Making Strategic Decisions with Oracle Advanced Planning. An Oracle White Paper September 2006

Transcription

1 Making Strategic Decisions with Oracle Advanced Planning An Oracle White Paper September 2006

2 Making Strategic Decisions with Oracle Advanced Planning SUMMARY Strategic decision making is more important than ever. With the current global landscape rapidly changing, companies need to be more focused than ever before on leaner supply networks, addressing local market requirements for new products, rationalizing assets as a result of mergers and acquisitions, and making trade off decisions around outsourcing and offshoring. In addition, fluctuating geo-political environments and unplanned events like hurricanes have dramatically increased the need to assess vulnerabilities in the extended supply chain network. Companies are implementing new strategies to make better decisions, such as: Demand driven adaptive planning Multi-tier cross-enterprise decision support and collaboration More frequent network flow analysis and risk mitigation Making the right strategic supply chain decisions can have a significant impact on profitability and the ability to meet customer expectations of delivery performance. These include questions such as: What is the appropriate number and location of distribution facilities? What products should be produced in which factories or outsourced? What is the real total cost of outsourcing (impact on working capital)? What postponement strategies should be employed, and where and in what form should inventory be held to protect against uncertainty? What impact do changing costs have on my sourcing strategy? How could I react to a disruption in supply due to unforeseen events? What is the impact of mergers and acquisitions on my supply network and capital asset budget? Oracle Strategic Network Optimization and Oracle Inventory Optimization are two products in the Oracle Advanced Planning solution that help companies design more agile supply networks, in line with a robust postponement strategy. They each uniquely address specific types of questions, and are designed to co-exist and provide synergy when used together. Together they enable you to define the optimal supply network to profitably meet your customer demand and service level objectives. 1

3 Design Your Optimal Supply Network for Agility and Profitability One of the most critical strategic decisions companies need to make is how to structure their supply network to ensure flexibility and profitability. Recent research shows that companies do not revisit network decisions frequently enough. Designing the optimal supply network consists of determining the most profitable distribution network for the customers, markets, and channels you plan to serve. This includes determining the transportation methods and lanes to be used as well as the number and placement of distribution facilities. It also includes determining what products should be produced at what facilities, and what supply base should be contracted to provide procured materials. Oracle Strategic Network Optimization enables you to design an optimal supply network. You can model all of the constraints and complex fixed and variable costs that determine the most profitable network, such as transportation cost (inbound, outbound), storage and inventory carrying costs, fixed costs (startup, shutdown, operating costs), material supply, manufacturing and labor, and service levels. Oracle Strategic Network Optimization enables you to make decisions about how to source material across your supply chain and helps you identify where changes need to be made to balance long term demand and supply. You can also make decisions on how to most profitably use your resources. For example, an aluminum producer might use Oracle Strategic Network Optimization to determine the most profitable mix of products to produce on a shared resource like a rolling mill, given the different profit margins of various products and constraints like customer contracts for specific products. Rationalize Your Capital Assets One of the most significant components of designing an optimal supply network is determining when to acquire or retire capital assets. Making the right decisions on when to make changes to your portfolio of capital assets can have a significant impact on profitability. Not acquiring capital assets early enough can lead to not having sufficient capacity to meet demand leading to an inability to gain or hold market share, or to missing opportunities to enter new markets. Conversely, acquiring assets too early, or not retiring assets in a timely manner, can lead to poor utilization, high fixed costs that cannot be covered by volumes, and a low return on assets. 2

