operations flexibility in process industries - Roland Berger Strategy ...

OPERATIONS FLEXIBILITYIN PROCESS INDUSTRIESFebruary 20091

AIntroduction33

The study covers three process industries with similarcharacteristics in operationsScope of the studySPECIALTYPHARMACEUTICALSCONSUMER CARECHEMICALSSIMILARITIES OFOPERATIONS• Capital intensiveproductionequipment withlong depreciablelife• Broad productportfolios• Batch productionExamples:• Adhesives• Coatings• Pigments• Solutions• Additives• Agents• Solvents• etc.Examples:• Anesthetics• Infusions & injections• Clinical solutions• Tablets & pills• Clinical nutrition• Clinical agents• etc.Examples:• Hygiene products• Beverages & water• Cleaning agent• Washing powder• Foodstuffs• Dairy products• etc.• Regulatoryrequirements• Globaloperations4

Four major trends put challenges for companies in all analyzedprocess industriesKey common trends in process industriesTRENDSWhat are the key challenges your company faces today?82%76%61%55%VolatileMergers & AquisitionsVolatileShortened product lifedemandenergy & rawcyclespatternsmaterial marketsCOMMENTS• Volatile demand patterns is namedas the highest current challenge;while at the moment mostcompanies experience an upswingand struggle to serve marketdemand there is awareness thatthe next downturn is coming• Mergers & acquisition comessecond and puts companies undera constant restructuring andreorganization pressure• Volatile energy and raw materialmarkets put the challenge to limitthe upwards trend by securingbenefits from short term drops• The shortening of product life leadsto a constant ramp up-/ downcycle the needs to be managed6MUC-

Eight trends in the pharmaceutical industry require more and moreflexibility in operationsPHARMA-CEUTICALS12 3Patents areProduct life cyc-New monitoringCost pressurerunning out on les are shortening standards are from health payersmajor blockbuster due to reduced changing frequentlyin the demanding pharma-is ever increasingdrugs puts pressure patent protectionon operational cost requires faster pharma industry economic benefitsstructure t adjustmentt ramp-up and ramp requiring ii quickdown of operations adaptations45 6Competition fromProduct diversityVelocity of tech-Asia is increasing is increasing due nology developmentsrequires a more to more and moreis increa-global footprint personalized sing along the(India and Asia but productspharma valuealso Russia)chain78Mergers andacquisitions as aresult of portfoliooptimization requirequick and efficientcarve-out andintegration ofoperationsSource: Roland Berger7

Five trends in the specialty chemicals industry require more andmore flexibility in operations1 2 3SPECIALTYCHEMICALSMergers and acqui-CompaniesContinuous reviewsitions as a result ofportfolio optimizationrequire quick andefficient carve-out andintegration ti ofextending theirvalue chain andbecoming solutionproviders to evadecommoditization ofof manufacturingpenetration to freecash for innovationoperationstheir products4 56Competition fromAsia is increasingrequire shorterreaction time towardscustomers and thus amore global footprintPressure toestablish scalesynergies to be costcompetitive whileavoiding asset buildupImproved on-shelfavailability due toincreased competitionand decliningcustomer loyaltySource: Roland Berger8

Six trends in the consumer goods industry require more and moreflexibility in operations1 2 3CONSUMERCAREVolatile demandShortened productIncreased productpatterns due tochanging consumerbehaviour andseasonal variationslife cycles due toincreased competition,technologicalimprovements andincreasing i customerdiversity due tocustomers demandingmore and morepersonalizedproductsrequirements4 56Increased variety inpackagingdue to regionalregulations andincreaseddifferentiation needsExtended cross-boarder activitiesdue to furtherinternationalizationand limited growthoptions in homemarketsImproved on-shelfavailability due toincreased competitionand decliningcustomer loyaltySource: Roland Berger9

