NETWORK DESIGN FOR GLOBAL SUPPLY CHAIN MGT

In years past, companies redesigned their supply chain networks infrequently, usually in response to a significant change in operations prompted by a merger or acquisition, the introduction of a new product, or a shift in sales profiles. Today, however, market dynamics drive leading companies to examine supply chain design more often. Take global sourcing, for example. Many companies undertake complex global sourcing initiatives, but fail to support them with similarly diligent network design analyses, notes Iain Prince, a senior manager with Accenture's global supply chain practice. "This is a critical disconnect, because a wholesale revamp of sourcing processes and policies affects virtually every aspect of an organization's supply chain network," he says. Global sourcing creates a whole new network-design ballgame, he explains, because of several factors:

The influence of low-cost labor. Geographic distances and their impact on service and availability. Barriers associated with language and technology sophistication. Volatility and reliability issues. Cultural and political barriers related to local governance. Additional supply chain links, handoffs, and customs challenges. Inventory visibility problems. The role of immediacy and perish ability in determining the optimal network. The impact of extensive transit times on inventory cost and ownership.

"Companies must assess network-related tradeoffs to reconcile the convenience and reliability of local or near-shore suppliers against the economies associated with sourcing from low-cost countries," Prince says. "If companies do not conduct a holistic assessment of global sourcing's impact on their supply chain network, their new suppliers may be the only ones who benefit from the arrangement."
THE NEW REALITY

As globalization increases, firms across all industries must grapple with a number of new realities. "Many companies are multi-national, but do not operate in an integrated, global fashion," says Jamie Hintlian, a partner with Accenture's health and life sciences supply chain management practice. "They may have a presence in a variety of markets on different continents, but only a limited ability to coordinate and leverage global supply and demand. That presents both a tremendous opportunity and a challenge. "For a global organization to function effectively, it must implement a truly global planning process, with strict rules for creating and aggregating forecasts around the world," Hintlian says. Truly global companies face many challengesfrom cultural and language differences, to disparate business processes within the same company, to different rules or practices for managing supply and demand. Many companies that grow through acquisitions, for instance, maintain extensive manufacturing capacity around the worldsome of which are redundant or inefficient. In these situations, companies need to optimize or rationalize their networks to fewer sites that are capable of serving global markets. "Companies need to ask: 'How do we establish a supply and demand network and reconcile it with global sales and operations planning so we make the most of our rationalized corporate infrastructure?'" Hintlian adds.

Companies have also begun to recognize that the supply chain is critical to making international business strategies function effectively. "Organizations are starting to develop business and supply chain strategy concurrently and collaboratively," Hintlian says. "In the past, business strategy was developed, then articulated across the organization, with various departments working independently to execute that strategy. The result? Organizations with conflicting functional goals."
DESIGNING FOR TOTAL LANDED COST

Working collaboratively on global supply chain design requires examining different areas of the business and how they impact the supply chain. Modeling supply chain flow, and pinpointing areas for improvement, is a smart way to begin. "Enterprises designing a global supply chain should start by surveying the business, looking at trade flows, understanding where trade partners succeed and fail, and projecting where company growth is heading," says Jim Preuninger, CEO of Management Dynamics Inc., an East Rutherford, N.J.-based software company that provides global trade management solutions. "Based on this data," Preuninger explains, "they can model the business and run benchmarks against the information to identify and prioritize opportunities for improvement. "One organization may look to improve customer service by providing better intransit shipment visibility. Another may want to automate its purchasing department so it can identify the total landed cost for multiple global sourcing options," he says. Designing and managing a global supply chain from a total-landed-cost perspective means factoring in the cost of carrying inventory over time. "Companies are not only managing the costs of capital and carrying inventory, they are also managing obsolescence costs," notes Raj Pinkar, vice president, global solutions and implementation, UPS Supply Chain Solutions.

