Supply Chain Leader - Issue 6 by Brent Baker

October 2008

Ideas & Innovations from i2 Technologies

The New Cost-Savvy Supply Chain • Product Sourcing: What’s Next After China? • The CFO’s Role in SCM • Counteracting Rising Fuel Prices • Can a Supply Chain Be Green and Efficient? • Synchronizing Supply Chain Applications Plus • Interview with Lenovo’s Ajit Sivadasan • Three Tips for Minimizing Risk from Texas Instruments • Increasing Profitability with Local Market Assortments • Case Studies from Continental Tire and Cementos Argos

The Supply Chain Results Company

October 2008 Vol. 3, No. 2 i2 Senior Director, Marketing Beth Elkin Editor Deborah Navas Art Director Peter Klabunde Circulation Manager Sangeeta Bajaj

Contributing Writers Lauren Bossers Guy Courtin Cynthia Fusco John Kadlecek Interactive Edition Team Bruce Johnson Brent Baker Vu Thai

Editorial Advisory Board Sanjiv Sidhu – Co-Founder and Chairman Emeritus Dr. Pallab Chatterjee – Chief Executive Officer Hiten Varia – Executive Vice President, Global Customer Operations and Chief Customer Officer Steve Estrada – Senior Vice President and Chief Marketing Officer

Chuck Kramer – Senior Vice President, Retail and Consumer Industries Sector Aditya Srivastava – Senior Vice President and Chief Technology Officer Kelly Thomas – Senior Vice President, Manufacturing Sector Razat Gaurav – Senior Vice President, Global Logistics

© Copyright 2008, i2 Technologies, Inc. This magazine is available online at www.i2.com. Reproduction of this magazine in whole or in part in any medium is prohibited without written consent of the editor. Contact: supply_chain_leader@i2.com.

In This Issue Cover story Private-Label Sourcing: What’s Next After China? by Gurdip Singh Page 4 Economic and political changes are making it far less profitable to source products from China, and forward-looking retailers are beginning to explore other alternatives for creating private-label products. Where in the world will their business land?

Features

Page 10 Fuel for Thought: Strategies for Counteracting Soaring Oil Prices by Hal Feuchtwanger Companies are looking at both short- and long-term hedges against escalating fuel costs, from retro-fitting tractor-trailers with fuel-saving technologies to optimizing intra- and inter-organizational loads, routes and transportation modes. Page 14

Page 18

Linking the CFO to Supply Chain Execution by Mahesh Rajasekharan, Ph.D

Synchronizing Supply Chain Applications with Continuous Change by Samir Bhargava and Lalith Vadlamannati

CFOs are ideally positioned to grow market share and profits through strategic supply chain management. Changes in a company’s supply chain processes require a CFO skill set— the financial, analytical, and bottomline knowledge—to drive crossfunctional execution in S&OP process management.

Keeping up with the speed of business is more challenging than ever. Now is the time to rethink today’s and tomorrow’s supply chains to assure continued business responsiveness and sustainability.

Case studies Page 22 Page 40

Continental Tire Speeds Planning Cycles and Inventory Turns, by Lauren Bossers Increasing Profits and Service Levels at Cementos Argos, by Lauren Bossers

Departments Page 3 Page 25 Page 29 Page 32 Page 34 Page 38 Page 42

Perspective: Supply Chain Leader Magazine Goes Interactive, by Beth Elkin Focus: Increase Profitability by Managing Local Market Assortments, by Ijaz Parpia Interview: Lenovo’s Superior Online Buying Experience Leads to Competitive Advantage. An interview with Lenovo’s Ajit Sivadasan, by Deborah Navas Process Playbooks: Playing by the Rules, by Amarnath Thombre Opinion: Can a Green Supply Chain Be an Efficient Supply Chain? Interviews by Guy Courtin Risk Management: Minimizing Risk: A Critical component of SCM Implementations, by Ramesh Raghunathan, Ph.D and Jiten Sandu Inside i2: i2 and the i2 User Group Announce Ken Sharma Awards of Excellence, by Lauren Bossers

Supply Chain Leader / October 2008

Perspective by Beth Elkin

Supply Chain Leader Magazine Goes Interactive Gain insight, share ideas and access expanded content in our online edition. If you opened the cover of this magazine, turned the first couple of pages and landed on this article, you are in the minority when it comes to Supply Chain Leader readers. That’s because with this issue, we’ve changed the way we bring you the ideas and innovations contained in i2’s award-winning magazine. This issue marks our transition to a more efficient, timely––some would say modern––method for bringing you the thought leadership you’ve come to expect from i2. Going forward, we’re expanding our web presence with a goal of reaching more of our increasingly global audience in a faster, more interactive way. This is prompted by the fact that a growing number of people worldwide are more consistently turning to the Internet for their information. The explosion of online media such as blogs, reader forums, podcasts and through networking sites has changed the way we live and do business. As a result, we are now bringing Supply Chain Leader content to the web in a way that is easier to access, provides the opportunity for dialogue and debate, and most important, enables us to use the power of the Internet to tap into the wisdom of you, the reader. With a renewed focus on our online presence, we’ve worked hard to enhance the content, making it easier to start—and to continue—a conversation with you. For example, by accessing Supply Chain Leader online you can: • Listen to the audio version of the articles. Don’t have time to read everything you’d like? Now you can download an audio podcast of key stories and listen to it at the gym, on a plane or wherever and whenever it’s convenient for you. • Express an opinion. With reader comment sections included with each article, you can post an opinion, ask a question or engage in a dialog with other readers—and sometimes even the authors themselves. • Provide feedback. You can rate each story. Was it useful? Did it offer ideas and insights that can help you better run your business? Did we miss the mark? If so, why? • Access related materials. If you like what you read, want to know more information about a particular solution, want to learn about a best practice for solving a

business challenge, or are interested in attending an event to gain additional knowledge, our improved web presence can help. We’ll provide links to related content such as customer case studies, web seminars, data sheets or event information so that you can continue to gather information on the topics that interest you most. • Suggest a story topic. If you have a story idea, we’d like to hear it. No idea is too big or too small, and while we may not write a story that exactly matches your idea, it may mesh with ideas from others to form a collectively developed article that more accurately reflects the multifaceted challenges and successes experienced by companies today. Throughout our 20-year history, i2 has been committed to engaging with our customers, seeking input, exchanging ideas, showcasing successes and building relationships through events, web seminars, case studies, special interest groups, surveys and the i2 User Group. We believe the more interactive version of Supply Chain Leader on i2.com provides yet another forum for information sharing and community building, and we look forward to your feedback as you experience the magazine in this new way. And finally, while Supply Chain Leader’s increased web presence was not developed explicitly as a “green” initiative, we are mindful of the fact that we’re using less paper and ink for printing, and less fuel for transporting the thousands of copies of magazines that have made their way around the world since our debut in April 2006. We do support the efforts of companies who have taken that path, and offer four interesting perspectives on green supply chains in this issue’s Opinion Section on page 34. We urge you to check it out and visit us on the web (http://www.i2.com/supplychainleader) to share your perspective on the green phenomenon and other supply chain management issues that continue to change the face of business.

Beth Elkin is senior director, Marketing, for i2. For more information, contact: supply_chain_leader@i2.com.

Supply Chain Leader / October 2008

Private-Label Sourcing: Whatâ&#x20AC;&#x2122;s Next After China? Economic and political changes are making it far less profitable to source products from Chinaâ&#x20AC;&#x201D;and forward-looking retailers are beginning to explore other alternatives for creating private-label products. Where in the world will their business land?

by Gurdip Singh

Supply Chain Leader / October 2008

t’s easy to see why China has risen to become the

As the dollar weakens and the yuan strengthens, Western

global center for manufacturing private-label goods. By

retailers have seen their profits dip even further. Since

taking advantage of China’s historically low wages, large

2005, the yuan has gained 18 percent against the dollar,

workforce, strong infrastructure, positive currency

and this trend is expected to continue.

exchange rates and relatively low taxes, dozens of Western

Finally, the relatively low Chinese taxes that foreign-

retailers have been able to increase their profits—while

owned businesses have enjoyed will be gradually phased

maintaining high quality standards—by outsourcing the

out, thanks to China’s new Enterprise Income Tax Law,

production of their private-label product lines there.

which was enacted on January 1, 2008. While Western

But today, many of the benefits that lured these retailers

businesses previously were subject to tax rates as low as 14

to China are turning into liabilities, and China is beginning

percent on the facilities they own in China, these rates

to lose its appeal as a trading partner. One i2 retail

will gradually increase to a standard 25 percent by 2013.

customer describes the current environment in China as a period of “exponential changes” that are completely reshaping the country’s economy and social order. As the labor pool in China shrinks—both for assembly line workers and skilled technicians—and demand continues to escalate, wages have steadily risen. In late June 2008—

Given all these changes, i2 estimates that over the last two years Western retailers have been paying 20-30 percent more for products sourced in China, and that these costs will continue to increase year over year in the foreseeable future. Firmly entrenched and heavily invested in their relation-

in response to double-digit inflation—the Chinese

ships with China, Western retailers have tried to weather

government announced a minimum salary increase of

this challenging economic situation by managing the few

10 percent in its capital city, Beijing, which will have an

costs they can control––such as inventory management––

immediate impact on the profitability of manufacturing

and cutting their own profit margins drastically, since the

goods there.

soft U.S. economy will not tolerate retail price increases

In addition, competitive pressures driving shorter lead

for most goods. But it is becoming increasingly clear that

and response times, coupled with the skyrocketing costs of

China is not a long-term, sustainable option for manu-

fuel, are making many retailers question the wisdom of

facturing private-label goods.

transporting finished goods, especially weighty products,

The move away from Chinese sourcing of private-label

halfway around the world. Increasing fuel costs are dra-

goods will represent an enormous economic shift that is

matically eroding private-label profit margins and forcing

sure to affect the global economy—as well as the world-

retailers to rethink their outsourcing strategies. Shipping

wide supply chains of every business that is currently

prices have increased up to 300 percent since 2000, and

doing business in China.

are expected to double again, as oil prices settle above $100 per barrel.

With Western retailers at a true crossroads, a number of critical questions arise: Where will all this business land?

Changes in currency valuation represent yet another factor affecting the profitability of outsourcing to China.

CHINA CONTINUED on Next Page . . .

Supply Chain Leader / October 2008

What regions will benefit as the new centers of global outsourcing? And what new opportunities and challenges can U.S. retailers expect, as they shift their business to new regions and new trading partners?

Sustainability: The new sourcing priority One thing is certain: Western retailers will make their next-generation sourcing decisions much more thoughtfully than when they joined the global rush to embrace China as a private-label sourcing partner. The ensuing years have ushered in a new era of financial and social responsibility—as well as a newly flattened world, in which the impact of business decisions is farther-reaching, and far more transparent, than a decade ago. Perhaps the most important factor guiding retailers’ future sourcing decisions will be the emerging concept of “sustainable” sourcing. What exactly is sustainable sourcing? i2 defines it as a set of sourcing and product flow strategies designed to meet the ongoing demands of a tailored market assortment. Sustainable sourcing is characterized by its ability to provide a continuous, long-term assortment advantage to an organization—while also fulfilling the business’s ongoing financial and corporate responsibilities. For most retailers today—and especially for those in the fashion, footwear, apparel and consumer electronics categories—tailored market assortments offer the single most important strategy for differentiating products over the long term, and sustaining a competitive advantage. While price is obviously critical—and it was China’s lowcost structure that initially led many private-label retailers there—a long-term, sustainable strategy based on cost differentiation has become much less feasible, because of the enormous power of the well-established market

Thanks to our Retail Customers In developing this story, i2 discussed global sourcing trends and issues with many retail customers, including Best Buy, Gap, JCPenney and Payless ShoeSource. We want to extend special thanks to Susan Olivier, business applications director for cycle-time reduction at JCPenney Private Brands, who generously contributed her time and insights.

Supply Chain Leader / October 2008

leaders in the value-based retail segment. Even if China could continue to offer low-cost sourcing, it is doubtful that many retailers would continue to source their privatelabel products there, unless China could also offer significant assortment advantages. To achieve an ongoing assortment advantage, retailers’ private-label supply chains must demonstrate three critical competencies: • A faster concept-to-store cycle time than competitors, including national brands • The ability to modify key assortment parameters late into the pre-season countdown • In-season sales agility and responsiveness, through postponement and margin-driven product allocation Obviously, there can be significant economic costs associated with this level of speed and responsiveness— and every sourcing decision must begin with a careful financial assessment. To establish a level playing field on which various sourcing strategies can compete, it is critical that retailers determine the total landed cost—or the “shelf cost”—for all their private-label products. Defining this cost upfront provides a fair, objective means by which sourcing strategies can be assessed and compared, based on controllable parameters. i2 estimates that over the last two years Western retailers have been paying 20-30 percent more for products sourced in China, and that these costs will continue to increase year over year in the foreseeable future. Total landed product costs include obvious expenses such as raw materials, energy, labor, transportation, distribution, handling and inventory holding. But less obvious cost factors—such as the impact of currency exchange rates, legal and government regulations, levies and taxes— must also be taken into account. In today’s fast-changing business world, it is not enough for retailers to look at the current costs associated with achieving an assortment advantage; they must also understand the future trends that will impact each potential sourcing partner. An example is China’s “one child” law, which may not severely affect the country’s workforce today—but is expected to have a significant impact on the availability and cost of Chinese labor in 10-15 years. In addition, today many retailers are adopting a riskadjusted approach that factors the element of risk into the total landed cost of their private-label products. As they analyze and compare the costs of various sourcing options,

Redefining the Ideal Sourcing Partner: Retailer Perspectives While low manufacturing costs helped turn China into an international sourcing center in the mid 1990s, today retailers are redefining their criteria for selecting private-label partners. Based on opinions from the experts—the retailers themselves—an entirely new list of attributes defines the ideal global sourcing partner today: Reliability. In this era of short product life cycles and lightning-fast replenishment, retailers cannot afford a single delivery delay or other mistake. They are using new measures to quantify the on-time, error-free performance of all their private-label suppliers. Product integrity. With every private-label offering, retailers are putting their own brand at stake. International suppliers must deliver products that meet the highest standards for both quality and consumer protection—for example, ensuring that all pharmaceuticals, food and drink, electronics, and toys meet stringent safety criteria. Agility. Because fashion trends change constantly and technologies rapidly become obsolete, privatelabel retailers need to delay their most critical decisions— about colors, technical capabilities and other product features—as long as possible, to ensure the most

they ask themselves questions such as: What is the financial exposure associated with having a longer lead time? What is the bottom-line impact of increasing our responsiveness in product replenishment? While it may be difficult to assign numbers to these kinds of intangible advantages or disadvantages, this risk-based approach highlights the increasing importance of sustaining a differentiated assortment over the long term.

