OPERATIONS FLEXIBILITY IN PROCESS INDUSTRIES

February 2009 F b
1

Contents

Page

A. A Introduction B. Industry trends drive flexibility requirements D. How to embed flexibility within operations strategy E. Best practice flexibility levers

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This document was created for our client. The client is entitled to use it for its own internal purposes. It must not be passed on to third parties except with the explicit prior consent of Roland Berger Strategy Consultants. This document is not complete unless supported by the underlying detailed analyses and oral presentation.

2008 Roland Berger Strategy Consultants GmbH

A Introduction

The study covers three process industries with similar characteristics in operations
Scope of the study
SPECIALTY CHEMICALS PHARMACEUTICALS CONSUMER CARE SIMILARITIES OF OPERATIONS Capital intensive production equipment with i t ith long depreciable life Broad product portfolios Batch production
Examples: Adhesives Coatings Pigments Solutions Additives Agents S l Solvents t etc. Examples: Anesthetics Infusions & injections Clinical solutions Tablets & pills Clinical nutrition Clinical agents etc. t Examples: Hygiene products Beverages & water Cleaning agent Washing powder Foodstuffs Dairy products etc. t

Regulatory requirements Global operations

We have conducted more than 80 focused interviews with senior operations managers from international industry leaders
Study approach and participants
OUR APPROACH Comprehensive list of flexibility levers derived from Roland Berger Strategy Consultants project history Preparation of hypotheses by partners and experienced consultants from RBSC Competence Center Operations Strategy and relevant industry practices More than 80 structured face-to-face interviews with decision makers, rather than questionnaire based statistics PARTICIPANTS FROM INDUSTRY LEADERS (SELECTION)

Four major trends put challenges for companies in all analyzed process industries
Key common trends in process industries
TRENDS
What are the key challenges your company faces today?

COMMENTS Volatile demand patterns is named as the highest current challenge; while at the moment most companies experience an upswing and struggle to serve market demand there is awareness that the next downturn is coming Mergers & acquisition comes second and puts companies under a constant restructuring and reorganization pressure Volatile energy and raw material markets put the challenge to limit the upwards trend by securing benefits from short term drops

82% 76% 61% 55%

Volatile demand patterns

Mergers & Aquisitions

Volatile energy & raw material markets

Shortened product life cycles

The shortening of p g product life leads to a constant ramp up-/ down cycle the needs to be managed
6

MUC-

Eight trends in the pharmaceutical industry require more and more flexibility in operations
1 Patents are running out on major blockbuster drugs puts pressure on operational cost structure adjustment t t dj t t 2 Product life cyc cycles are shortening due to reduced patent protection requires faster ramp-up and ramp d down of operations 3 New monitoring standards are changing frequently in the pharma industry requiring quick ii i k adaptations 4 Cost pressure from health payers is ever increasing demanding pharmaeconomic benefits

PHARMACEUTICALS

5 Competition from Asia is increasing requires a more global footprint (India and Asia but also Russia)

6 Product diversity is increasing due to more and more personalized products

7 Velocity of techtech nology developments is increasing along the pharma value chain

8 Mergers and acquisitions as a result of portfolio optimization require quick and efficient carve-out and integration of operations
7

Source: Roland Berger

Five trends in the specialty chemicals industry require more and more flexibility in operations
1 Mergers and acqui acquisitions as a result of portfolio optimization require quick and efficient carve-out and integration of i t ti f operations 2 Companies extending their value chain and becoming solution providers to evade commoditization of diti ti f their products 3 Continuous review of manufacturing penetration to free cash for innovation

SPECIALTY CHEMICALS

4 Competition from Asia is increasing require shorter reaction time towards customers and thus a more global footprint

5 Pressure to establish scale synergies to be cost competitive while avoiding asset build up

6 Improved on shelf on-shelf availability due to increased competition and declining customer loyalty

Source: Roland Berger

Six trends in the consumer goods industry require more and more flexibility in operations
1 Volatile demand patterns due to changing consumer behaviour and seasonal variations 2 Shortened product life cycles due to increased competition, technological improvements and increasing customer i i t requirements 3 Increased product diversity due to customers demanding more and more personalized products d t

