DH C

DECHERT-HAMPE & CO.

25910 ACERO MISSION VIEJO, CA 92691 949.586-6868 55 CORPORATE DRIVE TRUMBULL, CT 06611 203.268-5050 555 SKOKIE BOULEVARD NORTHBROOK, IL 60062 847.559-0490

EXPOLOGISTICA 2000
"ADVANCES IN SUPPLY CHAIN MANAGEMENT and SUPPLY CHAIN ISSUES IN COLOMBIA"
April 6, 2000 Presentation by: Shyam S. Sethi Executive Director Dechert-Hampe & Co. Princeton, NJ USA

22 WALL STREET PRINCETON, NJ 08540 609.497-1040

2405 GRAND AVE., STE. 500 KANSAS CITY, MO 64108 816.374-7664

MOSSWARNER COMMUNICATIONS
56 ARBOR STREET HARTFORD, CT 06106 860.233-5641 25910 ACERO MISSION VIEJO, CA 92691 949.859-6996

AGENDA

1. What is the "Supply Chain?" 2. Evolution of the "Supply Chain" Concept 3. Key Issues Influencing Supply Chain Design 4. Key Advances in Supply Chain Management
A. B. C. D. E. Service Performance -- Speed and Quality Globalization Asset Management Information Systems and the Internet Collaboration -- Manufacturers and Retailers

5. Supply Chain Issues in Colombia 6. 7. Steps to Improve Supply Chain Performance in Colombia Summary/Discussion

1. WHAT IS THE SUPPLY CHAIN?

The "Supply Chain" includes all physical product flows, capital and human resources utilized and associated information flows, from raw materials sourcing to satisfying end consumer demand. The Supply Chain includes raw material sourcing from vendors, manufacturing of products, distribution of products through distributors/retailers and purchases by end consumers.

The Supply Chain utilizes physical, financial and human resources -- manufacturing and distribution facilities; transportation; inventories; personnel. Information Systems are the "brains" that link an integrated Supply Chain.

2. EVOLUTION OF SUPPLY CHAIN

1970's -- The primary concept was "Physical Distribution" with focus on specific "functional silos" such as:
- Order Processing; Warehousing Inventory Management; Transportation - Sub-optimization of individual processes, for example, Transportation - Most physical distribution systems were based on "push" logic

Order Entry/Order Processing

D.C. Operations Inventory Management

Shipping/Transportation

2. EVOLUTION OF SUPPLY CHAIN

1980's -- Concept was integration of functions within an enterprise -- "Logistics" vision
- Integration of all activities from order receipt to final delivery to consumer within an organization - Focus on trade-offs between activities, for example, order fill levels and inventory investment; speed of delivery and inventory investment - Most logistics systems were still based on "push" logic.

1990's -- SUPPLY CHAIN MODEL PROCESS and PHYSICAL

Direct Store Drop Shipments
Account Distribution Centers

S U P P L I E R S

Plants

Customer Service Mgmt. Distribution Centers

Supplier Management Inbound Logistics

Retail Stores Processing/ Packing

Distribution Management
Finished Goods Inventory Deployment

Consumers

SOURCE
SUPPLY PLANNING INFORMATION FLOW

MAKE

DELIVER
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DEMAND PLANNING INFORMATION FLOW

3. KEY ISSUES INFLUENCING SUPPLY CHAIN DESIGN

The key driver of the supply chain is satisfying end consumer requirements and demand.
Consumers are significantly more knowledgeable and demanding. Consumers demand high service levels with very competitive pricing. Supply chains have to satisfy end consumer requirements.

The nature of competition is global, not local, regional or national. - Manufacturers in Colombia and other countries are competing with multinationals and global suppliers. -- Colgate-Palmolive; P&G; Unilever. - Retailers in Colombia and other countries are competing with global retailers -- WalMart; Carrefours; Ahold. - The marketplace is global, not Bogota or Medellin or Colombia or Americas - Protective national trade barriers are rapidly disappearing.
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3. KEY ISSUES INFLUENCING SUPPLY CHAIN DESIGN cont'd

Channels of distribution have changed significantly.
Significant new retail channels including E-Retailers (Amazon; CDNow); Category Killers (Home Depot; Staples); International Retailers (WalMart; Carrefours). Significant consolidation of manufacturers and retailers globally. Power has shifted significantly from manufacturers to retailers because of retailer consolidation. -- WalMart is negotiating with major suppliers on a global basis.