Corporate responsibility: A growing concern Sustainable sourcing strategies must also address an emerging concern for businesses across the globe: corporate responsibility. While we have all come to consider ourselves “citizens of the world,” retailers have a much greater capability to shape the international landscape than the individuals who shop their aisles.

current and popular assortments. Potential suppliers are judged on how dramatically they can cut their standard purchase order-to-delivery cycle time. Proximity to markets. As retailers expand into international markets, they are increasingly looking for suppliers who are “local” to these new customers for their private-label products. Identifying a source close to the final consumer can dramatically cut transportation costs, as well as foreign taxes and trade levies. Visibility and collaboration. To eliminate the element of surprise, retailers are demanding a new level of partnership with their private-label suppliers. These trading partners must be integrated seamlessly into retailers’ global supply chains, sharing both information and technology tools. Innovation. Finally, the next generation of sourcing partners must demonstrate sustainable value by creating new advantages that help retailers achieve the assortment edge they need in today’s marketplace. For example, some countries are establishing themselves as technology leaders, providing new product capabilities that make them an especially valuable sourcing partner.

The private-label sourcing decisions of these retailers have a substantial influence in determining how our increasingly interconnected, interdependent world economy evolves. As the business world is discovering, profitability and corporate responsibility are not mutually exclusive. In fact, these two priorities may converge more than they conflict. For example, energy conservation benefits both the environment and the corporate bottom line. Businesses are now considering corporate responsibility as not only a cost of doing business, but also as a strategy that can deliver tremendous rewards, both tangible and intangible. Retailers have the means, the motivation and the responsibility to pursue sustainable sourcing strategies that benefit three areas: CHINA CONTINUED on Next Page . . .

Supply Chain Leader / October 2008

Human Resources: Private-label sourcing strategies should always support human capital development— providing employees with the skills and sense of ownership that can help improve retailers’ product assortments and economic advantages. Investing in human resources may have a slow rate of return in the short term, but offers an enormous long-term payoff, as meaningful employee contributions have a real impact on the success of the sourcing strategy. Environment: Green sourcing and flow strategies that focus on limiting the carbon footprint, minimizing energy usage and encouraging recycling generally make good financial sense as well as protect the environment. Sourcing strategies based on environmental stewardship provide retailers with a unique convergence of economic and ecological drivers. (For more on this topic, see “Can a Green Supply Chain Be an Efficient Supply Chain?” on page 34.) Community: Local sourcing certainly supports retailers’ pressing needs to cut their concept-to-store cycle time, in addition to reducing the economic and ecological costs of transporting products over long distances. This is a strategic consideration that may have had its roots in environmental concerns, but it is emerging as an increasingly valid financial strategy—though it still offers limited options for most U.S. retailers.

Where are we headed from here? Given the complicated sourcing decisions they must make—balancing assortment advantages, costs and their corporate responsibilities—where are retailers likely to source their private-label products next? The answer will vary based on the unique challenges of each retailer, but several international regions are emerging as strong candidates for future private-label sourcing. Western businesses are standing at a crossroads, when a historically dominant trading partner is losing its appeal––and other nations are vying to be the next global powerhouse. The need for speed and agility is driving many retailers to plan aggressive four-week floor sets at regular retail for their fashion, footwear, apparel and consumer electronics categories—a capability that China simply can not sustain. A logical, closer-to-home alternative for Western retailers would be trading partners in the United States, Mexico and South America who can deliver private-label products to U.S. shelves much more quickly, supporting the short

Supply Chain Leader / October 2008

life cycles that are becoming a competitive imperative in so many product categories. Many of the capacity concerns that ruled out these “local” trading partners in the past will not be as relevant in the future, as lot sizes shrink dramatically to match shorter selling seasons. At a minimum, many retailers may consider dualsourcing strategies that create local rapid response capabilities for the replenishment of hot-selling products—while still leveraging their Chinese trading partners, at least in the short term, to meet less time-sensitive production schedules. In addition to speed and agility, retailers must still consider the total landed cost of their private-label products, an area where Asian countries have tended to offer great advantages. While nearly all total landed costs associated with manufacturing in China—raw materials, labor, energy, transportation, taxes, currency exchange rates and government regulations—have risen significantly, other Asian countries may represent attractive options. Even with a weakened U.S. dollar, there are a number of nations where U.S. retailers can still enjoy favorable exchange rates, including India and Vietnam. The currencies of both countries have depreciated by 3-5 percent over the past year, offering an opportunity for profit margin gains. With regard to infrastructure—which affects both the speed and cost of transporting raw materials and finished goods—China is still the leader among Asian countries. But both India and Vietnam are investing heavily in massive infrastructure projects that rival those undertaken by the United States during the 1930s. Over the next few years, improvements in transportation and logistics systems in both India and Vietnam are likely to make them extremely attractive alternatives to China. India has also adopted a forward-looking energy policy that focuses on solar and nuclear alternatives, curtailing the country’s dependence on fossil fuels. India has an aggressive plan to reduce its overwhelming dependence on imported fuel so that it can meet its own growing domestic energy needs. Finally, India has invested heavily in its educational system, which—along with its sustainable birthrate—will ensure a steady supply of skilled workers to meet future manufacturing needs. The importance of an educated workforce cannot be underestimated, and it is one area where many nations fall short today. U.S. retailers would do well to seek trading partners that will supply them with not only a plentiful workforce, but also one where welleducated employees can be expected to contribute to overall sourcing effectiveness.

A decision with global implications It is difficult to overstate the importance of the international sourcing decisions that U.S. retailers are facing today. Western businesses stand at a crossroads, when a historically dominant trading partner is losing its appeal— and other nations are vying to be the next global sourcing powerhouse. The choices made by U.S. retailers will shape their own private-label success and impact the international business landscape. Many retailers may consider dual sourcing strategies that create local rapid response capabilities while still leveraging Chinese trading partners for less time-sensitive products. When making these complex decisions, retailers must first consider the need to maintain or improve their assortment advantages, which will necessitate new levels of speed, flexibility and responsiveness. But they must also balance these competitive imperatives with the performance and capabilities of their global supply chain, as well as with the total landed costs of their private-label products. These costs will vary widely based on where, when and how products are manufactured and delivered. i2 is conducting thorough and ongoing studies of the global sourcing situation to help retail customers navigate these complex decisions with far greater confidence. In addition, i2 can help retailers to understand the ongoing viability of China as a sourcing center—and to make intelligent, informed decisions based upon a range of internal and external factors. Today, U.S. retailers literally have a world of private-label sourcing options available to them. The best decisions for their own businesses can be made by gathering readily accessible information—about their assortment advantages, cost structure and even their corporate responsibilities—and then using this data to thoughtfully weigh their alternatives. The most important action U.S. retailers can take today is to recognize the changing situation in China—and begin to look toward a more sustainable future for their private-label product lines.

What’s Behind Escalating Sourcing Costs in China? Since 2000 Shipping costs have risen 300 percent.

Since 2005 The yuan has gained 18 percent against the weakening dollar.

Since 2006 Skyrocketing fuel costs have dramatically eroded private-label profit margins.

Since 2007 In response to a shrinking labor pool and doubledigit inflation, a number of Chinese provinces have raised wages by as much as 50 percent. According to China’s National Bureau of Statistics (April 10, 2008) “...the mean annual wage for a typical urban Chinese employee grew at an 18.72 percent rate in 2007, to... 99.32 yuan ($14.17) per day. [This rate represents] the fastest growth in six years and [is] higher than the 14 percent on average of the preceding six years.”

January 2008 Enactment of China’s Enterprise Tax Law, which raised taxes to 25 percent, resulted in cost increases of up to 68 percent for foreign-owned businesses.

June 2008 China announced a minimum salary increase of 10 percent in its capital city, Beijing. Given these factors, i2 estimates that sourcing products in China today has added 20-30 percent in costs over the last two years for Western retailers— and that the cost of sourcing products in China will continue to increase year over year in the foreseeable future.

Gurdip Singh is vice president of Services for i2’s Retail and Consumer Industries sector. For more information, contact supply_chain_leader@i2.com.

Supply Chain Leader / October 2008

FUEL FOR THOUGHT:

Strategies for Counteracting Soaring Oil Prices

by Hal Feuchtwanger

Supply Chain Leader / October 2008

t’s difficult to identify any area of business—or of life, for that matter—that hasn’t been affected at some level by skyrocketing fuel prices. When the price of oil surges to record levels, businesses along every link of the supply chain feel the pain. That pain can reach crisis levels for many companies, and the first response for some is to attempt to offset these increased transportation costs by simply passing them along to their customers. The reality, however, is that there are a multitude of strategies companies can employ to hedge against increased fuel costs to avoid the wrath of their customers, and to retain, or even improve, their competitiveness. These solutions run the gamut from simple and shortterm to more complex, longer-term solutions.

Operations and equipment Operations and equipment is the first place many fleet operators can make adjustments to reduce transportation costs. By establishing some common-sense “rules of the road,” many of these companies have the potential to realize marked improvements in fuel efficiency. From an operational perspective, examples of relatively simple changes may include: • Scheduled/routine equipment maintenance and repair • Driver training, tracking, and incentives programs • Engine control modules to regulate top speed, cruise speed, RPM and idle time Additional advances in technology and equipment are also starting to generate substantial improvements in both fuel efficiency and emissions output. Many of these are being promoted within the United States as part of the EPA SmartWay Transport Partnership (www.epa.gov/smartway). Examples of these include: • Improved aerodynamic truck/trailer designs – profiles, bumpers, fairings, etc. • Advanced truck stop electrification • Idle reduction technologies • Low rolling resistance tires • Exhaust after-treatment devices • Alternative fuel powered vehicles It has been estimated that a SmartWay-certified tractortrailer combination is as much as 20 percent more fuel efficient than the average tractor-trailer combination on

the road today (Environmental Protection Agency press release, “New Green Big-Rigs Cut Greenhouse Gases, Save Truckers Up To $11,000 Yearly,” March 30, 2007). By the year 2012, the goal of this voluntary partnership is to save between 3.5-6.5 million gallons of diesel fuel per year, thereby eliminating 33-66 million metric tons of carbon dioxide (CO2) emissions. This initiative would represent the equivalent of removing roughly 12 million cars from the road. Some shippers are even beginning to make this partnership a prerequisite for the carriers with whom they contract.

Planning and control Driven largely by reduced manufacturing costs, companies have made dramatic moves during the past 25 years to low-cost country (LCC) manufacturing sources, particularly in China and the Asia-Pacific region. (For more on this topic, see “Private-Label Sourcing: What’s Next After China,” on page 4.) However, according to David Simchi-Levi of MIT, the tipping point for many companies to start looking at “near-shoring” is directly tied into the price of oil as a percentage of total supply chain costs. Once oil reaches a certain threshold, companies may benefit by sourcing closer to home. Although the manufacturing unit costs may still be higher in many cases, those costs are offset by the increased shipping costs from offshore locations. (“What is the Tipping Point for Bringing Back Production to the Domestic Market?” Supply Chain Digest, August 25, 2008). One of the world’s largest automakers recently worked with i2 to address and exploit this particular opportunity by jointly developing a total landed cost modeling solution. Most important, a world-class transportation management system feeds the forward-looking processes of forecasting and modeling. There are also significant cost savings opportunities for many companies in areas where existing transportation planning processes are not being optimized. Transportation optimization can include automated shipment and route planning, load building, intelligent shipment splitting, hub FUEL CONTINUED on Next Page . . .

Supply Chain Leader / October 2008

consolidation/deconsolidation, containerization, carrier mode selection and online dock scheduling. To enable these optimized transportation planning processes, companies must have the ability to control and systematically represent comprehensive transportation data. At the highest level, the three fundamental transportation data components include: • Physical network representation (locations, business hours, business rules, constraints, etc.) • Carrier tariff information (contracted services, equipment types, lanes, rates, etc.) • Transactional shipment data (origin, destination, dates, dimensions, etc.) Companies must be able to anticipate and evaluate changing business conditions––even those changes beyond their control. With a world-class transportation management system, companies can utilize this information to enable an optimal transportation planning capability, as well as an efficient (and automated) freight financial/reconciliation process. And while this systematic representation of operational data is critical to supporting a robust analytics/ reporting process, perhaps more important, it also feeds the more forward-looking processes of forecasting and modeling.

shipment forecasting process, manual or otherwise. On the carrier side, Schneider National is one of the larger companies with an established systematic shipmentlevel forecasting process for their top 50 customers. In fact, for many of these customers, Schneider has proven its ability to project shipment volumes and timing substantially more accurately than the shippers themselves. Modeling normally begins by establishing a current baseline with historic network data, much like the forecasting process. And while a shipment forecast may be used as input to create a subsequent modeling scenario, the modeling solution has the ability to modify and evaluate extensive network and data changes, well beyond just the shipment forecast. In fact, modeling solutions are normally utilized in one of two ways: 1. Network Rationalization – to create and fully represent one or more expected business scenarios across a company’s supply chain network, intended to justify planned or actual network changes and commitments. 2. Contingency Planning – to create and fully represent any number of alternative business scenarios across a company’s supply chain network, to formulate expected responses in the event of unexpected circumstances, variations or other unplanned network changes. Penske and PepsiCo are just two notable examples of

Projecting and sharing relevant data Given the volatility and uncertainty inherent in today’s transportation and logistics networks, world-class companies must be able to anticipate and evaluate changing business conditions—even those changes that may be beyond their control. Simply speaking, the ability to accurately project and share relevant logistics business data across partner networks increases each company’s ability to plan more effectively and efficiently. For the purposes of this discussion, this capability has been defined in terms of two distinct, but related processes: forecasting and modeling. For shippers, the forecasting process should create a projection of expected transportation demand, including total period volumes by geography, as well as likely shipment size and frequency, if possible. This forecast may be shared with carrier partners for the purposes of formulating a rough equipment capacity plan, and possibly even establishing customer-carrier commitments. While many manufacturers and consumer goods and retail companies have established technology-enabled sales forecasting and/or sales and operations planning processes, very few have a corollary

Supply Chain Leader / October 2008

How many unproductive miles half-empty trucks passing in

companies that have demonstrated success by establishing a clear internal competency and making a substantial commitment to the ongoing process of network/transportation modeling.

