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Supply Chain Videocast

End-to-End Optimization Uncovers True Drivers of Inventory

Quantify Inventory Opportunities for Better Results + PepsiCo Case Study

Broadcast Made Possible by:

End-to-End Optimization Uncovers True Drivers of Inventory

Dr. David Simchi-Levi

30 April 2013

Today’s Topics

Introduction to OPS Rules Management Consultants

Inventory Concepts and Optimization

PWF Supply Chain

End-to-End Model of PWF Supply Chain

Model Validation

Drivers of PWF Inventory

The Opportunity

Key Takeaways

4

© OPS Rules Partners, LLC 2013


4 Things to Know About OPS Rules

Ops Rules is a specialized consulting firm that:

Focuses on operations strategies that transform complex Supply Chains for competitive advantage and significant performance gains of 20-30%

Brings fresh Intellectual Property to clients based on the work of world-renowned Supply Chain thought leader Professor David Simchi-Levi from MIT

Applies cutting edge analytics to achieve a quantum leap in operational and business performance

Implements a three step methodology, analyze.innovate.transform, to ensure sustainable business outcomes

5


OPS Rules Connects the Customer Value Proposition to the Operations and Supply Chain

Strategy

6

Customer Value Proposition

Operations and Supply Chain Strategy


Sell Distribute Supply

Plan/ Design

Development Supply Chain

Fulfillment Supply Chain

OPS Rules identifies significant opportunities through the integration of Development and Fulfillment Supply Chains

Produce

Development-related Service Offerings

Product/Platform Architecture Design for Supply Chain Customer Value Proposition Make/Buy Strategy Strategic Partnerships Strategic Sourcing & Supplier

Development Supplier Contracting

Fulfillment-related Service Offerings

Push/Pull Optimized Planning Complexity Reduction Flexibility Supply Chain Segmentation Macro/micro Network Optimization Supply Chain Risk Management Managing Long Tail Products Operations Performance Management

7

Source


OPS Rules has Unique IP and Expertise to help firms Overcome Operational Challenges and Optimize Business

Performance End to End

Optimization Flexibility and Risk

Management Advanced Supplier

Management Process

Tools

Organization

Inventory Optimization Network Design Push-Pull Planning SC Segmentation Complexity Reduction S&OP

Data Collection Templates Inventory Analyst Network Design Complexity Calculator Risk Exposure Calculator

Risk Exposure Index Supplier Segmentation Sourcing Strategies Flexibility Analysis Inventory Positioning Control Tower

Supplier Segmentation Risk Exposure Index Maturity Model Extended Value Steam

Analysis Control Tower

Change Management Stakeholder

Engagement & Comms Readiness Governance Barrier Removal

Performance Management

Collaboration Framework

Readiness

Capability Development Performance

Management Collaboration

Framework

8


OPS Rules has Unique IP and Expertise to help firms Overcome Operational Challenges and Optimize Business

Performance End to End

Optimization Flexibility and Risk

Management Advanced Supplier

Management Process

Tools

Organization

Inventory Optimization Network Design Push-Pull Planning SC Segmentation Complexity Reduction S&OP

Data Collection Templates Inventory Analyst Network Design Complexity Calculator Risk Exposure Calculator

Risk Exposure Index Supplier Segmentation Sourcing Strategies Flexibility Analysis Inventory Positioning Control Tower

Supplier Segmentation Risk Exposure Index Maturity Model Extended Value Steam

Analysis Control Tower

Change Management Stakeholder

Engagement & Comms Readiness Governance Barrier Removal

Performance Management

Collaboration Framework

Readiness

Capability Development Performance

Management Collaboration

Framework

9

Today’s Topics



PWF Supply Chain


Model Validation


The Opportunity

Key Takeaways

10


11

Inventory Optimization

Objective: Develop a model that enables the firm to analyze and optimize inventory across multiple echelons

Determine the appropriate inventory levels (cycle stock, safety stock, intransient stock) at different locations

Why?

