Solutions to Optimize Your Supply Chain Operations Executive Summary Strategic optimization of your end-to-end supply chain produces significant savings and improves your operational service levels. Effecting this optimization requires a carefully-considered modeling and analysis approach and an incremental implementation. LLamasoft s Supply Chain Guru is the key tool for evaluating supply chain network structures, supply chain policies, and integrated operations to: Optimize Supply Chain Structure to achieve the lowest cost or the highest profit Optimize Supply Chain Policies to minimize operational costs and improve service rates Simulate Performance to validate the feasibility of supply chain strategies Analyze Risk and Robustness by evaluating alternate scenarios and designing contingency plans LLamasoft supports Supply Chain Guru with the best-practice solutions and turnkey services you need to succeed. Network Design is an essential and continual process for navigating the volatile global marketplace --LLamasoft can help you determine where to start the process and how to achieve the shortest time-to-benefit and greatest savings. INTRODUCTION If the Supply Chain and Manufacturing operations were optimized, many companies could reduce their total manufacturing and logistics costs by as much as 20% while maintaining, or even significantly improving, their customer service levels. Best-in-class companies are continually looking to drive down costs and improve their performance in the face of rapidlychanging market conditions, volatile costs, and dynamic sourcing options. Strategic optimization or realignment of channel flows and structural network changes are recognized to be the biggest source of major cost reductions in global supply chains. But to achieve these savings, a company must take a holistic approach to Strategic Planning and Optimization. Supply Chain Network Design is a powerful modeling approach which has been proven to deliver significant improvements in supply chain cost structures and service levels. It incorporates fixed and variable costs for all the main activities and cost drivers in a manufacturing and supply chain network: purchasing, production, warehousing, inventory, and transportation. Facility operating and capital costs are also incorporated by leading applications, as are carbon emissions. But where do you start? There is no generic prescription that applies to all situations, but there is a hierarchical sequence of steps a company should consider when embarking on a strategic optimization initiative. From this White Paper, you will learn the key criteria for making the starting-point decision. It will delineate the supply chain issues and the solutions to each, and it will illustrate the relationship between the solutions, which will provide guidance on which issues to address and in what sequence.
SOLUTIONS Achieving the ultimate improvement of your company s performance and profitability requires modeling multiple functional areas, their operations and the combined network. Many of the functional components can be optimized with standalone initiatives, but the greatest savings result from the holistic optimization of the end to end supply chain from sourcing through ultimate delivery, and including every station in between. LLamasoft provides software and services to design and improve supply chain networks. Combining optimization and simulation makes us unique. LLamasoft s comprehensive software platform, Supply Chain Guru, incorporates enterprise simulation with network and inventory optimization in a single modeling structure. It is the cornerstone for supply chain strategic planning, and can turn high-risk ideas into low-risk implementation and improvement plans. It will allow you to: Optimize Supply Chain Network structures Model Supply Chain Network alternatives Quantify the effects of changing the Supply Chain Structure or Policies Simulate multiple Supply Chain scenarios to evaluate service/cost trade-offs Predict customer service, inventory investment, transportation costs, and manufacturing utilization for corporate strategic planning functions Clients use Supply Chain Guru to identify major financial and operational improvements in sourcing, production, transportation, and inventory applications. Supply Chain Guru integrates multiple operations research algorithms, solvers, and data visualization tools to implement Solutions for many of the most challenging supply chain business issues. We have defined ten Solutions to common Supply Chain business issues that can be implemented individually, or in combination. The Solutions include: 1. Supply Chain Network Design - the extremely rapid evaluation and optimization of your entire end-to-end supply chain. Network Structure, Supply Chain policies, and Integrated Operations are evaluated to optimize the trade-offs of cost, time, and capacity in the Network. Supply Chain Network Design (SCND) realigns your factory and warehouse locations and minimizes inventory and transportation costs. 