CONSUMER CARE

4 Increased variety in packaging due to regional regulations and increased differentiation needs

5 Extended crosscross boarder activities due to further internationalization and limited growth options in home markets

6 Improved on shelf on-shelf availability due to increased competition and declining customer loyalty

Source: Roland Berger

Most companies in the process industries have recognized the need for flexibility
Verbatims
Kurt Hogh (Value stream optimization) "Stricter market requirements (in terms of fresh high quality chocolate, high-quality chocolate volume adjustments more adjustments, demanding customers,) and strategic targets mean that flexibility must be at the heart of our company "1) " Flexibility will have an ever increasing relevancy in order to reduce capital tie-up and to be able to react more quickly"
) (Annual report 20071))

Jeffry B. Kindler (CEO) "We must reduce our absolute cost and put in place a more flexible structure"

" our business now meets all conditions for long-term success: flexible asset structures and a global focus backed by regional flexibility" (Annual report 2007)

"Great flexibility is really important so that we can rapidly adapt to how our local customers work." (Letter to shareholders, June 2007)

Dr. Rainer Oschmann (Executive General Manager) " Operations flexibility is a clear strategic objective of our company " company " [Our] financial strength is therefore the result of the followed strategic course and of the flexibility and speed with which external challenges are dealt with." (Mission statement 2008)
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1) Translated from German source

Participants of this study confirm the relevance of flexibility however systematic transfer into their operations strategy is rare
Flexibility objectives and operations strategy
ASSESSMENTS ON OPERATIONS FLEXIBILITY
Do you perceive operations flexibility as one of your top 5 priorities?
Beverage producer, Production manager " operations flexibility is very important in our capital intensive industry" Specialty chemicals company, COO Pharma and Chemicals Group, Head of Business development "Definitely, flexibility is among our strategic goals. We would soon be out of the market if we would not constantly try to react as flexibly as possible. possible."

89%
" flexibility is much more economical than investing in forecasting excellence we had to learn it the hard way"

11%
yes no

Do you systematically define strategic measures to achieve this objectives?

Consumer Care company; Manager manufacturing Speciality chemicals company company, Head of Strategic Planning "Operations flexibility is so inevitably important. It would be foolish if we left it to chance." y g push "Only when we felt the strong market p and had to quickly boost our output did we recognize significant hidden flexibility buffers; in one plant we where able to increase output by 15% without any investments"

56%

44%

yes

no

Pharmaceutical producer, Head of Operations "We do build in flexibility but it is rather a functional responsibility than a systematic corporate approach"

Source: Roland Berger interviews, 2008

11

B Industry trends drive flexibility requirements

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12

Different flexibility types exist: from handling of day-to-day demand fluctuation to strategic considerations for M&A activities
Types of flexibility
TYPE
Demand 1 Geography 2 Network 3 Technology 4 Mergers & Acquisitions 5

EXPLANATION
The capability to deal with volatile demand patterns The capability to install necessary operations for a new market entry (e.g. local supplier integration) The capability to change volume and product allocation within a global site portfolio The capability to replace old technology with new technology The capability to make use of synergies or retain existing synergies i th case t i i ti i in the of investment and divestments

EXAMPLE
Increase in the advent of a new product or the downturn at the end of the product life cycle Entry into Chinese market making use of local labour cost advantages (keeping up necessary ingredient quality) e.g. new products, market demand shifts or currency changes might require an optimized utilization of global sites e.g. new small batch technologies require different skills and production system set-ups Integration of newly acquired plants into an existing production network i ti d ti t k

13

For the analyzed industries, the different types of flexibility have different relevancy demand flexibility is a common requirement
Relevancy of different flexibility types

SPECIALITY CHEMICALS
Low 1 Demand 2 Geography Network k 3 N t 4 Technology 5 Mergers & acquisitions
Source: Roland Berger interview results, 2008

PHARMACEUTICALS
High Low High

CONSUMER CARE
Low High

Demand Geography Network N t k Technology Mergers & acquisitions

Demand Geography Network N t k Technology Mergers & acquisitions

14

DEMAND FLEXIBILITY

Predicting yearly flu types is very difficult for the pharmaceutical industry demand for one serum can be very high or zero
Example: Flu serum
Demand

