Next-Generation Supply Chains Bigger Steps - Booz & Company

12 Pages·2009·0.31 MB·English

Perspective Richard Kauffeld
Abhishek Malhotra
John Potter
Martha D. Turner
Next-Generation
Supply Chains
Bigger Steps,
Smaller Footprints
Contact Information
London
John Potter
Partner
[email protected]
[phone]
New York
Richard Kauffeld
Partner
[email protected]
[phone]
Abhishek Malhotra
Principal
[email protected]
[phone]
Martha D. Turner
Principal
[email protected]
[phone]
Booz & Company
EXECUTIVE Major shifts in global business conditions are radically
SUMMARY altering input costs and risk. In response, companies must
realign their supply chains around new assumptions to meet
the multidimensional challenges of today’s marketplace.
That effort must include rethinking product formulation
and packaging, restructuring the supply chain network and
footprint, and realigning the role of suppliers and third
parties. While the right answers will vary by company, they
will generally require bigger steps than recent improvement
initiatives, resulting in smaller product and network
footprints. These changes will improve efficiency, resiliency,
and sustainability, while allowing for more responsive supply
chains with greater flexibility to support growth.
Booz & Company 1
NEw environmental regulations in develop- its derivatives. Simultaneous strength-
ing nations, relatively inexpensive raw ening and then erosion of currencies
CoNdITIoNS
materials, and advantageous currency such as the euro and real have magni-
ChAllENGE exchange rates in established markets. fied these impacts for key producers
and markets. U.S. commodity prices
PAST
Manufacturers found they could save rose 174 percent between January
STRATEGIES significant amounts of money by 2006 and June 2008 before falling
consolidating and shelving plants in by 25 percent in the second half of
the West while expanding supply net- 2008. Commodities from copper to
works deeper into low-cost countries, corn show a similar pattern and high
mainly in Asia and eastern Europe— volatility (see Exhibit 1).
farther and farther from the demand
Just when it seemed safe to follow in developed markets. In many cases, Variability in demand coupled with
orthodox, tried-and-true supply chain they moved production offshore the volatility of the inputs has had
strategies based on some very simple completely. They did all this without a tremen dous impact on supply
and consistent ideas, major shifts seriously considering that these longer chain costs and performance. This
in global business conditions have supply chains might someday increase is particularly true for companies
rendered invalid some of our most costs or create unmanageable risks to that have farmed out more and
critical assumptions, especially those product supply, quality, and safety. more manufacturing to third parties
related to input costs and risk. Now and, in so doing, ceded control of
companies must realign their supply But recent, unexpected, and volatile the purchasing process (including
chains around new assumptions to shifts in input costs have called into negotiating prices) for raw materials.
meet the multidimensional challenges question—and in some cases already
of today’s marketplace. invalidated—the wisdom of these Not as conspicuous but just as dis-
strategies. As a result, major supply ruptive are recent increases in other
Over the past few decades, manu- chain realignment is fast becoming a costs, such as labor and packaging—
facturers have built longer and more necessity for many manufacturers. especially in developing economies,
complex supply chains, driven by the where large changes in consumer
notion that certain conditions are The most widespread impacts have demand drive inflation or volatility
immutable: low energy and transpor- come from the dramatic increase and for exchange rates, material prices,
tation costs, cheap labor and scarce subsequent fall in the price of oil and and wages. And just when almost
2 Booz & Company
Exhibit 1
Exchange Rates and Energy and Commodity Prices Drive Volatile Supply Costs
1 CurrenCy exChange rates 2 Crude oil PriCe
USD to Euro; USD to Brazilian Real Cushing, OK, WTI Spot Price FOB
(average monthly, Jan ’06 to Feb ’09) (average monthly, Jan ’06 to Feb ’09)
2.6 140 +104%
+52%
2.4 130
BRL
2.2 120
2.0 110
100
1.8
90
1.6
D 1.4 -30% arrel 80
S B 70
U 1.2 D/
S 60
1.0 U
+24% 50
0.8 EUR
40
0.6 -23% 30 -71%
0.4 20
0.2 10
0.0 0
9/05 3/06 10/06 4/07 11/07 6/08 12/08 7/09 1/06 7/06 1/07 7/07 1/08 7/08 1/09 7/09
3 Corn PriCe 4 CoPPer PriCe
U.S. Corn Farm Price Received (average monthly, Mar ’06 to Feb ’09)
(average monthly, Jan ’06 to Feb ’09)
+174%
5.5 9,000 +70%
5.0 8,000
4.5
7,000
4.0 -25%
6,000
3.5
el
Bush 3.0 D/MT 5,000
SD/ 2.5 US 4,000
U
2.0
3,000
-64%
1.5
2,000
1.0
0.5 1,000
0.0 0
