03 August 2006

Operational Innovation
Drives Supply Chain
Excellence

STEVE HUSSEY – Managing Director, PRTM India

Management
Consultants
Where Innovation Operates
Agenda
PRTM’s Expertise

Setting the Stage

ƒ Trends in Manufacturing
ƒ Supply Chain Competitiveness and Maturity

Using SCOR to Reshape the Supply Chain

ƒ SCOR Model Defined
ƒ Using SCOR – Case Study

Summary

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PRTM Global Experience
ƒ 30 years of operational strategy and ƒ Major commercial and government sectors:
innovation − Aerospace and Defence
ƒ More than 500 consultants worldwide − Automotive
ƒ 16 offices worldwide − Chemicals and Process Industries

ƒ Over 1,200 clients and 6,000 projects − Communications and Media

− Consumer Goods
ƒ 90% level of repeat business
− Electronics and Computing
− Energy
− Financial Services
Bangalore Boston Chicago − Government
Dallas Detroit Frankfurt Glasgow − Life Sciences and Healthcare
London Munich New York Orange County − Industrial Products
Paris Shanghai Silicon Valley Tokyo
− Software
Washington, D.C.

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Our Expertise: Operational Strategy
PRTM is the premier operational strategy consulting firm
ƒ Marketplace realities have created new operational requirements
ƒ Without the right operational strategy, even strong business strategies fail

Business
Business Strategy
Strategy Operational
Operational Strategy
Strategy Operations
Operations
-- -- -- -- -- -- -- -- -- -- -- -- -- -- --
Where
Where and and why why How
How we’ll
we’ll win win Executing
Executing to to win
win
we’ll
we’ll win win

We focus on the critical link between business strategy and execution

ƒ Operational strategy structures your business operations and economics for
competitive advantage
ƒ We help you establish a winning operational strategy…and realize it

Operational Innovation Drives Supply Chain Excellence—03 August 2006 | © 2006 PRTM Proprietary CONFIDENTIAL |4
What should you ask of your operational strategy?
Outcome Scope Strategy Net Effect

Create Operational
Cross-Value Market
Operational Breakthroughs That Significantly
Stream, Cross- Commanding
Innovation Alter the Way a Company
Enterprise “Game-Changers”
Competes

Cross-Functional Transform Core Business

Operational Business
Operations Processes to Achieve Best-in-
Excellence Competitiveness
(Value Streams) Class Performance

Operational Functional Find and Address Ways to Functional

Improvement Operations Decrease Operational “Waste” Competence

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 Setting the Stage

Management
Consultants
Where Innovation Operates
Manufacturing is still a principal creator of wealth
Manufacturing contributes some $20,000B a year of world gross domestic
product and employs about 350M people worldwide
Success in manufacturing, in an increasingly competitive world, depends
on being good at a whole sequence of operations
Product Management
SC Performance Customer Channel
Management Strategy

Supply and Raw Material

Inventory Management Supply-chain processes Volume Planning
Plan
Procurement Design Sell
Source Make Deliver
Sales Planning

Supply Chain
Operating Model Information Systems Organisation Demand/Supply
Planning
Order Fulfilment
Customer Order
Management
Supply-Chain MIS
Manufacturing Configuration
Execution Execution

Manufacturing must be employed strategically in today’s global arena

ƒ Manufacturing capability can underpin an integrated operational strategy and
premium returns can be earned from superior production/manufacturing
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Supply Chain As a Strategic Competitive Weapon
Company Link Characteristics
Marketing > Design > ƒ “Fabless” business model
Manufacturing >
ƒ Substantial process knowledge
Service
In 75% of Mobile Phones ƒ Highly successful—but repeatable?

Marketing > Design > ƒ Pioneering “direct supply” model

Manufacturing >
ƒ Minimal design and production capability
Service
Dominant in PC Market
ƒ Depends upon purchasing power

Manufacturing + ƒ Products in own shops change every 2 weeks

Marketing
ƒ Production can be flexed to meet demand
ƒ Competitors can’t follow!
Leading Clothes Maker

Service + ƒ Responding to customer needs

Manufacturing
ƒ Service offering—“power by the hour”
ƒ Radical implications for production
Leading Defence Company

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 Trends lead to new supply chain requirements
Industry Trends CPG Retail Industrial
High
Tech

1. Increasing geographical concentration of capacity

THE RESPONSE
and inventory—move to low cost countries
2. Globalization—manufacturing and sourcing of
supplies
Pursuit of…
3. Increase in demand for customization/value added
series/make to order
4. Reduce product lifecycle ¾ Lower Total Cost
5. Tremendous focus on cost efficiency
of Manufacturing
6. Significant increase in control over supply chain
¾ Increased
Responsiveness
7. Investment in new customer relationship initiatives
¾ Lower Cost to
8. Increasing delivery frequency and declining order Service
size
¾ Greater
Impact on manufacturing CPG Retail Industrial
High Engineering
Tech Competencies
Speed Lo Med Med Hi

