Supply Chain Improvements (w/ Case Study Examples)

Agenda

• UPS Industry Segment Marketing Approach

• Focus on the Supply Chain (High Tech & Manufacturing)

• Creating Business Advantage

• High Tech Supply Chain and Its Success

• Top Areas of Opportunity

• Improved Demand Planning

• Improved Supply Chain Visibility

• Improved International Trade Management

• When to Outsource (Contract Logistics)

• Improved Return Logistics

• Supply Chain Foundations for Growth

UPS Market Segment Approach In addition to global Healthcare focus, UPS also possesses expertise,

infrastructure, and systems supporting other high growth industries.

High tech

▪ Computers

& Peripherals

▪ Electronics

▪ Semi-conductors

▪ Telecom Mftg

Healthcare

▪ Biotechnology

▪ Clinics and Doctors Offices

▪ Contract Research

Organization (CROs)

▪ Distributors and Wholesale

▪ Home Health

▪ Hospitals

▪ Labs

▪ Medical Supplies

& Devices

▪ Nursing

▪ Nutraceutical/ Cosmetics

▪ Other Medical Supplies

▪ Payors and Service

Providers

▪ Pharmaceutical

Manufacturers

▪ Retail Drug

▪ Veterinary

Retail

▪ Apparel

▪ Building Materials

Hardware, Garden Supply

▪ Consumer Goods

▪ Eating & Drinking

▪ Food Stores

▪ General Merchandise

Stores

▪ Home Furniture,

Furnishings and Equipment

Stores

▪ Mall-based Specialty

Retailers

▪ Miscellaneous Retail

▪ Small e-Commerce

Retailers

Business

services

▪ General Services

▪ Hotels and Lodging

▪ Mass Communications

▪ Organizations and

Associations

▪ Personal Services

▪ Repair Services

▪ Social Services

▪ Sports, Recreation, and

Museums

Consumer services

Professional services

▪ Advertising and Public

Relations

▪ Consulting, Accounting, and

Legal

▪ Education

▪ Engineering and

Architecture

▪ Finance and Insurance

▪ Real Estate

Diversified vehicles/

Industrial manufacturing

▪ Aerospace

▪ Auto Dealers

▪ OEM

▪ Tier 1 - 5 Manufacturing

▪ Tier 1 - 5 Wholesale

▪ Chemicals

▪ Construction

▪ Industrial Assemblies and

Machinery

▪ Industrial Components /

WIP

▪ Industrial Distributor

▪ Industrial Textile

▪ Oil and Gas

▪ Printing

▪ Publishing

▪ Raw Materials

Manufacturing

▪ Transportation and

Logistics

Diversified vehicles

Industrial manufacturing

“It’s a patient, not a package.” - UPS

9.8%

4.2%

0

2

4

6

8

10

Average Top quartile

Total supply chain cost

Perc

ent of re

venue

•The global supply chain directly impacts,

on average, 75% of a business’ operating

results.

•Corporations with best-in-class freight and

logistics competencies benchmark

operational costs that are less than half of

those of their direct competitors.

•They also manifest market cap growth 7%-

26% above industry average.

•This will be an increasingly critical market

advantage to possess in 2012 and beyond.

Creating Business Advantage In each of these industries companies with best in class supply chain

management significantly outperform their peer groups.

Significant gains made in the last two decades

34% reduction in ratio of inventory to sales

Yielding an estimated reduction of over $4.6 trillion in total

business inventories

Order to cash cycle time improved 10% in last 5 years

Gains came from:

• Information technology investments

• Improved information visibility

• Adoption of just-in-time processes

• Industry deregulation

Achievements in High Tech Manufacturing Segments Supply chain enhancements are paying substantial dividends in electronics,

telecom, and industrial manufacturing market segments.

Focus For Manufacturing Segment Supply Chains The annual Change in the Chain survey of high tech sector supply chain

executives indicates focus on nine areas of supply chain optimization.

SupplierManagement

InformationManagement

RegulatoryCompliance

Post-SalesSupport

CustomerCompliance

InternationalTrade

ManagementLogistics and Distribution

Multi-ModalFreight and

TransportationReverseLogistics

InventoryManagement

OrderManagement

Focus On Achieving Higher Service Levels The extended global supply chain is the foundation for customer service

delivery, and it is comprised of numerous disparate elements.

Delays, errorsand missed orders

Highercosts

Slow response todemand variability

Poor customerservice

Inadequate supply chain visibility

Higherinventory levels

Inefficiency/processredundancy

Increasedcapital investment

Focus On Achieving Higher Service Levels Decentralized, disconnected supply chain management produces

unintended consequences.

The approach to achieve business competitiveness

Rationalize both agendas to create

a balanced supply chain strategy

Efficiency

Pursue money-cost

and time-cost

improvement initiatives

Effectiveness

Enable service execution

and growth: differentiate

through value-added

execution

Advantage Requires Effectiveness and Efficiency Many have focused solely on the cost side of the equation. It is equally

important to grow value through enhanced coverage and capabilities.