Background
Serum has to be reproduced every year, as the virus transforms every year Inventories are therefore not possible WHO gives a yearly recommendation, which serum recommendation should be produced/normally three types of viruses are covered Development of year specific serum takes up to 6 months Extremely high demand of incubated eggs for reproy g gg duction of antibodies (Impfviren), capacities are limited Serum manufacturers expect that demand will double within the next 10 years, resulting in production capacities restraints t

Real demand for type A demand for specific virus (later: type A) demand type B t demand y tyoe C

Problem
Only one serum is really needed for one specific type Production capacities have to be extremely flexible to react to a specific demand Limited production capacities
15

Autumn

Summer

Fall

Winter

Source: Pandemic Report 2006

GEOGRAPHICAL FLEXIBILITY

Manufacturing networks will continue to go through a significant transformation process in the future
Attractiveness of market and production environment
Developing countries will further increase industrial assets and production capacities
High India France Market attractiveness1) Italy y Germany South Africa Low Low
Size indicates market size

Existing production networks will transform

China

Rationalization of Western European industries Significant development of industrial assets in Eastern European regions and Asia

Mexico

Czech Republic

Production overcapacities will occur in Europe Need for geographical flexibility of operations thus will increase

Chile

Production attractiveness2)

High

1) Growth, Attractivity etc. 2) Labor cost, country risk, infrastructure

16

NETWORK FLEXIBILITY

Flexible production networks allow companies to adapt to changing market conditions on a short-term base
Manufacturing network aspects
Explanation
Make use of global production networks, e.g. shift production volumes and production of low value-adding components B able t react on a Be bl to t short-term base on changing business characteristics

100%

Production capacity Production volume

Volatile demand pattern Degree of value added

Use of flexible production volumes e.g. use more volume/capacities due to currency advantage

Volatile demand asks for production volume shift on a short term base Degree of value added is decreasing

Share of value added Labor costs

Production of labour intensive products Make use of relative cost positions

17

PRODUCT TECHNOLOGY PORTFOLIO FLEXIBILITY

State of the art product technologies are needed to decrease costs product technology flexibility is seen as key enabler
Example: Energy consumption and costs
Energy consumption [Terajoule] 1,000 800 600 400 200 0 1994 1994 Costs [Eurocent/kWh]
10 8 6 4 2 0 2008

Energy consumption is growing steadily Energy costs rose with a CAGR of 12,7% from 2000-2007 The capability to replace old with new technology will increase production efficiency and decrease costs

1996 1996

1998 1998

2000 2000

2002

2004

2006

Manufacturing industries

Eurocent/kWh

Source: Statistisches Bundesamt / VCI-Chemiewirtschaft in Zahlen 2007 / BDI

18

BUSINESS PORTFOLIO FLEXIBILITY

M&A activities and value chain reconfiguration require operations to be flexible towards portfolio changes
Business portfolio flexibility
M&A transaction value Europe [USD m]
Business trends
100,000 80,000 80 000 60,000 Pharma 40,000 20,000 0 1994 Chemicals Consumer Goods G d

Drivers for portfolio changes

M&A activities Until 2004: mainly cost-focused Since 2005: mainly growthgrowth oriented Ongoing changes in Value Chain Configuration Competition of value chains rather than companies Forward and backwards integration and des-integration

1996

1998

2000

2002

2004

2006

2008

Ops challenges

Manufacturing: 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,
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C How to embed flexibility within operations

strategy

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Choosing the most suitable flexibility levers is often prevented by four common ruptures along the strategy process
Ruptures along the strategy process
1. 1 DEVELOP BUSINESS SCENARIOS 1st common rupture:
Business scenarios Business flexibility needs Business scenarios

Business flexibility needs are not systematically assessed for top down strategy development

2. DEDUCT FLEXIBILITY NEEDS

Operations flexibility needs Manufacturing Purchasing SCM

2nd common rupture:

Business flexibility needs are not systematically transformed into operations y flexibility needs

3. SELECT BEST FLEXIBILITY LEVERS

Flexibility lever toolbox

3rd common rupture:

Operations flexibility needs are not systematically translated into a consistent system of flexibility levers Overlaps between levers generate a hidden flexibility