Most companies in the process industries have recognized theneed for flexibilityVerbatimsJeffry B. Kindler (CEO)"We must reduce our absolute cost andput in place a more flexible structure"Kurt Hogh (Value stream optimization)"…Stricter market requirements (in terms of freshhigh-quality chocolate, volume adjustments, moredemanding customers,…) and strategic targetsmean that flexibility must be at the heart of ourcompany …" 1)"… our business now meets allconditions for long-term success: flexibleasset structures … and a global focusbacked by regional flexibility…"(Annual report 2007)1) Translated from German sourceDr. Rainer Oschmann(Executive General Manager)"… Operations flexibility is a clearstrategic objective of our company… ""Great flexibility is really importantso that we can rapidly adapt to …how our local customers work."(Letter to shareholders, June 2007)"… Flexibility will have an everincreasing relevancy in order toreduce capital tie-up and to be ableto react more quickly…"(Annual report 2007 1) )" [Our] financial strength is therefore theresult of the followed strategic course andof the flexibility and speed with whichexternal challenges are dealt with."(Mission statement 2008)10

Participants of this study confirm the relevance of flexibility –however systematic transfer into their operations strategy is rareFlexibility objectives and operations strategyASSESSMENTS ON OPERATIONS FLEXIBILITYDo you perceive operations flexibility as one of yourtop 5 priorities?89%yes11%Do you systematically define strategic measures toachieve this objectives?56%no44%Beverage producer, Production manager"… operations flexibility is very importantin our capital intensive industry…"Specialty chemicals company, COO"… flexibility is much more economicalthan investing in forecastingexcellence … we had to learn it thehard way…"Speciality chemicals company,Head of Strategic Planning"Operations flexibility is soinevitably important. It would befoolish if we left it to chance."Pharma and Chemicals Group,Head of Business development"Definitely, flexibility is among ourstrategic goals. We would soon beout of the market if we would notconstantly try to react as flexibly aspossible."Consumer Care company; Managermanufacturing"Only when we felt the strong market pushand had to quickly boost our output did werecognize significant hidden flexibilitybuffers; in one plant we where able toincrease output by 15% without anyinvestments"yesnoPharmaceutical producer, Head of Operations"We do build in flexibility but it is rather a functionalresponsibility than a systematic corporate approach"Source: Roland Berger interviews, 200811

BIndustry trends drive flexibility requirements1212

Different flexibility types exist: from handling of day-to-daydemand fluctuation to strategic considerations for M&A activitiesTypes of flexibilityTYPEEXPLANATIONEXAMPLE1Demand• The capability to deal with volatiledemand patterns• Increase in the advent of a new productor the downturn at the end of theproduct life cycle2Geography• The capability to install necessaryoperations for a new market entry• (e.g. local supplier integration)• Entry into Chinese market making use oflocal labour cost advantages (keepingup necessary ingredient quality)3Network• The capability to change volume andproduct allocation within a global siteportfolio• e.g. new products, market demand shiftsor currency changes might require anoptimized utilization of global sites4Technology• The capability to replace old technologywith new technology• e.g. new small batch technologiesrequire different skills and productionsystem set-ups5Mergers & Acquisitions• The capability to make use of synergiesor retain existing synergies in the caseof investment and divestments• Integration of newly acquired plants intoan existing production network13

For the analyzed industries, the different types of flexibility havedifferent relevancy – demand flexibility is a common requirementRelevancy of different flexibility typesSPECIALITYCHEMICALSPHARMA-CEUTICALSCONSUMERCARELowHighLow High Low High1DemandDemandDemand2GeographyGeographyGeography3NetworkNetworkNetwork4TechnologyTechnologyTechnology5Mergers &acquisitionsMergers &acquisitionsMergers &acquisitionsSource: Roland Berger interview results, 200814

1 DEMAND FLEXIBILITYPredicting yearly flu types is very difficult for the pharmaceuticalindustry – demand for one serum can be very high or zeroExample: Flu serumDemanddemand for specificvirus (later: type A)• Serum has to be reproduced every year, as the virustransforms every year• Inventories are therefore not possible• WHO gives a yearly recommendation, which serumshould be produced/normally three types of viruses arecovered• Development of year specific serum takes up to 6 months• Extremely high demand of incubated eggs for repro-duction of antibodies (Impfviren), capacities are limited• Serum manufacturers expect that demand will doublewithin the next 10 years, resulting in production capacitiesrestraintsReal demandfor type Ademandtyoe Cdemandtype BAutumn Summer Fall WinterSource: Pandemic Report 2006tBackgroundProblem• Only one serum is really needed for one specific type• Production capacities have to be extremely flexible toreact to a specific demand• Limited production capacities15

