SUPPLY CHAIN MANAGEMENT:Making the Vision a Reality

Dr. Chris MobergChair Marketing, Robert H. FreemanProfessor of Logistics ManagementOhio University

Presented to 2008 Brazil Executive Seminar Series

AGENDA

1. Current State of Logistics in U.S.

2. Logistics Performance and Tradeoffs

3. The Promise and Challenges of Supply Chain Management

4. Making the SCM Vision a Reality

• State of Logistics/SCM in Brazil

Why Is SCM Relevant for You?

• Three Core Business Processes that Generate Value for Customers: SCM, Customer Relationship Management, and Product Development Management (Srivastava et al 1999).

• These three processes are interrelated.

Why Is SCM Relevant for You?

• The key to competitive success in the future will not be decided by competitive differences between firms but by the battles fought between supply chains.

U.S. Logistics Expenditures1980-2007

Expenditures % of U.S. GDP1980 $466 Billion 17.21996 $801 Billion 10.22003 $947 Billion 8.62004 $1,027 Trillion 8.82005 $1,183 Trillion 9.52006 $1,305 Trillion 9.92007 $1,397 Trillion 10.1Two Questions:1. How did we become more efficient between 1980 and

2003?2. Why has the % of U.S. GDP increased in 2004-07?

Source: CSCMP 2008 State of Logistics Report.

Breakdown of U.S. Logistics Expenditures

2007 Expenditures = $1.397 Trillion

Transportation 61% (78% Trucking)

($856 billion- 671b on trucking alone)

Inventory 27%

Warehousing 8%

Admin/Overhead 4%

Why Did We Get Better at Logistics from 1980-2003?

1. Transportation Deregulation – 1980s

2. Technology = Faster Information

3. Preoccupation with Inventory

4. Interest Rate Declines

5. Impact of Big Firms

6. Increased Logistics Visibility/Focus

Why Have Logistics Expenditures as a Percent of GDP Increased in 2004-07?

1. Inv. CC – rose 13.5% in 2006 and 8.7% 2007; 2. Transportation Costs Increased 15.2 % in 2005, 9.4% 2006, and 5.9% in 2007.3. Increasing Fuel Costs4. Aging Transportation Infrastructure5. Transportation Capacity Issues6. Rising Interest Rates7. Total Business Inventories Have Increased8. Supply Chain Disruptions/Security

Logistics Performance

Major Components:1. Costs

* Transportation* Inventory* Warehousing/Handling* Admin., Tech., Overhead

2. Customer Service*Fill rates, Order Cycle Time (OCT), On-time deliveries, damage, responsiveness

3. Financial* ROI/ROA

Logistics Tradeoffs

Supply chains operate in complex business environments. Actions taken in a supply chain system do not occur in a vacuum and can have an impact within a firm and across the supply chain. An action can have a positive in one area and a negative one in another.

Logistics Tradeoffs

Four Broad Categories of Tradeoffs:

1. Logistics Cost to Logistics Cost

2. Logistics Cost to Logistics Customer Service

3. Logistics to other Firm Functions

4. Firm to Firm

Supply Chain Management Defined

• “Supply Chain Management encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all Logistics Management activities. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, Supply Chain Management integrates supply and demand management within and across companies.”

• Source: Council of Supply Chain Management Professionals, cscmp.org

SUPPLY CHAIN MANAGEMENT:

“Is the integration of business processesfrom original suppliers through end-usersthat provides products, services and information that add value for customers”

Raw MaterialRaw Material PurchasingPurchasing

FactoryFactory Manufacturer’sManufacturer’s DCDC Customer’s DCCustomer’s DC ConsumerConsumer

Suppliers’ Supplier

To

Customers’ Customer

Tier 3 Tier 2 Tier 1 FIRM Wholesaler Retailer Customer

Supply chain management is not businessas usual! It is business practiced in partnership with all ‘players’ in the jobof moving product to customers from source to point of consumption.

SCM: The GOALS:

1. WASTE ELIMINATION

2. TIME COMPRESSION

3. FLEXIBLE RESPONSE

4. UNIT COST REDUCTION

5. CUSTOMER SATISFACTION =

REVENUE GROWTH

Buy Make Move Sell

SUCCESS STORIES

Wal-Mart

Johnson & Johnson – Rite Aid

Dell Computer

SOME SOBERING THOUGHTS

•An Accenture Consulting CompanyPartner:

“There are really no companiesin the world today that have developed this totally seamlesssupply chain between vendors andtheir ultimate customers.”

“Most theorists have argued that successful supply

chain integration depends on building long-term,

harmonious partnership agreements.

Our experience, though, suggests that

this ideal is hard to establish and even

tougher to maintain. Traditional suspicion

is not easily overcome, and many companies

shy away from building closer relationships.” …A.T. Kearney study of 250 UK firms

A major study completed in 2000 showed that:

“Truly ‘integrated supply chains’are extremely rare. None of the firmsmanaged in a serious way beyond the first tier backward or forward”Supplier -2 Supplier -1 The Firm Customer -1 Customer -2

Sadly, after nearly a decade ofSC initiatives, the ConsumerProducts industry still carries,on average, 14 weeks of inventory,which represents almost $300billion of goods trapped in the supply chain!

In a Deloitte study of firms that claim to embrace SCM, only 2% were able to achieve supply chain success

Another UK study: 55% of all strategic partnerships fall apart within three years

NAMA study: 53% say their partnerships” are ‘poor;’ only 37 % say they are ‘good.’