Visibility and collaboration The contingency planning process discussed previously is a key method enabling leading companies to formulate and create a “predictive response” capability—or in simpler terms, a “plan B.” However, to make this predictive response process actionable, those same companies must have the ability to rapidly identify the fundamental nature, or basic cause and effect, associated with the corresponding unplanned result/event. Samsung is one example of an industry leader that has created a true global logistics visibility hub (or Control Tower, in the newest industry parlance) to enable real-time event monitoring, and more important, to identify and execute the appropriate countermeasure or quick customer response related to the unintended or unplanned event. Perhaps as significant, however, this wealth of information captured over time as part of the monitoring process is routinely analyzed and leveraged to inform and justify appropriate modifications to the process, or even to the larger network, creating a continuous feedback loop for future modeling efforts.

are driven by empty or the night?

While there are clearly numerous examples of companies that have adopted one or more of the transportation efficiency measures outlined here (and quantified the associated benefit as a result) the reality is that most of those processes are still executed within the four walls of any organization. Rarely, if ever, do truly collaborative efforts extend beyond the orbit or ecosystem of the individual company—for example, from division to division, shipper to carrier, or shipper to supplier. And in many cases, even those efforts are often suspect, or half-hearted.

What is your company doing to counteract External considerations soaring fuel prices? Share your thoughts and opinions at www.i2.com/supplychainleader Perhaps the biggest opportunity, and most difficult question to answer, may be, “what kind of reductions in fuel consumption and CO2 output could be realized based on expanded shipper-to-shipper, carrier-to-carrier, or even industry-to-industry collaborations?” It’s hard to fathom how many unproductive miles are being run as a result of myriad empty trucks passing in the night.

External considerations Many experts believe that unregulated speculation among large energy traders, authorized through the Commodity Futures Modernization Act in 2000, has been at least partially responsible for rising oil prices. The Food, Conservation and Energy Act of 2008 (2008 Farm Bill) gained legislative approval on May 22, 2008, overriding a presidential veto, and effectively closing the “Enron loophole.” Not surprising to some, the price of oil dropped roughly $25 per barrel in the first 50 days after the bill became law. While other regulatory actions, economic factors, geopolitical changes and even forces of nature will almost certainly continue to have both positive and negative impacts on the price of oil, those dynamics will continue to remain largely outside of a company’s control. A company’s ability to neutralize the effects of those kinds of events—and remain competitive in spite of them—will almost certainly depend on their willingness to embrace and adopt the kind of operational measures outlined here. Hal Feuchtwanger is managing director for i2’s Global Logistics sector. For more information, contact supply_chain_leader@i2.com.

Supply Chain Leader / October 2008

Linking the CFO to Supply Chain Execution by Mahesh Rajasekharan, Ph.D

CFOs are ideally positioned to grow market share and profits through strategic supply chain management.

Supply Chain Leader / October 2008

s global competition intensifies at an increasingly rapid rate, savvy companies are staying ahead by turning lean and agile supply chain management (SCM) from a service utility to a strategic asset—a functional part of the company that also positively affects the bottom line. While it is becoming generally accepted that flexibility, real-time responses and agility are necessities for success in supply chain management today, few companies have recognized that the key to implementing such a system as a strategic asset is already right under their noses. To use supply chain management strategically, a company needs to have a good overview of its total costs and sources of value to align business strategy with the supply chain. A company must also close the gap that commonly exists between the lip service paid to the importance of supply chain management and actually allocating the resources and experience necessary to optimize supply chain management performance. Fragmentation and decentralization among various supply chain processes too often hamper efficient product flow in today’s global business environment. Also, no system can achieve all its potential without the proper metrics to measure and fine-tune performance. You may think the odds of finding one person proficient in a range of tasks this broad would be next to nil. Surprisingly, he or she is already part of your company, occupying the Chief Financial Officer’s office. More and more companies are recognizing that the CFO’s skill set is a competitive asset in its own right, and well suited to employing the supply chain to strategically cut costs and increase profits. In fact, CFOs lead SCM at Home Depot, Sun Microsystems and Delta Airlines. Today’s CFO is charged with reducing cash-to-cash cycle times, achieving profitable growth, delivering predictable revenue and reducing the company’s risk profile. As the economy tightens, there are few places for the CFO to turn to affect the bottom line. Innovative CFOs are recognizing that they are in a unique position to lead a company’s supply chain management. They serve as an unbiased entity with no emotional affiliation to the current set of processes, and their top responsibility lies with the financial success of a company. Their financial training gives them a solid analytical CFO CONTINUED on Next Page . . .

Supply Chain Leader / October 2008

foundation from which to evaluate the effect of systemwide changes on the bottom line. Many profound changes in a company’s supply chain management processes require strategic financial bets that a CFO is in the best position to make. Most companies lack centralized global supply chain management processes, resulting in fragmented governance and control, and inefficient sales and operations planning (S&OP) processes. The CFO’s position and analytical skills are a natural fit to drive cross-functional execution in S&OP process management. It’s not just a good idea to have the CFO involved in SCM. Unbeknownst to many, Sarbanes-Oxley (SOX) indirectly demands it. SOX and other compliance and risk management responsibilities require the public company CFO to have a tighter control over supply chain performance and execution. Section 409 of SOX requires public companies to disclose rapidly, and on a current basis, any changes in the financial condition of the company—a challenging task given the complexities and changing nature of today’s global supply chain. For visionary CFOs, however, SOX compliance represents a unique opportunity to pursue best practices in supply chain planning and risk management integrated with corporate governance. The requirement to detect and report on material changes in a company’s financial performance creates an acute need to have complete visibility into the financial supply chain, including up-todate changes in inventory value and other liabilities and contracts.

Merging the financial plan into SCM helps both The rapidly increasing pace of business requires tight alignment between financial and supply chain management decisions. Short product life cycles and changing consumer demand—particularly characteristic of the hightech industry—mean companies whose supply chains aren’t in synch with their financial planning are less likely to make their numbers. For example, a semiconductor company recently implemented solutions to manage integrated sales and operations planning, thus tying the supply chain with financial management. This company has world-class supply chain management processes and centralized supply chain management governance, and its SCM team is financially savvy and engages in regular meetings with the CFO and controller. Team members are prepared to make management decisions based on forward-looking demand-supply (capacity) data matched with financial ratio projections. Accordingly, the SCM team members decided to ramp down factory output at one of the company’s high-volume factories after peak Christmas shipments had been completed. S&OP planning intelligence had indicated

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that additional shipments would lead to excess inventory at distributor- and supplier-managed hubs, which could create future price erosion and inventory write-offs. Previously, they could not have made such a timely decision because the factory wanted to maximize throughput and utilization, and supply chain managers did not want to risk reduced supply during the peak Christmas season. Short life-cycle product companies, especially in volatile markets such as high technology and consumer electronics, cannot survive without a finger on the pulse of their cash flow. Integrated financial and supply chain management gave them the ability to determine the risk level and positively impact the bottom line. Short-life-cycle product companies serving volatile markets such as high tech and consumer electronics have difficulty meeting revenue projections without the ability to generate forward-looking financials based on product demand-supply fluctuations. Yet many of these companies still have not taken the step to bring together the CFO’s office and SCM. For example, in the cell phone industry, leading companies like Nokia, Samsung, Motorola, LG Electronics and others collectively introduce 20-40 new cell phone models (including technology variants) every six months. These products typically have a 3-5-1 product life cycle, taking about three months to design the product, five months to launch and sell, and one month to liquidate. The exact duration in each life-cycle phase varies across different product types, but the relative ratio stays fairly constant. Cash flow is initially negative during the design phase, starts turning positive during the selling phase, and most companies become cumulatively positive in cash flow only when they get to the end of the selling phase. (Many companies slip back to a cash-flow-negative position due to issues such as price protection and disposal costs, but this can be avoided if managed correctly.) With short life cycles and volatile markets, effectively managing product margins by considering various cost components across the product life cycle can lead to sustained operating profitability and positive cash flow. Through proactive life-cycle cash-flow analysis, companies can implement timely decisions that lead to more products finishing in the black and fewer products dragged back into red at the end of their life cycles. Supply chain management can make a difference in these businesses by coordinating product transitions and new product introductions aligned with end-to-end supply chain capabilities and financial indicators of demand, such as point-of-sale information from retail channels.

Major Supply Chain Risks Companies Should Consider Regulatory • SOX compliance: Lack of network visibility for tracking and reporting material exposure

• RoHs/WEEE compliance: Lack of uniform quality assurance across the global supply chain for all supplier processes and products, from raw materials to finished goods

Customer-Facing • Shorter product life cycles: Slow-response time due to an outdated, poorly integrated or inadequate IT infrastructure

Contractual • Inadequate documentation of ownership and usage rights for products and components

Inventory • Overvalued channel inventory • Lack of visibility into inventory channel • Negative impact of aging inventory on demand matching

Brand • Poor visibility into global gray market • Counterfeiting exposure due to inadequate track-and-trace capabilities

Outsourcing • Invalidated pricing for outsourced components • Supply disruptions

How effective SCM benefits the CFO Effective supply chain management addresses the four key issues that follow: 1. Reducing cash-to-cash cycle times Through perfect orders and accurate customer invoicing, companies can optimize cash collection and shorten cash-to-cash cycle times on the accounts receivable side. On the other side of the cash cycle, proactive use of accounts payable to manage uncertain international lead times helps minimize growing cash cycle time. By basing invoicing on proof of delivery and making payments to suppliers at the last possible moment, CFOs can maximize the cash assets in the company. 2. Reducing the company’s risk profile Effectively optimizing total landed cost, despite global supply chain uncertainties, helps in the management of corporate budgets and gross margin erosions. Companies

frequently consider the lower unit costs in choosing global suppliers and fail to consider the uncertainties inherent in global supply chains. Several factors impact the total landed cost, among them: • Elevated transportation costs due to increased fuel surcharges and specially expedited shipping needed to offset delays from outsourcing • Longer lead times that require more in-transit inventory and reduce responsiveness • Lost business due to delays in custom clearance or a sudden surge in demand that could not be immediately fulfilled • Increased inventory holding costs due to higher inventory needed to offset these risks 3. Achieving profitable growth As CFOs experience the impact that strategic supply chain management has on the financial picture, they see they must not only focus on cost reductions but also on growing revenue and market share. The majority of supply chain organizations can measure and model cost reductions, but only the best can quantify the supply chain’s impact on revenue. The CFO is in an excellent position to analyze and quantify the financial tradeoffs of supply chain investments to improve revenue and market share. 4. Delivering predictable revenue The financial community expects CFOs to deliver predictable revenue and profits on a continuous basis. A majority of the future supply and demand information the CFO needs to fulfill this responsibility lies within the supply chain. In addition, the CFO’s ability to execute the financial plan is tied to the ability of the supply chain to deliver on the company’s business plan. Supply chain management programs can reduce working capital requirements through effective supplier-managed inventory programs, multi-echelon inventory optimization techniques and supply chain visibility linked to six sigma programs. These programs offer ways to free up cash flow and reduce current assets tied into operations. CFOs can clearly see the relationships among the projected financial statements, financial metrics such as return on assets and return on equity, and operational metrics impacted by supply chain performance. Therefore they are positioned to make the proactive investments and decisions required to make the business plan happen using their greatest strategic tool––the supply chain.

Dr. Mahesh Rajasekharan is vice president, i2’s High Tech industry group. For more information, contact supply_chain_leader@i2.com.

Supply Chain Leader / October 2008

by Samir Bhargava and Lalith Vadlamannati

Synchronizing Supply Chain Applications with Continuous Change

Supply Chain Leader / October 2008

he value of an efficient supply chain and its use as a competitive lever can only come when it is in continuous alignment with changing business conditions and market trends. This is harder than ever to make happen in today’s volatile business environment, characterized by tremendous competitive pressures and ongoing demand for better, faster innovations and customized products. The resulting shorter product life cycles add to associated supply chain risks, making supply chain management more complex and unpredictable. Supply chain owners want adaptable and agile processes that can change and adjust as need arises.

they need to set up foundations for developing an agile system, such as proper data models, data synchronization and governance strategies, re-usable basic services like user security, and the ground rules for enterprise visibility. The solution needs to be optimized throughout the design cycle, and more important, after deployment. Many software implementations face their biggest challenge right after deployment when the first business change request comes. If designed properly, the system will incorporate the change as an essential element rather than an inconvenient afterthought.

Rethinking the supply chain applications of today (and tomorrow) ensures continued business responsiveness and sustainability. Too often, corporate IT organizations find that their packaged applications don’t meet their business requirements, and consequently software reconfiguration after deployment is a common challenge. Yet, surprisingly, while low-cost offshore development options have made customized software solutions affordable again, many companies continue to select out-of-the-box solutions since they provide access to best practices and the latest technological innovations. A hybrid approach is becoming more common, however, where packaged business applications bring a core capability but with enough flexibility to customize the user interface, workflow, data modeling and other components to align more closely with business needs. In fact, with the right tools and the right infrastructure in place, business users themselves can take ownership to affect changes to customizable applications based on changing business requirements. These applications, however, can only deliver high value continuously if they are flexible and easily maintainable to achieve high-level responsiveness.

