Creating Agile Supply Chains In Chemical Industry

A BUSINESS - ENGINEERING

JOINT RESEARCH CENTER

AT LEHIGH UNIVERSITY

Creating Agile Supply Chains in the Chemical Industry

Stephen P. Crane

Director Supply ChainAir Products

Bethlehem, PAMay 14, 2008

Adapt Supply Chain Networks from Selling What I Make, to Making What I Sell

Who is Air Products?

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3

“ Creating Agile Supply Chains in the Chemical Industry”

APCI 2008, Creating Agile Supply Chains in the Chemical Industry

Air Products in Brief

Global supplier of gases, chemicals, equipment, and health care services

FY07 revenue ~$10 billion

Serving customers in technology, energy, industrial and healthcare markets

One of the safest large-scale chemical companies

Operations in more than 30 countries

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Performance Polymers

Worldwide Leader in Co-Polymer Dispersion Technology, Serving Adhesives, Nonwovens, Coatings, and PSA markets

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Performance Polymers Dimensions

$630 million global business

Multi regional (NA, Europe, Asia)

6 Plants (4 NA, 1 Europe, 1 Asia)

230 Products

1,800 Ship-to Customer Locations

3,500 Planning Combinations (Material-Ship-to-Primary Source Plant)

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Why focus on supply chain agility?

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“Supply Chain variability is one of the chief threats to profit margins, and in some industries, this can be as high as 100%”

Source: David Caruso, AMR Research, “Demand-Driven Supply Networks: SCM Done Right” (November, 2003)

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Oil Price Volatility

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4Q03

1Q04

2Q04

3Q04

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1Q05

2Q05

3Q05

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1Q06

Cru

de

Oil

WT

I ($/

Bar

rel)

1998 2008

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Natural Gas Price Volatility

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3

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154Q

03

1Q04

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2Q05

3Q05

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D /

MM

BT

Us

1998 2008

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Stock market reactions on days when supply chain glitches are reported

Delays in product development: -10%

Ramp-up and rollout problems: -11%

Production problems: -10%

Quality problems: -9%

Parts shortage in manufacturing: -7.5%

Potential Impact on the Unpredictable

Source: DePree College of Management Georgia Institute of Technology

“In the real world, you a have to be ready for the unexpected”

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What is supply chain agility?

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Agile: “quick in movement or nimble”

Agility is exceptional nimbleness to respond rapidly and appropriately to unpredictable changes in demand or supply

Agility is not a single function concept, it extends from one end of the supply chain to the other

What is Agility?

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Characteristics of Agile Organizations

They are demand driven rather than forecast driven

They substitute information for inventory

They manage processes not just functions

They leverage the capabilities of their network partners

They employ time-based key performance indicators

They postpone the deployment of inventorySource: Cranfield University School of Management

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Agility is all about managing in the face of variability

Identify sources of variability and determine their relative negative impacts

Eliminate or reduce variability wherever possible by changing supply chain design, processes, policies, and business rules

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Four Levels of Process MaturityL

evel

of

Mat

uri

ty

Agility

Level 1Functional Optimization• No formal synchronization• Vulnerable to variability and

risks• No provision for contingencies

Level 2Cross-Functional Plan Optimization• Clearly defined global

objectives and metrics• Constraints optimized and

synchronized• Plans become invalid when

variance occurs• Ad hoc monitoring process

Level 3Closed-Loop Performance to Plan• Strive to the make plan

happen within each

function• Embed early-warning

sensors in the execution

process• Corrective actions remain

at functional level• Waterfall-oriented process

Level 4Real-Time S&OM (Sales and Operations Management)• Continuous cross-

functional synchronization • Service level offerings

based on experience for a

menu of options• Rapidly evaluate multiple

scenarios of plans for

profitable decisions• Shift from S&OP paradigm

to a “living dashboard”

Source: Supply Chain Leader / April 2007

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How Can Companies Organize to Enable Agile Supply Chains?

