THE SMARTER SUPPLY CHAIN OF THE FUTURE

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1 THE SMARTER SUPPLY CHAIN OF THE FUTURE Manfred Meffert IBM Global Procurement November 13, 2009, Balatonalmadi, HU IBM Global Chief Supply Chain Officer Study (C) 2008 asbl Atomium / Artists Rights Society (ARS), New York / SABAM, Brussels Photo Number: WC6D8959

2 Economic Volatility... The best summary of today s global marketplace. Worldwide Real and Nominal GDP US and ROW GDP 7% 6% 5% 4% 3% 2% WW Nom GDP 5% 4% 3% 2% 1% 0% ROW Real GDP US Real GDP The global recession will result in -1% real GDP 2009 growth with -2% US growth and the Rest of World slightly positive 1% WW Real GDP -1% 0% -1% % -3% Source: Economic Assessments from Global Insight, IBM Finance and IPR, December 2008 Supply chains continue to become more global and complex... Going Global Increased Network Complexities Product Portfolio Turmoil Businesses and supply chains are becoming more global over the last decade Supply chains are involving more companies Supply chains must contend with rapidly expanding and contracting portfolios 3X 2X Between 1995 and 2007, foreign subsidiaries nearly tripled, from 265,000 to 790,000 Transnational companies more than doubled, from 38,000 to 79,000 1 Nearly 80% of executives 80% expect number of collaborative relationships with third parties to increase 2 Between 2007 and 2010, R&D 65% outsourcing is forecast to increase by 65% 17% In consumer products industry, production introductions increased by 17% in 2006, more than double the 2005 rate 4 Portfolio rationalization is eliminating SKUs almost as fast Engineering services and 80% product-design projects are forecast to increase by 80% 3 2 Manfred Meffert IBM Global Procurement

3 IBM in Hungary since 1936 IBM - Hungary Continuously in Hungary since 1936 ISC Hungaria Outsourcing activity IBM Storage Enterprise Server Manufacturing in Vác since Manfred Meffert IBM Global Procurement

4 Products manufactured in Vac, Hungary DS SquadronS SSPC / TKLM F2 SVC Lodestone 4247-X03, Z03 Matrix Printer 4247-L03 Matrix Printer Telluride Cut Sheet Printer 4 Manfred Meffert IBM Global Procurement

5 IBM System Storage DS 8000 Processor POWER 5+ Number of disk drives Maximum physical storage capacity Electrical Power Power Supply Dimension (h x w x d) Min 16 Max Petabyte (1024 Terabyte) 6 kw Three phase 50/60Hz 193 x 84.7 x 118.3cm Price $215K 5 Manfred Meffert IBM Global Procurement

6 We wanted to gain insight into the challenges facing supply chain executives around the world to learn what strategies and initiatives they are undertaking. 400 Supply Chain Executives World-wide Retail 400 Supply Chain Executives World-wide 29 Industries Electronics Industrial products Consumer products / wholesale Automotive Food, beverages and tobacco Chemicals and petroleum Life sciences / pharmaceuticals Transportation and logistics Telecommunications Aerospace and defense Government and public services Utilities (e.g., gas & electric) Number of Respondents 25 Countries Key Questions What is our supply chain strategy? Are we working towards a common goal or are we driven by what we ve done in the past? Are there opportunities for greater coordination, integration and collaboration between our supply chain functions and with our global network of partners? How can we can gain visibility and access to economies of expertise to improve responsiveness and agility? Is our supply chain at risk? How are we mitigating our risk or managing it adequately? Are we exploiting data and technology to its fullest extent? 6 Manfred Meffert IBM Global Procurement