Designing sustainable supply chain applications Prior to revamping supply chain infrastructure and data management systems, companies need to think through each step upfront and lay out the necessary building blocks before tackling larger applications. For example,

Architectural underpinnings to assure agility A system that can change at the speed of business requires architecture that can: • Integrate existing legacy systems until they can be replaced or enhanced • Allow rapid prototyping of business ideas to see the end result in days and months rather than years • Enable business users to define and adjust process flows without IT intervention • Link multiple disparate applications in a business process flow without rewriting individual applications • Provide for data synchronization and harmonization across existing systems Service-oriented architecture (SOA) and model-driven architecture (MDA) both provide the loose coupling required to leverage existing systems and minimize programming required to customize applications to fit business needs. SOA uses services to access and link data from disparate systems. MDA defines models of business processes and workflows. Business users can develop rich applications through data model attributes and visual, intuitive interfaces that sit on top of a business model. Rapid prototyping tools help test new ideas before they become an integral part of the business. Synchronizing CONTINUED on Next Page . . .

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Challenges in managing supply chain applications Given the pace of business change today, even the best-designed applications won’t deliver with a deployand-do-nothing approach. Proactive attention and maintenance are required to keep applications competitive and able to offer sustained business value. Operational challenges: Retaining operational knowledge in companies or industries with frequent turnover requires a focus on employee training, employee process ownership and periodic refresher training. This focus is not only important, but a business necessity to ensure effective use of applications. Evolution challenges: Dynamic business conditions spawned by continuously changing demand requirements, competitive pressures and supply arrangements challenge applications to evolve in parallel. A gap between business requirements and configuration of applications can quickly snowball, substantially diminishing application effectiveness Organizational challenges: Most applications are implemented to respond to certain business needs and with specific business justification. Over time, needs change or priorities shift reducing their relative importance. As attention is diverted to the next priority, applications lose executive sponsorship, causing a reduction in the required

Challenges in Sustaining Value

Supply Chain Leader / October 2008

ongoing investment to keep the application relevant, thus decreasing effectiveness. Infrastructure challenges: As the technology landscape continues to evolve, new hardware and middleware releases bring new technology and innovations to the table. Every upgrade of infrastructure opens questions of compatibility, both backward and forward, requiring business applications to be upgraded. Keeping track of interoperability issues is a huge undertaking in the complex IT environment of a large enterprise, where the upgrade of one system can potentially affect other applications’ performance in enabling business processes. These issues continually compromise applications’ usefulness and business value.

Keeping supply chain applications effective To overcome the above challenges, and not only sustain but increase the value delivered by the business applications, it is necessary to recognize and address the challenges listed above effectively and proactively. There are a number of different ways of ensuring the applications are maintained and stay aligned with changing conditions. Standard maintenance programs: Out-ofthe-box applications—whether used as is or used as the basis for a customized solution—offer some level of standard maintenance programs. These vendor-offered maintenance programs are valuable because they lower business risks due to disruptions, and also improve user productivity by providing access to expert support. Service contracts usually include upgrades as they’re made available, incorporating the latest best practices, tips from other users, standard technology advancements and added functionalities. Maintenance programs help to overcome many operational and infrastructural challenges, supporting users by providing technical help as needed and maintaining compatibility with the latest technology advances. Solution review and tuning: Inevitably, applications get out of synch with business requirements— not from major shifts in business processes, but from small changes over time. To keep solutions effective, it is necessary that applications receive regular architectural, technical and functional reviews. Subject area expert reviewers can identify any misalignments, gaps or missing opportunities and then address the best way to get the application back in tune. Often, solution tune-ups result in up to 20 percent improvements in key metrics by realigning critical factors related to demand patterns, supply changes, manufacturing constraints, etc.

Business changes and synchronization: Making changes after deployment has always been a challenge. However if designed well, using a loosely coupled architecture, it is possible to make adjustments economically to keep the application tightly aligned with business changes. The rules-based solutions built with BPM (business process monitoring) tools, can be adjusted quickly to keep pace with business changes. The IT organizations, if needed, can tap into solution architects and expert consultants to make changes in the user interface, add or remove steps in the process, change data models, work on integration points with other applications, and reconstruct the workflow if required. This work can be outsourced to experts who can continuously monitor the semi-custom solutions and intimately track changes in business to make adjustments as needed. With the right technology in place, the evolution of business processes can quickly be integrated into semi-custom software solutions. Strategic impact analysis: With every deployment, key metrics and targets for improvement need to be identified. Establishing a baseline for these metrics is a good practice at deployment so that over time changes can be tracked and measured. Periodically reviewing metrics and process improvements can enable and improve application business practices. This step becomes an important one when seeking sponsorship to address organizational challenges. Such studies can also identify gaps and opportunities to further increase return on investments.

Finally... Companies invest a great deal of resources and money in the applications that support their businesses. These applications face a number of ongoing challenges that reduce their impact and effectiveness over time, and diminish the value they are delivering to the business. By using loosely-coupled technologies with a disciplined approach to deployment and maintenance, flexible applications can be adjusted to maintain their effectiveness and continue to provide a high return on investment. Proactive consideration from the IT and business organizations, as well as with close collaboration with vendors and experts, will keep the applications performing to their potential.

Samir Bhargava is vice president, Global Services, for i2. Lalith Vadlamannati is a product manager for i2.

SOA Platform Migration Path Whether a company’s current applications are on a service-oriented architecture (SOA) platform or not, the challenges associated with sustaining the effectiveness of those applications remain the same. Most of the steps suggested here for keeping applications aligned with evolving business needs—use of standard maintenance programs, periodic impact analysis and regular fine-tuning––apply to legacy systems as well. With legacy systems, however, synchronization measures are more complicated and costly, and therefore likely face longer implementation times due to budget considerations.

Start with SOA on the front end Companies with legacy applications can implement an SOA platform that acts as the front end for all business functions. The platform can provide the external interfaces using WSDL/SOAP protocols while internally talking to the legacy application interfaces. It is not necessary that all of the data models of the legacy application be migrated to the SOA platform, as long as the necessary business functions in these applications are callable from the SOA platform––thereby leveraging legacy functionality. This approach enables the company to modernize its infrastructure to suit current business needs without incurring the costs of upgrading or replacing applications until absolutely necessary.

Iterative migration to SOA Some of the SOA platforms (such as the i2 Agile Business Process Platform) provide utilities to import data models from relational databases and construct logical representations of them, thereby enabling model-driven architecture (MDA) paradigms for new functionality that needs to be built. Such an approach provides a natural path for upgrading existing systems in bits and pieces. Finally, while integrating an SOA platform with legacy applications will make those applications more adaptable, an application entirely developed on an SOA platform will be easier to manage and keep synchronized with changing business requirements on a timely, ongoing basis.

For more information, contact supply_chain_leader@i2.com.

Supply Chain Leader / October 2008

CASE STUDY

Continental Tire Speeds Planning Demand planning and inventory optimization maximize service and cut costs. Continental Corporation is the fifth-largest automotive supplier in the world, with extensive know-how in tire and brake technology, vehicle dynamics control and electronic sensor systems. With targeted annual sales of more than €26.4 billion in 2008, Continental employs approximately 150,000 people in 36 countries, at nearly 200 plants, test tracks and research and development centers. As a leading technology partner to the automotive industry, Continental develops and manufactures a broad product range that includes tires, brakes, chassis, airbags, powertrains and advanced electronics components that enable sophisticated features such as electronic stability control and adaptive cruise control.

Tire division planning and inventory challenges Continental supports two tire divisions: Passenger and Light Truck Tires, and Commercial Vehicle Tires. Like many manufacturers, the tire divisions face two major supply chain management challenges: driving economies of scale in production while maximizing inventory efficiency in the distribution network. For Continental’s tire divisions this is no easy task: With 14 major worldwide production sites, over 80 warehouses, and more than 6,000 products, sophisticated software tools are necessary to cope with the huge data volumes processed by optimized production and replenishment plans. Continental has two major tire business areas—OEM and Replacement—each with very different supply chain management requirements. On the OEM side, the order volumes are relatively high, and every order needs to be fulfilled on time. In the Replacement business, however, the situation is very different—demand and product variability are high, order volumes are lower and profits differ widely depending upon the product and sales channels. Because brand loyalty on the customer side is a continuous challenge, ensuring that product is available at point of sale is critical to profitability. “In supply chain management you have to balance these conflicting requirements, always trying to achieve the global optimum,” says Dirk Petermann, head of the Competence Center of Supply Chain Management for the Continental Corporation’s tire unit.

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Continental recognized the complicated customer demand/inventory efficiency conundrum as a major opportunity to improve its supply chain management. Company executives concluded that they needed significant changes in business processes, organizational structure and planning methodology.

Why i2? Continental established its “as-is” and “to-be” positions, and identified the providers who could support the company in its transition to the “to-be” state. “We made a short list of three providers, one of which was i2,” Petermann says. “At the end of the day, i2 won because they were able to show us significant experience in solving problems like ours, with a very high number of installed solutions. The people from i2 proved that they could provide what we wanted, and from the very beginning they were passionate about helping us drive value with our supply chain management initiative.”

Cycles and Inventory Turns company turned to i2 Inventory Optimization, developed to optimize the relationship between inventory management, customer service, and product line profitability. “Inventory Optimization helps us to define different service levels based on the product and sales channel,” Petermann says. “This means we are now able to focus our investments in inventory exactly on the products where Sales wants to have a high service level. Overall inventory efficiency does not take a hit, and on the other side, we can reduce inventory levels for products with a lower service.” As a result, the tire divisions’ distribution network is now extremely responsive and inventory is deployed according to the rules defined by the sales organization. “After dramatically increasing speed in the distribution network we learned that production cannot keep up without taking a hit on production efficiency,” Petermann says. “Consequently we started looking for possibilities to increase the agility of production without influencing productivity negatively.”

On-the-floor responsiveness

i2’s contribution To address its supply chain challenges, Continental implemented i2 Supply Chain Planner and i2 Inventory Optimization in a phased approach. First, i2 Supply Chain Planner was implemented for European master planning. The planning system prioritizes incoming orders and forecasts demand in “demand layers.” Next, it creates a production and replenishment plan, accounting for supply chain and business rules unique to Continental. A new replenishment plan is created mid-week to respond to changes in the demand pattern. A major increase in inventory turns resulted, and consequently Continental extended the new demand planning system globally to include all cross-regional (Americas, Europe and Asia) suppliers. With demand planning in place, Continental continued to see potential for improving inventory turns further, in tandem with improving the service level for its most valuable customers and most profitable products. The

Creating a detailed production plan before the i2 implementation required entering in all demand, supply and production constraints. It took several days to create these production “campaigns,” and to support stable production, the production plan was frozen over a period of weeks. Consequently, demand changes within this frozen period had no impact on production. Now, however, Continental’s campaign planning functionality via i2 Supply Chain Planner creates an optimized production plan within hours, cutting the shopfloor stability freeze by half with the potential to reduce it further. Demand shifts can now be quickly accommodated on the shop floor, thereby eliminating excess materials, labor and inventory costs as well as maintaining valuable customer loyalty with superior service. “i2’s business expertise is highly welcome at Continental Corporation,” Petermann says. “We always engage i2 in our discussions of business processes, identifying weaknesses and areas for improvements, the business processes that should be implemented and the tools to support those business processes. We really appreciate the experience that i2 brings to those discussions.”

CONTINENTAL CONTINUED on Next Page . . .

Supply Chain Leader / October 2008

CASE STUDY (Continued)

can respond to demand changes with much more agility.” A mutual, long-term dedication to achieving results has made the relationship between Continental and i2 a successful one. “Looking back through the years, i2 was really a valuable partner, helping us to permanently improve our supply chain,” says Petermann. “The next improvement steps are already under discussion and the journey will continue.” — Lauren Bossers

At a Glance Company name: Continental AG Headquarters: Hannover, Germany Product/Services: Tires, brakes, chassis, airbags, powertrains, and advanced electronics enabling sophisticated features such as electronic stability control, adaptive cruise control and advanced driver assistance systems.

