all"

Seamless integration of all processes "All together now"

Targeted use of modern technology "Do IT smart"

Continuous striving for high performance "The sky is the limit"

Use SCM strengths

as a growth lever if you are superior

Integration of
operational processes within your company

Full transparency
and integration

Steady increase
in performance, aspiration level

Low transaction
costs along all processes

Outsource
processes if you are only mediocre

New breakpoints
evolving

Virtual management of end-toend SCM including outside partners

Focus on
immediate business need

New business
models demand dramatic change

However, never
lose control over your key processes within your industry

Source: McKinsey

Thanks to SCM innovations, companies such as Dell have managed to reinvent their industry Superior customer relationships
Customer segmentation by size/region/ need (key buying factors) Extensive customer knowledge building

Make-to-order production
Lead-time-based manufacturing model configured for order-specific production Flexible manufacturing units No obsolescence costs

Virtual integration of suppliers

Few selected partners for long-term relationships Real-time information sharing (forecasts, production planning) On-line inventory management
Source: Dell press releases, analyst reports 10

SCM and customer interaction consider the possibilities for different value offerings to customers
Customer(s) Demand planning Inventory mgmt Purchasing Your company Order penetration point Product delivery from stock

Value offering point Demand planning Inventory mgmt

Distribution

Manufacturing

Sourcing

Order penetration point Call-off Distribution Manufacturing Vendor-managed inventory Sourcing

Value offering point Demand planning Inventory mgmt

Order penetration point Call-off Distribution Manufacturing Direct customer response/ make-to-order Sourcing
11

Value offering point

Source: McKinsey

SCM and production timeline management has a major impact on production costs
Order checking Planning production sequence Frozen zone

EXAMPLE ASSEMBLY

Time line management

Production freeze period Optimal sequence Minimal cost Good due date performance

30

10

3-5

Time Days

Check feasibility of orders based on clear rules between Sales and Production

Introduce strict
filters to prevent unclear orders

No changes,
fixed sequence

Optimal
processing of production orders

Specify final
product mix

Production
sequence is "frozen"

Specify
volumes
Source: McKinsey 12

Four imperatives for successful SCM

Clear role and ownership structure "Do it right or don't do it at all"

Seamless integration of all processes "All together now"

Targeted use of modern technology "Do IT smart"

Continuous striving for high performance "The sky is the limit"

Use SCM strengths

as a growth lever if you are superior

Integration of
operational processes within your company

Full transparency
and integration

Steady increase
in performance, aspiration level

Low transaction
costs along all processes

Outsource
processes if you are only mediocre

New breakpoints
evolving

Virtual management of end-to-end SCM including outside partners

Focus on
immediate business need

New business
models demand dramatic change

However, never
lose control over your key processes within your industry

Source: McKinsey

13

Translate technologies into transformation levers to exploit potential

Advanced IT technologies Communication and access Cheap, standardized communications platform: Internet Off-the-shelf mobile communications Automated material identification Standardized barcodes Remotely readable transponders Advances in optimization algorithms Constraint capacity planning Hybrid simulation and optimization approaches

Supply chain improvement levers

Automated transactions Product data Delivery notes Orders/purchasing Invoices orders Transparency of current and future supply chain status Demand/orders Material flow Customer order Resources confirmations Automated planning and optimization Feasible plans Optimized plans

Source: McKinsey

14

E-technologies have a major impact on SCM, especially for customer and supplier interaction

SCM challenges

SCM challenges

Globalization
of supplier network

Capture customer
profiles for forecasting and segmentation
ProDemand/ order mgmt.

Changes in
Supply mgmt.

Smaller batch
sizes

batch size, duction lead times, mgmt. and nature of contracts

e-purchasing

More make-toorder
Distribution mgmt.

Improve

Service level mgmt.