2. Cost-to-Serve Optimization - the financial analysis of your end-to-end Supply Chain, making the tradeoffs necessary to achieve required customer service levels at the lowest total cost. Cost-to- Serve Optimization evaluates the end to end supply chain with the same scope as Supply Chain Network Design, but the emphasis is different. Cost-to-Serve utilizes more detailed financials, and incorporates a costing approach that focuses on properly representing fixed costs. Cost-to- Serve optimization incorporates the decision to serve or not to serve various customers, and to deliver or not deliver various products, in order to avoid incurring fixed costs (labor, shifts, assets/capacity, facility charges.) Indirect and direct cost pools are defined and allocated as part of the model setup to ensure that each alternative configuration is as accurate as possible. Cost- Optimize Supply Chain Operations Page 2 September 15, 2010
to-serve analysis can also be performed using detailed simulation, for incredibly precise costing of defined alternatives of interest to the CFO. 3. Strategic Sourcing - the evaluation and quantification of new sourcing options, such as offshoring to lower-cost manufacturing facilities, switching to new suppliers, or determining optimal locations to service customers. It allows you to model the entire supply chain network to determine how sourcing decisions will affect business as a whole. Each option may present tremendous cost-saving opportunities for the business, but each also carries its own unique risks. Strategic Sourcing evaluates total landed cost, and not simply manufacturing cost. It also considers the trade-offs implicit in each option: cost-versus-time; inventory-versus-service; and fixed costs-versus-variable costs. 4. Production Modeling - the balancing of supply and demand, linking strategy with operations. Production Modeling can become the key driver for optimizing resource utilization and maximizing Return-on-Assets. It depicts the relationships between Sales Demand and Operational Requirements to meet Customer Service Level Benchmarks. Challenges to production and supply chain capacity, such as seasonal demand, promotions, lengthy supplier lead times, and supplier bracket pricing, can be addressed cost-effectively. Production Modeling becomes a truly proactive capability for allocating capacity. 5. Transportation Modeling - the identification of the optimal transportation plan, based on the end-to-end costs and your defined service constraints. You can model your entire supply chain network, incorporating alternate transportation options and key variables such as cost, time, capacity, and delivery parameters. You can determine the best modal mix or the optimal number of transportation assets and the positioning of these assets. You can simulate routing strategies to predict actual costs and service levels. Optimal daily, weekly, monthly, or quarterly plans can be used to set inventory levels, schedule production, and define distribution routing. 6. Inventory Optimization - the creation of highly-accurate inventory requirements across all echelons of the supply chain. The optimization identifies the lowest-cost operation plan by both reducing variability that can be controlled, and planning for the lowest possible inventory necessary to counteract the variability that cannot be controlled (safety stock). It considers the need to keep inventory to cover normal replenishment frequencies (cycle stock). You can simulate operations to predict the service rates, inventory levels, and site capacity constraints for any supply chain structure. 7. Product Life Cycle Planning as products move through their phases of their life cycles, from launch, through growth, maturity, and decline, the optimal supply chain configuration can and will change based on the competing priorities of availability and profitability. You can also determine the optimal manufacturing footprint, given new product mixes. You can analyze challenging demand- and flow-patterns influenced by seasonality, promotions, fashion trends, or commodity pricing. You can change your supply chain design or operating policies to address a new product mix and new product service requirements, and accommodate fluctuating demand patterns. 8. Merger and Acquisition Rationalization - the evaluation of alternatives, the optimization of the proposed new structure, and simulation of multiple scenarios in order to predict the financial and operational performance of the newly merged enterprise. This analysis identifies redundant Optimize Supply Chain Operations Page 3 September 15, 2010
