Seven Habits of Highly Successful Supply Chains

Seven Habits of Highly Successful Supply Chains

S.C. International Trade Conference

May 30, 2007

2 2www.tompkinsinc.com 2Copyright © 2007 Tompkins Associates, Inc. All rights reserved.

Today’s Supply Chain Realities

Global Supply Chain

Synchronization

Agility

Competitiveness

Technology

Organization Acceleration


1. Understand and Communicate

2. Benchmarking and Best Practices

3. Leadership

4. Assess and Prioritize

5. Core Competencies

6. Partnership

7. Continuous Improvement

Seven Habits of Highly Successful Supply Chains


Six Levels of Supply Chain Excellence

1. Level I: Business As Usual

– Organizational elements pursuing self interests

2. Level II: Link Excellence

– The starting point of Supply Chain Excellence

3. Level III: Visibility

– The next step in establishing a visible presence with other

supply chain links



4. Level IV: Collaboration

– Using visibility to do the work smarter and meet marketplace demands

5. Level V: Synthesis

– A continuous improvement process to harness the energy of change

6. Level VI: Velocity

– The ideal state of synthesis with speed. Faster! Faster!




Synchronization Under Uncertainty

Performance ScenarioFactor I II III

Forecasting Bad

Customer Satisfaction Good

Cost High

Forecasting

CustomerSatisfaction

Cost

Bad

Bad

Low

Good

Good

Low

A. Proactive: Commodity • Quality Forecasting


Internal and External

Where are we?

Where are we going?

It is about Supply Chain vs. Supply Chain

Understand and Communicate: Then Communicate Again


Benchmarking and Best Practices

Use Benchmarking (metrics) to plot Best Practices.

How are you doing in comparison to others?

Are your costs reasonable and in line with others like you?

Are you missing any breakthrough opportunities?

How can you build a consensus around a supply chain path forward?


Benchmarking and Best Practices Supply Chain Consortium

Strong industry leadership

World-class tools

Right participants

Subscriber centric

Excellence in networking


Leadership and Content

Strong Leadership:

Broad Content:

Profile Inbound Orders Truck Transportation DC Operations International Ocean Transportation Dedicated Fleet

Supply Chain Technology Air Freight and Parcel Order Fulfillment – Internet/Catalog Demand Planning Supply, Distribution, Inventory and

Transportation Planning Supply Chain Network Design


Building Momentum

Question Refinement: 2004 – 2,900 2005 – 7,600 2006 – 9,000

Right Participants: 2004 – 50 Retailers 2005 – 80 Retailers and Industry leaders 2006 – 110 Retailers and Industry leaders

World-Class Tools:

Web Interview Process Search Online Queries Strategic Assessment Dashboard Peer Networking


Highlighting a Few Points in a Few Areas Today

• Overall Supply Chain

• Distribution Center Practices and Trends

• Vendor Collaboration

Overall Supply Chain

1414


7%

7%

11%

50%

25%

Very Inefficient

Inefficient

Insufficient Benefit

Close

Optimized

The focus on network optimization is improving.

However, 24% of members indicate that their network design has not been reviewed in over 3 years.

Overall Supply Chain - Network Design


------ Performance ------ TargetedOperational Metric Current Target Improvement

Transportation costs* 2.97 % 2.79 % 6%

DC operations costs* 2.98 % 2.81 % 6%

Inventory turns 6.0 turns 6.7 turns 12%

Supply chain overhead costs* 1.34 % 1.27 % 5%

Days purchases outstanding 44.6 days 45.0 days 1%

* As a % of COGS or Revenue

Supply Chain Performance Metrics

Significant cost reductions possible.

Overall Supply Chain – Performance Metrics


As supply chain networks become more efficient, the trend is toward more efficient transportation modes.

Avg % Avg % NoDomestic Shipping Mode More Change Less Change Change

Truckload -- excluding TOFC 69% 11% 19% 13% 13%

Rail Intermodal (TOFC and non-ocean COFC) 70% 9% 2% 45% 28%

Inbound consolidation (Pool) 58% 17% 17% 4% 25%

Rail (Boxcar) 21% 6% 8% 8% 71%

Parcel 22% 13% 26% 12% 52%

Air Freight 10% 9% 27% 6% 63%

Less Than Truckload 26% 16% 57% 11% 17%

Trends in Domestic Transportation Mode Usage

Overall Supply Chain - Transportation Mode Shifts


Network design is a significant lever, but may not be optimized. The key is to have the right facility types, right number and right location.