Speed and quality of service, rather than price, are key differentiators between companies.
-

Speed is essential in satisfying consumer demand. Order cycle times have been reduced from weeks to days or hours. Quality of service -- product availability; conforming to defined service requirements -- is equally important

3. KEY ISSUES INFLUENCING SUPPLY CHAIN DESIGN cont'd

Efficiency in managing supply chain costs, while providing excellent service, is essential for survival.
Global nature of competition exerts major pressure on prices and profits for both manufacturers and retailers. Competition from new channels adds to profit pressures -- ERetailing (Amazon; CDNow) and new trade channels/"Category Killers" -- Home Depot; CostCo; Staples. Supply chain efficiency has a significant impact on costs, and profitability.

3. KEY ISSUES INFLUENCING SUPPLY CHAIN DESIGN cont'd

The Internet will have a major impact on Supply Chain design.
Competition from "virtual" companies with limited investment in logistics infrastructure. Significant pressure on cycle times based on efficiency of E-tailers, for example, Amazon.com for books -- millions of books available; 2-3 day home delivery. Significant pressure on prices, profitability based on E-Commerce. -- Visibility on prices and price comparisons between suppliers. -- Pressure on prices from E-Commerce vendors based on lower costs

3. KEY ISSUES INFLUENCING SUPPLY CHAIN DESIGN cont'd

Advances in Information Systems will offer significant opportunities for improving Supply Chain efficiency.
-

ERP Systems to support all major functions with a common information database and significant process re-engineering.. "Best of Breed" package systems to address specific areas such as Warehouse Management Systems (WMS) to improve DC operations. Wide acceptance of EDI to streamline information exchange between trading partners. Development of UCCNET to link major Consumer Packaged Goods manufacturers and retailers in U.S. Internet-based Collaborative Systems for Planning/ Forecasting/ Replenishment (CPFR). Internet-based open systems, rather than limited proprietary systems.

4. KEY ADVANCES IN SUPPLY CHAIN MANAGEMENT

A. Service Performance -- Speed and Quality Service requirements have become far more stringent (tight) for both manufacturers and retailers.
- Benchmark for service performance will be E-Commerce retailers -- very short order cycle times; very high product availability/order fill levels. - Retailers are demanding very short order cycle times, high fill rates from manufacturers. - Consumers are demanding very high fill rates and excellent product availability on retail shelves from retailers.

Service performance has become a key differentiator for competitors in manufacturing and retailing.
- Both manufacturers and retailers are competing on the basis of service performance. - Excellent product availability and short order cycle times will be critical for manufacturers. 10 - High "in stock" position will be critical for retailers.

4. KEY ADVANCES IN SUPPLY CHAIN MANAGEMENT con't Information Systems are providing detailed and
summary service performance analyses.
- Both large scale ERP systems and traditional Legacy systems are focusing on service performance reporting. - Both retailers and manufacturers use service performance reports in evaluating suppliers and selecting suppliers.

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4. KEY ADVANCES IN SUPPLY CHAIN MANAGEMENT con't

B. Globalization Nature of competition is global rather than local, regional or national.
- Large multi-national consumer packaged goods manufacturers (P&G; Colgate; Lever) are truly global in scope and focus. - Major retailers are global in scope either through direct entry or regional alliances. -- WalMart and Carrefours expansion in Americas; Europe; Asia. - Companies will not be limited in sourcing products globally. - Tariffs and trade barriers are largely disappearing because of "open markets" in most countries and trade blocs - NAFTA; EEU; Mercosur.

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4. KEY ADVANCES IN SUPPLY CHAIN MANAGEMENT con't

Supply chains are global in scope and complex, to support global commerce.
- Global sourcing and logistics will add significantly to complexity of supply chains. -- Multi-nation transportation and information links. - Examples include major retailers (Exito; Cadenalco; WalMart; Carrefours) sourcing apparel and consumer goods in China, SouthEast Asia

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4. KEY ADVANCES IN SUPPLY CHAIN MANAGEMENT con't

C. Asset Management Nature of competition has forced retailers to focus heavily on cost reduction to improve profitability.
- Global competitors, for example, WalMart - Competition from new companies such as "Category Killers" -Home Depot - Competition from E-Commerce - Limited ability to consistently increase prices

Manufacturers are facing similar cost and profit pressures.