Annual revenues: Targeted annual sales of more than €26.4 billion in 2008. Employees: 150,000 Global operations: • 200 plants, test tracks and research and development Continental’s results Continental has succeeded in making its supply chain significantly more responsive, agile and reliable. Prior to implementing i2 solutions, planning was done on a monthly basis and as a result, plans were outdated by the time they went into effect. “Since we implemented Supply Chain Planner, planning is done weekly and replenishment planning is done twice a week. Planning time was reduced by more than 90 percent, and the planning horizon was multiplied by 10. Inventory turns increased substantially,” Petermann says. Through its use of Inventory Optimization, Continental is achieving significantally improved service levels, which has contributed to an increase in profit margins. “After the Inventory Optimization implementation with i2, we recognized that we often shipped tires much too early into the regional distribution centers,” he adds. “We learned that to increase overall service levels, we have to hold them much longer in the plant warehouses and ship them later. By keeping inventory upstream, we

Supply Chain Leader / October 2008

centers in 36 countries

Challenges: • Respond more quickly to changes in demand • Balancing customer service level and inventory • Continuously increase inventory efficiency Key solution components: • i2 Supply Chain Planner • i2 Inventory Optimization Results: • Nearly doubled inventory turns • Significantly increased product availability • Increased velocity of the planning process • Improved agility and responsiveness of production and distribution

• Improved ability to determine target inventory levels to achieve desired service levels

• Differentiated service level by product and sales channel

Focus by Ijaz Parpia and Sai Buddhavarapu

Increase Profitability by Managing Local Market Assortments Retailers that cater to their most profitable customers via localized assortment strategies are increasing sales in a down economy. On July 1, 2008, Starbucks Corporation announced the closing of 600 U.S. stores due to a substantial downturn in store traffic. On the same day, Home Depot’s stock price hit its lowest point in more than five years after a leading analyst firm downgraded the company’s stock, citing an unprecedented decline in the U.S. housing market. The previous week, JCPenney CEO Mike Ullman announced plans to cut store openings and renovations in 2009, consistent with continuing expectations of a challenging year for the American consumer. In the current economic downturn, retailers have been hit particularly hard: the Standard & Poor’s Retail Index has declined by more than 30 percent over the past year. Yet leading retailers almost stubbornly continue to innovate and explore new opportunities that will position them to compete even more strongly as the economy recovers. Innovations in pricing, sourcing, inventory management and assortment management are being funded with scarce capital resources. And for good reason: History shows that sector leaders can win disproportionate advantage in times of adversity. Most retail executives would agree that continuing success is predicated on profitable top-line growth. Oncegreat retailers Montgomery Ward and the F.W. Woolworth Company––two of the largest retailers in the United States and world, respectively––saw sales decline as competitors drew customers away, even while the market as a whole saw solid growth. Reasons for their decline––likely to be repeated by some of today’s industry leaders––include unanswered competitor success in pricing, logistics, merchandising, access, presentation, service and overall shopping experience. These reasons, and others, follow a central theme: consistently failing to meet customers’ changing product and service expectations.

that these customers form heterogeneous groups that vary depending on product, place and time. As early as 2003, Best Buy popularized the term “customer centricity” through an initiative to realign stores with their most profitable customers. Similarly, Wal-Mart’s “Store of the Community” initiative was developed in 2006 to meet the shopping needs of local customers, with stores specifically tailored to reflect the demographic makeup and customer preferences of their respective communities. The benefits are real, and more and more major retailers are taking note. In May 2008, The Wall Street Journal reported that Macy’s CEO Terry Lundgren had given merchants across the country the authority to tailor about 15 percent of store assortments to reflect local market preferences. Ross Stores, a leading off-price fashion retail chain, has developed a similar micro-merchandising focus (Ross Stores 2007 Annual Report, p. 4).

All retailing is local Retailing is a local activity in as far as each transaction is a successful encounter with an individual customer, but the fact remains that national chains dominate all segments of retail. It is ironic that their success, driven in large part by the advantages of scale on the supply side, is limited by the increasing complexity in defining the customers they already serve or are trying to reach. Every effort to meet customers’ expectations for value is hamstrung by the complexity in accurately identifying those customers in the first place, and then interacting with them appropriately. Adding to the irony, efforts to serve those customers— if they are a heterogeneous group—might lead to a corresponding segmentation of supply, undoing (at least in part) the very economies of scale that are key to the value those customers seek. Nonetheless, the tradeoffs cannot be understood until those customer segments are understood.

Rx for organizational stagnation A localized assortment strategy is perhaps the most effective way to fend off this sort of organizational stagnation. Local market assortments improve sales and margin performance by enabling merchandising decisions that attract and retain high-value customers, recognizing

The retail segmentation challenge The retail segmentation problem is multidimensional: customer preferences vary not only by who they are, but ASSORTMENTS CONTINUED on Next Page . . .

Supply Chain Leader / October 2008

Focus (Continued) also where they shop and when, and what they are shopping for, as illustrated in Figure 1.

Figure 1 – The multi-dimensional segmentation problem: Localized assortments cater to the buying preferences of specific consumer segments by product group, store type and time period.

While common-sense customer segment classifications seem a reasonable place to start, they tend to be too broad, highly subjective, and quickly lose relevance unless continually validated using local intelligence. Consider, for example, the description of a group as “Hispanic” or “Latino” (and some would draw important distinctions between these descriptions themselves). Can people of Mexican origin be grouped with those of Cuban origin? Do age, income and marital status matter? What about home ownership? And would a merchant based in New York or Chicago be able to correctly account for these differences? While efforts to segment customers into behavioral and socioeconomic groups continue to evolve, one fact is clear at a glance: the complexity of mass markets is growing. San Diego-based demographics company Nielsen Claritas now identifies 66 distinct consumer clusters in the United States. Changing economic fortunes, migration and immigration, assimilation patterns, aging, new technologies and a host of other factors have contributed to the number of segments and the variation within them. Consider next the notion of seasonality and place, or geography. In most cases, seasons are mapped to months

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on a calendar, recognizing important holidays, religious, cultural and sporting events, school calendars, and so on. Place might indicate geography in a broad sense, say “northern” or “southern,” or it might describe a market on a finer geographic scale, for example, whether the market is urban or rural, and perhaps the nature of the competitive environment. Finally, place, at its most granular level, is the store shelf. Naturally, segments will vary by product category, perhaps even by specific product. Every retailer uses some hierarchical structure to categorize products—for example, by divisions that include departments, which in turn contain product classes and so on—but any notion of product classification biases the structure of the resulting segments to some degree. Nevertheless, it is a common and reasonable practice to adopt a product classification structure that reflects some compromise between a customer’s internal notions of classification, and how product is managed by the retail organization. The purpose of segmentation is, of course, to partition a chosen universe of, say, customer, product, location and time combinations, into meaningful segments. To be useful, segment profiles should accurately reflect member profiles. Moreover, each segment should differ sufficiently from all other segments to warrant partitioning. And finally (and this is by no means easy to do) each segment should have a common-sense interpretation that is both meaningful and pertinent to the business purpose.

Characterizing customer segments Most commonly, retailers use anonymous point-of-sale data as a proxy for the target customer, simply inferring alignment with target customer segments based on category or product sales and margin performance. Simple store grading is the most basic such scheme: Assortments are built around a central core offering, with extensions to the core justified by above-average sales or margin performance as shown in Figure 2. Another more sophisticated approach based on this idea is illustrated in Figure 3. As the merchant considers each product—and the selections across a category as a whole—he relies on profile matching to infer target customer product preferences based on historical segment sales for similar products. An even more advanced approach to providing merchants with an understanding of a market entails building profiles for each customer segment. In broad terms, this means stepping back to first answer the question: Whom do we serve (or wish to serve) to grow market share profitably? The next question logically proceeds from

The data challenge There are, of course, many challenges to successful segmentation. The most significant of these almost always pertain to data. Availability, relevance, freshness, quality and completeness are all important attributes of good data; the “garbage in, garbage out” principle applies with certainty.

Figure 2 – Traditional store grading: Setting assortment breadth consistent with sales volume by product category. The colored dots indicate product choices in a given category. Note also that a subset of products, indicated here by the black and blue dots, comprise the core, or all-store, assortment. The remaining choices are extensions to the core.

the first: How do we align the organization to serve these targeted customers with the right products and services, ensuring access to them at the right time and price? Now the challenge lies in identifying who current or prospective customers are, and then once identified, whether they are understood in terms that will help the merchant decide what each segment is likely to buy. The result is shown in Figure 4 (page 28). Examining customer loyalty program data combined with syndicated market research data provides key insights that tie market and customer profiles together in useful ways. This is how a planner at Best Buy knows the proportion of, for example, tech enthusiasts to suburban moms, by market and by store. The field continues to evolve, and new approaches to developing consumer insights focus on automating direct customer feedback to make product recommendations, as Amazon and Netflix do. Leveraging the growth and increasing relevancy of social networking might add new richness to localization solutions with little added algorithmic complexity.

Figure 3 – A more advanced cluster-based localization scheme. Top: Historical store sales and margin performance form the basis for clustering; each dot within the cluster represents sales and profit for a productstore pair. Bottom: While overall performance might drive assortment breadth, product selections, represented by the colored dots, are made by comparing the attributes of each option to those that have sold well in the past in a given cluster.

Retail data volumes are so vast that it is desirable and often even necessary to summarize or classify data in many different ways. Similarly, selling conditions can be grouped according to patterns—such as seasonality— enabling application in even abstract, irregular conditions such as significant public events. However, these classifications might be based on incongruent merchant and customer perceptions of product and market similarities ASSORTMENTS CONTINUED on Next Page . . .

Supply Chain Leader / October 2008

Focus (Continued)

Figure 4 – A customer-driven localization method builds on product selection that directly reflects target customer preferences, while still taking into account category performance, store formats, events and so on.

and differences. The merchant’s only defense is to continually validate assumptions using a wide range of data sources within and outside the organization. Once the data has been cleansed and collated, segmentation is itself the litmus test for relevance. Although this might seem strange initially, it should be no surprise that many attributes of products, customers, stores and time play little or no role in what makes a segment distinct, unique or even relevant. Also, the discovery of the most important distinguishing features of a segment is no guarantee that the segment is describable in any useful way. Moreover, “over-fitting” the data—tracking noise rather than information—is a common problem. The solution is simply to avoid questionable detail. Getting the segments right underpins the effectiveness and manageability of the subsequent merchandising process. Finally, it is worth noting that historical data provide intelligence and clarity—in hindsight. Game-changing events can overwhelm detectable trends, and there is no substitute for human intelligence in recognizing sea change and anticipating its effects. Just as Netflix changed how customers rent movies, and Amazon has redefined how customers access content, new retail paradigms will emerge to challenge current notions of value.

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Supply Chain Leader / October 2008

Few retailers would argue against the value of customer intimacy, no matter what the market conditions. This is evident today, even with the challenges of the current economic downturn. America’s most admired retailers continue to invest in initiatives to understand and cater to their most profitable customers through localized assortment strategies. Simple store grading processes are being enriched by target market and customer attributes, often using traits that are managed locally. More advanced techniques rely on customer loyalty program data, augmented by market research data, to drive assortments targeted not only to maintain and grow historically important customer segments, but also to identify and cultivate new segments. And finally, the growing relevance of online social networking sites has raised the intriguing prospect of collaborative micromerchandising: customers engaging directly with merchants to identify new value propositions in consumer product and service offerings.

Ijaz Parpia is vice president of Retail Solutions at i2. Sai Buddhavarapu is a product manager at i2. For more information, contact supply_chain_leader@i2.com.

Interview

by Deborah Navas

Lenovo’s Superior Online Buying Experience Leads to Competitive Advantage For Lenovo, the key to growing online market share is an intuitive user interface backed by a highly synchronized supply chain. As vice president and general manager of Lenovo Global eCommerce and Direct Sales, Ajit Sivadasan is responsible for all global eCommerce functions including direct sales (online and phone) operations in Australia, Japan, Canada and the United States. This territory may soon expand, as Lenovo is exploring similar options for its customers in other mature markets, such as the United Kingdom. In addition to sales responsibilities, he also leads several other eCommerce functions including capabilities development, site production and merchandising, usability, and design—with each element aligned to ensure an optimal online customer experience. Within a year of joining Lenovo—having spent a five-year stint with Gateway as executive producer and senior director of eCommerce—Sivadasan moved Lenovo from a traditional customer-to-fulfillment supply chain to an online configure-to-order (CTO) model to enhance the customer experience. Partnering with i2, Lenovo redesigned its eCommerce user interface, linking all CTO processes and choices to back-end order execution, thereby optimizing the endto-end experience for customers. Synchronizing the eCommerce strategy with supply chain execution resulted in triple-digit growth in online revenues and profits. Currently Lenovo’s annual sales exceed US$16 billion, and the company employs more than 23,000 people worldwide. Lenovo made its first appearance on the Global Fortune 500 list this year.

What was your most pressing challenge upon arriving at Lenovo? Our user experience online had several gaps from a customer’s standpoint [after the Lenovo Group acquisition of

Photos: Brandon Hoe

the IBM Personal Computing Division in 2005]. The single biggest challenge was enabling customization and the ability for users to get access to products in an intuitive and logical manner. Our capabilities relative to competition were significantly lower. Once we clarified our priorities, the next challenge was to figure out how to redesign the experience within the framework of the legacy constraints. We met with the i2 team and developed a blueprint that looked to dramatically improve the experience end to end, all the way from the research (configuring and ordering) phase through manufacturing and fulfilment phase. We crafted a solution built INTERVIEW CONTINUED on Next Page . . .

Supply Chain Leader / October 2008

At the end of the day, this is what most online merchants are trying to do—sell more by simplifying the online experience. This seemingly simple notion was missing in our online sales experience. This in no way was revolutionary—neither was this a new discovery—but it allowed us to catch up to our competitors in a big way on the customer-facing front end and make improvements in our planning processes on the back end.

How do you identify and segment your customer base?

on the i2 Agile Business Process Platform that allowed for such an experience from a customer standpoint and that is scalable and manageable from Lenovo’s standpoint.

What was behind the decision to change Lenovo’s direct sales strategy to a configure-to-order approach? The premise of configure to order (CTO) is not new—it’s been done by several others in the industry, but it is quite complicated and requires great diligence to execute well. The value proposition behind selling online is that the ability to provide a much greater level of flexibility and convenience to users. In other words, the online channel has the ability to offer an almost infinite number of options to customers without traditional constraints of physical space faced by brick and mortar stores. The fact that we’ve seen such huge growth in online commerce signifies that customers want merchants to show them what they want to buy in a way that makes sense to the buyers. In our specific case, the switch to the new model allowed our customers to pick and choose what they wanted with minimal confusion.

Supply Chain Leader / October 2008

We service a broad spectrum of customers online, from individual consumers who buy one or two items from the web site for their homes and home offices, to small and midsize business owners who buy for their businesses. Business customers also buy online but typically buy from customized business-to-business sites, where they can have access to their negotiated bids, volume discounts and specific models that fit their needs. Business customers fall into several segments ranging from mid-market—500 to 5,000 employees—to large enterprise customers with numbers from 5,000 and up. We also serve education customers—higher education and K-12 institutions that buy in bulk—as well as public service entities such as various government agencies in the federal and state ranks that purchase large volumes for their constituents. In the case of business customers, we build custom sites that are password protected, have unique product sets, and occasionally highly customized workflows that enable flexibility and business efficiency for the company. In many cases, the procurement department uses these sites to place purchase orders with us directly on behalf of their user groups. The whole process also has an account management structure around it to ensure that customers have the ability to voice their concerns directly to Lenovo. Most of our business customers are looking for efficiencies, and ordering online is the most efficient way they can execute procurement. Billions and billions of dollars in sales happen through such B2B sites globally—it’s pretty significant, both for Lenovo and others in the industry.