• MRP (Materials Resource Planning)

─ Integrates demand forecast, current inventory and planned

supply into an easy to use web page to facilitate supplier

replenishments.

─ Works best with high degree of forecasting ability

• Lean Replenishment

─ Highly scalable electronic “kanban” that minimizes inventory

on hand by managing the “Virtual-On-Hand” inventory.

─ Able to compensate where limited forecasting is available

Improved Demand Planning There are two models that have created value for manufacturing

industries in allocating resources:

Lean Replenishment

InventoryInventory

200

200

Available

Inventory

500

300

Virtual

On Hand

50450200100SKU 2

-253255545SKU 1

VOH-ROPTarget (ROP)Inventory

in Transit

Planned

Shipments

200

200

Available

Inventory

500

300

Virtual

On Hand

50450200100SKU 2

-253255545SKU 1

VOH-ROPTarget (ROP)Inventory

in Transit

Planned

Shipments

5. Replenishment

Signal

4. Material

Shipments

4. Material

Shipments

3. Demand

Pull

3. Demand

PullGAP

$$

Vendors(s)

1. Demand Forecast (for capacity planning only)

2. Target Inventory (ROP)

(Determined by Demand, Variability,

and Supplier Lead Time)

6. Pull-based

Replenishment

6. Pull-based

Replenishment

ASNASN

Planned

Shipments

Planned

Shipments

Orthopedic Medical Device Mfg Case Study

Challenge:

• An “Orthopedic Medical Device Mfg” was having difficulty managing compliance regulations involved with linking raw materials, virtual on-hand inventory, on-site inventory, and field stocking inventory. Potential increase to “pedigree” of medical devices thru to destination provider (possibly to patient level) also served as a concern.

Solution:

• Build a solution allowing raw materials providers to virtually read inventory levels and fulfill based on agreed upon forecasting models, RFID inbounding into on-site inventory, shipment manifest/ tracking information/ delivery information linked to custom system by partnering with transportation provider, mobile device (cell phone) scanning of inventory upon receipt by field agents, mobile device scanning of inventory by field agents upon release to provider.

Results:

• Able to obtain a chain of custody from sourcing to consumer

• Potential avoidance of regulatory fines.

• Increased visibility eliminated $10M in inventory write off.

• Increased visibility tripled inventory turns.

Administrative

Support

Cost Center

Control

Bill

Reconciliation

A/R Customer

Invoicing

Claims

Processing

Inbound Logistics

Returns

Receiving

Inventory

Receiving

Operations

Production

Outbound

Logistics

Warehouse

Shipment

Processing

International

Shipment

Processing

Sales & Marketing

Order Entry

Service

Order Inquiry

Returns

Processing

Procurement

Cost Center

Control

A/P Supplier

Invoicing

Bill

Reconciliation

POD

Processing

Primary Functions

POD

Processing

Visibility

Improved Supply Chain Visibility Leading manufacturers have created business advantage by holistically

managing the flow of information with the flows of goods and funds.

DME Manufacturer & Distributor Case Study

Challenge:

• “DME Manufacturer & Distributor” was having difficulty managing FDA compliance regulations concerning validation and storage of origin, shipment detail, and delivery confirmation data. Recent FDA audit resulting in significant fines, and potential future fines.

Solution:

• Build a compliant and validated solution providing proof of delivery and reimbursement for tax credit, delivery image track/ trace of shipments, record retention per legal timeframes, and the ability to query and provide audit data as needed.

Results:

• Could have avoided $50K fine

• Potential avoidance of future fines.

• Eliminated resources allocated to storage, tracking, and tracing of compliance metrics.

• Focus on core competencies.

HarmonizedCode

Management

DeniedParty

Screening

ExportLicense

Management

ShipmentManagement

LandedCost

Calculation

TradeDocumentsAnd Forms

TradeForms andDocuments

ShipmentVisibility

ImportCompliance

Filings

P.O. andSupplier

Management

LandedCost

Calculation

HarmonizedCode

Management

International Trade Management The increased globalization of manufacturing has necessitated

systematized management of international trade functions.

Pathology Lab Case Study

Challenge:

• “Pathology Lab” was having difficulty managing IATA compliance regulations in regard to correct harmonized tariff code classification. In addition, the trans-Atlantic travel of shipments made cold-chain moves difficult to facilitate without incurring spoilage.

Solution:

• Integrate advanced third-party applications to aid in electronic tariff code classification and 24/7 monitoring of transportation moves. Monitoring engine isolates any jeopardizing incidents (a shipment not receiving an expected/ mapped out scan). 24/7 monitoring team takes action to isolate shipment, refrigerate or re-pack with Dry Ice, and advance to destination while mitigating spoilage opportunity.

