1. Show Them the Money: Building Supply Chains to Increase Profits Michael Hugos CENTER FOR SYSTEMS INNOVATION [c4si]

2. © 2011 Michael Hugos Center for Systems Innovation [c4si] Overview of Presentation  PART 1 – Changing Business Landscape  PART 2 – Supply Chain Case Study  QUESTIONS - Ask any time…

3. © 2011 Michael Hugos Center for Systems Innovation [c4si] PART 1 Changing Business Landscape

4. © 2011 Michael Hugos Center for Systems Innovation [c4si]  Efficiency requires predictability and stability  Both are now conspicuously absent  Responsive enterprise is to real-time economy as assembly line was to industrial economy – source of wealth creation  Use responsiveness to differentiate yourself or else participate in “grim race to the bottom”  Evolving mobile phone… efficiency or responsiveness?  Respond to changing customer needs by wrapping products in blanket of tailored, value-added services (information based) A Continuum Between Two Needs EfficiencyResponsiveness

5. © 2011 Michael Hugos Center for Systems Innovation [c4si] People Want More than Low Price Products meeting higher level needs are worth more Sneakers cost: $20 or >$100 Cars cost: $16,000 or >$40,000 As soon as basic needs are met, people want something more

6. © 2011 Michael Hugos Center for Systems Innovation [c4si] The Value-Added Paper Cup Ordering Labeling Delivering Receiving Invoicing Usage Reporting Budgeting Surround commodity items with tailored blanket of value added services to increase their value by 2 – 4% (and sometimes more) to High Value Customers Every product has two components Actual Item or Service commodity, easily copied, low margin – efficiency driven Information Component tailored to each customer to achieve desired results – responsiveness driven “Never sell a naked commodity”

7. © 2011 Michael Hugos Center for Systems Innovation [c4si] Profile of High Value Customers  Products you sell are “Mission Critical” to customer operations  Spends significant portion of their procurement budget on your products  Interested in tailored bundle of products & services  Open to outsourcing certain functions  Profits compared to industry average: Above? Same? Below?  Company is: Expanding? Steady? Contracting?  Other characteristics …

8. © 2011 Michael Hugos Center for Systems Innovation [c4si] The Value-Added Supply Chain Increase product value and sales margins by wrapping products with value-added services to address specific customer needs Product Bundle Customer A Manufacturer & Distributor Customer B Customer C e-Business services Product Usage Data Compliance Reporting Warehousing & Logistics Credit and financing Product training & support Customer Service

9. © 2011 Michael Hugos Center for Systems Innovation [c4si] PART 2 Supply Chain Case Study

10. © 2011 Michael Hugos Center for Systems Innovation [c4si] Respond to Continuous Fluctuations “Bullwhip Effect” Customer Demand STORE Customer Demand STORE PERCEIVED DEMAND DC

11. © 2011 Michael Hugos Center for Systems Innovation [c4si] Case Study: The Tao of Supply Chains Share daily sales, forecasts and inventory data Collaborate to produce and deliver inventory to meet demand Customer Demand Collaborative supply chains increase throughput while simultaneously reducing inventory and operating costs. Retailer Inventory Supplier Distributor Inventory Distributor Inventory Data Sales & Forecast Data

12. © 2011 Michael Hugos Center for Systems Innovation [c4si] Supply Chain Visibility 5,000 stores, 26 distributors, 40+ manufacturers Every day all parties transmit data as text files via FTP People log onto website and talk via conference calls Dynamic changed from defensive to collaborative

13. © 2011 Michael Hugos Center for Systems Innovation [c4si] Performance Visible to All Electronic Invoice Electronic ASN Electronic PO Retailer Distributor Manufacturer KPI Scorecard Plan vs Actual Wk 1 Wk 2 Wk 3 Wk 4 Inventory Turns Plan vs Actual Wk 1 Wk 2 Wk 3 Wk 4 Order Fill Rate % A B C D E Supplier On Time Delivery Rate Perfect Order Rate 100% 90% 70% 60% 80% Compare PO to ASN to calculate On-Time Delivery and Order Fill Rate Compare Invoice to ASN and PO to calculate Perfect Order Rate Display KPI score cards through dashboards visible to all parties. Set customer service alerts for quick response.

14. © 2011 Michael Hugos Center for Systems Innovation [c4si] Key Performance Indicator Scorecards Tracked and displayed real time performance data Real time visibility creates peer group dynamic and desire to perform! Problems spotted early and brought to peoples’ attention Reduced excess inventory by 60%, reduced stockouts and increased profitability for all

15. © 2011 Michael Hugos Center for Systems Innovation [c4si] Learn More… Presentation excerpted from my book: Essentials of Supply Chain Management, 3 rd Edition www.MichaelHugos.com Center for Systems Innovation [c4si] Best selling book worldwide on Supply Chain Management as reported by Amazon.com Join the conversation on my CIO magazine blog “Doing Business in Real Time” http://blogs.cio.com/blog/doing-business-in-real-time http://blogs.cio.com/blog/doing-business-in-real-time