9/05 3/06 10/06 4/07 11/07 6/08 12/08 7/09 1/06 7/06 1/07 7/07 1/08 7/08 1/09 7/09
Sources: FXHistory; Energy Information Administration; University of Illinois; U.S. Federal Reserve Statistical Release, Dec. 11, 2008;
LPL Financial; IHS Global Insight; Booz & Company analysis
Booz & Company 3
everything costs more, manufacturers tion underpinning current supply oil at $30 per barrel or $150? How
can no longer expect to save money chain structures will be inadequate. do we best meet expanding demands
by taking advantage of lax regula- Similarly, population growth and eco- for growth and customer service
tions in emerging nations. New and nomic development will propel raw while realigning supply chains to
sometimes expensive environmental material and other manufacturing increase efficiency, sustainability, and
protection rules are increasingly being costs higher in emerging markets, and resilience? Where should we put our
adopted to curtail carbon emissions, environmental concerns will thrust factories? Should we make or should
protect water supplies, and dispose on producers the costs of keeping we buy? Which costs will be the most
of waste. their “neighborhoods” clean and their volatile in the next five to 10 years?
operations green. What will conditions be like in devel-
These changes reflect fundamental oping nations such as China a decade
shifts in supply and demand, exac- Simply put, these changes will from now? What major steps are
erbated by continuing volatility in require manufacturers to make broad critical to ensure essential advantage?
the market, as well as intractable adjustments in their products and
alterations in regulatory, social, and processes and set in motion aggres- In our view, while these are tough
cultural conditions. Hence, they sive initiatives to realign supply strategic questions—and uncertain
have long-term implications for the chains. Incremental efforts toward issues—manufacturers can best
future of supply chain alignment and supply chain efficiency, so routine in address the underlying challenges
strategies. For example, the recent the past, will not be enough to offset with three efforts focused on
run-up in oil prices reflected growth the rising costs of inputs—or deliver realigning their products and supply
in global demand, and a supply that the essential capabilities that will be chains for the new realities.
was relatively inelastic and vulnerable required for long-term competitive-
to disruptions. However, per-barrel ness. Difficult questions will have to • Rethink product formulation and
costs have plummeted amid economic be addressed: To what extent do price packaging.
turmoil as demand adjusted down- changes represent a temporary or
ward in response to slowdowns in cyclical condition—and when should • Restructure the supply chain
economic growth. But it is highly they be viewed as a new normal, network and footprint.
likely that the cost of oil will increase reflecting fundamental shifts in supply
again once economic recovery begins. and demand? Should we realign our • Realign the role of suppliers and
The $30-a-barrel price assump- supply chain assum ing the price of third parties.
4 Booz & Company
REThINk more efficiently, be distributed more a U.K.-based research and advisory
cheaply, and reduce shelf space at company, came to a different conclu-
PRodUCT
the retail level. In addition, P&G has sion. The Carbon Trust found that 80
FoRMUlATIoN begun a campaign to attract envi- percent of the carbon emissions from
ronmentally conscious consumers by purchased paper could be blamed
ANd
selling products like Tide Coldwater on energy used in the production
PACkAGING that minimize carbon emissions. The process. Delving deeper, the company
company argues that if every U.S. concluded aptly, if a bit counterintui-
household were to use cold water for tively, that a supplier offering virgin
laundry, the energy savings would be paper produced through the use of
70 billion to 90 billion kilowatt-hours hydroelectric power would generate
per year, or 3 percent of the nation’s lower carbon emissions during man-
First, companies should consider their total household energy consumption. ufacturing—and, hence, be a greener
choices in product design and process Consumers would release into the partner—than a supplier that used 50
technology—the inherent drivers of air 34 million fewer tons of carbon percent recycled paper in its product
cost, sustainability, and risk. What dioxide—nearly 8 percent of the U.S. but whose factories ran on traditional
ingredients are used, how much target under the Kyoto Protocol—and carbon energy sources.
packaging is required for the finished save about $63 per year on their util-
product, and what changes in mate- ity bills, enough to cover the higher The household goods company S.C.
