IBM GLobal business services Solution Brief
Supply Chain Management
Value of supply-chain optimization tools revealed in IBM Study Overview A recent study found that networkoptimization tools are associated with improved order-fulfillment outcomes, lower inventory costs, and lower freight costs. IBM’s Supply Chain Scenario Modeler (SCSM) is a holistic, end-to-end solution that helps organizations quantify, evaluate and optimize the trade-offs among financial, operational and environmental challenges across the entire global supply chain. SCSM is differentiated from other optimization tools by its visibility into overall profit and loss.
Today’s businesses are facing growing challenges from customers, competitors and shareholders, which constrain supply chain operations and are becoming increasingly difficult to manage successfully. As a result, organizations are increasingly looking for methods and tools to help them effectively and efficiently manage these pressures and create a responsive supply chain. Consider the following challenges:
• Customer expectations and demands are increasing along with multi-channel supply chain needs. • Global, interconnected supply networks are complex, dynamic and growing, making it difficult to support these increasing customer demands. • Inefficiencies are buried in the complex supply-chain network, and it can be difficult to pinpoint specific opportunities for improvement in costs, flexibility or service. • Supply-chain risks are difficult to predict, and supply and demand are volatile. • Energy costs can be substantial and uncertain, and there is increasing demand to demonstrate sustainability. • Optimizing decisions requires cross-functional expertise; no single individual likely has the required holistic view across logistics, inventory, procurement and finance. • Cost minimization is a matter of survival; in reality, cost minimization is more about maximizing profitability and improving working capital.
1
IBM GLobal business services Solution Brief
Supply Chain Management
To a very great extent 80.5%
Increasing practice uptake
To a significant extent 79.2% To some extent
Optimization practices and tools provide a number of benefits, such as higher margins attained by reducing costs across the supply chain. Optimization techniques help position the correct items and volumes of inventory at the correct location at the correct time, which can result in improved order performance, shorter order-cycle times, and reduction in missed sales opportunities.
78.6% To a small extent 77.2% Not at all 77.3% Mean percentage Figure 1: Perfect order performance.
To a very great extent 22.8%
Increasing practice uptake
A recent study demonstrates the benefits from supply-chain optimization tools. We surveyed more than 1,200 supply-chain managers, from a variety of industries, across Europe, North America, Asia and Latin America. The respondents answered questions about various practices, as well as about their organizations’ performance for specific supply-chain metrics. One might expect that improving order fulfillment performance involves increased inventory costs. However, our study results show that using network-optimization tools to model the entire network during the supply-chain planning process, is associated with improved order-fulfillment outcomes (see Figure 1) as well as lower inventory carrying costs (see Figure 2).
To a significant extent 23.1% To some extent 23.9% To a small extent 26.3% Not at all 27.7% Mean percentage Figure 2: Inventory carrying cost as percentage of average inventory value.
One way that optimization tools can yield this type of result is through identifying opportunities for consolidation, which result in lower overall product inventory and subsequent reduction in carrying cost for that inventory. Optimization of orders has a direct impact on inventory across the entire network (raw materials, work in process, finished goods), as well as related safety stocks required to support the order demand. These inventory improvements equate to improvements in working capital. The study also found that the use of automated routing and scheduling tools is associated with lower expedited costs (see Figure 3). This is expected as a result of optimized order fulfillment.
To a very great extent 15.3%
Another significant outcome that can result from improved order fulfillment (although not measured during this study) is improved customer satisfaction resulting from better performance against service level agreements.
To a significant extent Increasing practice uptake
All of these challenges require organizations to think differently about their processes, technology and organization. We believe that optimization tools are critical to help organizations mitigate these challenges, identify and test scenarios, evaluate trade-offs, and finalize improvements in supply-chain strategy.
15.1% To some extent 15.8% To a small extent 19.6% Not at all 20.2% Mean percentage Figure 3: Expedited freight costs as percentage of total logistics costs.