7 Summary and overview The Top Five Supply Chain Challenges The Smarter Supply Chain Building the Supply Chain of the Future Visibility is vital Visibility is vital Instrumented Intelligent Risk must be managed systemically Risk must be managed systemically Customer Customer input input should should permeate permeate the the supply supply chain chain Interconnected Flexibility will counteract cost volatility Flexibility will counteract cost volatility Global supply chains require integration & optimization Global supply chains require integration & optimization Five trends define the CSCO agenda Instrumented, Interconnected, & Intelligent A new role for the CSCO and a map to the future According to our extensive study of 400 Supply Chain Executives, we ve found imperatives among visibility, customer demands, cost containment, risk, and globalization. The smarter supply chain has three new characteristics. Firms across the globe are beginning to see the benefits of building a new vision of supply chain excellence. Building the supply chain of the future will require the emergence of a new kind of CSCO and a comprehensive set of new capabilities. 7 Manfred Meffert IBM Global Procurement

8 The collective insights from 400 Supply Chain Executives identify five major challenges that comprise the CSCO agenda 70% 55% 60% 56% 43% COST CONTAINMENT Fighting integral costs as such as might be futile, but being flexible can identify cost savings elsewhere SUPPLY CHAIN VISIBILITY Supply chain visibility is inhibited by a lack of capabilities and an unwillingness to collaborate. RISK MANAGEMENT Process, data, & technology are identified as the roadblocks to good risk management, yet they are the key enablers. INCREASING CUSTOMER DEMANDS Customers have increased demand for more precise synchronization of supply and demand. GLOBALIZATION Lead times, delivery, and quality are top challenges, but overall globalization has been a positive boon for all. Based on responses of to a very great extent and to a significant extent 8 Manfred Meffert IBM Global Procurement

9 Visibility: Supply chain visibility leads the CSCO s agenda How significant are the following barriers to visibility & collaboration? (respondents answered very to moderately significant) Organizational silos inhibit collaboration Individuals are too busy to assist others across the organizational supply chain Performance measures not aligned to reward individuals for collaboration Technological tools do not effectively support visibility & collaboration 63% 68% 75% 75% Collaboration not viewed as important Concerns about intellectual property limit effective collaboration 31% 52% Very Significant Greatly Significant Moderately Significant To what extent have you adopted the following practices? 75% 70% As #1 Challenge Why are we NOT integrating & collaborating more to increase visibility? 15% Real-time information transparency inside and outside the enterprise Widely adopted 18% Event management & alert notification Somewhat adopted 9 Manfred Meffert IBM Global Procurement

10 Future Outlook: The Smart Supply Chain will require more connectivity, collaboration, and integrated processes to improve visibility among network partners as demonstrated by leaders Sum: extensive & some extent Extensive 86% 7% Planning with Suppliers Extent of implemented Integration Practices Leaders vs. Others 79% 30% 16% 24% 19% 24% 9% Leaders: 72% 11% 19% Continuous Replenishment with customers Extensive 61% Largest gap 72% 53% Customer Inventory Planning & Deployment Some Implementation 1% 63% 62% 11% 16% Shared, realtime electronic data Intelligent Interconnected Instrumented Key Capabilities Decision-support based advanced analytics and optimization to automate and self-actuate supply chain transactions. Multi-partner collaborative platform Sense-and-respond demand & supply signal notification Smart devices & sensors (RFID) to capture real-time visibility: Shelf-level replenishment forecasts/orders schedules/commitments pipeline inventory shipment lifecycle status Others: Extensive Some Implementation * Leaders determined based on respondents ranking in AMR Research Supply Chain Top 25 for Manfred Meffert IBM Global Procurement

11 Risk Management: Managing risks, both operational and financial, is a top concern of supply chain executives world-wide What are the obstacles for implementing risk management programs? Process Data 42% 46% Enabling technology 34% Culture 26% Organization Access/Process controls 15% 23% What is your organization s approach to performance and risk management? Financial 6% Do not have any formal risk or performance tools Formal performance monitoring doesn t incorporate risk 20% 11% 38% Formal performance monitoring incorporates risk indicators 31% Formally monitor both performance & risk but separately (e.g. - tools, process) 69% 69% manage risk in some fashion 11 Manfred Meffert IBM Global Procurement