"A firm that manufactures high-end, high-value laptop computers with a six-month average life span, for example, shouldn't transport its cargo on a ship that adds 21 days to the supply chain." Visibility is also critical to the success of a global supply chain. Companies that can effectively track shipments in transit have a better handle on freight status, and can make transportation decisions on the fly. "When a shipment arrives at the destination port, a company could, for example, opt for a DC bypass modelimmediately moving product to its destination instead of placing it in a warehousethen releasing it," says Charles Covert, vice president, consulting service and solutions implementation, UPS Supply Chain Solutions. "The availability of accurate supply chain information as needed is the real key to success," agrees C. John Langley, professor of supply chain management, Georgia Institute of Technology. "In the absence of valuable data, companies need to protect themselves. If they are uncertain about delivery reliability, they carry extra inventory. "Instead, they should quantify delivery time variability, then scientifically determine how much inventory to carry."
RISKY BUSINESS

Risk mitigation is another increasingly important consideration for companies designing a global supply chain. As Western organizations continue to outsource manufacturing to low-cost countries in Asia, the Caribbean, Eastern Europe, and Latin America, the frequency and severity of supply chain disruptions increase significantly. The repercussions of a supply chain failure can be extraordinarily severe. At stake are billions of dollars in stock market capitalization, market-share losses from failed product launches, or even the possibility of business failure. "Most organizations are not adequately prepared to manage supply chain risks," says a recent research paper published by the Supply Chain Research Consortium at North Carolina State University.

"Recent studies suggest only 5 percent to 25 percent of Fortune 500 companies are prepared to handle crises or disruptions, and a $50-million to $100-million cost impact can be incurred for each day a company's supply chain network is disrupted," the paper reports. "Stock market reaction to supply chain disruptions is also significant," the report says. "Firms that have announced major supply chain problems have seen shareholder values drop 10.28 percent on average, with an average recovery time of 50 trading days." High-tech markets are particularly vulnerable. Sony, for instance, has pulled its digital camera manufacturing out of China and moved it into Japan. "Sony executives recognized that the difficulty of coping with unpredictable market requirements for digital cameras was not aligned with the slow responsiveness, disruption potential, and inflexibility of long supply lines from China," the paper explains. "Sony realized that manufacturing in China is not a cure-all for pricing pressure, especially in fast-changing, high-tech consumer markets." Certain attributes of a company's global supply chain environment can amplify or mitigate the impact of disruptions, finds the research. These "disruption amplifiers" fall into one of two categories: 1. The extent to which a firm relies on global sources of supply. 2. The complexity of the product or process. (See sidebar, below, for a list of specific amplifiers in these two areas.) "One technique companies use to protect against increased risk is creating a priority supply chain for products or materials that would have a greater negative economic impact if their supply were interrupted," notes Langley. "Companies take a portion of the supply flow for these products and create a reliable alternative. "This strategy may be costly, but it can minimize the impact of supply chain failure," he says.

What Is Supply Chain Network Design and Why Is It Important?

A firms supply chain allows it to move product from the source to the final point of consumption. Leading firms around the world, from large retailers to high-tech electronics manufacturers, have learned to use their supply chain as a strategic weapon. A supply chain is defined by the suppliers, plants, warehouses, and flows of products from each products origin to the final customer. The number and locations of these facilities is a critical factor in the success of any supply chain. In fact, some experts suggest that 80% of the costs of the supply chain are locked in with the location of the facilities and the determination of optimal flows of product between them. (This is similar to the notion from manufacturing that you lock in 80% of the cost to make a product with its design.) The most successful companies recognize this and place significant emphasis on strategic planning by determining the best facility locations and product flows. The discipline used to determine the optimal location and size of facilities and the flow through the facilities is called supply chain network design. This book covers the discipline of supply chain network design. Sometimes it is referred to as network modeling because you need to build a mathematical model of the supply chain. This model is then solved using optimization techniques and then analyzed to pick the best solution. Specifically, we will focus on modeling the supply chain to determine the optimal location of facilities (warehouses, plants, lines within the plants, and suppliers) and the best flow of products through this facility network structure. Here are four examples to illustrate the value of supply chain network design. Example #1 Often, we hear about firms acquiring or merging with another firm in the same industry to reduce the overall costs to operate both firms. That is, they justify the new combined company by determining that they can deliver the same or more products to the market at an overall lower cost. In firms that make or ship a lot of products, a large portion of the savings comes from the merger of the two supply chains. In such mergers, the savings often come from closing redundant plant and warehouse locations, opening new plants and warehouses, or deciding to use existing facilities to make or distribute different mixes of product. We have heard firms claim resultant supply chain savings from $40 million to $350 million over a period of a couple of years. With these kinds of savings, you can only imagine the pressure placed on the supply

chain team to determine the new optimal supply chain structure after an acquisition or merger is announced.

Designing Supply Chain Network for each industry or business involves arriving at a satisfactory desig taking into all elements like product, market, process, technology, costs, external environment and fact impact besides evaluating alternate scenarios suiting your specific business requirements. No two sup designs can be the same. The network design will vary depending upon many factors including locatio you are looking at national, regional or global business models.