How do B2B channel revenues compare with revenues generated from the consumer/home business site? Sales on the business side far exceed the consumer sales for Lenovo, especially outside of China, because until very recently the majority of the products we sold were for the small-to-medium business, public sector, and enterprise audience. The ThinkPad’s reliability—it continues to be among the best designed and engineered products in

the marketplace—has earned it a niche in the business community. However, Lenovo recently announced its Ideapad line of products, aimed at the consumer segment. These products have a colorful and stylish design and upscale features such as facial recognition for security and advanced Dolby sound capabilities. Lenovo looks to distinguish itself on the high end—as a company, our aspiration is to delight our customers through an unequalled ownership experience, whether they buy our products for their homes or their offices.

What was i2’s role in the web site redesign and CTO shift? i2 helped us conceptualize and develop a solution that worked end to end: from a customer’s initial research through to back-end supply chain processes. The partnership has worked very well for us, in part because i2 is very focused on the customer. They go out of their way to make sure that the solution delivers value. In custom development it’s all about how you optimize the code. At the end of the day every bit of code that you write should improve the overall user experience, while addressing flexibility and scalability. There are pluses and minuses with out-of-the box configurable solutions versus custom development, but with custom development you can control how you develop the application front to back. Working collaboratively, we had to think about all the nuances on the eCommerce end to figure out how to execute each decision to do the things we needed to do on the back end—to drive sales conversion and all aspects that are important to the customer. We worked very closely with i2 on this project for the initial six months on what was a pretty significant amount of custom development work. All of the new processes have gone as planned, with only minor hiccups here and there. I would say that the relationship we have built, the team that we have today, and the quality of the people we work with—all of these things seem to click well for us and are not very typical of similar project teams I have seen in the past. In the last 18 months, we’ve been through six or seven releases of custom-developed capabilities, and I’m very pleased that we have continually added value to the customer’s purchase experience. We feel that there are things we can continue to do to gain a bigger share of the market, so we continue to focus on improving capabilities and focusing on user experience. The competitive landscape is tough—Apple, Dell and HP are worthy competitors, all trying to improve the user experience. I am confident that with our intense and unwavering focus on our customers, we will continue to raise the bar in customer experience.

How does this system now position you to handle future challenges more effectively? The one thing I can tell you with some confidence is that, as Internet penetration continues, and people spend more time online researching products and figuring out what they want to buy, the purchasing decision is more and more influenced by the online experience. As an example, if you go on a web site trying to buy a computer, or for that matter anything, and if your experience on the site is bad in spite of the product being good, and all other things being equal, it can absolutely impact the buying decision. We know that 70-80 percent of customers who go online to buy don’t follow through for one reason or another. For me it is very simple. You have to really focus on things that help customers make that decision properly. Everything in the online experience matters from a user standpoint. For example, consider flexible credit options. We recently integrated PayPal because it’s an easy way of transacting without having to worry about fraud from giving out credit card numbers. We’ve added chat capabilities where customers can interact online with our agents without having to call. We’ve added customer reviews—so customers can provide feedback and look at feedback from other customers to firm up their decisions. In these seven releases we’ve added 300-400 features that all look to help our customers make the right decisions quickly and conveniently.

How does this new system position Lenovo to contend with current economic fluctuations? Market conditions will fluctuate from time to time. When the economy turns downward, customers may migrate to the lower end and some may defer. But the surprising thing from a technology standpoint is that PCs have become so central to people’s lives, it is almost impossible for most people to operate without them. In most cases, newer versions of products introduce significant improvements in capabilities, whether it is a new version of a graphic card, increased computing power owing to a new chipset, wireless bandwidth or some other capability. You really can’t go on too long without upgrading if you want to take advantage of the advances in technology. PC sales continue to be strong. The current economic outlook may see some shifts in how customers buy, but at the end of the day, growth in this sector will continue to be strong. Deborah Navas (www.deborahnavas.com) is an editor and writer whose business technology articles appear in numerous international publications. For more information, contact supply_chain_leader@i2.com.

Supply Chain Leader / October 2008

Process Playbooks

by Amarnath Thombre

Playing by the Rules Combining flexibility with discipline, process playbooks ensure that businesses stay on track. While some might optimistically refer to today’s business environment as exciting and dynamic, a fair description could also be chaotic and confusing. The average business is overwhelmed with demand fluctuations, emerging global competitors, pricing pressures and the skyrocketing costs of materials, labor and transportation. These challenges are only compounded for manufacturers of trend-driven, technology-intensive products like consumer electronics because they must also contend with evershorter product life cycles, fickle consumer preferences and shrinking retail margins. Every business has a top-level strategic plan, but today’s volatile environment brings constant surprises that may throw that plan off course. In the face of these disruptions, it is becoming more and more challenging to remain focused on top-level goals and long-term objectives. Process playbooks guide companies with a set of rules and contingency plans that have a high probability of leading to a specific outcome. Faced with an unexpected market challenge—such as low sales volume in one region—many organizations go into firefighting mode, scrambling to run promotions, drop prices, shift inventory or take other drastic actions. However, because these actions are not rooted in thoughtful planning or analysis, they may not support top-level strategic goals. And, too often, these rash reactions can make a bad situation even worse. For instance, a regional drop in sales that is caused by poor weather or other localized conditions such as road construction near the store will only be exacerbated—not reversed—by aggressive product promotions. While volatile market conditions are frustrating—and every business wants to take swift, decisive actions when faced with the unexpected—this business environment demands a greater level of precision and discipline than ever before. When inevitable surprises occur, businesses must be prepared. They must respond not with rushed decisions made in panicky, spur-of-the-moment meetings—but with predictable, predetermined actions that have a high likelihood of success and are reflective of the overall goals of the organization.

Supply Chain Leader / October 2008

Staying focused as the game changes Process playbooks—borrowing the term for the predefined sets of strategies and rules that guide athletes during competition—are emerging as the new standard for leading enterprises through today’s ever-shifting business environment. Just as football playbooks help coaches and players make informed choices as the game progresses, process playbooks help executives analyze the current playing field—and respond appropriately to both obstacles and opportunities. Whether they exist at the strategic or the tactical level, process playbooks are based on a series of three actions that occur in a continuous cycle: • Monitor performance to identify any deviations from the strategic plan • Perform root-cause analysis to clarify the underlying reasons for these deviations • Take predetermined actions that address these root causes, bringing the enterprise back on course While this may seem like a daunting set of tasks for the typical business—especially given the external challenges they face—powerful new supply chain management (SCM) tools and business processes are making it much easier to carry out this ongoing cycle of monitoring, analyzing and responding. By leveraging those tools and processes to collect performance information from across the value chain on an ongoing basis, process playbooks reveal deviations at their earliest stage—before they significantly impact overall performance. And, because they take a holistic view of the global supply chain, process playbooks reveal connections that are not always obvious, making cause and effect transparent. For example, executives no longer have to guess the reason for low regional sales volumes; process playbooks make it clear whether they are caused by competitor promotions, geographic demand variations, materials shortages, supplier delivery problems or some other cause. In determining the best response to these root causes, process playbooks guide companies with a set of rules and contingency plans that have a high probability of leading to a specific outcome, based on best practices and historical performance data. Just as football playbooks are based on what worked in the past, process playbooks apply the

accumulated knowledge within the business to achieve the best possible outcome. They enable executives to capitalize on the intuitive knowledge that already exists within any enterprise—but is useless unless it is systematically gathered, supported with technology and shared across the organization. Because they apply a standard set of workflows, policies and rules, process playbooks eliminate the panicked, illconsidered reactions that can throw a corporate strategy off track. The response process is guided by logic and discipline, instead of emotion and best guesses. Process playbooks also guarantee a unified response from the entire business, eliminating any regional differences in process knowledge or expertise. All stakeholders within the business have an equal opportunity to learn from the monitoranalyze-respond cycle, so that the entire organization becomes better equipped to deal with the performance variability that has become an unfortunate fact of life.

Winning the game: Process playbooks in action Because process playbooks help manufacturers choose the most profitable responses to adverse situations, virtually any business can benefit from these innovative tools. However, in i2’s experience, certain kinds of organizations can achieve the greatest advantages. Recently, i2 has worked with a number of businesses in the fast-paced consumer electronics industry to create and apply process playbooks that are helping them cope with dramatic demand shifts, regional sales variations, product stockouts and the other challenges associated with fastmoving, short-life-cycle products. In this extremely competitive marketplace, process playbooks help consumer electronics leaders gain market share against competitors— while also protecting their profit margins. i2 is currently working with a major PC manufacturer to address a performance issue that is all too common in PLAYBOOKS CONTINUED on Page 44 . . .

Why a Process Playbook? 1

Elevating Expertise

• Region-to-region differences in process knowledge/expertise level can be overcome • Improve skills to deal with variability (what to monitor, how to analyze, what levers to use to counter)

Continuous Improvement of Process Knowledge

Process Playbook

Standardization of Work

• Defines standard process workflow, policies, and rules • Reinforces process discipline throughout the organization based on defined workflow and cycle (calendar)

• Process playbook is a living document/platform which continuously captures best practices

Retention of Knowledge • Institutionalize knowledge • Quick ramp-up for new hires

Supply Chain Leader / October 2008

Opinion

by Guy Courtin

Can a Green Supply Chain Be an Efficient Supply Chain? Kimberly Knickle Practice Director, Emerging Agenda, Manufacturing Insights

Companies are finding motivation to become green for a variety of reasons. One specific catalyst is government regulations, and from this beachhead the movement expands into other parts of a company’s thinking and strategy— including the supply chain. Firms are also highly motivated by what their customers are asking for with regard to the environment; being socially responsible has a tremendous impact on a company’s brand and market perception. It is not simply within their four walls that companies are tackling green. For example, the efforts by some companies to attain cleaner water consumption and alternative energy sources for server farms are now being joined by a focus on making supply chains more environmentally friendly. Realizing that being green and efficient are not mutually exclusive, companies are looking at multiple levels of the supply chain for improvements. The main areas of focus within the supply chain are material selection, sourcing policies, resource consumption and greenhouse gas emissions, and fulfillment or transportation.

Material selection Companies are realizing that being more environmentally friendly—using less packaging material, for example—also makes their loads more efficient, lighter and therefore more effective and cost-efficient. This is something everyone is concerned about in an era of $5-a-gallon diesel fuel.

Sourcing policies Companies are rightfully concerned about where and from whom they source materials, and this impacts both the assembly and disassembly of their products. It also creates new supplier requirements in areas such as transportation and quality assurance.

Resource consumption Companies are increasingly looking to reduce their greenhouse gas impact, particularly in water, gas and energy

Supply Chain Leader / October 2008

consumption. To this end, organizations are examining resource consumption, asking questions such as, “Can I reduce the consumption of water and energy within my four walls?” and “Can I improve shipping efficiency to reduce carbon emissions?” By reducing use of natural resources, companies can not only decrease their environmental impact, they can also add efficiencies to their supply chains in areas like transportation. In fact, transportation presents many opportunities to bring both environmental and business efficiencies to an organization. Companies must look at transportation modes and how they can be greener; how they can cut down on the distance needed to move material; how they package goods to be moved; and if packaging can be reused to lower the overall environmental impact. The leading companies are finding a profitable balance between economic and environmental responsibilities. But of course, ultimately companies must look at the economic impact first and the green impact second. Leading companies in green initiatives are the ones that are finding a profitable balance between economic and environmental responsibilities. This is easier said than done. An even more imposing challenge is how a company can gain a greater understanding of its entire carbon (CO2) footprint. Because there are so many components that go into measuring CO2 (or CO2 equivalents), it begs the question—can the footprint really be measured and a dollar value assigned? Ideally, CO2 footprinting would be as easy as calorie counting, with a label simply displayed on the side of products. But the science and calculations for CO2 footprints are nearly impossible to measure and accurately account for. This adds tremendous complexity to a company’s attempt at balancing good business decisions and environmental friendliness. Another challenge is that getting an accurate picture of carbon footprints requires companies to take a value chain perspective—extending their view of the supply chain to include their suppliers’ suppliers and their customers’ customers. To identify areas where energy use can be reduced, companies need to closely examine the entire value chain. For instance, a review could reveal that changing a sourcing policy or manufacturing closer to home would reduce overall transportation costs. Organizations that examine

the issue holistically and start thinking about the entire value chain will be able to better identify and isolate which problems they can tackle. Otherwise the effort can become overwhelming. A company doesn’t go green overnight. Those companies that are successfully going green realize it is a journey. For example, Cisco looks at supplier relationship management as a way to address the green supply chain, rather than addressing it on the transportation side. They perform quarterly reviews of their procedures to ensure they and their suppliers are working within Cisco’s green guidelines for consumption. They are also focused on how they package and ship their goods, with reducing the amount of packaging materials as one desired outcome. While many companies are making significant inroads in reducing their environmental impact, no one industry’s supply chain can be singled out as being the most green. Companies and industries should strive to address each aspect of their business with innovative and fresh approaches. For example, rather than saying it needs to get a certain number of laptops to a client, maybe a PC manufacturer should instead ask how it can meet its client’s specific computing needs. Taking a different approach to addressing customers’ needs potentially changes the business model for a company—how it does business, what it defines as its product, and what distinguishes its company from the next. They can start looking at environmental efficiencies at every step of the product life cycle—even going back to research and development—to make the supply chain greener and more efficient. If companies think about what the customer is really buying, and what the business problem really is, then they can more effectively weave going green into the business and the supply chain. Brittain Ladd Logistics & Project Management Director, Dallas-based private equity firm

Instead of asking if a green supply chain can be an efficient supply chain, I really believe that the question should be “where doesn’t green fit into a corporation’s overall strategy?” When I was managing Dell’s green supply chain strategy, I didn’t view green initiatives separately from the corporation. The corporation as a whole had an impact on the environment in one form or fashion; hence the corporation needed to be green. With regard to the supply chain, a green consciousness

plays an integral role in companies’ strategies. Companies would be well served to source as much product locally as possible and eliminate long, costly cross-country transport runs to deliver products. Obviously, purchasing locally significantly reduces transportation costs and carbon emissions. Additionally it allows for a more rapid response to replenishment and time to market, making the business cycle more efficient. Companies can find efficiencies combined with environmental friendliness in a number of areas, starting with transportation. In my articles and in speeches given at logistics conferences, I always state that one of the best investments a company can make is to have its entire supply chain analyzed to identify the optimal transportation network. Optimal transportation networks identify opportunities to consolidate parcel shipments into lessthan-truckload (LTL), and LTL shipments into truckload shipments, and to convert air shipments to more efficient ground shipments where feasible. Many companies are achieving significant reductions in logistics-related costs by ensuring that they have a network in place that eliminates unnecessary transportation and uses the optimal mode of transportation for all shipping. With Dell, and with my current employer, supply chain analysis and transportation management software has made reduced logistics costs a reality. This analysis not only ensures cost savings and efficiencies for companies but renders their supply chain greener.