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Agile Organizations

Agile organizations establish synchronized inter-organizational processes, designed to enable a rapid response to shifts in demand or supply

Processes and systems that facilitate real-time- transfer of information and plans among multiple functions

Cross-functional synchronization is especially critical, with shared goals and metrics that support agility

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Synchronized Planning

Synchronized Planning is primary process that aligns different functions to a single synchronized plan which optimizes company performance, not just functional performance

Functional organizations have responsibility to deliver on their sub-plans understanding their plans can compromise the overall plan and hurt the entire company

Agile companies live and die by their plans

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Fast Escalation

Variability presents new threats and opportunities beyond the bounds of any plan

When opportunities arise, agile companies respond quickly if they have designed processes in place

Escalation processes are defined on basis that most situations occur multiple times

With defined processes, determining the appropriate course of action is easier, faster, more effective than making decisions on the fly

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Performance Measurement of Plans

One obstacle to taking appropriate action when variability occurs is adherence to “local” metrics

Agile companies coordinate each function’s plan performance in achieving the overall synchronized plan objectives

Did each function’s plan aid or hurt achievement of the overall plan?

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Agility Requires Keeping Commitments to Overall Plans

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Keeping Commitments to Plan

Plans in typical companies are “dead on arrival”

They’re out of sync with demand conditions or violate supply constraints

Agile companies ensure plans are valid and synchronized across functions continuously monitoring plan execution

Every function commits to it’s own sub-plan and provides early warning if deviation occurs

Enables corrective actions to be taken rapidly

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Constraint-Optimized Planning

Typical process for generating a plan is constraint-insensitive

Agile companies use the latest information on constraints in their planning process

They consider multiple scenarios to arrive at realistic, optimal plans – fast

Agile companies create a plan in one-tenth the time it takes to execute it

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Proactive Monitoring / Analysis of Threats

Once a plan is rolled-out, it is subject to threats

Plan owners are expected to take quick corrective actions to ensure their commitments to the synchronized plan holds

Preferred actions are those that can be taken unilaterally

Such actions reduce the element of surprise and variability for the rest of the business

When a plan has to change, it’s important to collaborate and communicate quickly to all functions

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How Has Performance Polymers Increased Supply Chain Agility?

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Standardized Work Processes

Integrated Sales & Operations Planning Process

Supply Chain Planning (APS)

Supply Chain integration

Supply Chain Network Simplification

KPI Measurement

Collaboration Processes

Transactional Automation (orders, pricing)

Business Rules

Approaches to Increasing Supply Chain Agility

Global Work Processes

MetricsMetricsFollow the Money!Follow the Money!

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Sales & Operations Planning

Combines all business plans into one integrated plan

Monthly process

Reviewed by management at an aggregate level

Reconciles demand and supply plans at detail and aggregate level and linked to operating plan

What the business plans to do over near/intermediate term covering an 18- month horizon to:

– Plan for resources

– Execute business plan/strategy

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Plan Supply Chain

P1 Plan Supply Chain

P1.1 Aggregate Demand

P1.2 Aggregate Supply

P1.3 Balance Demand & Supply

P1.4 Issue Supply Chain Plans

Sales & Operations Planning

Raw Material Planning

Inventory Planning

Master Production Scheduling

Distribution Planning

Financial Planning

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Supply Chain PlanningAdvanced Planning Systems (APO)

Air Products ERP Platform is SAP

SAP R/3 Single Instance

– Go-Live August 2003

– Global Release strategy developed through 2008

APO (Advanced Planner & Optimizer) v4.1

– Scope included deploying Demand Planning (DP) and Supply Network Planning (SNP) modules

– First APO forecast generated in October 2003

– APO planned orders passed to plants for production scheduling

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Centralized planning, local execution

Forecast generated monthly for 18 months - Target 85%

Supply plan generated monthly for 18 months

Planned orders passed from APO to plant for execution - Production Plan Target 85%