Coordination
of supply chain information transfer

e-sales quality of information flow to enable inventory tracking and real-time reporting of order status

Source: McKinsey

15

On-line ordering improving connectivity with low transaction costs

From
Customers

EXAMPLE ASSEMBLY

To

Customers

Subsidiaries

Subsidiaries

Phone

Fax Individual IT Plant/ warehouse

On-line ordering along standard format Product code Quantities Delivery week

Plant/ warehouse

Long order process

Data inconsistency No strict time line Expensive order administration process Irregular input for production
Source: McKinsey

On-line order status tracking

Supply availability Shipment status Regular weekly planning cycle Four times faster order confirmation Inventory reduction of 40% due to better forecasting
16

The traditional approach and thinking regarding IT tools in SCM does not necessarily lead to success

Traditional approach Software: Select and implement software Processes: Adapt processes to software Results: Hope for results

"Follow the crowd

with AI, CIM, MRP, ERP, APS, XML ..."*

Assume that "bestof-breed" software automatically enforces best-practice processes

Rely on promised
results

Argue for strategic

investment

* AI: Artificial Intelligence; CIM: Computer Integrated Manufacturing; MRP: Material and Resource Planning; ERP: Enterprise Resource Planning; APS: Advanced Planning Systems; XML: Extensible Markup Language Source: McKinsey

17

The better way to e-enable the supply chain

Traditional approach

Software: Select and implement software

Processes: Adapt processes to software

Results: Hope for results

"Lean eSCM" approach

Results: Anticipate impact

Processes: Keep it simple

Software: Go for lean IT solutions

Identify the 3 - 6 key Start with integrating Create flexible IT

jobs Connect them by Translate IT into real simple processes and simplify the transformation remaining process levers steps potentials along the entire supply chain architecture

Concentrate on a few
core functionalities

Prototype the solution

and roll it out fast

Source: McKinsey

18

Four imperatives for successful SCM

Clear role and ownership structure "Do it right or don't do it at all"

Seamless integration of all processes "All together now"

Targeted use of modern technology "Do IT smart"

Continuous striving for high performance "The sky is the limit"

Use SCM strengths

as a growth lever if you are superior

Integration of
operational processes within your company

Full transparency
and integration

Steady increase
in performance, aspiration level

Low transaction
costs along all processes

Outsource
processes if you are only mediocre

New breakpoints
evolving

Virtual management of end-to-end SCM including outside partners

Focus on
immediate business need

New business
models demand dramatic change

However, never
lose control over your key processes within your industry

Source: McKinsey

19

Continuous striving for operational excellence

Performance comparison/gaps 100 15 - 25% Personnel 35 - 40%

EXAMPLE ASSEMBLY

60 - 75% Capital

Material

Other Client company Process Process effective- efficiency ness Factor costs Best competitor benchmark Best-ofbest benchmark Theoretical limits

Source: McKinsey

20

New business models and breakpoints are creating discontinuities in supply chain performance
Disintermediation (e.g., copper industry)
Manufacturer Wholesaler Retailer Customer

Mass customization
Toyota Home

Coil batches Value-added services Call-off

Copper.com

9 basic product lines, unlimited customized options Lead time and life cycle time competition
Automotive OEM industry leaders

Event-based demand Order volume

Dedicated
promotions

"Every product delivered within 4 days"

Increasing new
product launches

Mobile phone industry leaders

Difficult to predict
Time
Source: Press releases, McKinsey

"New products every 9 months"

outcomes
21

How to act lessons learned

Step 1 Set aspiration and direction Customer requirements

Step 2 Prioritize levers and design solution

Step 3 Manage the solution

Step 4 Monitor performance

Processes
Efficient, fast, and transparent order processing Optimizing production costs Frozen period Sequencing Reliable demand planning integrated with production planning

Rules

Supply Chain KPI

Business strategy
Clear customer service level segmentation

Organization

IT

ROI

Operational performance

Skills

Incentives

Source: McKinsey

22

Focus on setting direction of supply chain transformation

STEP 1: SET DIRECTION 1. Set aspirations: run/rebalance, redesign, or innovate 2. Think customer breakpoints and theoretical best practices and not only competitive benchmarks 3. Think end-to-end 4. Systematically segment the supply chain according to logistics criterions 5. Focus on the key 3 - 6 improvement levers (and not 10 - 20) 6. Think pilot (microcosm) and not big bang 7. Use cross-functional teams of star line managers and provide top-management leadership

STEP 2: DESIGN THE SOLUTION

STEP 3: MANAGE THE SOLUTION

STEP 4: MONITOR PERFORMANCE

Source: McKinsey

8. Design key performance indicators (KPIs) and potential organizational changes up-front

23

Companies have different aspirations for transforming their supply chains

Innovate
Supplier(s)

Redesign
Company

Consumer(s) Retailer(s)

Run and rebalance

Aspiration Better execution of current SCM design to improve competitiveness Context

Redesign supply chain to improve cost and/or increase growth

Change the game by innovating across the industry value chain Industry discontinuity Tap latent demand Redefine roles Change cost structure