Reliability Med Med Hi Med

Control of cost to produce Hi Hi Med Hi

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 Competition is NOT manufacturing site vs. manufacturing
site, but rather supply chains vs. supply chains

Global Considerations Local Considerations

ƒ Compete at a global level in all areas of supply ƒ Be prepared for local competition, through
chain performance clustering and potential acquisition
ƒ Improve overall capability of the entire end-to-end ƒ Focus in on overall cost reduction initiatives, and
supply chain processes determine cost to compete
ƒ Meet international quality, cost, and delivery ƒ Encourage and actively seek migration to low-cost
demands locations within India
ƒ Implement best practices from other industries ƒ Consider divestment of non-core supply chain
elements
ƒ Collaborate to gain access to global markets
ƒ Implement quickly a mindset that drives initiatives
for productivity improvement

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While Indian companies must consider key cost drivers…
100% 10.8 % India versus China
100
7.6 %
82.7 %
80 2.9 %
2.1 % 0.8 % 0.6 %
1.2 % 1.0 %
2.5 %

60
Indian Cost 60% is Materials Costs

40

China Advantage India Advantage

20

Indian companies must optimize the two advantages

0
Cost of Exist

Engineering
Cost
Logistics

Cost of Funds
Taxes

Labour

China Cost
Power & Fuel
Duties

Other
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…other productivity aspects must be addressed
0–20% 20–40% 40–60% 60–80% 60–80%
Selected Metrics Major Opportunity Disadvantage Average/Median Advantage Best in Class

Cash-to Cash
(Days)

IDOS
(Days) Below Average
Performance in
Asset Turns
(Turns)
ALL Sectors

COGS
(% of Revenue)

Auto Chemicals Industrials FMCG Pharma Electronics

This performance is governed specifically by the

MATURITY of a supply chain
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 How to define supply chain maturity?
Maturity is dependent upon the depth and breadth of practices within a supply chain

Operational
Innovation Stage 4:
Operational Cross-
Enterprise
Excellence
Operational Collaboration
Stage 3:
Improvements ƒ IT and solutions
Integration enable a
External collaborative supply
Enablers

Stage 2: chain strategy that:

ƒ Strategic partners
– Aligns
Internal throughout the
participating
Integration global supply chain
companies’
Stage 1: collaborate to:
business
Functional ƒ Company-wide – Identify joint objectives and
Supply Chain business
Focus process and data associated
Disciplines model continuously objectives and processes
measured at the action plans
– Results in real-
Strategy ƒ Discrete supply
company, process, – Enforce time planning,
chain processes and
data flows well and diagnostic common decision
Process levels processes and
documented and making, and
Performance understood ƒ Resources data sharing execution of
ƒ Resources managed managed at both – Define, monitor, supply chain
Organisation at department level functional and and react to responses to
and performance cross-functional performance customer
Collaboration measured at levels metrics requirements
functional level

Operational Capability
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 Are “mature” supply chain practices important? YES
It improves the top line It improves the bottom line

Best-in-class companies have Best-in-class companies have

25% higher sales growth than 40% higher profitability than
other companies median companies
Sales Growth Relative Profitability
Percent Year-over-Year Change

18% 160%

Percentage of Industry Average

25% 40%
15%
120%
12%

60%
9% 80%

6%
40%
3%

0% 0%
BICC Non-BICC BICC Median WICC
Source: The Performance Measurement Group, LLC, a PRTM Company

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What does this mean to you?
There is a strong correlation between the maturity of supply chain
practices in a company and quantitative performance
BIC companies outperform median companies by 10–20% on both cost
and inventory; specifically they:
ƒ Achieve higher levels of customer service using lower inventory levels
ƒ Have lower supply chain costs with shorter cash-to-cash cycle times and respond to
demand more quickly than the competition
BICCs focus their supply chain development efforts on rapid enablement
of new business strategies
ƒ Innovation, growth in new markets, global operations
BICCs have already adopted many of the practices embodied in SCOR

What are you doing to improve your supply chain?

