Developing agility & responsiveness in the Supply Chain in wake of permanent volatility

Defining the Concept of Permanent Volatility

Volatility isnt new but its velocity is
Government & Politics Economic Volatility Commodity Cycles

Government policies are increasingly unpredictable.

Financial and Market volatility impacts

Shortened Product lifecycles and instant commoditization of innovations

Globalization & Regionalization

New/Demanding Customers

Supplier Variability

Global footprints increase vulnerability.

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Failure to meet demand results in lost customers, permanently

Continued volatility in commodity prices.

2

Permanent Volatility Timeline

The frequency of volatility has increased significantly in the past five years, which coupled with the growth of globalization creates an environment that is increasingly difficult to maneuver in
Movement From Volatility Index 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 Iranian Revolution Arab Oil Embargo Saudi Arabia abandons swing producer role

Highest point since 1970

Asian Economic Crisis

Global Financial Crisis

Min - CoV

Max - CoV

Avg - CoV

CoV; Coefficient Variable Supply Chain 2.0: Managing Supply Chains in the Era of Turbulence Martin Christopher

Measurements used in the volatility index Exchange rate Crude oil Gold bullion Copper Baltic Dry Index UK Clearing Banks Rate

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Permanent Volatilitys Impact

Research has demonstrated that supply chain disruptions can have a substantial and lingering negative effect on shareholder value

Part Shortages

Changes by Customers Production problems

Rampup/ roll out problems

Quality problems

Development problems N/A

Average Shareholder returns (%)

-2.6 -3.3

-8.6 -10.6 2001 2011 -12.7

-8.2

-7.7

-11.8

-12.2

-11.6

Average Shareholder Return 2001: -10% 2011: -7%

The negative impact of-14.4 supply chain disruptions and on shareholder return is higher than most other corporate announcements
Source: (blue bars) Prof. Vinod Singhal, Georgia Institute of Technology Source: (red bars) Accenture internal research

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Responding to Volatility and Risk Events

Industries are responding to risk in a variety of ways, although typically falling short
Manufacturing locally and globally

62% 61% 53% 50% 49% 42% 38%

Sourcing of contingent suppliers and/or logistics provide Increased inventories and safety stock

Establishing an intentionally geographically distributed supply base Formal supply chain risk management program Forward buying/hedging strategies Insource (return back to home country for manufacturing)
Source: Global Operations Survey, Accenture

The shelf life of any change program is significantly lower than in previous years.

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Dynamic Operations Need of the hour

Dynamic Operations is a group of networks able to maneuver in unpredictable markets while driving greater levels of economic value
Illustrative ($$)

Dynamic Optimization
($$)

Buy

Move

Source Design
($$) How many supply chains or channels does the organization operate?
How many supply chains exist across the organization? What is common across supply chains? What is unique and differentiating? Which ones will insulate the firm against external risk factors?

Need Make
($$) Where does each supply chain require agility and speed?

Sell
($$) Where is the push/pull How can the supply boundary for each ($$) chain drive economic supply chain? value?
Where is the most optimal point for the switch between push and pull? How can operations strategy be leveraged? Is it possible to shift this boundary through unique product design, delivery or supplier management? How can Operations serve as an engine of growth and competitive advantage? What is the optimized cost by value stream and function? How can the supply chain improve company profitability?

What is the right amount of flexibility by value stream and function to profitably serve an array of offerings and customers? What is the required investment to create future value or offset risk? What activities can be Copyright 2012 Accenture All rights reserved. simplified to create value?

The Increasing Importance of Dynamic Operations

Functional Excellence Integrated Supply Chain Meet a Customer Commitment Company Boundaries Cost & Service Interdependence Available to Promise Extended Enterprise Design and Fulfill Dynamic Operations Design, Fulfill, and Drive Profit Ecosystem/network

Fit With Business Strategy

Role of Supply Chain Extent of Influence

Meet Internal Commitments Departmental Boundaries Cost Compliance First come first serve

Selected Partners Drive Value Collaboration

Financial Focus Operational Focus

Order Management Philosophy Supply/ Demand Balancing Approach Decisioning Risk Factoring

Dynamically Optimize Tradeoffs

Agility

Capable to Promise

Profitable to Promise

Ability to Execute

Produce to a schedule

Fulfill Demand

Forecast & Fulfill

Sense, Shape, & Respond

Siloed Afterthought

Team-Based

Rapidly Address the Urgent Contingencies and Redundancies

Rapidly Address the Important Predictive and Responsive

Buffers in the System

Creating a Dynamic Operations will require a major cultural and organizational change shifts in mindsets and behaviors Copyright 2012 Accenture All rights reserved.

Accentures approach to managing volatility

In a world of permanent volatility, Dynamic Operations creates a critical balance between the dual needs of responding to volatility and building economic value.