Levers applied EBIT

4. 4 MEASURE IMPLEMENTATION

Target Actual t

4th common rupture:

Neither a systematic forecast nor controlling of gains from flexibility is made
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Source: Roland Berger

DEVELOP BUSINESS SCENARIOS

Establishing flexibility starts with creating different business scenarios and assessing the related cost and benefits of flexibility
Determinants of flexibility value
Different business scenarios trigger the need to evaluate cost and effects of becoming more flexible. Business scenarios can be calculated with different time horizons and incident probabilities The cost of becoming more flexible are determined by the actual degree of flexibility and the cost of implementing additional flexibility measures. The type of measures to be implemented crucially depends on the time horizon of the business scenarios EBIT Scenario A Occurs with probability PA

Incident No investment in flexibility

The benefits from flexibility are the effects resulting from the measures implemented during the realization of one of the possible business scenarios
Cost of becoming more flexible EBIT development scenario A
Source: Roland Berger

investment in flexibility

Scenario B

Occurs with probability PB TIME

22

Gains from flexibility scenario A EBIT development scenario B

Gains from flexibility scenario B

Airbus interview

DEDUCT OPERATIONS FLEXIBILITY

Business flexibility needs are often not systematically derived from the company's strategic objectives
Link between strategic objectives and measures
CONCLUSION Is flexibility part of your strategic objectives? 61% 39% The majority of participants confirm flexibility to be part of their strateg strategy NEGATIVE EXAMPLE Strategic objectives could be able to cope with demand increase of 10% Further divestments of operations assets; increase of outsourcing level Independent OP objectives
Purchasing
Demand fluctuations of -5% without purchasing price effect Develop second supplier for key component Compensate 5% volume reduction in cost per piece Prepare to insource 30% of volume from contract manufacturer Build task force to prepare integration of potential acquisition Demand changes of 5% without decreasing service level
23
Airbus interview

Yes

No On the other hand a lot of companies lack the transfer into the desiered flexibility of their operations

Is flexibility transferred as an objective of your operations strategy? ti t t ? 59% 41%

Manufacturing

Yes

No

SCM

Source: Roland Berger interview results, 2008

SELECT BEST FLEXIBILITY LEVERS

Selection of flexibility levers is not always based on the respective implementation cost and time
Levers selection matrix
Cost of implementation High g
I.1 II.11 III.5 II.1 I.5 III.3 I.2 I.12 II.8 II.2 IV.6 I.4 II.7 I.11 III.7 I.9 II.4 I.10 II.3 I.8 II.9 I.7 I.13 I.6 II.6 II.5 IV.8 IV.9 III.6 III.4 II.14 II.12 III.3 IV.1 III.1 II.10 IV.3 IV.5 IV 5 IV.4

MANUFACTURING

I.1 I.2 I.3 I.4 I.5 I.6 I.7

Optimize production footprint Use of multi-purpose plants

I.8 I.9

Define pull/push points Kanban utilization Optimize change-over time and cost

Buy options on infrastructure/real estate I.10 Joint facility utilization Make-to-order Keep options on future technologies Use modular/flexible manufacturing systems

I.11 Consider total lifecycle costs I.12 Reduce lead time in production I.13 Introduce advanced operating schemes I.14 Postpone product differentiation

II PURCHASING

II.1 Global/cross-regional sourcing II.2 Multiple sourcing II.3 Peak sourcing II.4 Negotiation/reflex II.5 Risk sharing partnerships II.6
Supplier collaboration

II.7 II.8 II.9

Make-or-buy eProcurement Sale & lease back

II.10 Standardization of product structure II.11 Modularization II.12 CLB organization III.5 Advanced planning systems III.6 Optimization of contractual conditions
for assets

Med. M d
IV.6 III.8 I.3

IV.2

III SCM/ Logistics

III.1 Warehouse footprint optimization III.2 Flexible warehouse dimensioning

pp y III.3 Supply chain collaboration

III.7 III 7 Sharing of logistics assets III.8 Risk sharing with logistics
service providers

III.4 Outsourcing

IV GENERAL

IV.1 Partnerships/JV IV.2 Monitoring systems/KPI IV.3 IV 3 Standardized & scalable IT systems IV.4 Modularization & standardization of
processes