2 GEOGRAPHICAL FLEXIBILITYManufacturing networks will continue to go through a significanttransformation process in the futureAttractiveness of market and production environmentDeveloping countries will further increaseindustrial assets and production capacitiesExisting production networkswill transformHighChina• Rationalization of WesternEuropean industriesMarketattractiveness 1)ItalyIndiaFranceGermanySouth AfricaMexicoCzechRepublicChile• Significant development ofindustrial assets in EasternEuropean regions and Asia• Production overcapacitieswill occur in Europe• Need for geographicalflexibility of operations thuswill increaseLowLowProductionattractiveness 2)HighSize indicates market size1) Growth, Attractivity etc.2) Labor cost, country risk, infrastructure16

3 NETWORK FLEXIBILITYFlexible production networks allow companies to adapt tochanging market conditions on a short-term baseManufacturing network aspectsExplanation100%ProductioncapacityProductionvolume• Use of flexibleproduction volumes• e.g. use morevolume/capacities dueto currency advantage• Volatiledemand asksfor productionvolume shifton a shortterm base• Degree ofvalue added isdecreasingVolatile demandpatternDegree of valueadded• Production oflabourintensiveproducts• Make use ofrelative costpositionsShare ofvalue addedLabor costst• Make use of globalproduction networks,e.g. shift productionvolumes andproduction of lowvalue-addingcomponents• Be able to react on ashort-term base onchanging businesscharacteristics17

4 PRODUCT TECHNOLOGY PORTFOLIO FLEXIBILITYState of the art product technologies are needed to decrease costs– product technology flexibility is seen as key enablerExample: Energy consumption and costsEnergy consumption[Terajoule]1,000800600400200Costs[Eurocent/kWh]001994 1996 1998 2000 2002 2004 2006 200810 • Energy consumption is growingsteadily8642• Energy costs rose with a CAGRof 12,7% from 2000-2007• The capability to replace old withnew technology will increaseproduction efficiency anddecrease costsManufacturing industriesEurocent/kWhSource: Statistisches Bundesamt / VCI-Chemiewirtschaft in Zahlen 2007 / BDI18

5 BUSINESS PORTFOLIO FLEXIBILITYM&A activities and value chain reconfiguration require operationsto be flexible towards portfolio changesBusiness portfolio flexibilityBusinesstrendsM&A transaction value Europe [USD m]100,00080,000000ConsumerGoods60,000Pharma40,00020,000Chemicals01994 1996 1998 2000 2002 2004 2006 2008Drivers for portfoliochanges• M&A activities– Until 2004: mainly cost-focused– Since 2005: mainly growth-oriented• Ongoing changes in Value ChainConfiguration– Competition of value chainsrather than companies– Forward and backwardsintegration and des-integrationOps challengesManufacturing:Supply chain management:Purchasing:R&D:Process for product transfers, modular value chain, flexible support functions,…Scalable distribution infrastructure, standardized processes and systems, …Global and regional sourcing strategy, …Platform strategy, alignment with manufacturing, …19

CHow to embed flexibility within operationsstrategy2020

Choosing the most suitable flexibility levers is often prevented byfour common ruptures along the strategy processRuptures along the strategy process1. DEVELOPBusinessBusinessBUSINESSflexibilityscenariosSCENARIOSneedsBusinessscenarios1st common rupture:Business flexibility needs are notsystematically assessed for top downstrategy development2. DEDUCTFLEXIBILITYNEEDSOperations flexibility needsManufacturing Purchasing SCM2nd common rupture:Business flexibility needs are notsystematically transformed into operationsflexibility needs3. SELECT BESTFLEXIBILITYLEVERSFlexibility lever toolboxLevers applied3rd common rupture:Operations flexibility needs are notsystematically translated into a consistentsystem of flexibility levers – Overlapsbetween levers generate a hidden flexibility4. MEASUREIMPLEMENTATIONEBITTargetActualt4th common rupture:Neither a systematic forecast nor controllingof gains from flexibility is madeSource: Roland Berger21