Results:

• Reduced customs holds by 80%.

• Reduce spoilage rates by increasing reliability of shipment arrival within time of life-cycle range or extending life-cycle thru cold-chain solutions.

• Reduces resources allocated to tracking, tracing, and customer service efforts.

• Focus on core competencies.

Insourcing

Upsourcing

Downsourcing

Outsourcing

Sourcing

Options in the

2000’s

Effective Supply Chain Solution SourcingFor leading manufacturers the question is no longer ‘Should we

outsource?’ It is now ‘Which strategic sourcing combinations will create

the most business value?’

Benefits of Outsourcing• Outsourcing provides…

• …an integrated supply chain with enhanced visibility and flexibility,

• …increased intellectual capital and access to broad supply chain expertise,

• … greater geographic coverage and scalability,

• … process optimization, operational benchmarking and monitoring,

• … a powerful relationship with multiple carriers that can result in lower costs options and priority service,

• … an opportunity to focus internal efforts and resources on strategic areas of expertise rather than tactical problem solving, and

• … reduced working capital by leveraging shared infrastructure including facilities, technology, and employees.

When to Outsource?

• If the supply chain is not an area of expertise and competitive

advantage. Outsource.

• If building or buying a solution that is a competitive advantage is an

expense that cannot be supported. Outsource.

• If existing supply chain IT systems are inadequate or the cost of

maintaining them is prohibitive. Outsource.

• If supply chain operations lack synchronization, integration, or

connectivity. Outsource.

• If scalability within existing markets and expansion to new geographies

is a requirement. Outsource.

• If flexibility in the utilization of assets and labor are necessary.

Outsource.

• If the cost of supply chain operations is simply too high. Outsource.

Qiagen Pharmaceuticals Case Study

Challenge:

• Qiagen estimates had them growing 15-20% YOY for the next 5 years. Qiagen made multiple acquisitions in the last three years, with plans for more in the near future. Qiagen had two manufacturing and distribution facilities in Maryland. Space was needed to increase manufacturing capacity.

Solution:

• Build a global distribution network via the outsourcing of warehousing, distribution and transportation.

Results:

• Avoided a $50M capital expenditure and moved distribution to a partner that built a repeatable solution designed for their business model.

• Eliminated distribution operations, excessive resources and expanded manufacturing operations.

• Focused on core competencies such as research, development and manufacturing allowing distribution partner to focus on logistics.

• Extended operating hours, enhanced TNT, improved customer satisfaction due to strategic geographic locations.

The Importance of Reverse Logistics Manangement

• Best-in-class companies recognize $1.8 million

in year-over-year savings from improved

velocity of returns - Aberdeen Group

• U.S. companies spend $100 billion on returns

– Reverse Logistics magazine

Reverse Logistics Best Practices

To get the most return from returns:

• Treat returns like a business in terms of staffing and

resource allocation

• Perform supply chain mapping exercise

• Consider outsourcing to leverage third-party assets and

expertise

Think backward and act forward

High Tech Company Case Study

Challenge:

• A High Tech device company in TX sales devices that have a 6 month life-cycle to end-consumers. Once the old device becomes in-operative, the company has the product returned for refurbishment and resale. Often times, the product is a consumer health necessity, so a working device must be shipped as soon as the old device becomes in-operative. In many cases, the in-operative device is not returned in a timely fashion or not at all. These devices are valued at $25,000 apiece.

Solution:

• Integrate a returns scenario wherein the courier network arrives at the consumer location with return packaging, accepts the in-operative device, packages, and then only releases the new device after receiving the in-operative device. Second, tie the outbound and inbound tracking details together. In essence, a fully integrated returns exchange program.

Results:

• Mitigation of loss or fraud of high value/ time sensitive goods.

• Enablement of post-sales support and warranty programs.

• Dramatically reduced cost of customer service, lost goods, operation man hours, etc.

Increase

Economic Profit

Increase

Economic ProfitReduce Supply

Chain Costs

Improve Service

Levels/Revenue

Reduce

Capital Needs

Reduce Supply

Chain Costs

Improve Service

Levels/Revenue

Reduce

Capital Needs

Reduce

Transportation Costs

Improve Supply

Chain Processes

Increase

Forecast Accuracy

Improve

IT Capabilities

Distribution Network

Optimization

Reduce

Inventory Levels

Reduce

Transportation Costs

Improve Supply

Chain Processes

Increase

Forecast Accuracy

Improve

IT Capabilities

Distribution Network

Optimization

Reduce

Inventory Levels

Supply Chain Foundations for Growth Optimization of the supply chain in 6 key areas has been the key to

business improvement in manufacturing industries.

Thank You

Please visit the tables in the back for UPS Solution Collateral

Charles Trammell

UPS Healthcare

214.549.2497, ctrammell@ups.com