1. Supply Chain Network in Simple and basic Terms Involves determining following process Procurement Where are your suppliers How will you procure raw materials and components

Manufacturing Where will you locate the factories for manufacturing/assembly Manufacturing Methodology

Finished Good Where will you hold inventories, Number of Warehouses, Location of warehouses etc. How will you distribute to markets - Transportation and Distribution logistics All above decisions are influenced and driven by Key Driver which is the Customer Fulfillment.

2. Designing Supply Chain Network involves determining and defining following Elements: Market Structure Demand Plotting or Estimation Market Segment Procurement Cost Product /Conversion Costs Logistics Costs including Inventory holding costs Over heads Cost of Sales 3. Network Design aims to define:

Best fit Procurement model - Buying decision and processes- VMI, JIT, Kanban, procurement cost models etc.

Production processes - One or more number of plants, plant capacity design, Building to order, build to stock etc, in-house manufacturing or outsource manufacturing and related decisions including technology for production. Manufacturing Facility design - Location, Number of factories, size of unit, time frames for the plant setup project etc. Finished Goods Supply Chain network - Number of warehouses, location & size of warehouses, inventory flow and volume decisions, transportation. Sales and Marketing Decisions - Sales Channel and network strategy, Sales pricing and promotions, order management and fulfillment process, service delivery process definitions. 4. Network Design also examines:

Derives cost estimates for every network element Examines ways to optimize costs and reduce costs Extrapolates cost impact over various product lines and all possible permutations and combinations to project profitability 5. Some of the key factors that affect the supply chain network modeling are:

Government Policies of the Country where plants are to be located. Political climate Local culture, availability of skilled / unskilled human resources, industrial relations environment, infrastructural support, energy availability etc. Taxation policies, Incentives, Subsidies etc across proposed plant location as well as tax structures in different market locations. Technology infrastructure status. Foreign investment policy, Foreign Exchange and repatriation Policy and regulations.

Supply Chain Network designs not only provide an operating framework of the entire business to guide the managements, they also examine the structure from strategic view point taking into account external influences, interdependencies of all processes and critically evaluate opportunities to maximize profitability. Supply Chain Design consultants use various design softwares and optimization techniques coupled with inputs from industry consultants and experts.

RISK MAGT
The credit crisis has forced Russian banks to take a critical look at how they manage risk as well as highlighting some significant weaknesses in their risk management processes. The transformation of a weak risk management system starts at the top and should be viewed as an essential part of a strategic plan so it will have more authority rather than be viewed as a compliance rule. The main challenge for financial institutions now is to build the right risk management infrastructure. The crisis has also illustrated that risk management issues can only be resolved through the implementation of a complex and robust risk management technology, that has contact with all aspects of company activity. As only an integrated risk management system is able to significantly decrease the amount of potential losses that could occur as a result of a financial crisis, by optimally minimising the degree of probability for extreme losses. C5s conference Risk management in the Russian Banking Sector will be of value to any practitioners wishing to stay at the cutting edge of banking risk management efficiency. This event focuses on the critical issues that banks are facing now with regards to identifying and implementing effective risk management strategies. * Risk management in a local and global context. How can Russian banks adequately follow Basel guidelines? * Which best global practices can be successfully applied in Russia? Pros and cons of implementation * Insights in building complex risk management infrastructure * Strategic risks and future business plans. Where to invest capital? * Industry sector analysis: defining each sectors potential and perspective for credit financing * Risk-management: preparing for a new product line * How to manage credit risks effectively * Investments into new technologies * The increasing need for improved operational risk * Estimation and allocation of economic capital * Defining the new methods of risk anticipation

Benchmarking
Benchmarking can somewhat philosophically be defined as follows (APQC, 1992): Benchmarking is the practice of being humble enough to admit that someone else is better at something, and being wise enough to learn how to match them and even surpass them at it.

Measurement, of own and the benchmarking partners performance level, both for comparison and for registering improvements. Comparison, of performance levels, processes, practices, etc. Learning, from the benchmarking partners to introduce improvements in your own organization. Improvement, which is the ultimate objective of any benchmarking study. Benchmarking emphasizes attaining so-called breakthrough improvements, as shown below (Andersen and Pettersen, 1995): Benchmarking is conducted in separate projects whose individual objective is to improve one of the organizations business processes. There are a number of models describing the different steps that constitute a benchmarking study. One such model is the so-called benchmarking wheel,