1DEVELOP BUSINESS SCENARIOSEstablishing flexibility starts with creating different business scenariosand assessing the related cost and benefits of flexibilityDeterminants of flexibility valueDifferent business scenarios trigger the needto evaluate cost and effects of becoming moreflexible. Business scenarios can be calculatedwith different time horizons and incidentprobabilitiesEBITScenario AOccurswithprobabilityThe cost of becoming more flexible aredetermined by the actual degree of flexibilityand the cost of implementing additionalflexibility measures. The type of measures tobe implemented crucially depends on the timehorizon of the business scenariosNoinvestmentin flexibilityIncidentP AThe benefits from flexibility are the effectsresulting from the measures implementedduring the realization of one of the possiblebusiness scenariosinvestmentin flexibilityScenario BOccursCost of becoming more flexibleEBIT development scenario AGains from flexibility scenario AEBIT development scenario BGains from flexibility scenario BwithprobabilityP B22AirbusTIMESource: Roland Bergerinterview

2DEDUCT OPERATIONS FLEXIBILITYBusiness flexibility needs are often not systematically derived fromthe company's strategic objectivesLink between strategic objectives and measuresCONCLUSIONNEGATIVE EXAMPLEIs flexibility part of yourstrategic objectives?• The majority ofparticipants confirmflexibility to be part oftheir strategy• Strategic objectives could be able tocope with demand increase of 10%• Further divestments of operations61%assets; increase of outsourcing level39%Independent OP objectivesYes NoIs flexibility transferred asan objective of youroperations strategy?t 59%41%• On the other hand a lotof companies lack thetransfer into thedesiered flexibility oftheir operationsPurchasingManufacturing• Demand fluctuations of -5% withoutpurchasing price effect• Develop second supplier for keycomponent• Compensate 5% volume reduction incost per piece• Prepare to insource 30% of volumefrom contract manufacturer• Build task force to prepare integrationof potential acquisitionYesNoSCM • Demand changes of 5% withoutdecreasing service levelSource: Roland Berger interview results, 200823Airbusinterview

3SELECT BEST FLEXIBILITY LEVERSSelection of flexibility levers is not always based on the respectiveimplementation cost and timeLevers selection matrixCost of implementationHighMed.LowIV.6III.8I.4 II.7I.3I.9II.4I.10I.1II.11III.1 IV.4II.10III.5IV.3II.1IV.5I.5 II.14IV.1III.3II.12I.2I.13III.3I.12 II.8I.6IV.2 II.2I.7 II.6 III.6IV.6II.3I.8II.5III.4I.11IV.8III.7 IV.9II.9Short-term Medium-term Long-termTime to implementSource: Roland BergerIIIIIIIVMANU-FACTU-RINGPUR-CHASINGSCM/LogisticsGENERALI.1 Optimize production footprintI.2 Use of multi-purpose plantsI.3 Buy options on infrastructure/real estateI.4 Joint facility utilizationI.5 Make-to-orderI.6I.7II.1II.2II.3II.4II.5II.6Keep options on future technologiesUse modular/flexible manufacturingsystemsGlobal/cross-regional sourcingMultiple sourcingPeak sourcingNegotiation/reflexRisk sharing partnershipsSupplier collaborationIII.1 Warehouse footprint optimizationIII.2 Flexible warehouse dimensioningIII.3 Supply chain collaborationIII.4 OutsourcingIV.1 Partnerships/JVIV.2 Monitoring systems/KPIIV.3 Standardized & scalable IT systemsIV.4 Modularization & standardization ofprocessesIV.5 Continuous improvementI.8 Define pull/push pointsI.9 Kanban utilizationI.10 Optimize change-over time and costI.11 Consider total lifecycle costsI.12 Reduce lead time in productionI.13 Introduce advanced operating schemesI.14 Postpone product differentiationII.7 Make-or-buyII.8 eProcurementII.9 Sale & lease backII.10 Standardization of product structureII.11 ModularizationII.12 CLB organizationIII.5Advanced planning systemsIII.6 Optimization of contractual conditionsfor assetsIII.7Sharing of logistics assetsIII.8 Risk sharing with logisticsservice providersIV.6 Flexible working hoursIV.7 Temporary workersIV.8Variable remunerationIV.9 Orientation on industry standards24