Dynamic Operations key capabilities:

Insight to Action assimilating business data into a decisive response with speed Agile Execution adjusting quickly to volatility Flexible Innovation innovating for growth and operational efficiency Adaptable Structure designing the operating model to capitalize on new opportunities
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Dynamic Operations
Case Study: Apple
Although being the largest and most innovative technology company in the world, Apple cannot escape volatility in the marketplace.

Examples of Volatility

Dynamic Operations Actions Taken

Insight to Action
Retail locations allow Apple to track detailed demand and improve forecasting at a per hour per store level. Apple's new strategy is meant to decrease risk and increase the quality of its products by partnering with manufacturing suppliers. Apple and their manufactures gain negotiation leverage with other electronic component suppliers. Apple is dependent on offshore suppliers and is under pressure to monitor and improve conditions across the supply chain

Fluctuating Commodity Prices

Short product life cycles and high competition for emerging technology.

Adaptable Structure
Apple works with suppliers to innovate and hold exclusive rights to parts. Before parts are commoditized across other competitors, Apple negotiates competitive rates to purchase same parts at lower cost than competition. Large outsource manufacturing for speed and flexibility, working around the clock to meet production requirements Apple: Create a closed Eco System where Apple monitors and controls most supply chain functions Apple's Supplier Responsibility 2011 Progress Report announced that more than 300,000 workers were trained in companys supply chain since 2006

Short Product Lifecycles

Design to Availability: With an excess of 1 million units sold within two months of its release.

Flexible Innovation
Competitive Marketplace:
Mobile devices and computer technology are standard in amenities from multiple companies.
Apple holds exclusive rights/first to the market with new technology/parts before competition (example Gorilla Glass) Apple designs products around the consumer. Apple has shown that consumers are willing to pay a premium for products that are easy to use. Fast to Market: Beat competitors to market with new products. Integrated design to deployment through their closed Eco-system Apple improving social and environmental sustainability within its supply chain, including annual audit programs, quarterly reports of KPIs for social responsibility and adoption of a supplier code of conduct

Agile Execution
Ensure suppliers hold 2 weeks of inventory within 2 miles of manufacturing facility for material availability Quickly move vast amounts of finished product by purchasing all available air freight capacity and ship direct to 9 customers from manufacturing facility Copyright 2012 Accenture All rights reserved. Sources: Accenture research, AMR, DJF, HBR, EBSCO

Dynamic Operations
Case Study: IKEA
IKEA is known for its simple product design, its massive, friendly retail stores, and its very low prices. It views itself as a service provider, focusing on solutions to real -life problems and contributing to a better life for the majority of people

Examples of Volatility
Globalization

Dynamic Operations Actions Taken

Insight to Action

IKEAs supply chain has a global spread with both sales and purchasing in all major regions of the world. Some business areas change up to 30% of its assortment every year making planning a real challenge. Supply chain visibility and control keep costs down and avoid obsolete inventory and/or stock outs.

Command center with real-time monitoring and visibility: made progress over the past 2 years in maintaining stock of items

Adaptable Structure
IKEA had to become even better at increasing volume, enabling the overall lower cost of goods and operating costs. To increase volume, IKEA had to become better at handling more people and products in a relatively small number of stores (fewer than 400).

Commodity Cycles

Flexible Innovation
IKEA uses 10 million pallets to ship goods from suppliers to its 287 stores in 26 countries. In Jan 2012, IKEA replaced wooden pallets with a paper variant thats lighter, thinner, cheaper , cutting transport costs by 10%. Providing products at lower price point while maintaining the experience IKEA is aiming to offer even lower prices - which have dropped an average of 2 to 3 % each year since 2000 by investing 100 % of its net savings . While doing that, IKEA decided to maintain its investment in retail stores which it , custom builds and designs for efficiency and sales potential (restaurants and child care in store) Flat-pack business: designers sometimes start with a pallet outline (how will the pieces fit together in the package and how many boxes can they get on that pallet?). The price tag is designed first beginning with a decision on what price the majority can afford, a production line is then designed to produce furnishings that satisfy form and functionality IKEA provides value for its customers through the co-creation of individualized solutions during pre-purchase customer experiences. This simultaneously reduces risk for the customer and enhances customer imagination and interaction with the organization.

Supplier Variability:
Years with significant increases in raw material prices, IKEA was able to offer even lower prices to customers than the year before leading to higher market share Starting in 2008, facing rising prices and a global recession that impacted its core markets (new homeowners and middleclass consumers), IKEA set out on a new strategic path to offer even lower prices to consumers, while positioning itself for long-term growth.

Economic Volatility:

Agile Execution

As part of growth strategy in difficult times, IKEA lowered its operational costs wherever it could, especially where customers didnt see the impacts to enable cash flow flexibility in strategic areas Empowering the people. Keep the center of the company relatively lean, and not make too many decisions centrally 10 that would be better made in stores or factories close to customers and suppliers. Copyright 2012 Accenture All rights reserved. Sources: Accenture research, AMR, DJF, HBR, EBSCO

Thank You

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