Too Much Inventory – Ties up cash; Increase holding costs; Risk obsolesce

Not Enough Inventory – Increase expediting cost; lose or delay potential sales; Effect brand reputation

Key Drivers:

Demand: Average and Variability

Lead Time: Average and Variability

Fill Rates Objectives

Order frequency, Order size, Minimum order quantity

Suppliers performance


©Copyright 2012 D. Simchi-Levi

From Local to Global Optimization

Study used Inventory Analyst™

$0

$10,000

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$100,000

0 20 40 60 80 100

Safe

ty S

tock C

ost

($/y

ear)

Lead Time Quoted to Customer (days)

Safety Stock Cost vs. Quoted Lead Time

Local Optimization

Global Optimization




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Safe

ty S

tock C

ost

($/y

ear)



Local Optimization

Global Optimization

For a given lead-time, the

optimized supply chain

provides reduced costs




$0

$10,000

$20,000

$30,000

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$50,000

$60,000

$70,000

$80,000

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0 20 40 60 80 100

Safe

ty S

tock C

ost

($/y

ear)



Local Optimization

Global Optimization

For a given lead-time, the


provides reduced costs

For a given cost, the


provides better lead-times

Today’s Topics



PWF Supply Chain


Model Validation


The Opportunity

Key Takeaways

15


16

Pepsi Worldwide Flavor (PWF) Supply Chain

Manufacturer of Carbonated Soft Drink Concentrate

Multi-tier Network Manufacturing in 3 plants

Four DCs in US serving US and Canada Markets

Products 450 Finish Goods (MTO at DCs)

Average Price Per Unit = High

Average Truckload Value = Very High

1781 Components and Raw Materials Product Shelf Life is Between 30 days to 2 years

Components are shared across multiple Finish Goods

Multi-level Supply Chain Network Cannot be Fully Optimized using Single-Echelon Optimization Method


17

Overview of the Network

Plant 2

Plant 1

Plant 3

NEDC

SEDC

SCDC

SWDC

Suppliers (Asia)

Suppliers (Europe)

Suppliers (North

America)

Suppliers (South

America)

Non-buffer Stock

Buffer Stock

Customers (Canada)

Customer (US)

Customer (US)

Customer (US)

Customer (US)

Raw Material Component

Component and Raw Material

Component

Component

Finish Goods


Today’s Topics



PWF Supply Chain


Model Validation


The Opportunity

Key Takeaways

18


Project Scope

Distribution

Manufacturing

Suppliers

PWF’s Supply Chain is Complex with Inventory at Multiple Locations

Flavors

Commodities

Packaging

Salts

Plant 3

Plant 2

Plant 1

Customers

Bottlers

NEDC

Food Service

SEDC

SCDC

SWDC

PBC Location A

Other Bottler Location A

PBC Location B to Z

Other Bottler Location B to Z

Other Customers

Retail Customer

Inventory is held in several locations in the supply chain, creating opportunities for risk pooling and complexity reduction

Plant Raw

Materials

Components DC Finished

Goods

Bottler

Demand

*Bottler Inventory is not in scope

D

19


PWF Supply Chain Details

Demand

138 Bottlers, 11 in Canada and 127 in US

PWF does not own any inventory at customer site

Number of Finished Products: 450

For each product-location pair, information includes Average Weekly

Demand, and Demand Standard Deviation

20 © OPS Rules Partners, LLC 2013

PWFs Annual Demand Profile is Relatively Stable with Minimal Seasonality

21

-

200

400

600

800

1,000

1,200

1,400

1,600

-

20

40

60

80

100

120

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49 51 53

Th

ou

san

ds

(lb

s)

Mil

lio

ns

(8 o

z ca

ses

)

8oz cases Lbs

The same inventory targets can be set and maintained for the majority of SKUs for the majority of the year


PWF Supply Chain Details (Cont.)