2
IBM GLobal business services Solution Brief
Supply Chain Management
Supply Chain Scenario Modeler: supply-chain optimization meets sustainability and financial optimization Inventory Positioning Engine
Network Analysis Engine
Profit & Loss Engine
Sustainability Engine
Vehicle Routing & Customer Clustering Engine
Figure 4: Profit and Loss Engine.
Recognizing the pressures and constraints facing supply-chain operations, IBM developed Supply Chain Scenario Modeler (SCSM), a holistic, end-to-end solution that helps organizations quantify, evaluate and optimize the trade-offs among financial, operational and environmental challenges across the entire global supply chain. SCSM can run extensive “what-if” scenarios to address a wide variety of strategic and tactical questions and assist executives by helping them better understand the financial, operational and environmental implications of their decisions. The solution enables analysis and interaction across four dimensions, with visibility to the impact on overall profit and loss (see Figure 4): 1. Network optimization (impact of changes in distribution centers/ warehouses – e.g., mergers, additions) 2. Inventory optimization (determining the right target inventory level of each product in each warehouse and distribution center) 3. Sustainability (how asset changes impact carbon and/or greenhouse gas emissions) 4. Routing and scheduling (optimizing routes and transportation) SCSM provides the power to view in minutes the results of “what-if” scenarios by supply-chain type, item, distribution center, supplier, product group or category. The ability to evaluate scenario impact on overall profit and loss is a capability that differentiates SCSM from competitive analytical tools.
SCSM and McKesson – A case study in supply chain optimization As a result of joint efforts with IBM using SCSM, McKesson (a large pharmaceutical and medical products distributor, ranked number 14 on the Fortune 100) attributes nearly $1 billion in working-capital reduction to recommendations arising from various optimization scenarios. As important as the quantitative savings cited by McKesson, were the qualitative benefits provided through use of SCSM, such as new insights into their operations. McKesson’s experience demonstrates that supply-chain analytics are a key element to its current and ongoing success; analytics shed light on what was previously an invisible set of opportunities. An organization’s supply chain can be a differentiating factor. Organizations that adopt and continue to improve their use of optimization methods and tools can attain significant benefits in the marketplace, including increased profitability, improved competitive position, improved customer satisfaction and increased agility.
3
The right partner for a changing world
© Copyright IBM Corporation 2014
At IBM, we collaborate with our clients, bringing together business insight, advanced research and technology to give them a distinct advantage in today’s rapidly changing environment. Through our integrated approach to business design and execution, we help turn strategies into action. And with expertise in 17 industries and global capabilities that span 170 countries, we can help clients anticipate change and profit from new opportunities.
IBM Global Services Route 100 Somers, NY 10589 U.S.A.
About the authors Timothy Bremer is a Senior Management Consultant in the Distribution Strategy & Transformation practice with IBM Global Business Services. Lori Simonson manages supply-chain benchmarking for IBM Global Services. The IBM business process benchmarking team can be reached at global.benchmarking@us.ibm.com
Produced in the United States of America January 2014 All Rights Reserved IBM, the IBM logo and ibm.com are trademarks or registered trademarks of International Business Machines Corporation in the United States, other countries, or both. If these and other IBM trademarked terms are marked on their first occurrence in this information with a trademark symbol (® or ™), these symbols indicate U.S. registered or common law trademarks owned by IBM at the time this information was published. Such trademarks may also be registered or common law trademarks in other countries. A current list of IBM trademarks is available on the Web at “Copyright and trademark information” at ibm.com/legal/copytrade.shtml Other company, product and service names may be trademarks or service marks of others. References in this publication to IBM products and services do not imply that IBM intends to make them available in all countries in which IBM operates. Please Recycle
Key Contacts To learn more about IBM’s supply chain solutions, including Supply Chain Scenario Modeler, contact one of our executive supply chain management leaders: Rich Gregg Associate Partner Global SCSM Leader rich.gregg@us.ibm.com Dave Lubowe Vice President and Partner Global Leader – Operations and Supply Chain dave.lubowe@us.ibm.com
GBExxxxxUSEN-00