IV.6 Flexible working hours IV.7 Temporary workers IV.8 IV 8 Variable remuneration IV.9 Orientation on industry standards

Low Short-term
Source: Roland Berger

Medium-term

Long-term Time to implement

IV.5 Continuous improvement

24

MEASURE IMPLEMENTATION

Decisions regarding flexibility are made with limited knowledge about cost and gains; effective measurement is neglected
Transparency of flexibility
Do you measure flexibility of your internal operations? 22% Yes 31% Partly 47% QUOTES
"We build buffers and flexibilize working hours although we are not ki h lth h t really sure these efforts pay off ..."

CONCLUSION
The majority of companies do only have a rough idea about their internal flexibility Most companies cannot fully utilize their supplier flexibility because they do not measure it

No
"Often we are not exploiting our flexibility potentials where we could because supplier are not transparent transparent"

Do you measure the flexibility of your external supply chain? 35% 10% Yes Partly No 55%

Consequently decisions regarding flexibility are made with limited knowledge about cost and gains Effective measurement systems are not fully implemented

Do you know the cost of being more flexible? 60% 30% 10% Yes Partly No

" We tackle flexibility needs when they occur, then we make a business case and calculate cost implications" "What is more complex then calculating fl ibilit cost is to get to l l ti flexibility ti t tt know the benefits of flexibility"

Source: Roland Berger interviews, 2008

Airbus interview

25

Using a systematic four step approach, the four common ruptures can be overcome and the full value of flexibility can be utilized
Four step approach
DEVELOP SCENARIOS CLUSTER OPERATIONS FLEXIBILITY NEEDS
Probability x Size h high h high Best case Incident medium Scenario B medium Scenario A

SELECT BEST SET OF FLEXIBILITY LEVERS

Cost of implementation Cancel Use all levers with short impl. time

CONTROL FLEXIBILITY GAINS

EBIT No investinvest ment in levers

low

investment in levers

Worst case short t medium long Time to scenario short

low

Scenario S i C

Condider only medium cost levers but allow Be selective for more and review contintime to uously implement medium long Time to implement

Evaluate different business scenarios Derive of flexibility needs for each business scenario

Cluster specific flexibility needs for each scenario along the product of probabiliy and size (benefit/risk) and time till potential occurance

1st rupture closed

Source: Roland Berger

2nd rupture closed

Constantly review flexibilty Select levers that reflect the probability x size category as well gains and cost as the time horizon of the scenario Detect hidden flexibility by p g comparing feasible levers with those already implemented and cancel those 3rd rupture closed

4th rupture closed

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D Best practice flexibility levers

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DEMAND FLEXIBILITY LEVERS

Levers to tackle demand flexibility are well known, though their importance in the eyes of operations managers is changing
Top levers address demand flexibility
Rank #
1

General
IV.7 Temporary workers

Purchasing
II.2 Multiple/dual sourcing II.6 Supplier collaboration

Manufacturing
I.12 Reduce lead time in production I.15 Subcontractor use I.2 Multi purpose plants

Supply chain
III.4 Push-pull-point differentiation III.4 Outsourcing III.5 Advanced planning systems III.10 Buffer stocks A differentiated definition of push-pull-point (make-toorder vs. make-to-stock) has risen in the attention Outsourcing remains an established lever to share volatility risk with service providers Buffer stock is used to cover sales upswing potentials though focus is on lead-time reduction in production instead
28
28

IV.6 Flexible working hours

II.1 Global/cross regional sourcing

Comments

Temporary workers and internally flexible working hours in the most common means to tackle demand fluctuation Models of both levers strongly depend on local legislation

Multiple sourcing or dual Lead time reduction is sourcing is applied for clearly highest on the critical materials agenda of manufacturing For materials/services responsibles where this is most feasible Strategic flexibility is built in collaboration models up to by using subcontractors for JV approaches are applied volatile/peak demand For suppliers where second Multi purpose plants are source is too expensive considered where sometimes dual site economically feasible production at supplier is requested/ supported

Source: Roland Berger interviews, 2008

M&A FLEXIBILITY LEVERS

With regard to establishing flexibility to better handle divestments and integrations, the clear focus is on more standardization
Top levers applied to address mergers & acquisitions
Rank #
1

General
IV.9 Orientation on industry standards IV.2 Standardized Monitoring/ KPI systems t

Manufacturing
I.1 Optimize production footprint I.17 Production system

Supply chain Mgmt.