Current SCM design

Current design does not supports strategy support strategy and/or Room for improvement is inefficient in key processes

Source: McKinsey

24

The supply chain should be designed around the customer breakpoints

Buying probability depending on delivery time in percent

Does not buy Does probably not buy

Market Research consumer good example 1 5 1 8 Breakpoint 8 Service level where customer buying behaviour does change significantly delivery time of about two weeks in this example

44

61 94

Does buy

94

91 48

34 5 4-8 6 >8

1-2

2-4

Delivery time (weeks)

Source: McKinsey

25

Prioritize levers and design the solution

STEP 1: SET DIRECTION 1. Set aspirations: run/rebalance, redesign, or innovate 2. Think customer breakpoints and theoretical best practices and not only competitive benchmarks

STEP 2: DESIGN THE SOLUTION

3. Think end-to-end 4. Systematically segment the supply chain according to logistics criterions 5. Focus on the key 3 - 6 improvement levers (and not 10 - 20) 6. Think pilot (microcosm) and not big bang 7. Use cross-functional teams of star line managers and provide top-management leadership

STEP 3: MANAGE THE SOLUTION

STEP 4: MONITOR PERFORMANCE

Source: McKinsey

8. Design key performance indicators (KPIs) and potential organizational changes up-front

26

Thinking end-to-end helps control "noise" in the system

Flow of demand information through the supply chain

Regional warehouses

Customers

Retailers

Central production

Reasons
Quantity
4.000 3.500 3.000 2.500 2.000 1.500 1.000 500 0
0
1 2 Jan 4 6 8 10 12 2 3 4 5 6 7 8 9 10 11 12 Feb Mar Apr May Jun 1 2 Jan 3 4 5 6 7 8 Feb Mar Apr 9 10 11 12 May Jun 1 2 Jan 3 4 5 6 7 8 Feb Mar Apr 9 10 11 12 May Jun

Unfavorable
reorder algorithm along the chain

No synchronization
of available market information

Time

Source: McKinsey

27

Different supply chain types have different characteristics

Supply chain types

Supply chain characteristics

Examples

"Fashion"

Short life cycle High seasonality Multiple products Inventory-driven Significant product variety Customized/make-to-order Seasonal Forecast/event-driven Long lead times Large batch sizes

Fashion apparel PCs Toys Retail Spare parts Medical systems Engineering goods Consumer packaged goods Pharma (some products) Chemicals Basic materials

"Replenishment"

"Engineered"

"Promoted"

"Process"

Source: McKinsey

28

Focus first on the 3 to 6 key improvement levers for supply chain transformation
Supply chain type "Fashion" Physical costs Forecasting Key design lever Product launch management Complexity reduction Response time Order management Demand management "Reple"Engineered" "Promoted" nishment" "Process"

Source: McKinsey

29

A company should systematically segment its supply chain along clearly defined criterions
Example: Inbound logistics in assembly industry
High

EXAMPLE

Predictability/ forecastability
Low Low High High Low

Material flow intensity

Supply chain flexibility

Supply chain segment Characteristics

"Make-to-order"
No stock Order-specific supply
Efficient, quick order management

"Directly forecastdriven"
Supply depends
directly on forecast Well-defined planning processes and forecasting models

"Inventory replenishment"
Supply via inventory
buffer/warehouse Optimal replenishment parameters /algorithm

Source: McKinsey

30

Six typical key levers to improve the supply chain

4 Optimizing production Frozen zone Lot size Sequence Accuracy 3 Efficient, fast, and transparent order processing 2 Reliable demand planning integrated with production planning

Supply management

Production management

Order and demand Service level management management

5 Optimizing inventory levels and distribution network

Distribution management

1 Clear customer service level segmentation along customer groups

6 Performance measurement using KPIs along the entire supply chain

Source: McKinsey 31

A "microcosm" approach with appropriate organization is crucial

STEP 1: SET DIRECTION 1. Set aspirations: run/rebalance, redesign, or innovate 2. Think customer breakpoints and theoretical best practices and not only competitive benchmarks

STEP 2: DESIGN THE SOLUTION

3. Think end-to-end 4. Systematically segment the supply chain according to logistics criterions 5. Focus on the key 3 - 6 improvement levers (and not 10 - 20) 6. Think pilot (microcosm) and not big bang 7. Use cross-functional teams of star line managers and provide top-management leadership