4MEASURE IMPLEMENTATIONDecisions regarding flexibility are made with limited knowledgeabout cost and gains; effective measurement is neglectedTransparency of flexibilityDo you measure flexibility of your internaloperations?22%Yes31%Partly47%NoDo you measure the flexibility of yourexternal supply chain?10%Yes35%Partly55%NoDo you know the cost of being moreflexible?60%30%10%YesPartlyNoQUOTES• "We build buffers and flexibilizeworking hours although h we are notreally sure these efforts pay off ..."• "Often we are not exploiting ourflexibility potentials where we couldbecause supplier are not transparent"• " We tackle flexibility needs whenthey occur, then we make a businesscase and calculate cost implications"• "What is more complex thencalculating l flexibility cost is to get toknow the benefits of flexibility"CONCLUSION• The majority of companiesdo only have a rough ideaabout their internalflexibility• Most companies cannotfully utilize their supplierflexibility because they donot measure it• Consequently decisionsregarding flexibility aremade with limited knowledgeabout cost and gains• Effective measurementsystems are not fullyimplementedSource: Roland Berger interviews, 2008Airbusinterview25

Using a systematic four step approach, the four common ruptures canbe overcome and the full value of flexibility can be utilizedFour step approachDEVELOP SCENARIOSCLUSTER OPERATIONS SELECT BEST SET OFCONTROL FLEXIBILITYFLEXIBILITY NEEDS FLEXIBILITY LEVERS GAINSEBITNoinvestmentinleversinvestmentin leversIncidentBest caseWorst casehighmediumlowProbability x SizeScenarioAScenarioBScenarioChighmediumlowCost of implementationUseallleverswithshortimpl.timeCondideronlymediumcost leversbut allowfor moretime toimplementCancelBe selectiveand reviewcontinuouslytshortmedium longTime to scenarioshortmedium longTime to implement• Evaluate different businessscenarios• Derive of flexibility needs foreach business scenario• Cluster specific flexibility needsfor each scenario along theproduct of probabiliy and size(benefit/risk) and time tillpotential occurance• Select levers that reflect theprobability x size category as wellas the time horizon of the scenario• Detect hidden flexibility bycomparing feasible levers with• Constantly review flexibiltygains and costthose already implemented andcancel those 1st rupture closed 2nd rupture closed 3rd rupture closed 4th rupture closedSource: Roland Berger26

DBest practice flexibility levers2727

DEMAND FLEXIBILITY LEVERSLevers to tackle demand flexibility are well known, though theirimportance in the eyes of operations managers is changingTop levers address demand flexibilityRank # General Purchasing Manufacturing Supply chain1IV.7TemporaryII.2Multiple/dualI.12Reduce lead timeIII.4workerssourcingin productionII.6SuppliercollaborationI.15SubcontractoruseIII.4Push-pull-pointdifferentiationOutsourcing2IV.6Flexible workingII.1Global/crossI.2Multi purposeIII.5hoursregional sourcingplantsIII.10Advanced planningsystemsBuffer stocksComments• Temporary workers andinternally flexible workinghours in the most commonmeans to tackle demandfluctuation• Models of both leversstrongly depend on locallegislation• Multiple sourcing or dualsourcing is applied forcritical materials• For materials/serviceswhere this is most feasiblecollaboration models up toJV approaches are applied• For suppliers where secondsource is too expensivesometimes dual siteproduction at supplier isrequested/ supported• Lead time reduction isclearly highest on theagenda of manufacturingresponsibles• Strategic flexibility is built inby using subcontractors forvolatile/peak demand• Multi purpose plants areconsidered whereeconomically feasible• A differentiated definitionof push-pull-point (make-toordervs. make-to-stock)has risen in the attention• Outsourcing remains anestablished lever to sharevolatility risk with serviceproviders• Buffer stock is used tocover sales upswingpotentials though focus ison lead-time reduction inproduction insteadSource: Roland Berger interviews, 20082828