rial choice or manufacturing process cost of Tide Coldwater. Johnson & Son Inc. similarly went
would reduce material and energy against the grain recently when it
usage? It is important to understand Such initiatives require a broad shifted to plastic pallets across its
the economics of product and process understanding of the trade-offs supply chain. The company claims
choices before considering other across the supply chain, which like that its new pallets are 100 percent
supply chain changes. Small changes much of supply chain realignment recyclable and average more than 80
to such inherent factors can create involves reconsidering the validity of uses in a lifetime, compared with only
large market and cost impacts. old assumptions. As an illustration, seven uses for wood pallets. This effort
it is generally believed that recycled reduces waste and weight—the new
For example, Procter & Gamble and paper is better for the environment pallets are 20 pounds lighter—and
Unilever PLC have both launched lines than virgin paper. But a study con- S.C. Johnson posits that the company
of concentrated products in smaller ducted for U.K. newspaper publisher will require 900 fewer trucks and burn
packages that can be made faster and Trinity Mirror by the Carbon Trust, 80,000 fewer gallons of diesel per year.
Manufacturers must understand
the economics of product and
process choices before considering
supply changes.
Booz & Company 5
RESTRUCTURE Once product and process choices The challenge for manufacturers is
have been reconsidered, the supply to make the right footprint trade-offs
ThE SUPPlY
network needs to be realigned to bal- not only for today but also for an
ChAIN ance cost, service, risk, and sustain- uncertain tomorrow. Successful com-
ability in meeting market demand. panies will build more flexibility and
NETwoRk
(See “The Supply Chain in 5-D.”) adaptability into their networks with
ANd A prime example is Craftmaster investments in technologies and assets
Furniture Inc. in Taylorsville, N.C. that can react to changes in demand
FooTPRINT
The company, bought in 2006 by a as well as variability in factors like
Chinese firm, once intended to shift labor costs and energy use. For
40 percent of its U.S. production to example, in 2008, Honda Motor Co.
China within two years. But in early was the only carmaker able to rapidly
2008, with the move only about half- match—within a threshold—its pro-
way completed, Craftmaster halted duction volume to changing demand,
the exodus. A year earlier, the furni- primarily because the Japanese
ture maker had saved 15 percent by automaker had figured out how to
assembling sofas in North Carolina make the Civic, its compact car, on
using kits of fabric that had been the same assembly line as the Acura
precut in China. However, the savings MDX, its midsized SUV. As demand
had fallen soon thereafter to only for the larger vehicles flagged, Honda
about 8 percent, making it harder to seamlessly and with little lost time
justify having the initial work done in adjusted the production mix in
distant Chinese factories, from which its plants in favor of smaller cars.
it can take more than 12 weeks for However, there is a limit to what such
deliveries to reach the United States. flexibility can support—as vehicle
6 Booz & Company
The 5 Dimensions of Supply Chain Performance
Supply chain realignment must be based on a series of strategic and integrated
decisions. To build a competitive advantage through the supply chain in today’s
environment, we recommend that companies assess their current ability to
perform across five dimensions—to develop what we call “5-D supply chain
capabilities.” Evaluating current performance across these dimensions should
identify gaps and trade-offs to focus the organization’s efforts on enhancing
supply chain performance and skills. The five dimensions are the following:
Growth: The supply chain must be flexible enough to support the company’s
overall growth strategy. This could mean, for instance, having the adaptability
and skills to open and close factories or develop relationships with suppliers in
new markets or geographies. Or it could involve having the capability to quickly
and inexpensively develop new product lines to meet changing customer demo-
graphics and needs.
Cost: The supply chain must be able to deliver products at competitive costs.
volumes have continued to decline by This may entail achieving low-cost producer status in categories or markets
30 to 50 percent, even Honda has had driven by price competition. Alternatively, companies may develop capabilities to
to temporarily idle plants. minimize the costs of increasing complexity in their product lines or differentiat-
ing customer requirements.