Higher fuel prices are changing the balance between transportation and distribution center costs in designing optimal networks.

SKU rationalization is also key – the right quantities, inventoried at the right locations, and flowing through the correct parts of the network.

Accurate demand planning and forecasting is key to using the network optimally.

As companies take greater control of their inbound networks, transportation modes will shift. The burden of finding adequate capacity shifts from the vendor to the buyer.

Overall Supply Chain – Learnings

Distribution Center Practices and Trends

1919


To put this topic in context, note that the majority of DC’s are in the 201K to 500K square foot size categories.

DC Size % ofin Square Feet Total DCs

0 to 10K 0%

11K to 50K 0%

51K to 100K 7%

101K to 200K 2%

201k to 300K 22%

301K to 400K 20%

401K to 500K 17%

501K to 600K 6%

601K to 700K 3%

701K to 800K 7%

801K to 900K 6%

901K to 1M 1%

1M to 1.5M 9%

Over 1.5M 0%

DC Size

DC Operations – Size


What trends have you seen in the last 3 years? What trends do you anticipate in the next 3 years?

Trend Increase Decrease Increase Decrease

Inbound order size (weight, cube, cases or pieces) 76% 18% 88% 12%

Outbound order size (weight, cube, cases or pieces) 56% 39% 61% 33%

Number of SKU's carried 89% 6% 61% 33%

Imports as a percent of inbound shipments 83% 11% 89% 6%

Exports as a percent of outbound shipments 83% 9% 73% 9%

Crossdock volume as a percent of total inbound volume 77% 15% 77% 15%

Flow through volume as a percent of total inbound volume 82% 9% 82% 9%

Direct to consumer sales (catalog or Internet) as a percent of total volume

71% 14% 100% 0%

Degree of automation (material handling equipment) 83% 6% 89% 0%

Operating hours 29% 2% 77% 20%

Live unloads for truckload deliveries (vs. drop trailer) 13% 16% 40% 65%

Last 3 Years Next 3 Years

Trends in DC Operations

DC Operations - Trends


If you could make changes, what changes would you make to your current DC layouts?

Capacity/ Labor Order Fill

Change Throughput Productivity Accuracy Safety

Fewer dock doors 0% 0% 0% 0%

More dock doors 68% 36% 0% 32%

Narrower building (less width) 0% 0% 0% 0%

Wider building (greater width) 14% 14% 0% 0%

Shorter building (less length) 0% 0% 0% 0%

Longer building (greater length) 14% 10% 0% 0%

Lower ceilings 0% 0% 0% 0%

Heigher ceilings 43% 20% 0% 0%

Different storage racks 50% 43% 15% 14%

More automated material handling 73% 83% 62% 38%

Less automated material handling 0% 0% 0% 0%

Wish List of DC Layout Changes

---------- Anticipated Improvements --------------

DC Operations - Layout Wish List


Best practice can yield exceptional results. Product slotting in DC’s is one example of a potential opportunity.

% ofSlotting Methodology Companies

a. Fixed assignment of SKU's to storage slots based on physicalcharacteristics (i.e. pallets, cases, loose pieces)

b. Manual assignment of SKU's to slots based on physicalcharacteristics and best efforts to minimize labor requirements

c. Same as manual process in b., but assisted by internallydeveloped spreadsheets or database tools

d. Sophisticated slotting software that optimizes the trade offsbetween storage utilization, labor productivity and safety

18%

Slotting Methodologies

9%

45%

27%

DC Operations - Slotting Methodologies


The benefits of automated slotting can be significant, but not all DC’s have taken advantage of the technology.

Efficiency % of Companies

Near optimal 5%

Efficient, but small improvements are possible 15%

Acceptable, but improvements are possible 70%

Inefficient, significant improvements are possible 10%

Efficiency of Slotting Plan

Benefit % Improvement

Labor productivity 14%

Pick accuracy 25%

Benefits of Automated Slotting

DC Operations - Slotting Opportunities


Automated material handling equipment tops the wish list of DC facility upgrades.

There are several key opportunities to upgrade receiving operations including expanded use of ASN’s for unload planning and automated product receipts.

