Improving supply chain performance through an integrated planning concept

MA-Thesis / Master von Hermann Kraxenberger

Problem statement:

In recent years enterprises are facing a dramatic change in the way that they do business. Rapid advances in technology and increasing regulatory freedom have changed the rules and nature of competition. Enterprises are now competing globally and traditional barriers between industries are breaking down. To cope with these changes and achieve superior performance, business leaders are moving towards new business paradigms that allow their companies to work more closely with their traditional and new business partners to adapt to the rapidly changing marketplace. This improved integration is the very essence of Supply Chain Management. Supply chain leaders are reconsidering the linkages, not only between functions within their own company, but with organizations up and down the supply chain.

Supply chain networks are becoming more efficient and more responsive to the need of increasingly demanding customers, driven by competitive pressures and supported by developments in information technology. Hereby integrated supply chain planning approaches play a major role in efficiently matching demand of the market place with supply capabilities of inter-organisational networks. Driven by major success stories of supply chain performance improvements, almost every company is nowadays considering the integration of its supply chain entities to yield better business performance. Two of these shining examples are Hewlett Packard that saved 25% of their distribution costs by optimizing inventories and transports as well as IBM Personal Computers that achieved a cash flow release of 750 Mio. US$ by reengineering planning processes for direct materials and finished products. These impressive gains show the potential of coordinating organizational entities and integrating information flows and planning efforts along a supply chain. Which company can afford not to present such substantial gains in improving competitiveness?

However, this picture may be shattered by looking behind the shining curtain of well marketed supply chain management concepts to the real state in industry. According to a research study of Mc Kinsey&Company only 32% of multinational companies, running major supply chain projects, claim that their performance has significantly increased. Furthermore Gartner Group states that more than 70% of all advanced planning system implementations, supporting the supply chain management concept, have an extensive cost and time overrun and do not lead to the expected results in business practice. Considering both sides of the coin, the fundamental question is whether an integrated supply chain planning solution can practically improve the performance of a company up to a high or even best-in-class performance level or if they are bubbles of theory that may explode in the challenge of practical appliance.

The problem statement that has been presented above leads to the following research question this thesis will answer: Does the implementation of an integrated planning concept improve the supply chain performance of a company? In order to base the above question on a business environment with real industry insights the multinational company RAX International has been taken as the focal company. However it is important for the author to highlight that today’s challenges in supply chain management are applicable for total industries and that the thesis can be a successful reference for the entire chocolate industry and for a majority of fast moving consumer goods (FMCG) companies.

Supply chain performance improvement at RAX follows the long-term objective to reach a world-class level in Supply Chain Management (SCM) to fulfil customer demands in a responsive way within the integrated supply chain network and to contribute through efficiency gains to cost and working capital savings of the company. The overall supply chain objective can be broken down into three dimensions including the reduction of supply chain costs, the increase of return on capital employed (ROCE) and responsiveness. The dimension cost reduction includes the improvement of supply chain process designed to plan more efficiently along the integrated network and to achieve synergies by sharing information and avoidance of double work of different organizational entities within the chain. The objective to increase ROCE is linked to a more efficient utilization of resources along the RAX supply chain network. This includes the optimization of inventories throughout the supply chain from supplier to customer as well as a high asset utilization of production and logistic resources. Responsiveness as a third objective aims at increasing speed in the supply chain by reducing lead times from supplier to customer. Shorter reaction times ensure higher product availability and improved customer.

The objective of this thesis is to introduce a state-of-the-art supply chain planning concept for RAX international to improve along the above objective dimensions and to evaluate the performance improvement. This includes, based on the current state, the definition of a strategic framework for supply chain planning and modelling of supportive planning processes, system and control indicators. In order to assess the business success of the future state planning concept performance benefits are measured against realization costs. The financial analysis of income and expenditure streams concludes on the profitability of investing in the proposed supply chain concept.

Structure of Thesis:

The next chapter introduces the basics of Supply Chain Management, which includes definitions, objectives, types and concepts of SCM. Furthermore, it presents supply chain methods and principles as well as planning tasks along the supply chain.

Chapter 3 describes the general structure and feature of Advanced Planning Systems supporting supply chain planning tasks. Planning modules and system solutions of different vendors are introduced. Moreover APS vendors and the market evolution are assessed.

Chapter 4 provides an in-depth analysis of current state supply chain at RAX International. This includes the description of the external market place and the configuration of current supply chain including the description of current planning processes and systems. The chapter ends with a SWOT analysis of current state supply chain performance.

Chapter 5 introduces the future state integrated supply chain planning concept at RAX. This chapter is the ‘heart’ of the thesis and forms the foundation for supply chain performance improvement. Based on the business objectives a strategy for supply chain planning is derived and planning processes and system modelled accordingly. A dedicated section on key performance indicators ensures the traceability of performance improvements in the deployment phase.

Chapter 6 presents an evaluation of performance improvements derived from the concept and compares them against costs for realization. It ends with a financial analysis to conclude on realized performance gains based on the pilot implementation in Czech Republic and the analytical verifications with RAX key markets.

Chapter 7 concludes this thesis by highlighting interesting results, contributions, and sketching future work.

Table of Contents:

Text Sample:

Chapter 3.1, Features of an APS:

SCM is concerned with the coordination of material, information and financial flows within and across often legally separated organizational units. Software vendors have developed so called Advanced Planning Systems (APS) to overcome deficiencies of traditional Enterprise Resource Planning systems (ERP) and to better support the planning functions needed in SCM.

Advanced Planning Systems are designed to manage simultaneously entire networks of facilities operating in an intra- or inter-organizational environment. The advanced techniques used by the system are a variety of mathematical procedures to find the optimal planning decision for a given set of objectives. These objectives can include minimizing cost, meeting customer service targets, accelerating the flow of inventory, or any other combination of performance targets.

A powerful feature of the APS model is that changes can flow both up and down the planning stack. In contrast to ERP solutions which cascade modifications to the master plan down to lower-level modules, causing planning entities to alter detailed plans, the APS communicates changes in the lower-level plans upward to the master planning module, which reworks the master plan to accommodate these changes. This bidirectional flow can save high effort and guesswork. For example, it allows a purchasing manager to modify the purchasing plan directly and propagate the effects upward, which is much more efficient than running the master planner repeatedly in order to produce the desired change from the top down. This capability also means that APS systems can be used to explore what-if scenarios to discover the potential effects of material shortages, strikes, and other disruptions to planned operations.

The mathematical tools used by APS systems are able to handle thousands of parameters. The systems can take into account a huge number of constraints on production including the cost and availability of materials, machinery, labour, and other critical resources. For example, planners could require that production of each product be limited to specified plants, that 97 percent of customer orders be delivered on time, that no overtime to be used, and that other constraints to be met. The system could then find the plan that satisfies these constraints at the lowest possible cost. Furthermore, APS can allocate capacity across multiple plants when more than one can handle a production run, apply flexible criteria when choosing among transportation modes and carriers, and make other decisions based on business rules provided by human planners.

Another feature of APS systems is that they respond intelligently to situations in which there are not enough materials, production capacity, or distribution options to handle the requested load. To this end, APS can automatically prioritize orders based on their size, their profitability, the importance of the customer, penalties for late delivery, and similar considerations. APS can also find the most profitable mix of products for products for any given plant, decide when to outsource production and distribution, and make other business tradeoffs.