In addition, flexibility should extend
Service: Historically, service capabilities meant filling most orders with limited
to creating more regional manufactur-
case cuts and on-time delivery, given several days of lead time. Increasingly,
ing networks to serve local markets
however, service performance requires not only meeting delivery deadlines
with the lowest possible cost exposure.
but also having the ability to manage rapid replenishment or late-stage product
Volkswagen has taken this tack with
differentiation.
its recent decision to open a manufac-
turing plant in Chattanooga, Tenn., by Risk: The supply chain needs to be resilient—built to avoid undue risk of supply
2011, nearly 15 years after it closed disruption or product failure. This could involve having flex capacity for unpre-
its last U.S. plant, in Pittsburgh, Ohio. dictable surges in demand, or having contingency plans for critical suppliers,
VW sees the Chattanooga facility, materials, facilities, or equipment. It could also include the ability to audit product
which will make cars for the American safety and track products to limit exposure from potential recalls.
market, as a hedge against exchange
Sustainability: This, the newest critical dimension for performance, requires
rate fluctuations.
capabilities to reduce carbon emissions, increase the use of renewable energy
sources and recycled materials, and improve energy efficiency and material
Similarly, in 2007, Dell Inc. opened
yields. Sustainability performance is measured across the entire value chain,
plants in Brazil and India to be
from raw material source and other inputs, to consumer use and disposal of
closer to what it perceives as its new
the product.
growth markets. From its $30 million
Indian plant, Dell primarily serves its
increasing number of large corporate
clients in the country and avoids the
taxes and import fees that would
be incurred if it were shipping the
computers in from elsewhere.
Booz & Company 7
REAlIGN raw materials. Now suppliers rou- Anheuser-Busch Companies Inc. pro-
tinely provide a broad set of materials vides another good example of how
ThE RolE oF
and services. They also participate in strong relationships with suppliers
SUPPlIERS product development efforts by sharing can offer advantages that cannot be
ideas as well as making investments in developed single-handedly. In a joint
ANd ThIRd
new processes and technologies. In one effort with its suppliers, Anheuser-
PARTIES such case, Sony Electronics Inc. part- Busch reduced the lid diameter for
nered with its waste disposal supplier, four types of cans, saving 17.5 million
Waste Management Inc., to establish pounds of aluminum in 2006, which
a “take back” program, which lets not only reduced the amount of
consumers recycle Sony products energy needed to produce, transport,
for free at centers across the United and recycle the cans, but cut manu-
In an environment of increased uncer- States. And in another case, Virgin facturing costs as well.
tainty, close collaboration between Atlantic Airways Ltd., General Electric
supply chain partners has become Company, and Boeing Company Some of the dramatic changes that so
more important than ever. Pressures are collaborating to produce biofuel significantly affect supply chain strate-
felt by manufacturers—higher mate- systems for aircraft. Indeed, since 50 to gies will continue to evolve as manu-
rial costs, sustainability requirements, 70 percent of the cost base for manu- facturing environments are changed
supply–demand imbalances, product factured products consists of procured by cycles of supply and demand,
safety issues, resilience and envi- materials, a comprehensive approach the depletion of resources, and the
ronmental concerns—are shared by with suppliers is absolutely necessary. development of new technologies. But
suppliers. Certainly, it is not uncom- one thing is certain: Manufacturers
mon to see suppliers passing on The increasingly collaborative nature will not be able to stand pat. They
higher prices to their customers. But of supplier relationships allows more will have to become more flexible
in many instances, even higher prices visibility into sourcing decisions and and adaptable—better able to foresee
are not enough to maintain supply makes it easier to define mutually and respond to future conditions in
as demand outpaces supply and new beneficial goals. For instance, DuPont order to adjust their supply networks
uses compete for the same resources. Packaging & Industrial Polymers to meet evolving input costs and con-
For example, it may seem that biofuel announced in 2007 that it was join- straints. While the appropriate strate-
incentives would scarcely impact the ing with Plantic Technologies Ltd., gies will vary by company, they will
beverages market. But increased use of an Australian bioplastics company, generally require big steps that will
ethanol-based fuel leads to an increase to develop polymers based on corn tend to result in smaller footprints and
in corn production rates. That leads to starches that could be used for cos- significant changes to products and
greater demand for fertilizers, which metics and food packaging. The part- supplier relationships. These changes
translates into higher consumption nership offered advantages to both will improve efficiency, resiliency, and
of phosphates. And that places severe companies: It broadened Plantic’s sustainability—as well as enable more
limits on the availability of phosphoric market reach, and it brought DuPont responsive supply chains with greater
acid—traditionally a mass-produced closer to its goal of growing revenues flexibility to support growth.
low-cost material—which the bever- from nondepletable resources to $8
ages industry needs as an acidifier. billion by 2015 from $4 million in
2007—a goal the company says it
Today, the role played by suppliers has can achieve only by supplementing its
gone well beyond merely providing own research and development with
that of strategic partners.
8 Booz & Company