Automated slot management tools can result in significant productivity improvements, but they are not used in many DC’s.

Expanded use of crossdock and flow through operations is the ultimate key to improved performance.

Current WMS applications have left significant room for improvement.

DC Operations – Learnings

Vendor Collaboration

262626


TargetedMetrics Improvement

Operational Metrics

On-time availability at shipment origin 84.5 % 97.4 % 15%

On-time delivery (prepaid) 86.0 % 95.7 % 11%

In stock at stores 94.7 % 97.3 % 3%

Lead time (in days) 13.7 days 11.2 days 18%

Fill rate on closed orders 91.8 % 97.7 % 6%

Perfect Orders 92.3 % 99.4 % 8%

Status/EDI Metrics

Timely and accurate PO Acknowledgements 91.3 % 98.9 % 8%

Timely and accurate Advance Shipment Notifications 75.6 % 90.3 % 19%

Timely and accurate Ready to Ship notices 77.6 % 93.4 % 20%

Vendor Performance Metrics

---- Performance ----Current Goal

… significant opportunities for improvement.

Vendors - Where is Performance Today?


ImportanceReason (1 - 5)

Vendor is not ready to ship on time 4.2

Last minute changes in products, quantities or dates (promotions or "ads")

3.9

Last minute changes in products, quantities or dates (on routine orders)

3.3

Insufficient lead time when order was placed 3.3

Carrier delay in transit 2.4

Improper routing 2.0

Lack of adequate documentation 2.0

Delay at consolidation points 1.9

Reasons Shipments Must Be Expedited

… three of the top four reasons are controlled by the retailer.

Vendors - Expediting and Ordering Behaviors


The most significant improvements can result from joint initiatives undertaken with vendors.

% Of Initiative Companies

Sharing of inventory status 62%

Shipment size, frequency and timing optimization 54%

Reductions in order lead times and lead time variability 54%

Pallet or shipment build improvements 54%

Sharing of demand forecasts 54%

Packaging improvements 54%

Order fill accuracy improvements 46%

Shipment mode and carrier use guidelines 46%

Shipment damage reduction 38%

On-time availability at origin improvements 31%

Store ready initiatives 31%

On-time delivery improvements (freight prepaid shipments) 31%

Security of in-transit product 31%

Sharing of customer or store sales data 31%

Accurate and timely status reporting from order acknowledgement to delivery 23%

Initiatives to increase cross docking opportunities in distribution centers 23%

Inventory reduction initiatives beyond those listed above 23%

Joint Improvement Initiatives with Vendors

Vendors - Joint Initiatives


Penalties and Rewards Yes No Yes No

Poor performance

Financial penalties 65% 35% 89% 11%

Reduced order volumes 53% 47% 67% 33%

Performance that meets or exceeds goals

Financial bonuses 0% 100% na na

Vendor recognition awards 26% 74%

Part of Program Used in Last 12 Months

Avg Awards = 5

Vendor Penalties and Rewards

Penalties are a key part of many programs

Positive incentives are less pervasive

Intent – corrective action versus revenue line item

Monitoring programs are not always “transparent”

Penalties and Rewards


• Implement a timely, accurate and transparent measurement process. Communicate results. Measurement can be two-way, but the retailer creates and maintains the process.

• Penalties can be effective, but they need to be reasonable (reflect the cost of non-performance), applied consistently and motivated by a desire to fix problems.

• Ordering behaviors need to support performance goals.

• Information sharing is essential – sales forecasts and future plans.

Vendor Collaboration – Learnings


Leadership

Leadership shapes culture

Leadership defines direction

Leadership ensures motivation


Leadership Shapes Culture

Type I: Static Consistency

Type II: Dynamic Inconsistency

Type III: Dynamic Consistency


Leadership Defines Direction

Vision – Where?

Mission – How?

Requirements of Success – Science?

Guiding Principles – Values?

Evidence of Success – Key Performance Indicators

(KPI)?


Leadership Ensures Motivation

How they think

► Integrity ► Optimism

► Credibility ► Urgency

► Enthusiasm ► Determination

How they communicate

How they work

How they treat people


Assess and Prioritize Structure

Area: Overall supply chain process

Topic: A focused area within process

Best Practice: Industry identified best practice for topic

Current Practice: Today’s performance for topic

Priority: Importance to pursue

Actions: Steps to be taken

Benefits: Expected results of pursuing actions

Responsibility: Who will make it happen?