4 Oracle Strategic Network Optimization enables you to model all complex costs needed to make optimal capital asset management decisions. You can model the fixed and variable costs of opening and closing facilities and or acquiring new equipment. You can also model costs such as shut down benefits, which might represent the salvage cost you can receive for selling obsolete equipment or the amount you will receive for selling existing real estate and facilities. You can control the number and timing of potential openings, closings, or acquisitions. For example, a global distributor might use Oracle Strategic Network Optimization to evaluate if consolidating distribution warehouses could reduce distribution costs without jeopardizing delivery or increasing transportation costs more than the potential savings. Evaluate the Profitability of Outsourcing Decisions In addition to making decisions about the locations of your internal supply network, you also need to evaluate make versus buy decisions and decide what portion of your supply network should be outsourced to contract manufacturers and suppliers. Outsourcing can reduce fixed costs and make it easier to adjust production rates and cost structure when demand shifts occur. Sometimes outsourcing can lead to lower overall costs by leveraging economies of scale gained by enterprises that specialize in activities like specific manufacturing processes or logistics activities, while you concentrate on your core competencies. On the other hand, outsourcing can lead to higher variable costs, added risk in the supply chain, and a loss of direct control over quality and cost containment as additional stakeholders that need to earn a profit are added to the overall supply network. Oracle Strategic Network Optimization enables you to evaluate the impacts of outsourcing decisions. You can evaluate scenarios with and without outsourcing with all of the relevant costs to make optimal decisions. You can even use risk adjusted costs to model some of the risks and uncertainties inherent in these decisions. One of the risks might be the impact of currency fluctuations. You can use risk adjusted costs to model uncertainty in upcoming exchange rates and how that affects the profit necessary to justify a decision. For example, a brewery can use Oracle Strategic Network Optimization to evaluate the profitability of buying outside capacity in advance of peak seasons against the fixed costs of opening another facility. 3

5 Consider All Demand Determining the total cost and profitability of a supply network requires as an input an estimate of both the total expected demand and the time phased inventory targets required to meet customer service level objectives. You need to consider not only the direct manufacturing, procurement, and transportation costs of meeting customer demand, but also the cost of holding inventory to buffer against the risk and uncertainty caused by variability in demand and supply. Oracle Strategic Network Optimization uses the inventory recommendations from Oracle Inventory Optimization to ensure a comprehensive estimate of the total requirements on your supply network when designing it. Account for All Sources of Variability In addition to determining the basic structure of your supply network, you also need to determine how to buffer yourself from variability in supply and demand in order to reliably meet customer requirements while remaining profitable. Oracle Inventory Optimization takes the recommended supply network from Oracle Strategic Network Optimization, or the set of potential networks being evaluated as part of alternative what if scenarios, as an input and then determines the optimum postponement strategy to most cost effectively meet your customer service objectives. Oracle Inventory Optimization considers all your manufacturing plants, distribution centers, central warehouses, and even your suppliers and customers to determine where in your supply chain to hold inventory. In addition, it considers your bill of materials to calculate how much inventory to hold at finished good, subassembly, and raw material levels. Oracle Inventory Optimization solves the complex issue of balancing the time and cost you need to incur to get a product to a customer, without paying high costs to hold every product configuration close to your customer. Oracle Inventory Optimization considers all of the variability in your supply chain to recommend exactly what buffers you need in your supply chain to cost effectively meet your customer service objectives. It considers demand variability, manufacturing variability, in-transit variability, supply variability and varying fulfillment lead times to provide optimal inventory recommendations. (Inventory Optimization uses a technique known as stochastic optimization to make optimal recommendations that incorporate the variability and uncertainty in your supply chain). 4

6 Oracle Inventory Optimization also provides powerful decision support capabilities that enable you to identify and prioritize the elements of your supply chain and cost structure that drive the cost of achieving your customer service level targets. You can use this data to more effectively target the improvement activities that will have the greatest leverage on improving your delivery performance while reducing inventory costs. Leverage Savings from Postponement and Risk Pooling Postponement refers to how, as inventory is moved closer to the customer either geographically or in stage of conversion, it becomes both more expensive as value is added and less flexible as inventory can no longer be used to meet variability in other demands. Risk pooling refers to the fact that when common components are used in different assemblies, the variability of the component is much less than the variability of the end products due to pooling of the risk. This also applies to material held at a central distribution point, where less inventory can potentially buffer the variability from multiple end distribution points. Oracle Inventory Optimization solves the complex issue of balancing the time and cost you need to incur to get a product to a customer without paying high costs to hold every product configuration close to your customer. For example, a semiconductor company can use Oracle Inventory Optimization to develop a die bank strategy. Since many end products are typically produced from a common die, holding the appropriate level of inventory at die level in what is known as a die bank can provide a buffer for many end products much more cost effectively than holding inventory of each end product. It also factors in the stabilizing effect of pooling. A distributor can evaluate holding inventory for slower moving products at central distribution points instead of holding it at local distribution centers as increased premium transportation costs may be more than offset by the savings realized by pooling inventory at a central point. 5