- Global, well-established competitors - Limited ability to increase prices

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4. KEY ADVANCES IN SUPPLY CHAIN MANAGEMENT con't

Retailers and manufacturers are focusing heavily on improving asset management to improve profitability, return on assets.
Focus on reducing inventory investment through shorter order cycle times, smaller order sizes. - Cross-docking with major suppliers to reduce inventory investment, improve product availability at stores. - Reliance on manufacturers/suppliers to manage inventory -Vendor-Managed Inventory (VMI) and CPFR (Collaborative Planning, Forecasting and Replenishment). - "Return on assets" will be key area of focus for both manufacturers and retailers.
-

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4. KEY ADVANCES IN SUPPLY CHAIN MANAGEMENT con't

Sophisticated third-party logistics providers are helping manufacturers and retailers in improving "Return on Assets".
- Global third-party suppliers will provide total logistics support. -- Distribution Centers; Customization/Assembly; Transportation; Inventory Management; Information Systems support -- Examples include UPS; Fedex: CHEP

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4. KEY ADVANCES IN SUPPLY CHAIN MANAGEMENT con't

D. Information Systems and the Internet The Internet will significantly improve information exchange between manufacturers and retailers.
- Internet-based systems, using open standards, will largely replace proprietary systems. -- XML is already being established as an open language for supply chain information exchange. - EDI will be replaced by Internet-based information exchange.

"Off the Shelf" Systems to support supply chain operations are readily available, significantly less expensive, easy to install and use.
- Warehouse Management Systems (WMS) with RF-technology are in most large distribution centers in the U.S. - Transportation routing and tracking systems are widely used for improving efficiency of transportation. - Third party providers are also using these systems extensively. - Wide variety of Supply Chain software will be available on a 17 fee basis on the Internet.

4. KEY ADVANCES IN SUPPLY CHAIN MANAGEMENT con't

Internet-based systems will significantly improve collaboration between manufacturers and retailers.
- Collaborative Planning, Forecasting and Replenishment Systems (CPFR) will be readily available and widely used by major manufacturers and retailers. - "Scan-based" payment systems will further link manufacturers and retailers. - Cross-docking systems, supported by store POS reporting, will be common.

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4. KEY ADVANCES IN SUPPLY CHAIN MANAGEMENT con't

Collaborative systems will link End Consumers to raw material suppliers.
- Internet-based "business to business" systems will significantly improve interaction between all links of the Supply Chain. - Consumer "demand"-based systems will link consumers; retailers/distributors; manufacturers and raw material suppliers. - Most systems will be driven by end consumer "demand". -- "Pull" systems based on demand rather than "Push" systems based on production.

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4. KEY ADVANCES IN SUPPLY CHAIN MANAGEMENT con't

E. COLLABORATION -- Manufacturers and Retailers Collaboration, rather than confrontation, between manufacturers and retailers is a key advance in the area of Supply Chain management.
- Major manufacturers and retailers realize the importance of collaboration in jointly improving supply chain performance. - They are partners in eliminating costs from system, not shifting costs.

Information Systems, including Internet-based systems, will significantly facilitate information exchange for collaboration.
- Relatively easy to exchange information on sales and production plans at detailed and summary levels between retailers, manufacturers and raw material suppliers. - Internet-based information exchange will further improve collaboration. - All links of the supply chain will have visibility of end 20 consumer demand.

5. SUPPLY CHAIN ISSUES IN COLOMBIA

Service performance standards are not clearly defined.
No clear definition of order cycle times -- days from order placement to order delivery. Order completeness standards are generally not defined or are defined ambiguously. Order delivery lead times are defined as a range, for example, delivery from April 3 to April 8, rather than as precise number -deliver on April 3. Additional service requirements -- bar coding, packaging, unitizing are not well defined. Current service standards are not competitive with global companies.

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5. SUPPLY CHAIN ISSUES IN COLOMBIA

Lack of service standards and monitoring results in high "outof-stocks" at stores, high inventory investment.
"You cannot improve what you cannot measure". Retail stores have significant out-of-stock situations because of poor vendor service performance -- late deliveries; incomplete deliveries. Retailers have to significantly increase inventory investment to guard against service failures -- "just in case" inventory rather than "just in time" inventory. No shipments by several vendors during period prior to Christmas -holidays??