Area: Supply Chain Event Management

Topic: Production Tracking and Visibility

Best Practice Current Practice Priority

Production management should be facilitated by structure means to communicate and update the following with suppliers: PO submission Acknowledgement/confirmation PO changes

Communications with suppliers regarding PO’s are manual and maintained individually through the buyer

1

The production management platform should provide ability to communicate and update: Predefined production milestone Predefined inspections and testing milestones

System provides tracking for pre-defined milestones

4

The production management platform should include event management and alerting capabilities to be used for: Reminder to supplier/agent regarding ship schedule Response to buyer regarding intent to ship Any predefined production tracking activities

Merchandising spends approximately 60% of time performing PO administrative review and updates in current system. Alerting and exception-based management capability not supported in system.

2


Area: Supply Chain Event Management

Supply Chain Roadmap:

Actions:

Benefits:

Responsibilities:

Expand on inbound freight management initiative to include electronic PO transmissions, acknowledgement, confirmation and changes. Expand integration with current system to include relevant updates from inbound freight management.

Expand on inbound freight management initiative to include alert capabilities to buyers, suppliers, agents and integrated updates with the current system.

Near-real-time updates and visibility to production events based on tight integration among suppliers, inbound freight management and current system.

Merchandising to expand focus on product strategy and reduce focus on administrative elements.


Core Competencies

Core Functions:– The unique business functions that allow an

organization to be successful– The critical activities included in an

organization’s vision statement that allow it to thrive


Core Competencies:Primary and Secondary

Primary focus core competencies: Those activities and processes that differentiate an organization in the marketplace

Secondary focus core competencies: Those activities and processes that must be done well for the organization to retain market share but are not visible to customers


Non-Core Competencies

What is left in an organization after you remove core competencies?

Primary non-core: Activities that, although not core, have an impact on a company’s bottom line.

Secondary non-core: Activities that need to be done, but unless they are really done poorly, they do not have an impact on an organization’s bottom line.


Core Competencies Matrix

Things that need to be done but do not have any significant impact on the success of the business.

Things that if not done well can have a negative impact on your customer relationship.

Things that need to be done well but are not visible to the customer.

Things that differentiate your organization in the marketplace. The reasons customers come to you.

Secondary FocusPrimary Focus

Things that need to be done but do not have any significant impact on the success of the business.

Things that if not done well can have a negative impact on your customer relationship.

Things that need to be done well but are not visible to the customer.

Things that differentiate your organization in the marketplace. The reasons customers come to you.


Non-Core Process

Core Process

Non-Core Process

Core Process


Core Competencies Matrix for Chic Retailer

• Store Supplies

• Accounting• Landscaping

• IT

• HR• Logistics

• Procurement

• Sourcing• Real Estate

• Retail Stores

• Merchandising• Brand


• Store Supplies

• Accounting• Landscaping

• IT

• HR• Logistics

• Procurement

• Sourcing• Real Estate

• Retail Stores

• Merchandising• Brand


Non-Core Process

Core Process

Non-Core Process

Core Process


Core Competencies Matrix for a Manufacturer/Distributor

• Real Estate• Food Service• Landscaping

• IT• Finance and Accounting• Sales and Marketing

• Procurement• Logistics• HR• Maintenance

• Production• Product Design• Production Planning and

Scheduling


• Real Estate• Food Service• Landscaping

• IT• Finance and Accounting• Sales and Marketing

• Procurement• Logistics• HR• Maintenance

• Production• Product Design• Production Planning and

Scheduling


Non-Core Process

Core Process

Non-Core Process

Core Process


Core Competencies Matrix

Outsource

Contract

Insource

Outsource

Contract

Insource

OutsourceInsource


Outsource

Contract

Insource

Outsource

Contract

Insource

OutsourceInsource


Non-Core Process

Core Process

Non-Core Process

Core Process


Organizations and Leaders Must Focus on Core Competencies

To achieve a highly successful supply chain, organizations must outsource.

However, if an organization does not have a core competency of outsourcing, the outsourcing will fail and leaders will be pulled away from core competencies.

Organizations MUST have a core competency in outsourcing.