facilities, assets, suppliers, customers, and products. Divestitures pose similar challenges, often leading to new transportation lane volumes, inventory strategies, and Greenfield facility options. 9. Risk Analysis - the evaluation of alternate sources, routes, transportation modes, or production processes to address key risk factors throughout the supply chain. You can analyze sensitivity to key supply chain, or commodity, costs to determine when new strategies should be employed. You can use simulation to introduce disruptive events or supplier uncertainty into your network to get a better understanding of the robustness of your supply chain, and to predict the operational and financial effectiveness of contingency strategies. 10. Greenhouse Gas Emissions Analysis - the calculation of your supply chain network s carbon footprint as it currently exists (footprinting); the determination of the most cost-effective network that will meet your defined GHG emissions cap or a percent reduction target; and the incorporation of Carbon Offsets into cost and footprint calculations to optimize Carbon Offset purchases. SOLUTION RELATIONSHIPS Supply Chain Network Design is the cornerstone of the LLamasoft Solution Suite. It is the ultimate parent of many of the component solutions and, in many cases, the logical starting point for all other optimization projects. At least four of the other Solutions can be considered subsidiary optimizations to Supply Chain Network Design, since they are each individual components of the SCND process. These components include: Strategic Sourcing, Production Modeling, Transportation Modeling, and Inventory Optimization. Tradeoffs between these four supply chain components are typically analyzed during a SCND optimization project. There is a special relationship between Supply Chain Network Design and Cost-to-Serve Optimization (CTS). Cost-to-Serve Optimization can be considered a subsidiary process to SCND, or it can be considered a peer process with a different emphasis and audience. The table below contrasts SCND with CTS. Supply Chain Network Design Cost-to-Serve Optimization Evaluates: End-to-end supply chain End-to-end customer fulfillment cost Audience: Manufacturing and Supply Chain Operations Management Chief Financial Officer Detail Level: Product groups and families Customer and/or SKU specific Optimizes: Total supply chain cost Total supply chain profitability Results: Realigns factory/warehouse locations, assigns customer servicing locations, determines lowest total network cost Balances required customer service levels with lowest landed cost for each product in product category, identifies profitability of each customer Optimize Supply Chain Operations Page 4 September 15, 2010
To visualize these various relationships on a spectrum, the graphic below depicts the spectrum from macro focus on the supply chain itself (SCND) to the micro focus on individual products (CTS) and the functions of Strategic Sourcing, Production Modeling, Transportation Modeling, and Inventory Optimization as subsidiary functions to both. The remaining four Solutions are point solutions that tend to be used to address a specific business initiative, such as a new product launch or key acquisition. With each of these point solutions, the Supply Chain Network Design baseline models serve as the key launching point for analysis. Certainly, Product Life Cycle Planning accounts for many of the same factors that Cost-to-Serve Optimization considers, but it adds often focuses on product phase-in/phase-out decisions, asset utilization, and sensitivity of long-term forecasted demand. Merger and Acquisition Rationalization is a form of Supply Chain Network Design that accounts for merging two disparate supply chains or the impact of subtracting elements of a single supply chain. Risk Analysis takes Supply Chain Network Design to another level, analyzing the impact of uncertainty and disruption. Finally, Greenhouse Gas Emissions Calculation is a special-purpose Supply Chain Network Design dedicated to determining carbon emission reduction strategies. WHERE TO START With the Solutions in context, the question of where to start? remains. The simple answer is that a company should start where they perceive the greatest short-term return. Most often, a company embarks on an initiative with a specific objective in mind, e.g., reducing transportation costs, or offshoring to lower cost manufacturing facilities. When such a project exists (or has been dictated), it is the ideal starting point. Absent such a specific project, a company should start with Supply Chain Network Design. It is the basic building block of a holistic optimization effort and is logically executed first. Further, any optimization project must be visualized as a continuum, not as an isolated instance. Savings are obtained in increments and often savings from a former optimization project can be used to justify the next project increment. Ideally, a company should develop a strategically-incremental strategy -- develop a holistic vision of all of the optimization projects possible and their sequence, then Optimize Supply Chain Operations Page 5 September 15, 2010