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 Using SCOR to
Reshape Your
Supply Chain

Management
Consultants
Where Innovation Operates
 SCOR helps companies to integrate their supply chains

ƒ Supply Chain Strategy and Network ƒ Cross-Enterprise Supply/Demand

Design Planning
ƒ Regional and Global Collaboration ƒ Supply Chain Performance
ƒ Organisational Design Measurement

Plan
Plan

Supplier’s Customer’s
Supplier Customer
Supplier Customer

Deliver Source Make Deliver Source

Source Make
Make Deliver
Deliver Source Make Deliver Source

ƒ Strategic Sourcing ƒ Cycle-Time Reduction ƒ Forecasting

ƒ Supplier Collaboration ƒ Make/Buy Decisions ƒ CPFR
ƒ eProcurement ƒ Lean Manufacturing ƒ Order Management
ƒ Supplier Management ƒ Yield/Quality Improvement ƒ Inventory Management
ƒ Warehouse Management
ƒ Logistics Management
ƒ Customer-Managed Inventory

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SCOR is organised around five core processes
Any supply chain can be configured from multiple instances using the
five core processes

Plan
P1 Plan Supply Chain

Customers
Suppliers

P2 Plan Source P3 Plan Make P4 Plan Deliver P5 Plan Return

Source Make Deliver

S1 Source M1 Make-to-Stock D1 Deliver
Stocked Product Stocked Product

S2 Source M2 Make-to-Order D2 Deliver Make-

Make-to-Order Product to-Order Product

S3 Source Engineer- M3 Engineer-to-Order D3 Deliver Engineer-

to-Order Product to-Order Product

Return
R1 Return
Enable Plan Source Make Deliver Product
1) Establish and Manage Rules
2) Assess Performance
3) Manage Data 7) Manage Supply Chain Configuration
4) Manage Inventory
5) Manage Capital Assets
8) Manage Regulatory Compliance
9) Process-Specific Elements Align SC/Financials SCOR Version 7
6) Manage Transportation Supplier Agreements Manage Returns

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SCOR contains three levels of process detail…
Level # Description Schematic Comments
Supply-Chain Operations Reference-model

1 Level 1 defines the scope and content for the Supply-

Top Level Plan
Chain Operations Reference-model
Source Make Deliver
(Process Types)
Here basis of competition performance targets are set

2
Configuration
A company’s supply chain can be “configured-to-
Level order” at Level 2 from approximately 17 core
“process categories.” Companies implement their
(Process operations strategy through the configuration
Categories)
they choose for their supply chain
3 Process Element Companies “fine-tune” their Operations Strategy at
Level Level 3
(Decompose
Processes) Level 3 defines a company’s ability to compete
successfully in its chosen markets and consists of:
P3.1
Identify, Prioritize, and
Aggregate Production
ƒ Process element definitions
Requirements
P3.3 P3.4 ƒ Process element information inputs and outputs
P3.2
Balance Production Resources
with Production Requirements
Establish Detailed
Production Plans ƒ Process performance metrics
Identify, Assess, and
Aggregate Production
Resources
ƒ Best practices, where applicable
ƒ System capabilities required to support best practices
ƒ Systems/tools by vendor

Companies implement specific supply chain

4 Implementation
Not Level management practices at this level
in (Decompose Level 4 defines practices to achieve competitive
Scope Process Elements)
advantage and to adapt to changing business
conditions

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… and a set of metrics to understand performance

Customer-Facing Internal-Facing

SCOR Level 1
Supply Chain Management Metrics Delivery Flexibility & Cost Assets
Performance/ Responsiveness
Quality

Delivery performance 
Order fulfilment performance 
ƒ Fill rate (Make-to-stock)

ƒ Order fulfilment lead time (ETO, MTO, CTO)

Perfect order fulfilment 

Supply chain response time 
Production flexibility 
Total supply chain management cost 
Value-added productivity 
Warranty cost or returns processing cost 
Cash-to-cash cycle time 
Inventory days of supply 
Asset turns 

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SCOR can be used to achieve many objectives

Example Objectives Likely Outcomes

ƒ Illustrate current supply chain configurations
Rapidly map own or others’ ƒ Establish common reference point and definitions
supply chain
ƒ Communicate effectively with suppliers and customers

Compare process ƒ Benchmark metrics across multiple industries

performance to targets ƒ Compare existing practices to industry best practices

Determine required IT/IS ƒ Identify software vendors providing required capabilities

capabilities
ƒ Identify gaps in current processes
Identify supply chain ƒ Quantify the potential benefits
improvement opportunities ƒ Provide data for project financial justifications

ƒ Design to meet strategic objectives

Implement supply chain
ƒ “Fine-tune” based on pilot results and changing market
process improvements needs

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 Case Study—$3bn Global Industrial Company
Business issue Basis of Competition Competitive Best
Delivery
ƒ Recognised the need to improve its Performance/Quality
supply chain to support overall business
strategy Flexibility and
Responsiveness
ƒ Global turndown in market has increased
Low Cost
pressure to meet customer requirements
better than competitors while reducing
Asset Performance
costs
Benchmarking
ƒ Uncertainty of customer demand patterns Delivery Performance to Commit
90.0% 97.8%