Understanding Partnerships

Supply Chain Partnership Evolution and Marriage Partnership Evolution

Partnerships

BETWEEN TWO PEOPLE IN A RELATIONSHIP

BETWEEN PEOPLE WITHIN TWO ORGANIZATIONS

Customer-Driven Organization

Invincible Customer Service

Cooperative Relationship Planning for Partnership

Supply Chain Partnership

Customer-Driven Organization

Invincible Customer Service

Cooperative Relationship Planning for Partnership

Supply Chain Partnership

Dating

Going Steady

Being Engaged

Marriage

Dating

Going Steady

Being Engaged

Marriage



Supply Chain Partnerships believe relationships should be based on:

− Building on each other’s strengths

− Growing the pipeline’s competitive strength

− Integration of systems

− Frequent communications at all levels of the organization

− Frequent structured interactions on creating supply chain peak-to-peak performance



Supply Chain Partnerships believe relationships should:

– Not be based on antagonism, leveraging, hammering and negotiating

– Be long-term based on trust and a true understanding of Supply Chain Excellence

– Be based upon sharing of information, planning, scheduling, risk, rewards, problems, solutions and opportunities for creating peak-to-peak performance



Supply Chain Partnerships believe relationships should be based on working together toward improved performance of the total pipeline on:

− Quality

− Lead times

− New product development

− Time

− Inventories

− Waste

− Costs

− Customer satisfaction



Growing the Supply Chain Partnership

– No two relationships ever develop in the same way

– Relationships evolve not as cold-blooded business negotiations, but as comfortable personal bonds between individuals

– A positive chemistry exists between the two parties involved in a relationship


Understanding Peak-to-Peak

“Success Has Ruined Many A Man.”

-Benjamin Franklin

“Each Success Only Buys An Admission Ticket To A More Difficult Problem.”

-Henry Kissinger

Continuous Improvement



“We Cannot Solve Today’s Problem With The Same Level Of Thinking That Created The Problem In The First Place.”

-Albert Einstein




“It’s What You Learn After You Know It All That Counts.”

-Coach John Wooden

“He Who Stops Being Better, Stops Being Good.”

-Oliver Cromwell




Peak performance is often the beginning of failure. The natural order of life is peak-to-valley-to-peak-to-valley-to-peak-to-valley.

Why not climb to the top of the mountain and instead of traveling to the valley, travel from this peak to the next higher peak, to the next higher peak, and so on?




There will always be more problems than there are solutions. We need to install a process that anticipates and solves problems before they are problems and that continuously transforms our organization into a championship organization that is nevertheless the underdog.




A Supply Chain Excellence organization goes peak-to-peak-to-peak, etc.

Today, there is no steady state. We live in permanent white water. Supply Chain Excellence organizations are organizations that capture the energy of change to move from peak-to-peak-to-peak.




A Supply Chain Excellence Organization Understands:

– The shift required is not from your present path to a new path, but to a process of continually changing paths

– The process of continuous renewal

– That because you are on top you are the underdog

– The non-stop evolution to higher levels of peak performance



Embrace the Seven Habits

Organizations that embrace the Seven Habits of Highly Successful Supply Chains will have a major competitive advantage over organizations that do not.

Evaluate your organization based on the Seven Habits and define a path forward.

“When you come to a fork in the road…Take It!”

-Yogi Berra

Call to Action


Supply Chain James A. Tompkins, Ph.D., No Boundaries: Break Through to Supply Chain Excellence,

Tompkins Press

James A. Tompkins, Ph.D. and Dale Harmelink, The Supply Chain Handbook, Tompkins Press

Benchmarking and Best Practices Website http://www.supplychainconsortium.com/resource_center.asp

Leadership, Partnerships and Continuous Improvement James A. Tompkins, Ph.D., Revolution, Tompkins Press

James A. Tompkins, Ph.D., Future Capable Company, Tompkins Press

Core Competencies and Outsourcing James A. Tompkins, Ph.D., Steve W. Simonson, Bruce W. Tompkins, Brian E. Upchurch,

Logistics and Manufacturing Outsourcing: Harness Your Core Competencies, Tompkins Press

Tompkins Press 8970 Southall Road, Raleigh, NC 27616, (800)789-1257 ext. 55494

Reference List for Seven Habits of Highly Successful Supply Chains

Documents

Seven Habits of Highly Successful Supply Chains