divide that strategic vision into increments for implementation. This also implies periodic review of successes and savings and adjustments to the incremental strategy as conditions dictate. Part of a strategically-incremental strategy is dividing optimization projects into two major phases for sequential execution. Included in the first phase are the projects that deliver the low-hanging fruit -- the greatest savings that are easiest to actualize. These tend to be projects that optimize channel flows through policy changes, but do not change structure. For example, a company can consider changing: Where an item is manufactured (in the existing plants) Where an item is stocked and in what quantities How an item is transported -- mode, carrier, and time Which suppliers to use and in what locations What is the ideal customer service level and the policies to support that strategy All of these are policy decisions that do not affect the overall supply chain structure. They allow you to reduce operating capital and logistics costs without significant capital investment. In the second phase, one removes the structural change constraints that were imposed in the first phase and considers changing the physical plant and network configuration, including: where manufacturing plants should be located (changed, opened, closed) and should manufacturing be outsourced. These structural changes can introduce another level of savings to the overall network, but often require capital investment and, therefore, more thorough financial analysis and justification. OPTIMUM SAVINGS ASSESSMENT If you still struggle with where to start, LLamasoft can help! We offer an Optimum Savings Assessment that can quickly help you determine where your greatest short-term benefits exist. Our professional services team has developed a structured methodology that will assess your current state and develop the types of economic benefits you can expect. Through interviews (we provide an interview sheet and the roles to be interviewed), we identify problem areas, develop metrics, frame opportunities, and develop preliminary expected results. When the assessment is complete, we are able to: Define the key issues Describe opportunities -- optimization that addresses the key issues Define solutions to optimize specific business processes Recommend alternatives Present potential value propositions for each component Optimize Supply Chain Operations Page 6 September 15, 2010
CONCLUSION Historically, network re-design initiatives were performed every one to three years to help a company realign its warehouse and factory locations and minimize transportation costs. Network design projects took 4-6 months or longer, and model accuracy was limited by the need to limit the number products, sites, and demand transactions. Now, Supply Chain Network Design projects can be accomplished in weeks or less. Models can be run at the SKU level, with multiple time periods, and entire end-to-end supply chains are evaluated and optimized. Supply Chain Guru can evaluate network structure, supply chain policies, and integrated operations. Your holistic solution allows you to: Optimize Supply Chain Structure to achieve the lowest cost or the highest profit Optimize Supply Chain Policies to minimize operational costs and streamline processes Simulate Performance to validate the feasibility of each scenario Analyze Risk and Robustness by evaluating alternate scenarios LLamasoft has created a breakthrough application, Supply Chain Guru, supported by the best-practice Solutions, and turn-key services. This extends Network Design optimization to a whole new audience and makes it a strategic imperative. Network Design is now an essential and continual process of evaluating operational strategies and navigating the volatile global marketplace. Further, you have multiple implementation options from do-it-yourself to having LLamasoft do-it-foryou. You can acquire the strategic capability, get your team trained, and bring the technology in-house to enable rapid response to ongoing business initiatives. You can also outsource your projects to the LLamasoft Solutions Team as your partner for outsourced network design business services. Finally, you can implement a mixed model and have the LLamasoft Solutions Team deliver rapid benefits for your first project, then transfer the models, technology, and know-how to enable your team to build on our initial success. ABOUT LLAMASOFT LLamasoft provides software and expertise to design and modify supply chain network operations. Supply Chain Guru is the leading supply chain strategic planning application available in the market today. It enables companies to model their supply chain operations, optimize the structure for cost and profitability, and simulate proposed changes, allowing users to implement their changes with confidence. The world s leading corporations across nearly every major industry vertical, including over half of AMR s Supply Chain Top 25, leverage Supply Chain Guru to help them achieve a competitive advantage through superior Supply Chain Design. The privately-held company, based in Ann Arbor, Michigan, was founded in 1998 as the first company to combine enterprise-level simulation with full-feature network optimization within a single modeling structure. For more information, visit www.llamasoft.com or contact info@llamasoft.com. Telephone: 734-418-3119 Optimize Supply Chain Operations Page 7 September 15, 2010