APO re-plans demand every night based on new sales orders and generates supply requirements for 60 days

APO generates 18 month raw material forecast

Supply Chain PlanningAdvanced Planning Systems (APO)

(This approach integrated planning with execution)

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Supply chain complexity increases costs, reduces supply chain agility and responsiveness

Developed cost-to-serve model to understand profitability

Rationalized plants, warehouses, products, assets, and customers

– Plants 40%

– Warehouses 80%

– Products 55%

– Customers 65%

Supply Chain Network Simplification

“20 % of products generated 80% of the profits, but only 49% of the revenue”

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Product Rationalization History

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70

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# D

isco

nti

nu

ed

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100

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tal # Pro

du

cts

# Discontinued Total # Active

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Large number of transactions involved small quantity, packaged orders (15% of volume, ~30% of transactions)

Established national distributor network for North America

Transferred customers purchasing only packaged products to distributors

Transferred ~68% of ship-to customers to distributor network

Adherence to distributor business rules critical for delivering low cost to serve for this segment

– Full truckload orders– Extra lead time requirements

Sales orders decreased by ~40%, distribution costs decreased by ~50%, and packaged inventory decreased by 95%

Distributor revenue grew 2-3 times market growth rate

Distributor Channel Expansion (NA)Use Distributors for Package Customers

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Standardized KPIs

Supply chain planning• Forecast Accuracy %

– Forecast Value Added

• Production Plan Adherence

• Inventory DOS

• Inventory Accuracy %

• Master Data Accuracy (APO, production, customer)

Operational Performance• On-stream

• Efficiency

• Non-prime inventory

• Off-grade

Financial• Financial Forecasting

Accuracy

• Cash-to-Cash cycle time

Purchasing/Fulfillment• % Orders Received on Time

• On-Time delivery

• % Perfect Order Fulfillment

Customer• % Complaints closed by

target date

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Forecast Accuracy

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50

60

70

80

90

100

% F

ore

cast

Accu

racy

World Class Performance

2003 2007

50% Improvement

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Production Plan Adherence(Supply Planning Accuracy)

50

60

70

80

90

100

Pro

du

cti

on

Pla

n A

dh

ere

nc

e (

%)

38% Improvement

2004 2007

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Financial Forecast Accuracy

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60

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90

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Dir

ec

t P

rofi

t A

cc

ura

cy

(%

)

21% Improvement

2004 2007

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Where We Are TodayThe Benefits

Established standardized supply chain processes that integrate all functions

Improved integration with suppliers, customers, and service providers

More accurate capacity plans developed based on real world constraints and variability

One volume forecast aligned w/ all business plans

– Financial, Supply Chain, Operations, Commercial, and R&D

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Force Majeure CaseSo how agile was our supply chain?

From May-October 2007, 4 suppliers announced force majeures in NA/EU

Supplier allocations ranged from 80-10%

Competitors cutoff many customers

Established daily S&OP meetings

Calculated run-out dates for raw materials by plant

Procured materials from all around the world

Implemented “force majeure” surcharge

Gained several $ million in new business

“We were so impressed how you maintained uninterrupted supply of product during the force majeures”

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Improved Financial Performance

– Inventory reduced by 25%

– Net Asset Investment down by 25%

– Profitability increased by 80%

– ORONA improved from 5% to 13%

“All these benefits have been easier to achieve due to increased supply chain agility”

Where We Are TodayThe Benefits

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Conclusion

“The only sustainable competitive advantage any company can have is the ability to consistently react to market opportunities faster than the competition. A company’s products, engineering, proprietary manufacturing processes/technologies or even a powerful brand simply no longer ensure long term, sustainable advantage”

But those who can build superior agile and responsive supply chains have a real chance

Thank you!

Stephen CraneDirector Supply ChainAir Products and Chemicals

[email protected]