Green product packaging Another area in which a company can go green is in product packaging. At Dell and at the companies I work for in my current role, packaging is one of the primary areas addressed. My recommendations include: • Collaborating with suppliers and customers to identify the optimal packaging configurations to eliminate unnecessary materials • Utilizing logistics beams and air bags in trailers to double-stack pallets safely to eliminate damage in transit • Identifying opportunities to collaborate with customers on recycling • Utilizing multi-pack shipping boxes to eliminate the number of individual boxes needed to fill an order • Creating a “design for sustainability” mindset whereby all packaging is designed to be as green as possible

OPINION CONTINUED on Next Page . . .

Supply Chain Leader / October 2008

Opinion

(Continued)

Green product design At Dell we spent a tremendous amount of time and effort to design and sell the most green and energy-efficient products on the markets. We also designed products configured specifically to require less packaging—thereby saving money for Dell. Companies also need to be aware of what happens to their products at end of life. This is an area that makes a tremendous impact on the environment. If you can design products with end-of-life considerations inherent in their design, you will recognize tremendous savings when it comes to handling waste, and at the same time be environmentally conscious. It is clear that supporting an efficient supply chain goes hand-in-hand with green concerns, and green fits everywhere in business. Unfortunately, far too many companies have jumped on the green bandwagon merely for the sake of public relations. At Dell, however, we understood that all of the efforts we put into product design, supply chain analysis and management, packaging, supplier collaboration, and so on all increased Dell’s competitive advantage. Measurable savings from green initiatives come in the form of reduced transportation, packaging and component costs. In addition, when suppliers and customers recognize the value of collaboration, relationships strengthen and sales grow—making a green supply chain a smart supply chain. Dr. Larry Lapide Director, Demand Management, MIT Center for Transportation & Logistics

I am not sure we should talk about energy-efficient supply chains and green supply chains in the same sentence. This is not because the two cannot coexist, but because we are still in an immature stage when it comes to applying green policies governing supply chain processes (which I define as complying with government regulations and not harming the environment). Why are supply chains still immature regarding green? We are all getting constantly bombarded with companies touting their “green” initiatives. However, I am not convinced that these firms have unilaterally taken steps toward being green because we have not proven that these steps can be efficient or profitable. When it comes to the greening of supply chains, we are still only in a hype cycle. We should not be giving a company credit for truly being green, when all they’ve done is become more energy efficient to save costs.

Supply Chain Leader / October 2008

What do you think? Post your opinion online at www.i2.com/supplychainleader

We must understand and accept the fact that companies will not truly tackle green issues until there is universal pressure to motivate all companies to act green. Governments can pass tougher environmental laws if they work in unison with other governments and global organizations such as the United Nations. In addition, I would not be surprised to see consumers start pressuring companies. If the end product is not “green” enough, environmentallyconscious consumers may seek alternatives and therefore avoid doing business with companies that don’t measure up to certain green standards. When it comes to the greening of supply chains, we are still only in a hype cycle. So when will the tipping point occur? I’m not sure, but I do believe it is coming. Governmental regulations, and potentially consumers, will likely act as the primary catalysts. Once companies gain the proper motivation and start looking at the greening of their supply chains in earnest, supply chain managers will need to focus on three areas of relevance for them: 1. Reverse logistics As governments on both national and regional levels start imposing increased regulations on recycling, supply chain systems will have to accommodate products being returned for recycling or disposal at end of product life. This will require a truly closed-loop supply chain where goods have to return to the supply chain to be broken down and properly disposed. 2. Greener product design Designers will need to use the maximum amount of environmentally-safe product components, and finished goods and packaging will need to be more biodegradable and minimally harmful to the environment. 3. Supply network compliance It is not good enough for a company to be environmentally friendly if any of their suppliers—as removed as they may be from the end product—are not themselves green. It will become imperative for companies to do an audit of their suppliers and their suppliers’ suppliers to ensure every firm—both local and global—that has an

impact on their products is complying with green guidelines. Non-compliant suppliers can do great damage to brandname firms. The risk potential of situations such as this should be sufficient motivation for these firms to police their supply chain for green compliance. Transportation is very much in vogue as a topic of green discussion. I think we confuse the desire to reduce spending on high-priced fuel with the goal of becoming green. When talking about reducing the carbon footprint by rendering our transportation more efficient, I caution that this is really an economically motivated initiative. Companies look to reduce fuel consumption for financial reasons driven by the high cost of fuel, not necessarily to save the planet. Yes, the by-product of increasing efficiencies in transportation—maximizing truck loads, reducing shipping distances, and planning fuel efficient routes, to name a few options—is the reduction of carbon dioxide emissions. I would argue, however, that the true motivation for firms is pure economics. The reality is that cheap oil from the past 20 years has led to supply chains becoming less green from a transportation standpoint, and now we are paying the price for these past excesses. I think we are still in the midst of hype when it comes to green. However, as government mandates become more universal and consumer pressures increase, companies will begin to focus on being green in earnest. By understanding how to handle reverse logistics, product and packaging design, and supply network compliance, supply chain managers will play an important role in driving effective green initiatives. Companies will find that they can continue to be efficient—and maybe become even more efficient—with their green efforts.

The Last Word Kelly Thomas Senior Vice President, Manufacturing Industry Sector, i2 Technologies

Green supply chain management considers environmental impacts when planning and executing the supply chain. Execution of each step in the supply chain creates waste by-products in the form of carbon dioxide, packaging materials and hazardous materials associated with product design, manufacturing and delivery. It also creates the product itself, which eventually will become a waste

product that needs to be recycled. The more efficient the supply chain, the less natural resources and energy it consumes and thus the less environmental impact it incurs. In that sense, the two things are inextricably intertwined—make your supply chain more efficient, and you make it greener. If you make your transportation network 10 percent more efficient, you reduce your fuel charges by 10 percent and your carbon emissions by 10 percent. Despite significant improvements in the past 15 years, supply chains throughout the world still have huge inefficiencies. Reducing those inefficiencies directly and positively affects a company’s bottom line, but also has the added effect of reducing the impact to the environment. Green considerations merely extend the domain of constraints to be considered in the practice of SCM. More explicitly, however, green variables must be introduced into supply chain decision making. For example, carbon credit management should be part of sales and operations management decisions, and green product content should be part of material sourcing and design-forsupply-chain decisions Ultimately, green considerations merely extend the domain of constraints to be considered in the practice of supply chain management. i2 has been a pioneer in the management of constraints and optimized decision making across a set of constraints. Green considerations extend the set of constraints we are incorporating into our solutions. Most of these constraints—like carbon emissions—actually force other things to be more efficient when considered in the decision-making process. The world is becoming more and more of an interconnected supply chain, incorporating the raw materials we take from the environment and the products, emissions and other by-products we put back into the environment. At the end of the day, the most efficient supply chains will not only win in company-to-company competition, but will win in their participation in the community of supply chains that make up the global supply chain. So yes, a green supply chain is, and will continue to be, an efficient supply chain.

Opinion Interviews were conducted by Guy Courtin, senior manager, Marketing, i2. For more information, contact supply_chain_leader@i2.com.

Supply Chain Leader / October 2008

Risk Management by Ramesh Raghunathan, Ph.D and Jiten Sandu Minimizing Risk: A Critical Component of SCM Implementations Like all major business initiatives, SCM technology implementations can bring significant rewards—but also carry some degree of risk. Effective project teams mitigate this risk by looking at both short- and long-term consequences, as well as sharing risk responsibility and ownership across the supply chain. Risk minimization has become a universal theme in today’s business world. Every major product launch, market expansion or other corporate initiative is supported by weeks or even months of analysis that seeks to answer the most basic question: What do we do if something goes wrong? With every significant business initiative comes the prospect of an enormous reward—as well as the potential for minor setbacks, if not outright disasters. Implementing new supply chain management (SCM) technology solutions is no exception. While innovative SCM processes and technology tools have the strength and capability to revolutionize an organization, they can also disrupt business as usual, at least in the short term. Unless implementation projects are intelligently managed—with risk minimization in mind from the very beginning—new technology initiatives can have unexpected long-term consequences as well. For example, in 2001 a much-publicized supply chain breakdown involving Cisco and a third-party solutions provider cost Cisco $2.2 billion in inventory write-downs—the largest loss of its kind in business history. Risk mitigation responsibility should be shared by a broad range of supply chain and business process stakeholders. In hundreds of technology implementations, i2 has gathered a wealth of risk-mitigation insights that can help businesses minimize exposure and maximize rewards when embarking on a new technology implementation. These insights begin with the need to take an entirely new view of risk.

An expanded concept of risk The conventional definition of risk—as it relates specifically to technology implementations—is an uncertain event or condition that could have a negative effect on meeting the project deliverables with regard to scheduling, cost, scope or quality. Typically, the process of risk management entails identifying these events, preparing a response plan, monitoring the risk level and implementing an

Supply Chain Leader / October 2008

appropriate response when unexpected events occur. For most technology project teams, risk management efforts are focused solely on meeting their own project deliverables, as opposed to ensuring the future stability and scalability of the overall supply chain footprint. Most project teams fail to even consider risks that may arise during the post-implementation phase, when the solution will be subjected to multiple process and technology changes. We believe this approach to risk management is dangerously narrow in scope. Instead of defining risk in terms of the short-term work of the project team, risk must be defined as it relates to the long-term viability of the global supply chain. While a technology project team might conclude its narrowly defined task with complete success, there can be enormous negative consequences when that team disassembles, because team members have failed to consider the far-reaching effects of their work. When the new SCM solution causes a broad disruption across the value chain— whether this occurs weeks, months or years later—there is seldom anyone in the business who understands what has happened, or knows how to address the issue. While many teams assess short-term project risks in such areas as resource availability, and data integrity and integration, they need to consider broader issues such as long-term performance and scalability, operating environment and hardware, and reporting and connectivity. Their implementation work must look toward the future, assessing the subtle but important ways in which their technology project has the capability to impact the global supply chain.

Risk mitigation: a shared responsibility Similarly, most project teams take a narrow view of risk ownership—relying on a limited number of team members to understand and assess the risks associated with their efforts. But project teams need to remember that the supply chain spans the business, and possible risks can also be found throughout the business. Some of these risks are obvious, while others are subtle and easily overlooked. For that reason risk mitigation responsibility should be shared outside the project team,

with a broad range of business process and supply chain stakeholders called upon to lend their insights and expertise. By inviting the participation of employees up and down the supply chain—as well as key vendors and customers— technology project teams can ensure that their implementations will bring lasting benefits, not continuing disruptions.

Learn from the experts Every implementation project is unique—fraught with its own set of complexities and risks. But risk minimization practices can be standardized across projects, in order to capture best practices and ensure consistency. Some leading organizations, including Texas Instruments, have become extremely sophisticated in the way they mitigate risk during SCM technology implementations— and the typical business has much to learn from them (see “Three Tips for Managing Risk”).

While not every business may be able to achieve this degree of sophistication and thoroughness, we believe that every organization can enhance the work of its project teams simply by taking a new perspective on risk. By broadening the definition of risk to include long-term impacts—as well as making risk mitigation a shared responsibility— virtually any business can improve its implementation practices and manage risk more effectively.

Dr. Ramesh Raghunathan is senior director of i2’s Manufacturing Industries business unit, and Jiten Sandu is senior program director for i2. For more information, contact supply_chain_leader@i2.com.

Three Tips for Managing Risk At Texas Instruments, we have a “zero disruption” policy for our technology implementations. Therefore, we must place a great deal of focus on managing risk during these implementations. In our 12 years of working with i2, we have made numerous improvements to our risk management processes. Today, we apply three basic tenets that help us manage our exposure at every phase of implementation—and beyond. 1. Identify every risk Each technology implementation project at Texas Instruments begins with a “universal risk assessment” process that collects information on potential risks from multiple stakeholders and perspectives. Any stakeholder in the overall SCM solution is a potential risk expert and has an oppor-tunity to contribute to the universal risk assessment. During this process, individuals outside the core project team are invited to identify potential risks from their perspective. Gathering input from management, operations, infrastructure and other stakeholders helps to identify key areas of focus and may reveal critical insights. All identified exposures are mitigated through a regular risk management process, but the most critical risks— those with high likelihood or severe impact—progress to the next phase of risk management. 2. Track critical risks over time At Texas Instruments, we use risk dashboards to track the status of key risks over time. These risk dashboards contain the most critical risks as identified

by the Universal Risk Assessment. Because the relative priority, severity, likelihood and status of any risk can change throughout a project, this is a useful way to show the progression of risks over time. The status of each risk—monitored using a color rating (red/yellow/ green)—is tracked weekly via the dashboards to show the current state of the risk, as well as highlighting any actions needed to eliminate the risk, mitigate it or plan a contingency. This additional oversight has proven beneficial to our project execution. 3. Ensure ownership of solutions and associated risks Virtually every SCM solution includes a number of custom programs that are wrapped around out-ofthe-box software products. These programs, written for various reasons, can be implemented under the radar, without proper documentation and knowledge transfer. If left unmanaged, these custom programs can represent future risks, as they could be inadvertently deleted, changed or overlooked during system upgrades. At Texas Instruments, we have adopted the term “work products” to legitimize all work done for any particular solution. These work products are subject to the same configuration management processes as the rest of the SCM solution. This helps to transfer the complete solution ownership from the project team to the operations team, and ensures that the entire solution is managed properly. –– Robin Bray, Director of Supply Chain Systems, Texas Instruments

Supply Chain Leader / October 2008

CASE STUDY

Increasing Profits and Service Levels at Cementos Argos With more than 50 percent of the cement market in Colombia, Cementos Argos was well positioned as a local industry leader. The company sought to expand its position regionally and internationally, but its complex network and disjointed supply chain processes and systems made this goal daunting—despite its presence in 10 countries. From 2005 to 2006, Argos combined eight Columbian cement companies to maximize synergies and economies of scale and acquired another to expand its international reach. However, the acquisitions left the cement manufacturer essentially functioning as nine separate companies, all of which operated in silos.