7 Manage the Effects of Changing Product Lifecycles Early in the life of a product service level targets are high as you attempt to penetrate new markets, and inventory carrying costs are relatively low. Towards the end of the products life you tend to have lower service level targets as you try to guide customers to other newer and more profitable products, and the carrying costs tend to be high due to a higher risk of obsolescence. Oracle Inventory Optimization incorporates the spectrum of service level targets and costs in recommending time phased inventory recommendations enabling you to completely model your changing product portfolio. SYNERGIES WHEN USED TOGETHER SUCCESSIVE REFINEMENT Oracle Strategic Network Optimization recommends an optimal supply network to balance your long term supply and demand at the lowest overall cost or highest overall profit. It enables decisions on what facilities to open and close, what equipment to acquire or retire, whether to outsource production or produce in house, what supply base to develop, how to rationalize mergers and divestitures, and other long-term decisions for budgeting and contingency planning. Oracle Inventory Optimization recommends the most cost effective postponement strategy and time phased inventory targets to meet your customer service objectives at the lowest overall cost. It also enables you to incorporate the impacts of changing strategies and cost structures throughout the product lifecycle. Together they enable you to design an agile supply network that includes both the optimal structure and the optimal inventory strategy to most profitably meet your customer demand and meet your customer service objectives, in essence making you more responsive to supply chain events, as needed to compete in today s complex environment. Developing a postponement strategy requires as an input the structure of the supply chain and what the potential sources of supply and potential inventory holding points are. Determining the total cost and profitability of a supply network requires as an input an estimate of both the total expected demand and the time phased inventory targets required to meet customer service level objectives. Starting from these two premises, a logical process for utilizing the two Oracle strategic planning products to get the most benefit from each individual product, as well as to realize synergies from the two working together might be as follows. Start by evaluating potential supply networks with Oracle Strategic Network Optimization. Identify either the most profitable supply network, or 6

8 the small number of likely choices that are close enough in profitability to be in contention. Publish the results of this analysis as one or more assignment sets of sourcing rules. Use Oracle Inventory Optimization to determine the postponement strategy and time phased inventory targets appropriate for each potential supply network given your customer service level targets and your inventory budgets. Feed these inventory plans as demand schedules along with your consensus forecast into Oracle Strategic Network Optimization, and rerun your network optimization to determine if meeting your inventory targets, along with the forecast, changes the cost structure and profitability of the potential supply networks. In this way you can determine the most profitable supply network and inventory plan that enable you to achieve your customer service level objectives. Integrated Planning Solution Focus on the Most Important Problem First Customers of Oracle s strategic planning products also benefit from coexistence with the integrated Oracle E-Business Suite. Initial implementation and setup is minimized since all of the reference information comes directly from the Oracle E-Business Suite. Facilities, products, customers, suppliers, transportation methods and lanes, and process definitions all come in via pre-built integration. Benefits are also attained from being part of a complete and integrated best in class planning solution. For example, Oracle Strategic Network Optimization benefits from having more accurate consensus demand forecast scenarios as input for network design decisions. Oracle Inventory Optimization uses demand variability in determining the time phased safety stock required to meet customer service level targets cost effectively. Strategic decisions also control down stream decisions. The sourcing network decisions made by Oracle Strategic Network Optimization, along with the inventory targets from Oracle Inventory Optimization, drive the tactical and operational planning decisions made during supply planning in Oracle Advanced Supply Chain Planning. CONCLUSION Making the appropriate decisions about the structure of your supply network and the inventory holding and postponement strategies to implement can have a significant impact on your profitability and your flexibility. Oracle Advanced Planning provides unique and powerful tools that enable you to design the optimal supply network including the optimal inventory strategy. They enable you to develop a more responsive demand driven supply network and improve your competitive position. 7

9 Making Strategic Decisions with Oracle Advanced Planning September 2006 Author: Scott Malcolm, Oracle Corporation Contributing Authors: Roger Goossens Copyright Oracle Corporation 2006 All Rights Reserved Printed in the U.S.A. This document is provided for informational purposes only and the information herein is subject to change without notice. Please report any errors herein to Oracle Corporation. Oracle Corporation does not provide any warranties covering and specifically disclaims any liability in connection with this document. Oracle is a registered trademark and Enabling the Information Age, Oracle Strategic Network Optimization, and Oracle Inventory Optimization are trademarks of Oracle Corporation. Oracle Corporation World Headquarters 500 Oracle Parkway Redwood Shores, CA U.S.A. Worldwide Inquiries: Fax Copyright Oracle Corporation 2006 All Rights Reserved 8