M&A FLEXIBILITY LEVERSWith regard to establishing flexibility to better handle divestmentsand integrations, the clear focus is on more standardizationTop levers applied to address mergers & acquisitionsRank # General Manufacturing Supply chain Mgmt. Purchasing1IV.9Orientation onI.1Optimize productionfootprintfootprintIII.1WarehouseII.12industry standardsProductionOutsourcingIV.2StandardizedI.17II.7Monitoring/ KPIsystemsystemsCorporate LeadBuyer organization2IV.3Standardized&scalable ITsystemsII.13Standards oncommodity codes&use of databasesComments• Industry standards is widelynamed as key to be flexible• Often though standards arecountry specific and thereach is thus limited• Standard KPI systems area key lever to quicklyintegrate new companiesand make themmanageable• IT standards are anadvantage but depend onthe target company's setup• Clearly still on the rise isthe introduction ofproduction systems• Even if implementation willbe different a merge with acompany that has one isachieved much faster• In the context of PMI oftenoutsourcing is helpful,provided the contract is setup in a flexible way for suchcases• Often companies take thechance to outsource duringM&A situations as thejustification case withregard to labor laws arebuilt more easily• A corporate lead buyerorganization is consideredby most of the participantsas highly adaptive tointegrate or to be integrated• The increasing use ofstandard commodity andsupplier codes also is veryhelpful in integrationscenariosSource: Roland Berger interviews, 200829

During the interviews companies across all industries analyzedand gave an insight into how they establish flexibilityOverview flexibility casesCASEFLEXIBILITY TYPES1 De-2 Geo-3 Net-4 Tech-5mandgraphyworknologyM&AINDUSTRYPharma Consumer Chemical1. 1 Central coordination department2. 2Volatile demand consumer goodindustry3. 3 Fast growing markets inconsumer good industry . 4 External intermediate business asa buffer5Facilitating of manufacturingnetwork and service provider7. 6 Network and geographic flexibilityto satisfy yglobal customer base8. 7 Selective M&A Strategies to reacton changing business environmentsSource: Roland Berger interviews, 200830

1A manufacturer of pharmaceutical products uses a centralcoordination department to react to short term customer demandsInterview example: Pharmaceutical industrySITUATION/CHALLENGEComplex market conditions• High volatility in demand• Fast changing g customerneeds/preferences• Short product life-cycleSOLUTIONCoordinationdepartment• Close working relationshipwith customers andfast communication ofcustomer needs into theorganization via centralcoordination departmentCentral coordination departmentR&DProduc-Marke-Customertioting• Central coordination department as an "earlywarning system" to react to trendsEnhance production capabilities• Continuously improve production technology (e.g.• Best practice technologycross industry benchmarking for productionis key important technology of flavors)• Contract manufacturing• React to specific country regulations, produce big lotwith high volumesImprove sizes for one country and minimize set-up times• Special regulations for technology • Standardize products in close relationship withindividual countries and planning customers to improve planning flexibilityhave an impact on• Enhance workforce flexibility; multi-purpose use ofproduction strategyworker capabilities (can operate all lines)Best practiceSource: Roland Berger interviews, 200831

2A consumer goods producer uses a mixture of measures to dealwith volatile demandInterview example: Consumer industrySITUATION/CHALLENGEVolatile demand pattern …DemandTime… that is relatively predictableDemandTimeScenariosSOLUTIONClosecooperationwith thecustomerFlexiblemachine parkandproductioncontrolHR-Managementmeasures• Studies on market development and trends on aregular basis• For selected products customer forecast on weeklybases• For selected products only make-to-order• Flexible machinery• Set up APS to get overview on global [?] capacity• Nearly no change over times and nearly no yield lossesduring change-over• Flexible maintenance contracts with service provider(maintenance during time of low demand• Flex-time/working hours account• Job sharing (partly hob in production/partlyadministration)• Usage part time employees (5-20%) depending onproduction line to face huge volatilities in demand• Very "flexible" workers (e.g. students) for high peaks(up to 10%) "Hausfrauenschicht"Source: Roland Berger interviews, 200832Airbusinterview

3A consumer goods and a pharmaceutical producer use a four stepapproach to deal with fast growing local marketsInterview example: Chocolate industrySITUATION/CHALLENGEFast growing local markets…… that are relatively predictableDemandTimeScenariosSource: Roland Berger interviews, 2008SOLUTIONContractswith localdistributorsJointventuresAdditionalown salesorganizationAdditionalproductionplants• Supply of the customer in fast growing markets bydistributor• Distribution to the county is organized by chocolateproducer to secure fats delivery times• In several countries the chocolate producer has jointventures with local companies• If demand d in local l market is high h enough, own salesorganization id founded• Organization of whole distribution from the productionplant over the warehouse to the final customer by thechocolate producer• Build-up of additional production plants in the fastgrowing markets• Preferred option if business opportunity appears stableand needed quality standard can be achieved incountries• Often acquisitions are used for a fast increase of localproduction capacity33Airbusinterview