12 Future Outlook: Leaders have more integrated risk management strategies and compliance programs 96% What types of and risk management practices have/are you implementing? 82% Integrating process controls in logistics and operations Compliance programs with suppliers and service providers Leaders 92% 79% Currently implemented/implementing Plan to implement in next 3 years 80% 76% Incorporating risk strategies and mitigation policies in supply chain planning Using supply chain event management techniques with tolerances to monitor disruptions Others 72% 57% Currently implemented/implementing Plan to implement in next 3 years Intelligent Interconnected Instrumented Key Capabilities Risk adjusted inventory optimization Compliance strategies & policies with suppliers, service providers, contract manufacturers Probability-based risk assessment & predictive analysis: Likelihood, severity, ease of detection for key risk factors with mitigation policies & procedures Monitors & sensors for product traceability from ingredients to final customer consumption * Leaders determined based on respondents ranking in AMR Research Supply Chain Top 25 for Manfred Meffert IBM Global Procurement

13 Customer intimacy: Rising customer demands ranks as the third highest supply chain challenge Extent of external demand collaboration with customers Very great extent Almost Half (47%) FAIL to Collaborate with Customers! No extent 19% 5% 15% Significant extent What are the most significant challenges in bringing new products and services to market? 67% 28% 33% Little extent Moderate extent Correct identification of customer needs 13 Manfred Meffert IBM Global Procurement

14 Future Outlook: The Smart Supply Chain will require further integration of customer demands from inception to delivery the entire global network focused on the end consumer. 96% 19% Sales & Operations Planning To what extent do the following statements describe your planning process? 77% Leaders: 81% 24% Gaps 57% Integrated Demand and Supply Planning Applications Very great extent 73% 10% External Supply Collaboration with Suppliers Significant extent 63% 63% 10% 53% 30% 18% 19% 11% 12% 4% 7% 5% External Demand Collaboration with Customers Some extent Intelligent Interconnected Instrumented Key Capabilities Simulation models of customer behavior, buying patterns, and market penetration applied to planning and operations volumes Cost to serve models and analysis Networked S&OP with optimized forecast, buy/sell decision support Customer collaboration throughout all SC processes Embedded software & analytics for automated product defect and service alerts Others: Very great extent Significant extent Some extent * Leaders determined based on respondents ranking in AMR Research Supply Chain Top 25 for Manfred Meffert IBM Global Procurement

15 Cost containment: Constant cost containment pressures and fluctuating costs require a comprehensive view of the tradeoffs. Cost containment efficiencies In support of enterprise growth initiatives For competitive advantage How do you position your supply chain to meet the challenges affecting your organization? 48% 54% 69% CSCOs create flexibility to control the cost equation where they can Extremely Effective 42% What efficiency practices and initiatives are you implementing? Formal distribution strategy 83% 38% Collaboration & integration among 3rd party logistics providers 79% 32% Differentiated logistics services for distinct customer segments 70% 30% Network optimization and simulation tools 58% 24% Supply chain visibility for managing exceptions 67% Extensive implementation Some implementation 15 Manfred Meffert IBM Global Procurement

16 Future Outlook: Responding to new cost pressures will always be a challenge. What will tomorrow bring? Most have adopted these practices widely/comprehensively 89% 81% Agile Supply Chain (Rapid Response to changes in market conditions) 81% 77% 37% 22% 22% 20% Maximizing variable supply chain costs to be aligned with revenues Intelligent Interconnected Instrumented Key Capabilities Simulation models and analyzers to evaluate flexibility factors: service levels, costs, time, quality w/ inventory synchronization. Variable cost structures that fluctuate with market demand Leaders: 37% 22% 22% Outsourcing nondifferentiating (Rapid Response functions to to Agile Supply Chain share changes risks in across market the global conditions) network Extensively adopted Sensor based solutions to Others: Extensively adopted reduce inventory costs with increased visibility Leaders: Others: Extensively adopted Extensively adopted Somewhat adopted Somewhat adopted * Leaders determined based on respondents ranking in AMR Research Supply Chain Top 25 for Manfred Meffert IBM Global Procurement

