2005 by Hitachi Consulting

April 4-6, 2005, Disneyland Hotel

Anaheim, California USA

Leveraging IT Investments Through Improved Supply Chain Management

Jim Culliton- Manager, Supply Chain Solutions; Hitachi Consulting

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Agenda

Common issues with Supply Chain ManagementSupply Chain Design and OptimizationLinks with ERP and APSSCDO as part of Overall Operations Planning ProcessAssessment of applicability of Network Design and Inventory OptimizationExpected ROIHow to execute and SCDO strategyCase StudiesSummary

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Key Learning Points

What is Network and Inventory Optimization and what problems does it help solve?How does it related to ERP and APS system?What situations is it applicable to?What are the different approaches to Network and Inventory Optimization?

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Hitachi is one of the world’s leading global companies with approximately 322,000 employees worldwide

– Founded in 1910– Revenues of $64B– 320,000 employees worldwide– Almost 1/3 of Hitachi’s worldwide revenue is from

information technology and telecommunications– Owns approximately 75% of Hitachi Consulting – Over 1,000 integrated and subsidiary companies

Hitachi is a leader in delivering global technology solutions

9th largest Development and Integration Services ($3.1B)

11th largest Professional Services ($4.6B) 13th largest IT Services ($6B) 17th largest Outsourcing Services ($800M)

The “i.e. HITACHI Plan” was a strategic plan initiated to transform Hitachi from a manufacturer to a solution provider. It articulated the need to build a world-class IT and business consulting business, of which Hitachi Consulting is a core element.

Hitachi’s IT and Business Consulting arm Created through the acquisition of Grant Thornton’s,

Arthur Andersen’s and other consulting businesses Over 20 years of successful engagements U.S. based executive team with headquarters in Dallas,

Texas 16 offices in the U.S. including Dallas, Washington D.C.,

Denver, Philadelphia, New York, Los Angeles, Atlanta, Seattle, Chicago and Boston

Over 1000 professionals across all U.S. locations Hitachi provides access to capital and global clients

Hitachi Consulting focuses on key markets– Industrial, high-tech and discrete manufacturing – Energy & communications– Consumer products, distribution, and retail

Hitachi Consulting offers a complete range of global solutions– Enterprise Applications– Customer Solutions– Technology Solutions– Strategy and Business Improvement– Supply Chain

Hitachi Consulting and Hitachi Ltd.

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Supply Chain Design and Optimization

The majority of a supply chain’s lifecycle value is determined by the design

APS

MRP / ERP

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onal

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rate

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Supply Chain Design

and Optimizati

on

80%

20%

Decisions Solutions Value

Upfront decisions include:• Inventory Levels• Inventory Locations• Assembly network• Distribution network• Raw material and packaging suppliers• Desired raw material, WIP, and FGI

availability• Desired raw material, WIP, and FGI

costs• In-house vs. contract manufacturers• Logistics suppliers

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How Companies Tackle Inventory Policies Today

Other companies Other companies elect to hold elect to hold inventory as close to inventory as close to the customer as the customer as possible (high FGI)possible (high FGI)

Some companies hold Some companies hold inventory right before inventory right before a value added mfg a value added mfg stepstep

One rule of thumb One rule of thumb is to sprinkle a is to sprinkle a little inventory at little inventory at every stage to every stage to spread riskspread risk

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Still further, companies often look at inventory policy as a “local” activity

ASSEMBLY DISTRIBUTION CUSTOMERS

EN

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RS

CO

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COMPONENT PLANTS

• Given a desired service level for customers or downstream supply chain partners, the challenge in the past has been to determine how much inventory should be maintained at a particular location

• Even if this is done well and your local service objectives are met, it will come at a greater “global” cost, represented by inventory, carrying costs, expedite costs, etc.

Decisions in IsolationDecisions in Isolation

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Network Design and Inventory Optimization Overview

What is the total supply chain cost, including inventory related costs, for a given end-to-end supply chain structure?What are the tradeoffs of time vs. cost in evaluating new inventory deployment strategies

•Postponement•In-house versus contract manufacturer•Domestic versus off-shore•New suppliers versus current suppliers•VMI and SMI strategies•Demand and supply risk pooling strategies

Cost optimal safety stock levels and locations for an end-to-end supply chain

•S&OP weekly, monthly, quarterly updates to inventory targets•Service level evaluation on inventory and total supply chain cost•Evaluation of demand, cost, and time changes on total supply chain cost

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Network Design and Inventory Optimization Overview

Strategic Value• Facility number, sizes, and locations• Service level vs inventory investment • In-house versus outsource• Domestic versus off-shore• Postponement and delayed differentiation strategies• New product evaluations, including total landed cost analysis• Vendor managed inventory and supplier managed inventory initiatives

Tactical Value• Make better decisions regarding inventory mix and placement• Optimize FG, WIP, and raw material stocks to improve upon traditional inventory policies• Understand and quantify drivers of inventory related costs• Understand and quantify impact of uncertainty and interdependencies in the supply chain• Understand and quantify trade-offs of capacity, efficiency, and inventory• Make time phased plant and warehouse sourcing decisions

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Network Design and Inventory Optimization Overview