4A large pharmaceutical producer uses external intermediatesbusiness as a buffer to cope with fluctuation of internal demandInterview example: Pharmaceutical companySITUATION/CHALLENGEVolatile internal capacitydemand …Internal demandTime… combined with extremelyflexible plantsManufacturing technologyPotential of plant equipmentProductsSOLUTIONExternalbusinessas capacityreserveFlexiblemanufacturingsystem• Company sells intermediates to external customers• If internal demand is increasing/decreasing, businesswith external customers is slashed/increased• Flexibility is secured by relatively l short-term t contractstwith external customers• Due to combination of internal and external demandeconomies of scale can be realized within the plants• Extensive use of multi-purpose-plants• Avoidance of continuous production processes• Standard shift models to vary personnel capacity• Flexible working models (working time, accounts,job rotation)• Manufacturing KPI system to measure performanceand flexibility• Sharing of warehouses with other pharmaceuticalcompaniesSource: Roland Berger interviews, 200834Airbusinterview

5A large consumer goods company facilitates its manufacturingnetwork and service providers to cover demand fluctuationsInterview example: Consumer goods companySITUATION/CHALLENGEDifferent demand patterns …DemandProduct 2Product 3Product 1Time… combined with increasingcomplexity in packagingNumber ofpackaging variantsTimeSOLUTIONManufac-turingnetworkUse ofserviceprovidersTechnology• Mostly local manufacturing for local demand, at leastfor commodity products• Worldwide sister plants use same raw materials (e.g.chemicals, packaging) and the same plant equipment• Shift of production capacity is institutionalized within ITsystems for the case of demand peaks, local rawmaterial shortages etc.• Contract manufacturing is used to cope with demandpeaks• Service providers have expert knowledge when itcomes to fast product/plant changes, oftenmanufacturing of products with small lot sizes isoutsourced• Benchmarking with the external service providershelps to increase speed of product/plant changes• Throughput optimization with machines focussed onone product type (e.g. shampoos), flexible automationof machine periphery to cope with packaging variantsSource: Roland Berger interviews, 200835Airbusinterview

6A specialty chemicals manufacturer combines network andgeographic flexibility to satisfy its global customer baseInterview example: Specialty chemicalsSITUATION/CHALLENGEGlobal customer base…SOLUTIONNetworkflexibility• Products are produced in technologically identical("twin") plants (e.g. 2-3 twin plants per region)• Local production for local demands• Free capacities are shared within every region• Payoff time for local infrastructure shortens astransportation costs are on the rise…requires presence in localmarketsGeographicflexibility• Increase of local l coverage with partnerships (logisticssuppliers) and joint ventures (e.g. [not yet] favorableM&A targets)• Leveraging advanced planning systems (e.g. SAPAPO) for fully leveraging capacities• Utilizing standardized IT systems for effectively routingflow of goods & products together with logisticspartnersOwn siteJoint ventureSource: Roland Berger interviews, 200836

7The specialty chemicals company uses hedging and selective M&Astrategies to react on changing business environmentsInterview example: Specialty chemicalsSITUATION/CHALLENGEWinning with acquisitionsSOLUTIONSelectiveM&Astrategy• Flexibility for product technologies is achieved byselectively acquiring specialized competitors• Post-merger integration of acquisitions is donecarefully on R&D to allow for quick response onchanging technological requirements• Immediate integration of acquisitions into global leadbuyer structure• Centralized production only for business units offeringsignificant economies of scale• Risks of volatility reduced by broad business portfolioRaw material price increaseUSD/t+105%timeHedging withfutures• Prices for important raw materials are secured byusing futures e.g. on commodities such as palm oil• High planning security as prices are locked in• High flexibility to get the optimum independently ofprice developments• Possibility to smooth out peaks and downsSource: Roland Berger interviews, 200837