Supply Chain success stories are usually focused on two large firms, e.g. P&G and Wal-mart

Supply chain efforts usually do not extend beyond dyads in the supply chain

A major 3PL supplier in a “supply chain relationship” won supplier of the year awards and lost money on every unit shipped!

In one study: 25% of the respondents saw a “partnership” as a way to gouge more from suppliers

Relationships sometimes don’t live upto our expectations

SCMR – MARCH 2004Fawcett, Magnan, and Williams

One customer invited several suppliers to a hotel’s conference center for negotiations. Each supplier was assigned to a room where negotiations would take place. The customer’s staff then went room to room sharing details of the concessions extracted from other suppliers until they met their “target cost.”

SCMR – MARCH 2004Fawcett, Magnan, and Williams

• One manager talked about his company’s enlightened approach to supplier management. But when asked what happens when a supplier runs into a problem or cannot meet cost targets, he snapped his fingers and said, “They’re gone, just like that.”

SCMR – MARCH 2004Fawcett, Magnan, and Williams

One supplier showed a form letter it just received, which included a note of thanks for their dedication and a notice of the buyer’s need to reduce costs. The second paragraph noted that the buyer expected the price of its purchased parts to drop to levels offered by Asian suppliers – retroactive to the first of the year. The attached price list revealed that the buyer was seeking an across-the-board price cut of 10 percent.

SCMR – MARCH 2004Fawcett, Magnan, and Williams

One manager proudly related the experience of being selected as the “Supplier of the Year” by a major Japanese company. He told about the wonderful evening at a downtown hotel with a banquet to honor the supplier’s performance. He then said, “That was a year ago. About a month ago we received a letter informing us that we are no longer an approved supplier because someone else beat our price by two cents per part.”

"We have met the enemy and it is us."

Walt Kelly, "Pogo” comic strip

Supply Chain Management

Requirements and Barriers

* Information Exchange* Information Technology* Strong Relationships

Trust and Commitment* Long-Term Perspective* Sacrifice Firm Goals* New Performance Measures

Making the Vision a Reality

• SCM has Tremendous Promise

• Significant Barriers Lie in the Way

• Overcoming Barriers Requires Radical Changes

• Small Success Stories will Continue but True Supply Chain Systems not Likely

Overview of Brazil

Population – 190,000,000

Nominal GDP (2007) – $1,313 trillion U.S.

GDP Growth Rate (2007) –4-5%

Unemployment – 9-10%

Imports/Exports - 2006 (91.4b/137.5b US$)

Logistics expenditure as % GDP – approx. 18-20%

Overview of Brazil

Economic/Logistics Overview:• Real Strengthening Against US Dollar• Lower Labor Rates• 4 of World’s Top 50 Ports (Tubarao, Itaqui, Santo,

Sepetiba)• Sao Paolo - #1 Air Cargo Hub in Latin America• Advantage in Flight and Shipping Times(Source: Inbound Logistics, June 2007)

Special Logistics ChallengesFacing Brazil

1. Leveraging Abundance of Natural Resources into Strong Sustained Economic Growth while Balancing Interest of the Public and Environment

Special Logistics Challenges Facing Brazil

2. High Raw Materials Inventories* Twice the U.S. Level* Financing Costs of Current Levels = 9.4% of GDP* Becoming more efficient could save approximately 4% of GDP * Largely Caused By Infrastructure Quality and Capacity Constraints

Special Logistics ChallengesFacing Brazil

3. More Investment in Infrastructure to Support Logistics

“There is increasing empirical evidence that both the quantity and quality of infrastructure, including transport, energy and water-sanitation, have substantial impacts on economic growth and income inequality.”

Source: World Bank-Calderon and Serven, 2004

Special Logistics ChallengesFacing Brazil

3. More Infrastructure (cont.)* In 2004, Brazil’s total investment in infrastructure was 1.5% of GDP, compared to China’s investment of $100 billion, or approximately 6% of GDP. India is also 5-6%.* Only 25% of Brazil’s Roads are Rated as Good * Inadequate Roads, Waterways, and Ports Lead to Expensive Transportation Costs – Competitive Disadvantage

Special Logistics ChallengesFacing Brazil

3. Infrastructure Challenges:• Good News: 4-Yr Plan Approved in 2007 to

spend $300 Billion on Roads, Power Plants, and Ports.

• Represents an Infrastructure Investment around 6% of GDP instead of 1.5% in 2004.

(China now at 12% of GDP and India 9%)(Source: The Economist, June 5, 2008)

Special Logistics ChallengesFacing Brazil

An Illustration: Soybeans – (US$/Bushel)

Brazil U.S.

Production Cost 3.89 5.11

Transport to Port 1.34 .43

Freight to Rotterdam .57 .38

Final Cost in Rotterdam 5.80 5.92Source: Economic Research Service, USDA

Strengths/Opportunities

* Infrastructure privatization and economic stabilization

• Strong Export Trade Growth

• Diversified Economy

• Mercosur and ALADI

Logistics Opportunities - Brazil

• Expand Quality and Capacity of Infrastructure (Limited/Strong in south – 4 year Plan a Strong Start)

• Logistics Outsourcing is Increasing, but there is still not enough 3PL Supply for the Demand – 3PL Industry still fragmented

• Continued application of SCM Best Practices (Retailers/automotive /outside competition)

• Inventory centralization – development of modern distribution centers

• Conclusion: Real opportunities to increase service and decrease costs = tremendous impact on the economy. With location, labor, currency, and natural resource advantages, investing in infrastructure, growing 3PL service industry and adopting SCM Best Practices should lead to strong growth in the economy.

Source:CSCMP Perspectives - Brazil