III.1 Warehouse footprint II.7 Outsourcing

Purchasing
II.12 Corporate Lead Buyer organization

IV.3 Standardized& scalable IT systems Industry standards is widely Clearly still on the rise is named as key to be flexible the introduction of Often though standards are production systems country specific and the Even if implementation will reach is thus limited be different a merge with a Standard KPI systems are company that has one is a key lever to quickly achieved much faster integrate new companies and make them manageable IT standards are an advantage but depend on the target company's setup

II.13 Standards on commodity codes& use of databases In the context of PMI often A corporate lead buyer outsourcing is helpful, organization is considered provided the contract is set by most of the participants up in a flexible way for such as highly adaptive to cases integrate or to be integrated Often companies take the The increasing use of chance to outsource during standard commodity and M&A situations as the supplier codes also is very justification case with helpful in integration regard to labor laws are scenarios built more easily

Comments

Source: Roland Berger interviews, 2008

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During the interviews companies across all industries analyzed and gave an insight into how they establish flexibility
Overview flexibility cases
CASE 1. Central coordination department 1 2. 2 Volatile demand consumer good 2 industry 3. Fast growing markets in 3 g y consumer good industry . 4 External intermediate business as a buffer Facilitating of manufacturing network and service provider FLEXIBILITY TYPES
1

INDUSTRY
4

Demand

Geo3 Netgraphy work

Technology

M&A

Pharma Consumer Chemical

30

7. Network and geographic flexibility 6 yg to satisfy global customer base 8. Selective M&A Strategies to react 7 on changing business environments
Source: Roland Berger interviews, 2008

A manufacturer of pharmaceutical products uses a central coordination department to react to short term customer demands
Interview example: Pharmaceutical industry
SITUATION/CHALLENGE Complex market conditions High volatility in demand g g Fast changing customer needs/preferences Short product life-cycle SOLUTION Close working relationship with customers and Central coordination department fast communication of customer needs into the ProducP d MarkeM k CusC R&D Coordination tion ting tomers organization via central department coordination department Central coordination department as an "early g y warning system" to react to trends Continuously improve production technology (e.g. cross industry benchmarking for production gy ) technology of flavors) React to specific country regulations, produce big lot Improve sizes for one country and minimize set-up times technology Standardize products in close relationship with and planning customers to improve planning flexibility E h Enhance workforce fl ibilit multi-purpose use of kf flexibility; lti f worker capabilities (can operate all lines)

Enhance production capabilities Best practice technology is key important Contract manufacturing with high volumes Special regulations for Best practice individual countries have an impact on production strategy

Source: Roland Berger interviews, 2008

31

A consumer goods producer uses a mixture of measures to deal with volatile demand
Interview example: Consumer industry
SITUATION/CHALLENGE Volatile demand pattern
Demand

SOLUTION Close cooperation with the customer Studies on market development and trends on a regular basis For selected products customer forecast on weekly bases For selected products only make-to-order

Time

that is relatively predictable

Demand

Flexible machinery Flexible Set up APS to get overview on global [?] capacity machine park Nearly no change over times and nearly no yield losses and during change-over production Flexible maintenance contracts with service provider control (maintenance during time of low demand Fl Flex-time/working h i / ki hours account Job sharing (partly hob in production/partly administration) HRManagement Usage part time employees (5-20%) depending on production line to face huge volatilities in demand measures Very "flexible" workers (e.g. students) for high peaks (up to 10%) "Hausfrauenschicht"
32
Airbus interview

