Houston-Supply chain - IFEAT

Paper presented at the IFEAT International Conference in Montreal, 28 3 Sept. - 3 Oct. 2008 ‘North America and the World: The Challenge’.Pages 3-10 in the printed Conference Proceedings.SUPPLY CHAIN CHALLENGES IN A GLOBAL WORLD:AN IFEAT PERSPECTIVEPat HoustonBooz and Company (N.A.) Inc200 Park Avenue, Suite 240Florham Park, NJ 07932, USApat.houston@booz.comINTRODUCTIONWith globalization, today's supply chains, including those in the essential oils and aroma chemicalssectors, face significant challenges - growing product complexity and proliferation, increasing one-toonecustomization, shortages of supply, increased risk of supply assurance and safety, increasingawareness of sustainability issues. These challenges have led not only to key management concernsregarding escalating costs, but more importantly concerns regarding the certainty and quality ofsupply. Successful supply chains manage/mitigate these challenges in several ways:(i) they fully understand the supply and demand dynamics of the products they source,(ii) they have a detailed understanding of the costs of those product across the value chain,(iii) they understand the risks across the value chain (price, supply, quality, sustainability),(iv) they develop supply strategies based on these insights (including longer term,collaborative supply relationships and strategies to mitigate risks),(v) and they establish the necessary capabilities to manage the supply chain through thechallenges.These issues are analyzed more fully in this presentation.TODAY’S COMPLEX SUPPLY CHAINSNo longer are supply chain simple one-to-one relationships between buyer and supplier with cost andsupply reliability being the simple primary objectives. Supply chains are now networks ofinterconnected relationships spanning the globe to meet very diverse end-market and consumer needs.These networks must deal with ever-increasing volatility and risk and therefore must also be morerobust in their design and management processes.Dealing with business continuity risks, quality, sustainability and innovation are equally, if not moreimportant than the price and supply dimensions of the past. Figure 1 illustrates the increasingchallenges and complexities facing today’s supply chains.THE FIVE DIMENSIONS OF SUPPLY CHAIN MANAGEMENTCost, Risk, Growth (innovation), Service and Sustainability have become the dimensions of supplychain management for most of today’s global companies. The degree to which these dimensions areimportant can vary depending on end goals of the various business, market or product. The bestsupplier management and development efforts create clarity around the goals for these dimensions anddesign appropriate interface points between supplier and buyer. Figure 2 briefly describes these fivedimensions.3

Figure 1Figure 24

Given many of today’s natural and man made risks, supply assurance has become a priority for supplychain management, as Figure 3 illustrates. Assurance addresses many dimensions of risk - quality,sustainability, costs, reliability - and recent events such at contamination, natural disasters, laborstrikes, currency volatility and terrorist attacks have heightened awareness. Many companies today aredeveloping Business Continuity Planning (BCP) to deal with the increaseFigure 3Best practice companies are using five levers in order to build the necessary insight and internalcapabilities to manage against these new supply dimensions. These five levers are shown in Figure 4.Three of the levers provide elements of insight - Supply & Demand Dynamics, End-to-End ValueChain Costs and Multi-Dimensional Risk Assessment – and build the strategic, economic and risktransparency needed to craft the best supply relationships for today’s complex world.The elements of Capabilities Development (Operating Model Change) - Collaborative SupplyStrategies and Enhanced Internal Capabilities - define the new internal and external models(organization, process and tools) required to manage against the complexities and riskFigure 45

SUPPLY AND DEMAND DYNAMICSFor each “commodity” being purchased, demand should be understood in terms of current and futurerequirements at global, regional and local levels as necessary. Figure 5 provides insights into theaspects of the demand for citrus by-products.Figure 5At the same time, supply should be mapped - also at global, regional and local levels. Figure 6illustrates aspects of citrus production from selected citrus producing countries. The balance ofdemand and supply patterns provide insight into potential economic and supply pressures.Figure 66

VALUE CHAIN COSTSAggregate supply and demand understanding is not enough. An understanding of the underlying costsand cost drivers provide the basis for a longer term understanding of product economics and can formthe basis for improved sourcing decisions based on geographical as well as individual suppliereconomics. A longer term cost understanding also facilitates the basis for longer term morecollaborative supplier relationships. Figure 7 illustrates how new levels of cost insights are beingdeveloped.Figure 7Factor costs, in general, are significant drivers of many of the commodity-based product costs in theessential oils and aromatic chemicals markets. An understanding of these differences acrossgeographies and suppliers provides a basis for better supply decisions. Figure 8 illustrates some of thefactor cost trends that are impacting overall product costs.Figure 87

MULTI-DIMENSIONAL RISK ASSESSMENTAs mentioned, risk plays a significant role in today’s supply networks. As such, companies aredeveloping more rigorous approaches to identifying, monitoring and managing supply risks andadopting formalized Business Continuity Planning (BCP) processes.Dimensions of supply, price, quality and sustainability are the key measures that companies are payingclose attention to (see Figure 9).Figure 9These formalized “BCP” approaches include a much more analytical view of the impact of potentialrisk scenarios and allow companies to take appropriate action based on risk-return profiles of differentrisk scenarios (Figure 10).Figure 108

Ultimately, for a new collaborative model to exist both buyers and suppliers will need to developenhanced capabilities along several dimensions (see Figure 13). For buyers, better cost and marketinsight are required, as well as increased sharing of business/product planning and strategic goals.Ultimately, new supplier management and development are required to build the right connectivitywith the strategic suppliers. For suppliers, integration and openness with buyers will be key - creatinglinked innovation, investment and supply chain processes with the willingness to share information oncost and performance measures.Figure 13Patrick Houston is a partner in the operations practice of Booz & Company, apremier global management consulting company, based in New York. He has over13 years of experience focused on supply chain and sourcing issues primarily in theconsumer and media industries. His expertise lies in driving strategic operationaland organisational change in creating essential advantage for his clients. Patrickreceived a dual master's degree, with distinction, from Northwestern University'sKellogg Graduate School of Management (MBA) and the McCormick School ofEngineering and Applied Sciences (Masters in Manufacturing Management). Healso holds a Bachelor of Science degree in Chemical Engineering, summa cumlaude, from the University of Southern California. He has co-authored several industry-relatedarticles, most recently, “Start with sourcing (Leveraging sourcing to achieve your "green" strategy)”,Strategy & Business, Third Quarter, 2008.10