SCM to expand global reach As a result, designing a new network posed a significant challenge to the company’s management, whose goal was to understand its customers in the United States as well as its customers in Central and South America. “We wanted to ensure we were attending to our customers in terms of time to delivery and quantities. In the cement industry, meeting the delivery time you provide is the key driver to achieving customer satisfaction,” says Luis Cappeletti, supply chain planning manager for Cementos Argos. To improve customer satisfaction and increase value for its shareholders, Argos needed to create a new organizational structure and supply chain processes. “Supply chain is more than demand and production planning, raw material procurement, and transportation and logistics,” says Cappeletti. “We’re trying to get as close as possible to supply chain best practices. That requires not just technology solutions, but also a culture, procedures, and processes that support excellence in supply chain management. Argos is taking a holistic approach to supply chain management.”

board of directors,” says Juanita Quintana, logistics optimization director for Cementos Argos. “We needed supply chain knowledge and experience to help us change culture, mindsets, processes and procedures. i2 represented all of that. Companies like Oracle or SAP are not just focused on supply chain. i2 was a supply chain specialist, and we were impressed with i2’s history. i2 demonstrated its commitment to jointly developing an ongoing relationship focused on supply chain concepts, as well as on the tools.” Argos uses i2 Demand Manager to understand its product movement and its market, as well as to plan demand for up to 10 years. Demand Manager is used on a monthly and weekly basis, enabling the company to alter its demand projections according to new information it receives through the solution.

Partnership for supply chain excellence With these goals in mind, Argos began looking for a company that could provide both superior supply chain management technology and the long-term service relationship to help support a culture of supply chain excellence. “We wanted to get away from the enterprise resource planning solution we had used in the past, but we had to make sure that we were recommending a supply chain solutions provider that would inspire confidence from our

Supply Chain Leader / October 2008

“Because we are trying to understand our global business for the next 5-10 years, we need to understand what all of our locations are doing,” says Quintana. “With Demand Manager, we now have all of our information in one place, which means we can better understand our market.” Demand Manager enables Argos to create product

strategies that incorporate special events, external variables, historic patterns, prices and the variability inherent in international orders. i2 Transportation Modeler and i2 Supply Chain Strategist work in tandem on Argos’ network design planning. Supply Chain Strategist operates as the calculator of all of the production and the distribution plans. Together, the two solutions determine long-term network options, stock policies and node locations, as well as transportation, warehousing, and production costs and capacities. Argos also uses Transportation Modeler and Supply Chain Strategist to create bills of material for grinding and packing. “Demand Manager, Transportation Modeler and Supply Chain Strategist enable us to have as much information as possible to provide useful recommendations to our production systems,” says Cappeletti. “We are operating internationally, and those operations—including our 12 plants and 32 distribution locations—have to be absolutely synchronized every day. Using i2 solutions enables us to understand the full international picture.”

Improving profitability, synchronicity and customer satisfaction By establishing an organization-wide supply chain model, coordinating weekly with its sales and operations planning team, and conducting daily adherence tracking between the plan and reality, Argos has now integrated and optimized its strategic planning processes. The company can define service standards, sales forecasting, production plans, distribution and supply in the long, medium and short terms. i2 solutions enable Argos to closely supervise and monitor production plans, and to make quick corrective actions to adjust those plans when necessary. All of these process improvements help Argos to define, ensure, and improve its contribution margins and to better fulfill service offers. Synchronizing production plans with demand has enabled Argos to reduce its distribution costs. “We continue to discover lots of new ways to do things more efficiently in production and distribution planning, and our savings continue to go up as a result,” says Quintana. “In the first 10 months of our implementation, we reduced transportation costs by 7 percent and increased our delivery service level significantly. We are pleased about the return we have received on our investment with i2. Most important, we have the partnership that enables us to establish the supply chain processes, technology, people, and structure we need to succeed as a company.”

The future: Looking for increased savings and service levels Cementos Argos is also implementing i2 Transportation Manager to increase control over shipments of finished products and raw materials to positively affect production for internal customers, and delivery service capabilities for external customers. “This is really a culture transformation process,” says Cappeletti. “It’s not just about IT. It’s about the way we are reaching our financial goals, because our sales and operations planning team can make more informed, transformative decisions by leveraging new technologies and new people skills.” — Lauren Bossers

At a Glance Company name: Cementos Argos Headquarters: Barranquilla, Colombia S.A. Product/Services: White and gray cement, lime, prefabricates, aggregates and mortar

Annual revenues: US$1.8 billion Employees: 11,000 Global operations: • 13 ports • 20 cement plants • 8 sand and gravel plants • 32 distribution locations Challenges: An international expansion initiative was significantly hampered by a fragmented and inefficient supply chain

Key solution components: • i2 Demand Manager • i2 Transportation Modeler • i2 Supply Chain Strategist • i2 Transportation Manager • Ongoing support Results: Efficient and accurate short-, medium- and long-term sales forecasting as well as production, distribution and supply planning; the ability to make quick, event-driven corrective actions; improved product margins and customer service.

Supply Chain Leader / October 2008

Inside i2

by Lauren Bossers

i2 and the i2 User Group Announce Ken Sharma Awards of Excellence i2 and the i2 User Group have named the 2008 winners of the Ken Sharma Awards of Excellence, which honor companies for distinction in supply chain management. The awards were announced at i2 Planet in the JW Marriott Desert Ridge in Orlando, May 2. Sprint, one of the largest wireless operators in the United States, won the award for Supply Chain Depth and Breadth. Panasonic Consumer Electronics Company, a market technology leader with a wide range of product offerings, received the award in the Supply Chain Innovation category. Lenovo, one of the world’s largest personal computing manufacturers, won the award in the Return on Investment category. (For more information see “Lenovo’s Superior Online Buying Experience Leads to Competitive Advantage,” p. 29.) Now in their seventh year, the Ken Sharma Awards are given to those companies that have made outstanding advancements in supply chain management using i2 solutions. The award competition was open to hundreds of i2 customers with implementations planned, in progress or completed. AMR Research served as the exclusive judge of the Ken Sharma Awards of Excellence, evaluating the entries on the basis of vision, implementation depth and breadth, innovation, time to value, and return on investment.

Supply Chain Depth and Breadth: Sprint Sprint offers a comprehensive range of wireless and data communications products and services to meet the needs of both individual and business consumers. Sprint operates more than 1,300 of its own retail locations while also selling through national third-party retailers. Sprint also sells direct through its own web site, sprint.com. With so many channels in play, Sprint was challenged to reduce costs by decreasing overall inventory while also maintaining or improving service levels and field sales operations. Working together with i2, Sprint began to improve its key business processes. i2 solutions for forecasting and

Supply Chain Leader / October 2008

Hiten Varia (left) of i2 and Bill Bryan (right) of Timken Steel, present a Ken Sharma Award for Supply Chain Depth and Breadth to Michael Hahn (center) of Sprint.

planning now enable Sprint to automate weekly demand forecasts across all channels for its handsets and accessories. This has made a positive impact on purchasing, replenishment, allocation, supply chain visibility and order fulfillment activities. i2 solutions also promote supplier collaboration while enabling comprehensive reporting on specific key metrics. As a result, Sprint has reduced inventories at both the enterprise and retail store level while also increasing service levels. In addition, the improved business processes have enabled Sprint to better adapt to quickly changing business conditions.

Supply Chain Innovation: Panasonic Consumer Electronics Panasonic operates an extended supply chain with various suppliers for sub-assembly parts and is challenged

across its eCommerce properties. The company uses i2 solutions for its configure-toorder global web transformation project. This provides the synchronization of its web channels with various functional groups within Lenovo, including manufacturing and logistics. The program has significantly improved the web experience for Lenovo’s web customers, especially in the United States and Canada, while driving operational efficiency in its global eCommerce operations. The Ken Sharma Awards were presented at i2 Planet 2008 by Hiten Varia, i2’s executive vice president of Global Customer Operations and chief customer officer, and Timken Steel’s Bill Bryan, chairman of the i2 User Group.

Hiten Varia (left) of i2 and Bill Bryan (right) of Timken Steel, present a Ken Sharma Award for Supply Chain Innovation, to Gary Lanzilotti (center) of Panasonic.

by demand volatility, short product life cycles and margin deterioration as new manufacturers and brands enter the marketplace. As a result, the company is faced with razorthin margins for both the manufacturer and the retailer. Panasonic engaged i2 to develop a solution that would help the company focus on the consumer and more closely integrate marketing and the supply chain to improve visibility from the factory to the retail shelf. Panasonic reports that its project with i2 enabled the company to bring inventory distribution and sales velocity into alignment, and to improve forecast accuracy and instock ratios for retailers who carry Panasonic products. As a result, the company was able to position the right inventory at the right place, at the right time, as well as to run more effective promotions, increase sales and efficiency, and drive bottom-line value.

Return on Investment: Lenovo Lenovo engaged i2 to help the company become more competitive and customer-centric, with an emphasis on improving the customer experience on its web site. Working with i2, the company has transformed its supply chain and other processes to handle configure-to-order for its customers through its various sales channels. The transformation has helped Lenovo reshape its web user experience tangibly through rapid functional enhancements, studied site flow redesigns, and ultimately by providing added flexibility in the merchandising and promotions management processes

Hiten Varia (left) of i2 and Bill Bryan (right) of Timken Steel, present a Ken Sharma Award for Return on Investment to Ajit Sivadasan (center) of Lenovo.

About Ken Sharma Vice chairman and senior partner of i2 from 1988 until his death in 1999, Ken Sharma made an impact on the development of supply chain planning that continues to resonate today. Throughout his career, Sharma worked to define and redefine the concepts of global optimization, multi-enterprise planning, master planning and supply chain planning. His leadership and vision not only helped make i2 a top provider of supply chain solutions, but also changed the paradigms by which industries understand concepts such as supply chain planning and technology. Most important, even as Sharma changed the face of business, he remained dedicated to his craft. He was known to say, “This work of mine has been a great source of satisfaction. If I’ve been able to help at least one person, that will be enduring.”

Supply Chain Leader / October 2008

Process Playbooks

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the consumer electronics industry: ensuring adequate inventory levels during product promotions. The PC trendsetter runs so many hugely successful promotions on its retail web site that it sometimes creates low inventory levels of its most popular hard drives, monitors and other product components. To maximize revenues and market share, i2 is working with the manufacturer to define those factors that lead consumers to choose a specific product or component—such as default product configurations, upgrade offers and seasonal promotions. Based on this analysis, i2 is creating process playbooks that not only apply the right levers to increase sales of certain strategically important products—but also ensure an automated response as stock levels decrease. As a result, this PC leader will be able to create more strategic promotions that consider overall revenues, as well as profit margins, inventory levels and service levels. By consistently capturing best-practice and historical data, process playbooks read virtual platforms that institutionalize the knowledge existing within every business. i2 helped another consumer electronics leader—selling through a more traditional brick-and-mortar channel— address the issue of regional product stockouts. By studying the manufacturer’s inventory and distribution systems, as well as retailer sales data, i2 recognized that products were not being allocated in a strategic manner, leading to inventory shortages in key markets. i2 created powerful process playbooks that ensure available inventory is sent to the most promising and highest-margin regions; these playbooks also enable responses to demand shifts and inventory changes in a predetermined manner that maximizes overall profitability. These are just two examples of the enormous capabilities of process playbooks. By constantly capturing best-practice and historical data—and applying it to the organization’s most pressing strategic and tactical challenges—process playbooks are virtual platforms that institutionalize the knowledge existing within every business. They facilitate a swift and certain response to unexpected performance issues, keeping the business on track and ensuring that the long-term strategy remains in sharp focus—even in a business environment where the immediate obstacles and opportunities are not always clear.

Achieving Success by the Book Can your business benefit from process playbooks? Nearly every organization can use these SCM tools to sharpen its focus and remain on course. But i2 has created a list of characteristics that define those enterprises with the most to gain from process playbooks: Short product life cycles: Companies forced to continuously phase products in and out of the market operate at the intersection of success and failure every day. Process playbooks can not only help manage the uncertainties of a product launch, but also ensure that margins are maximized during end-of-life transitions. Extreme price sensitivity: For businesses that routinely experience shifts in the costs of raw materials, or the price at which they can sell finished goods, process playbooks provide both discipline and flexibility. As materials, labor or transportation costs fluctuate, process playbooks institute pricing policies and rules that guarantee acceptable margins. Heavy reliance on promotions: If promotions are too successful, consumers and retailers are frustrated by stockouts. But failed promotions result in excess inventory and margin cuts. By continuously monitoring sales, process playbooks enable immediate interpretations and responses to the effects of promotions—protecting both service levels and profits. Variable materials costs or availability: On the supply side, process playbooks ensure an immediate response to shifts in the availability or cost of raw materials, as well as the cost of key product components sourced from suppliers. These automated actions ensure the continuity and profitability of global supply chain activities—by instituting multisourcing and other appropriate strategies.

AmarnathThombre is director, Total Plan Management solutions, i2. For more information, contact supply_chain_leader@i2.com.

Supply Chain Leader / October 2008

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