Network Design Inventory Optimization

Optimized Outputs Facility locationsThroughputTransport lanes

Inventory locationsInventory levelsCustomer service levels

Cost Perspective Total landed cost Total supply chain cost

Planning horizon and frequency Monthly/quarterly/seasonal Monthly/quarterly/seasonal

Level of aggregation Major product categories/families Product line/SKU

Treatment of uncertainty Deterministic Stochastic

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Links with ERP and APS

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SCDO as part of Overall Operations Planning Process

•Network infrastructure design

•Transport lanes

•Factory locations

•Distribution center locations

•Production schedule

•Capacity utilization

•Pre-build targets (anticipatory stock)

•S&OP

•Order management

•Available to promise

•Production execution

•Automated data exchange

•Shipping management

•End-to-end supply chain inventory policy

• Safety stock locations

• Safety stock levels

•S&OP

•The impact of network design on all costs including inventory related costs

•Vendor & outsourcing decisions

•Postponement Strategies

•Lean, Six Sigma Supply Chain Design

NetworkDesign

Supply Chain Design

Inventory Optimizatio

nProduction Planning

Advanced Planning

and Scheduling

Annual Quarterly- Seasonal Monthly Weekly Daily

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Typical Benefits

Service level improvements of 25-30% Reductions in total inventory investment by 30-50% while increasing customer service levelsIncreases in inventory turns by over 20-25%Strategic supply chain visibility across multiple organizations-enabling faster, more collaborative decision-makingBetter utilization of space at plants, warehouses and stores

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Assessment of applicability of Network Design and Inventory Optimization

Low

High

High

Complexity of Supply Chain

Abi

lity

to C

ontr

ol S

C P

roce

sses

Neither

Both IOand ND

InventoryOptimization

NetworkDesign

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Assessment of applicability of Network Design and Inventory Optimization

Ability to Control Supply Chain Processes• Limited control- gaps in inventory planning process between planning and execution, poor

inventory visibility and accuracy• Basic Control- legacy transactional systems and spreadsheets used for planning and

execution, little systemic integration across supply chain• Control with pure pull systems or ERP – basic MRP and inventory planning functionality in

place, but lack advanced planning and execution ability• Control with Advanced Planning and Scheduling- using APS for forecasting and all levels of

inventory and replenishment planning, target safety stock levels and locations are determined outside of APS

Supply Chain Complexity• Less than five company owned facilities (mfg, dist, etc). Limited customer base. North

America focused in sales. Limited supply base. Limited number of options of where to source, make, and distribute products.

• 5-10 company owned facilities. Global focus of sales and operations. Multiple options of where to source, make, and distribute.

• 10-20 company owned facilities. Outsourced processes in addition to company owned processes. Complex sources of supply, many customer classes, many skus.

• 20+ company owned facilities. Greater complexity of supply, customers and skus

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SCDO Execution Strategy Options

Business case development through a proof of concept pilot project:Companies take a subset of products and/or supply chain structure and compare optimized results to current structure and processes. This approach limits the risk of investment in new technologies and processes, while identifying and quantifying the value proposition for deploying new SCDO technologies and processes.

Software acquisition, training, and implementation: Companies that have sophisticated operations research, business strategy, and knowledgeable IT personnel may wish to undertake SCDO in-house with minimal outside help.

Use outside consultancy as “outsourced SCDO arm” of the organization: Some companies may not have nor wish to acquire resources necessary to deploy new SCDO processes and technologies. These companies may use consultancies on an ongoing basis to implement SCDO best practices across the organization, without the organization acquiring software or adding resources

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How to execute an SCDO strategy

For any of the options chosen above, a standard project approach can be used:

1. Benchmark technology and current SC metrics, processes, and practices – to create a base case for future comparison.

2. Identify the segment of business with the largest improvement potential based upon business goals – service, inventory, logistics, etc. – Usually an organization has a particular area of concern and a specific metric they are falling short on.

3. Apply appropriate SCDO tool given the current state - Given the matrix of complexity and ability to execute, the appropriate SCDO tools will be deployed.

4. Determine process changes to internally develop SCDO expertise if it will be kept in house – Identify changes in roles, performance criteria, structures, and processes.

5. Create a roadmap for a repeatable process that ties to operational systems.6. Expand and iterate across supply chain to provide continuous improvement.

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Case Studies

A household-name data storage company reduced total inventory investment by 20 percent while improving service levels by 28 points with a postponement strategy that effectively balanced offshore labor savings with local customization.A $10 billion industrial equipment manufacturer increased market share and service levels while lowering inventory by 30-40 percent, overcoming the challenges of a 50 percent spike in demand during the busy season, and products that take months to configure, by optimizing the way inventory was pooled in its nationwide dealer network. A multi-billion dollar consumer electronics manufacturer that identified and implemented savings of over $200 million in supply chain costs by evaluating new supply chain design structures.A household-name consumer adhesives manufacturer aligned inventory with tiered retail service agreements to improve customer service while increasing turns and lowering safety stock by 20 percent

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Summary

What is Network and Inventory Optimization and what problems does it help solve?How does it related to ERP and APS system?What situations is it applicable to?What are the different approaches to Network and Inventory Optimization?