STEP 3: MANAGE THE SOLUTION

STEP 4: MONITOR PERFORMANCE

Source: McKinsey

8. Design key performance indicators (KPIs) and potential organizational changes up-front

32

Problems should be tackled in smaller pieces with a fast iterative approach to achieve tangible results
Scope of solution Scope of solution

Design

Detail Do

Do

Design

Detail

Do
Design

Design Detail

Detail Do

Time Value Value

Time

Time
Source: McKinsey

Time
33

Fast implementation within a "microcosm" a small but "end-to-end" slice of the supply chain containing all key participants

Customer A Sales company Logistics Factory Supplier Y, Z

Purchasing manager Production manager Logistics manager Customer A Production planning manager Sales manager, sales reps for customer A IT central support Sales administration manager Suppliers Y, Z

Source: McKinsey

34

Strong leadership team and cross-functional working teams are critical for success of SCM transformation

EXAMPLE

Steering committee

CFO CEO Head of manufacturing Head of purchasing Head of sales Head of marketing
SCM team leader Senior manager (cross-functional experience)

Purchasing subteam

Manufacturing subteam

Marketing subteam

IT architecture subteam

Product design subteam

Source: McKinsey

35

Ongoing monitoring to ensure success

STEP 1: SET DIRECTION 1. Set aspirations: run/rebalance, redesign, or innovate 2. Think customer breakpoints and theoretical best practices and not only competitive benchmarks

STEP 2: DESIGN THE SOLUTION

3. Think end-to-end 4. Systematically segment the supply chain according to logistics criterions 5. Focus on the key 3 - 6 improvement levers (and not 10 - 20) 6. Think pilot (microcosm) and not big bang 7. Use cross-functional teams of star line managers and provide top-management leadership

STEP 3: MANAGE THE SOLUTION

STEP 4: MONITOR PERFORMANCE

Source: McKinsey

8. Design key performance indicators (KPIs) and potential organizational changes up-front

36

Four measures of accuracy need to be checked to improve supply chain process efficiencies
INFORMATION FLOWS Sourcing plan Production plan Orders (dispatch plan)

Forecast

1. Forecast accuracy 2. Production accuracy 3. Sourcing accuracy 4. Dispatch accuracy MATERIAL FLOWS

Sourcing

Production

Sales

Dispatch

Key success factors: assign responsibility for type

of accuracy to an individual person in each case

Experience suggests that performance improves as

soon as these four types of accuracy are monitored regularly
Source: McKinsey 37

Overall supply chain performance should be calibrated using output indicators

EXAMPLE

Product availability to meet customer requirements

At the lowest possible cost to the system

3
Days

In the shortest possible time to increase flexibility

Service level indicators

Inventory indicators

Lead time indicators

Lost/deferred sales
Percentage of total sales 22
86%

Inventory
Weeks 6.5
Target =3 62%

Order cycle times

28
75% Target =6

2.5 7 Baseline* 5 months later

Target =0

3 Baseline* 5 months later Baseline* 5 months later

* Before beginning supply chain improvement effort Source: McKinsey

38

Summary: Four steps towards successful supply chain transformation

STEP 1: SET DIRECTION 1. Set aspirations: run/rebalance, redesign, or innovate 2. Think customer breakpoints and theoretical best practices and not only competitive benchmarks

STEP 2: DESIGN THE SOLUTION

3. Think end-to-end 4. Systematically segment the supply chain according to logistics criterions 5. Focus on the key 3 - 6 improvement levers (and not 10 - 20) 6. Think pilot (microcosm) and not big bang 7. Use cross-functional teams of star line managers and provide top-management leadership

STEP 3: MANAGE THE SOLUTION

STEP 4: MONITOR PERFORMANCE

Source: McKinsey

8. Design key performance indicators (KPIs) and potential organizational changes up-front

39

The SCM Diagnostics questionnaire helps to evaluate supply chain performance in more detail EXAMPLES
Production management Freeze period? Acceptance of late changes? Order and demand management Forecast accuracy? Order status transparency? Discipline regarding ordering rules?

Production

Sales

Supply management Transparency on supply? Segmentation of inbound flows?

Distribution management Optimal warehouse network? Efficient warehouse handling? Streamlined transportation costs?

Service level management Clear service level segmentation? Regular service level performance measurement?

Overarching building blocks Clear responsibilities? Clear performance parameters? Targeted IT leverage?
Source: McKinsey 40