Distribution Centers

Four DCs in the US Each DC supplies a group of customers, predetermined by PWF PWF uses FTL to ship from DCs to customer sites Products are shipped in a weekly cycle The network is fixed

Plants and Plants to DCs Lanes Three plants, supplying components to four DCs in the US Predetermined assignments of products to plants Stable lead time per Plant to DC lane Lead time varies from 1 day to 35 days depending on lane Products are shipped in a weekly/bi-weekly cycle to DCs (depending on product) Raw material is received in a weekly cycle

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Use a 2-Phase Validation Process

Phase 1- Provide the model with historical data (lead times, costs, historical inventory information) and ask the model to determine fill rate

Phase 2 - Model is given historic al fill rate and historical inventory levels and determines where (location/products) there may be insufficient inventory to achieve the historical fill rate or where the historical inventory levels implies a higher fill rate than the historical fill rate. For each SKU there are 3 possible outcomes:

Exact match: Achieve historic fill rate with historical inventory

Inventory More Than Sufficient: Historical inventory implies a higher fill rate than historic fill rate

Inventory Insufficient: Need more inventory to achieve historic fill rate

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Historical Inventory Level

Total $

Plant 1 $

Plant 2 $

Plant 3 $

NEDC $

SCDC $

SEDC $

SWDC $

Phase 1 Validation (Fill Rate): Model Produced Fill Rate, Using Only the Historic Inventory Data

Historic inventory level is only constraint used in the model during

this phase

Concentrate Plant

Compliance

Delta

Plant 1 2.91%

Plant 2 1.75%

Plant 3 0.71%

Concentrate Pack

Availability

Delta

NEDC -0.99%

SCDC -1.17% SEDC -1.21%

SWDC -1.27%


Today’s Topics



PWF Supply Chain


Model Validation


The Opportunity

Key Takeaways

25


Inventory Drivers

Frequency; Batch Size Production Planning

Reduction by 20% Demand Variability

Complexity Reduction

Inventory Positioning

Impact Analysis Driver

Component Forecast Forecast Method

End-to-End Model

Change Package Size

26



What Opportunities Exist by Simply Optimizing the Current Inventory Without Any Change to Structure or Policy?

99.00% 99.20% 99.40% 99.60% 99.80% 100.00%

Current State

PA*=max (Current, 99.7%) 2

9%

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Model Trade Off: Service Level vs. Inventory cost

Inventory Cost

Fill Rate


Where are the Inventory Savings Coming From?

28

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Plant1 Plant2 Plant3 DC1 DC2 DC3 DC4


Where are the Inventory Savings Coming From?

29

Why are there significant inventory savings in raw material at the plants?

70% of the savings are in plant raw material


0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

Plant1 Plant2 Plant3 DC1 DC2 DC3 DC4

Impact of Supplier Lead Time and Variability

30

-60% -40% -20% 0% 20% 40% 60%

Average Lead Time

0% 10% 20% 30% 40% 50% 60%

Lead Time Variability


Bullwhip Effect: Significant Evidence of Bullwhip Effect is Apparent in PWF's Supply Chain

31

-10000

0

10000

20000

30000

40000

50000

60000

70000

7 12 17 22 27 32

RM xxxxx "Bottler's Demand"

"Plants Requirement"

"DCOrderExp"

Divergences from Established Make-Weeks further exacerbates the variability (Red vs. Green)

Classic Bullwhip Effect (Red vs. Blue)

A single component drove all the variability in this raw material—this component has a production cycle of every other week


Inventory Drivers

Frequency; Batch Size Production Planning

Reduction by 20% Demand Variability




Component Forecast Forecast Method

End-to-End Model

Change Package Size

24%-29%


Inventory Drivers

7% Frequency; Batch Size Production Planning

5% Reduction by 20% Demand Variability




<1% Component Forecast Forecast Method

End-to-End Model

Change Package Size

24%-29%

<1%

Impact of last four drivers is relative to optimal inventory positioning

33


Today’s Topics



PWF Supply Chain

The Challenge


Model Validation


The Opportunity

Key Takeaways

34


Key Takeaways – Inventory Optimization To understand true inventory drivers you need to develop an end to

end inventory model of your supply chain

A critical step in this process is model validation

Potential inventory drivers are analyzed through scenarios

Result of the analysis provides opportunities to significantly improve supply chain performance

Improve suppliers performance

Inventory positioning is typically a big opportunity.

35


Resources David Simchi-Levi

OPS Rules Chairman [email protected] www.opsrules.com

Laszlo Molnar

Sr. Director, Supply Chain PepsiCo Worldwide Flavors [email protected] www.pepsico.com

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mailto:[email protected]

mailto:[email protected]

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Supply Chain Videocast - The best in supply chain