Time
Scenarios
Source: Roland Berger interviews, 2008

A consumer goods and a pharmaceutical producer use a four step approach to deal with fast growing local markets
Interview example: Chocolate industry
SITUATION/CHALLENGE Fast growing local markets SOLUTION Contracts with local distributors Joint ventures Additional own sales organization Supply of the customer in fast growing markets by distributor Distribution to the county is organized by chocolate producer t secure fats delivery ti d to f t d li times In several countries the chocolate producer has joint ventures with local companies If demand in local market is high enough, own sales d di l l k t i hi h h l organization id founded Organization of whole distribution from the production plant over the warehouse to the final customer by the chocolate producer Build-up of additional production plants in the fast growing markets Preferred option if business opportunity appears stable and needed quality standard can be achieved in countries Often acquisitions are used for a fast increase of local production capacity
33
Airbus interview

that are relatively predictable

Demand

Time
Scenarios

Additional production plants

Source: Roland Berger interviews, 2008

A large pharmaceutical producer uses external intermediates business as a buffer to cope with fluctuation of internal demand
Interview example: Pharmaceutical company
SITUATION/CHALLENGE Volatile internal capacity demand
Internal demand

SOLUTION Company sells intermediates to external customers If internal demand is increasing/decreasing, business with external customers is slashed/increased Fl ibilit i secured b relatively short-term contracts Flexibility is d by l ti l h t t t t with external customers Due to combination of internal and external demand economies 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 time, accounts, job rotation) Manufacturing KPI system to measure performance and flexibility Sharing of warehouses with other pharmaceutical companies

External business as capacity reserve

Time

combined with extremely flexible plants

Manufacturing technology

Flexible manufacturing system

Potential of plant equipment Products

Source: Roland Berger interviews, 2008

34

Airbus interview

A large consumer goods company facilitates its manufacturing network and service providers to cover demand fluctuations
Interview example: Consumer goods company
SITUATION/CHALLENGE Different demand patterns
Demand
Product 2 Product Prod ct 3 Product 1

SOLUTION Mostly local manufacturing for local demand, at least for commodity products Worldwide sister plants use same raw materials (e.g. chemicals, chemicals packaging) and the same plant equipment Shift of production capacity is institutionalized within IT systems for the case of demand peaks, local raw material shortages etc. Contract manufacturing is used to cope with demand peaks Service providers have expert knowledge when it comes to fast product/plant changes, often manufacturing of products with small l t sizes i f t i f d t ith ll lot i is outsourced Benchmarking with the external service providers helps to increase speed of product/plant changes Throughput optimization with machines focussed on one product type (e.g. shampoos), flexible automation of machine periphery to cope with packaging variants
35
Airbus interview

Manufacturing network

Time

combined with increasing complexity in packaging

Number of packaging variants

Use of service providers

Time

Technology

Source: Roland Berger interviews, 2008

A specialty chemicals manufacturer combines network and geographic flexibility to satisfy its global customer base
Interview example: Specialty chemicals
SITUATION/CHALLENGE Global customer base Network flexibility SOLUTION Products are produced in technologically identical ("twin") plants (e.g. 2-3 twin plants per region) Local production for local demands F Free capacities are shared within every region iti h d ithi i Payoff time for local infrastructure shortens as transportation costs are on the rise I Increase of local coverage with partnerships (l i ti fl l ith t hi (logistics suppliers) and joint ventures (e.g. [not yet] favorable M&A targets) Leveraging advanced planning systems (e.g. SAP APO) for fully leveraging capacities Utilizing standardized IT systems for effectively routing flow of goods & products together with logistics partners

requires presence in local markets Geographic flexibility

Own site

Joint venture

Source: Roland Berger interviews, 2008

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The specialty chemicals company uses hedging and selective M&A strategies to react on changing business environments
Interview example: Specialty chemicals
SITUATION/CHALLENGE Winning with acquisitions SOLUTION Flexibility for product technologies is achieved by selectively acquiring specialized competitors Post-merger integration of acquisitions is done carefully on R&D to allow for quick response on changing technological requirements Immediate integration of acquisitions into global lead buyer structure Centralized production only for business units offering significant economies of scale Risks of volatility reduced by broad business portfolio

Selective M&A strategy

Raw material price increase

USD/t

+105%

time

Prices for important raw materials are secured by using futures e.g. on commodities such as palm oil High planning security as prices are locked in Hedging with High flexibility to get the optimum independently of futures price developments Possibility to smooth out peaks and downs
37

Source: Roland Berger interviews, 2008