17 Globalization: Low cost country sourcing and operations have caused lead time, cost, quality and service level issues -15% 43% Average percentage of direct materials sourced United States, Mexico, or Canada Central or South America 19% 13% Africa Eastern Europe 20% 6% 2% Asia or Asia Pacific 38% 61% The three year outlook indicates a continued increase in sourcing from low cost regions despite on-going and anticipated challenges -30% 33% Western Europe (EU 15) What is the anticipated three year change in sourcing to the following regions? Bar indicates respondents average response to increase or decrease What are the major challenges that you have in regard to global sourcing & global operations? Delivery issues and reliability of commitments Lead times are greater than expectations Capacity issues for new / unproven sources or operations supply Difficulty evaluating / managing new sources 73% 80% 76% Quality issues 75% 76% Regulatory / legal issues in sourcing or manufacturing country contract 65% Have experienced issues Future concern 17 Manfred Meffert IBM Global Procurement

18 Future Outlook: The positive advantages of globalization of markets & operations, outweigh the negatives Percentage who have experienced these outcomes as a result of globalization over the past three years Improved overall performance 10% BETTER 3 % 43% BETTER 36% 33% 33% Increased sales Improved margins 30% 14% 12% 4% NEGATIVE Increased lead times Increased costs Decreased customer service levels Decreased quality POSITIVE Top supply chains Others 22% BETTER 22 % BETTER * Leaders determined based on respondents ranking in AMR Research Supply Chain Top 25 for % 37% 38% 41% 59% 63% Intelligent Interconnected Instrumented Key Capabilities Leveraged global centers of excellence to optimize capability and delivery Demand, supply & distribution network planning & execution Simulation models Optimization of inventory throughout all phases of pipeline activity Scenario strategies for planning Integrated production planning & execution Sensor solutions connecting the expanding global trading partner infrastructure for increased supply chain visibility 18 Manfred Meffert IBM Global Procurement

19 We also inquired about sustainability and green supply chain programs 37% of SCM Executives view green strategies and operations as a significant challenge impacting their supply chain To what extent have you implemented the following green or sustainability practices? Product design & packaging includes environmental considerations 63% Supply chain strategies include plans & initiatives for carbon management, water management, energy usage & waste mgt Manufacturing targets (where applicable) include carbon management goals 51% 57% There is an ongoing program for low carbon design for distribution 39% Supplier selection criteria and contracting reflect suppliers' carbon capabilities. Outsourcing policies seek to minimize carbon impacts such as increased emissions. 29% 36% Supply chain executives are embracing green programs Sustainability practices differ by region Contract with warehouse and distribution service providers favors those with low direct and indirect CO2 emissions. Transportation companies are evaluated for carbon emissions, energy consumption, and strategy or approach to carbon mgt. 27% 25% Respondents who answered some, significant, or very great extent Supplier selection based upon compliance more prevalent in Asia Pacific Sustainability practices in Europe focus on carbon reduction in manufacturing & transportation North America has lower sustainability practices around low carbon distribution network design and supplier selection based on carbon capabilities 19 Manfred Meffert IBM Global Procurement

20 And how does talent management fit into all of this? What are your top 3 capability-building challenges facing your organization? Building leadership talent 78% Culture that supports learning & development activities Rotating leadership talent across business units / geos Cross-training individuals needed in other parts of the organization Developing basic skills across the employee base Rapidly getting new employees up to speed Passing on knowledge from older to younger employers Forecasting skills required in the near future 40% 37% 33% 30% 29% 24% 23% Building leadership talent was clearly the largest issue in managing world-wide talent 20 Manfred Meffert IBM Global Procurement