C u s t o m e r - f a c in g
(%)

requires increased supply flexibility to Delivery

Performance/
Order Fulfilment Lead Time:
Product (days) 17.9 days 7.7 days
Quality
enable winning orders from competitors Order Fulfilment Lead Time:
Project (days)

Objective Flexibility & Upside Production Flexibility:

Responsiveness Principal Constraint (days)
30 days 9.7 days

ƒ Enable significant business performance In t e r n a l-f a c in g Cost

Supply Chain Mgmt. Costs
(% of Revenue)
6.4% 3.5%

improvement through development of a Total Inventory Days of Supply 87.8 days 51.9 days
(days)
complete supply chain strategy and Cash-to-Cash Cycle Time
Assets 92.9 days 68.2 days
SCOR-based supply chain design (days)

Net Asset Turns 1.8 3.8

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SCOR mapping highlighted redundant activity
P1 = Plan Supply Chain
Two
Twodistinct
distinctinternal
internalsupply
supply P2 = Plan Source
chain “threads,” indicating P1 P1
chain “threads,” indicating P3 = Plan Make
significant
significantredundant
redundant P4 = Plan Deliver
planning
planningactivity
activity S1 = Source Stocked Materials
S2 = Source MTO Materials
M1 = Make to Stock
P2 P3 P4 The
Thefinal
finalassembly
assemblyplant
plant M2 = Make to Order
views the subassembly M3 = Engineer to Order
views the subassembly
Supplier 1 plant
plantasasanyanyother
othersupplier.
supplier. D1 = Deliver Stocked Materials
Each plant sources D2 = Deliver MTO Materials
Each plant sources
independently
D1 S1 M1 D1 independentlyeven eventhough
though
they
theyshare
shareaakeykeysupplier
supplier

Subassembly
Production
P2 P3 P4

Supplier 2

S1 M1 D1 S1
D1
Both
Bothplants
plantsmanufacture
manufacturetotostock.
stock.
The
The production schedule withinthe
production schedule within the
final assembly plant does not drive Final Assembly D2 S1
final assembly plant does not drive
the Production
Suppliers theproduction
productionschedule
scheduleininthe
the
subassembly plant
subassembly plant Customers

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Moved from Make-to-Stock to Make-to-Order Strategy
P1 = Plan Supply Chain
Integrated
SCOR “to-be” mapping Supply Chain
P2 = Plan Source
P3 = Plan Make
Planning
P4 = Plan Deliver
S1 = Source Stocked Materials
P1 S2 = Source MTO Materials
M1 = Make to Stock
M2 = Make to Order
M3 = Engineer to Order
Supplier 1 D1 = Deliver Stocked Materials
D2 = Deliver MTO Materials
P2 P3 P4
D2

S2 M2 D2 S2
Supplier 2

D2 M2 D2 S2
Subassembly and
Final Assembly
Production

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Case Study Results
Developed operations strategy and supply chain vision using SCOR supporting
the divisions’ business strategy
Developed time-phased supply chain performance targets based on business
priorities
Designed end-to-end integrated supply chain solution at SCOR Level 3
Significantly improved process performance; planning processes alone led to the
prevention of inventory purchases in the amount of €23m in the first year
Impact on Business Performance
Obsolescence Inventory
Service Flexibility
Improvement Cost
Improvement Level € 23M in FY00/01
area € 22M in FY01/02
€ 18M in FY01/02
33%
€ 27M in FY02/03 € 40M in FY02/03

Supply Chain 33%

Response Time
Master Plan
95%
105%
Accuracy 95%

Sales Plan
50%
Accuracy

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Summary
Global competition is fierce, and, ultimately, companies will be forced
to compete at the global level
Leading companies don’t wait for something to force attention to the
supply chain
ƒ They stay ahead of their competition on an ongoing basis using benchmarking
ƒ They constantly look for ways to add value and push the boundaries of
performance and redesign their supply chains to compete
ƒ They know that today’s competitive edge is tomorrow’s price of entry
ƒ They innovate for improvement—not for the sake of being innovative
Companies must continue to drive operational innovation and using
tools such as SCOR can help to achieve a globally competitive supply
chain
Business
Business Strategy
Strategy Operational
Operational Strategy
Strategy Operations
Operations
-- -- -- -- -- -- -- -- -- -- -- -- -- -- --
Where
Where and and why why How
How we’ll
we’ll win win Executing
Executing to to win
win
we’ll
we’ll win win

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