Supply chain management case study
Strengthening the supply chain
Optimising the supply chain is one of today’s hot topics. Supply chain inefficiency is a key cause of unnecessary costs and poor delivery performance. There is no doubt, however, that far-reaching, end-to-end projects demand a complex blend of process, IT and financial skills and involve people at virtually every level. Consequently, they can take several years and create a large amount of upheaval, even though the outcome is often highly successful.
There are situations, however, where a truly focused organisation can, with proper support, achieve a major turnaround in a very short space of time. In one client company, we laid the foundations of wholesale supply chain improvement in only six months. The project will self-funded within six months and the ROI is expected to be 175% percent over 2 years. Equally important, if the company wants to refine their processes still further, we have created a firm platform for future activity. And, since the company is actively looking to grow through acquisition, new businesses can be rolled into the current business model quickly and cost-effectively.
The company, a division of an international engineering group, specialises in medical devices. Its market is becoming much more demanding and its competitors are raising their game, which is highlighting shortfalls in its own performance. The current shape of this division has largely come about through acquisition. As a result, many of its processes are fragmented – a situation which is compounded by the policy of treating each product line as a mini-business. Although this has some advantages, it makes it difficult to co-ordinate customer handling or to take costs out by sharing back-office systems. The company recognized that it was carrying too much inventory yet was still habitually missing its delivery targets. Each of business units was trying to improve its own performance but, without being able to look across the entire division, little wholesale progress was possible.
Our supply chain practice, whose members had worked with this company on previous occasions, was engaged for an exploratory project. It was geared to finding short-term inventory reductions and service improvements that could be generated from the supply chain within its existing framework of disparate IT support systems. The division was unwilling to consider capital investment in technology without understanding what was wrong with its existing processes and what advantages integrated technology would bring.
We concentrated on stabilising and standardising processes across the entire business. We carried out root cause analysis of acknowledged delays and problems along both the internal and external supply chain. The emphasis on local solutions meant that no-one had previously considered the entire sequence of activities, from market intelligence right the way through planning, sourcing, manufacturing, delivery and servicing. For the first time, the entire operation was examined, across four European countries and the USA. A team of seventeen Deloitte people worked with a similar number from the client company. Most Deloitte staff came from the supply chain practice but were joined by tax experts on occasions to ensure that all recommendations were optimised from the financial perspective.
This allowed Deloitte to provide value stream maps of the ‘as is’ state of operations, so the client could understand where the chain was becoming disconnected. It starkly highlighted why the business was not reaching its full potential. The current maps were used as the basis of a detailed design for a future supply chain process. It separated out exactly what could be achieved within a year, without IT enhancements, and what could be taken further with an ERP enabler. Alternative manufacturing and replenishment models were looked at and the outcome projected in terms of inventory reduction and impact on service levels. Better adherence to demand-focused production schedules meant that expediting costs that could also be cut. With more accurate planning, sea-freight could replace air-freight and still achieve a better rate of on-time delivery.
The analysis was extended into distribution, exploring the current rationale behind stocking levels by both SKU and location, and examining the implications of potential amendments. We also suggested operational improvements to warehousing which was outsourced to a third-party, but not performing well, and produced a detailed action plan to improve response to customers. By implementing the recommendations from this project, the division is positioned to make real progress in 4 important areas:
customer service - levels are expected to rise significantly from their current range of 86%-95% to a consistent 98.5%, with a corresponding financial benefit in reduced cost of lost sales running into several £millions
leadtimes - stock replenishment leadtimes for sales affiliates are expected to be cut by up to 75%
inventory - global inventory levels of both raw materials and finished goods are expected to be reduced by over 11%
operating costs - global supply chain operating costs are expected to reduce by 14%
From the client’s point of view, this has been a successful exercise with a good rate of return. There are, however, limits to what can be achieved in supply chain improvement without supporting automation. We are therefore using the findings of this exercise as the foundation of a business case for a wider project. This will involve looking at the feasibility of sharing services across the organisation and will also scope a supporting ERP implementation. The end-goal is to transform a series of uncoordinated businesses into an integrated, market-focused entity in firm control of both its own supply chain and its profitability. In the final analysis, any organisation intent on acquisition needs a firm business model and platform for synergy benefits to be achieved quickly. It means that improvements can be made smoothly with both speed and efficiency, fostering confidence in customers and shareholders alike.