21 What have we learned from talking with 400 multi-industry supply chain executives world-wide? How will we tame the volatility and orchestrate the complexity? 21 Manfred Meffert IBM Global Procurement

22 The Smarter Supply Chain We Must be Instrumented Intelligent Smarter Interconnected Instrumented, Interconnected, & Intelligent The smarter supply chain has three new characteristics. Firms across the globe are beginning to see the benefits of building a new vision of supply chain excellence. 22 Manfred Meffert IBM Global Procurement

23 The Supply Chain of the Future must be SMARTER...It will be Instrumented, Interconnected & Intelligent Instrumented Interconnected Automated Transactions & Smart Devices Use of sensors, actuators, RFID, & smart devices to automate transactions: inventory location, shelf-level replenishment detection, transportation locations & bottlenecks Supports real-time data collection & transparency from POS to manufacturing to raw material Sense-and-respond demand/supply signals allow predict and act Optimized Flows ERP to ERP to ERP system integration across the network. Standardized data and processes. Collaborative decision making through decision support and business intelligence starting with the customer C-Suite risk management programs for integrated financial controls with operational performance monitored and measured Networked Planning, Execution & Decision Analysis Intelligent Simulation models to evaluate trade-offs of cost, time, quality, service and carbon and other criteria Probability-based risk assessment & predictive analysis Networked planning/execution with optimized forecasts & decision support 23 Manfred Meffert IBM Global Procurement

24 Our Point of View on the Progression of Supply Chain Management to a Smarter Future Smart Supply Chain Future External Collaboration & Integration Horizontal Process Integration Intelligent Networked Planning, Execution & Decision Analysis Optimized Flows Flexibility & stability Effectively driving profitable growth Functional Excellence Interconnected CSCO Balancing risk and performance Static Supply Chain Instrumented Integrated Transactions (ERP to ERP) Automated Transactions (Sensors & Actuators) Managing complexity 24 Manfred Meffert IBM Global Procurement

25 Building the Supply Chain of the Future BUT ARE WE READY? A new role for the CSCO and a map to the future Building the supply chain of the future will require the emergence of a new kind of CSCO and a comprehensive set of new capabilities. 25 Manfred Meffert IBM Global Procurement

26 The CSCO must take on a new lead role in orchestration of all supply chain resources and must connect with other leaders and groups Address the top challenges: Cost Containment Visibility Risk Management Customer Intimacy Globalization Optimized Talent Sustainable A new role that is strategic and tactical as a conductor coordinating resources and stakeholders: The CSCO of the Future A critical & crucial role to continually balance, optimize and orchestrate global resources Is the ultimate Optimizer of the organization Requires negotiation skills, stakeholder management skills + supply chain strategy & execution + market knowledge Includes the functions of the previous CPO & COO, along with bridging the optimization gap of sales & marketing and finance aligned with supply, operations, and logistics Key Attributes New foundational competencies that will drive success: Instrumented Interconnected Intelligent 26 Manfred Meffert IBM Global Procurement

27 The Smartmap to the Supply Chain of the Future SCM Competency Areas Strategy Planning Lifecycle Mgt Sourcing Operations Asset Mgt Logistics Enterprise Apps Integrated real-time transactions (ERP) with business intelligence Multi-partner collaboration platform Predictive sense-and-respond event detection & resolution Supply chain risk analysis & mitigation models Probability-based risk mgt Risk-adjusted inv. optimization Customer-segmented product lifecycle management Real-time consumption & replenishment programs Variable cost structures that fluctuate with market demand Optimized inventory Asset Mgt / execution Dynamic supply & demand balancing Outsourcing non-differentiating functions Environmental strategies w/ sustainability models for usage impact analysis Global centers of excellence to optimize capability and delivery Each company must plot their unique journey to smarter supply chain capabilities 27 Manfred Meffert IBM Global Procurement

28 The Smarter Supply Chain of the Future Thank you Manfred Meffert 28 Manfred Meffert IBM Global Procurement