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5. SUPPLY CHAIN ISSUES IN COLOMBIA cont'd

Companies make poor short-term trade-offs between service and costs.
Example is non-unitized/palletized shipments. A large truck, nonpalletized, requires 5hours to unload versus 0.5 hours for palletized truck. Truck cube utilization is unimportant relative to efficient loading, unloading and storage. Unitization is basic to improving transportation and distribution center efficiency.

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5. SUPPLY CHAIN ISSUES IN COLOMBIA cont'd

Manufacturers and retailers often do not realize the importance of managing inventory investment.
Rationale for cross-docking -- to improve product availability on store shelves and reduce inventory investment -- is poorly understood by manufacturers. Most manufacturers tend to "load" inventory during special events, promotions. -- truckloads of toilet tissue in retail distribution centers. Both manufacturers and retailers must understand that a product is "sold" only when the end customer buys it, not when you sell to each other. High inventory investment, poor inventory turns to support level of sales No system to establish inventory parameters -- reorder points; reorder quantities; safety stocks -- based on item classification -"A", "B", "C".
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5. SUPPLY CHAIN ISSUES IN COLOMBIA cont'd

Business relations between manufacturers and retailers are "adversarial" rather than "partnerships".
-

Each group views the other group with suspicion -- "win-lose" rather than "win-win". Collaboration between manufacturers and retailers is critical to success in the future. Objective is to eliminate costs from supply chain, not push costs upstream to vendors.

Supply chain costs are not well developed or monitored.

-

Difficult to identify "high cost" accounts/options versus "low cost" accounts/options. Difficult to establish costs/benefits of supply chain activities such as centralized distribution; cross-docking.

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5. SUPPLY CHAIN ISSUES IN COLOMBIA cont'd

Distribution operations at most companies are not well developed.
Distribution centers use inefficient storage and handling methods. -- Lack of unitization; no labor performance standard; limited systems support. Transportation methods are inefficient -- non-unitized loads requiring significant loading/unloading time. Third-party rates and cost structures are not well defined.

Information Systems support is not well developed.

Largely "home-developed" legacy systems for most applications. Recent focus on EDI applications. Internet usage for supply chain is relatively new.

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5. SUPPLY CHAIN ISSUES IN COLOMBIA cont'd

Third party logistics infrastructure is not well developed.

Transportation companies doe not compete and generally provide unreliable service. Third-party distribution service providers (distribution centers) provide primarily basic warehousing rather than advanced distribution services. Third-party rates and cost structures are not well defined.

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6. STEPS TO IMPROVE SUPPLY CHAIN PERFORMANCE IN COLOMBIA

Define service requirements based on End Consumer service requirements.
- Timely product availability at retail shelves is critical for survival of both retailers and manufacturers. - Service requirements must be defined to permit competition with emerging channels, for example, E-Retailers

Both manufacturers and retailers must focus on eliminating costs rather than shifting costs.
- Inventory turns improvement for retailers must be accompanied by inventory turns improvement for manufacturers. - This requires collaboration rather than confrontation.

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6. STEPS TO IMPROVE SUPPLY CHAIN PERFORMANCE IN COLOMBIA

Both manufacturers and retailers must focus on the old proverb "Time is Money".
- Most companies will operate on "Internet time" in the future -- hours, not days. - Both manufacturers and retailers must eliminate supply chain activities that add to cycle time, for example, non-palletized shipments.

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6. STEPS TO IMPROVE SUPPLY CHAIN PERFORMANCE IN COLOMBIA con'td

Focus on improving efficiency of all logistics operations.
- Employ economically justifiable levels of automation in distribution centers. -- rack storage; forklift trucks; conveyers where appropriate - Establish efficient transportation operations. - Use palletized loads for transportation to improve transportation efficiency. -- 30 minutes to load/unload trucks rather than 5 to 6 hours - Use palletization for improving distribution center operations. -- handling pallets rather than cases or units - Build distribution facilities with well designed loading/unloading docks.

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6. STEPS TO IMPROVE SUPPLY CHAIN PERFORMANCE IN COLOMBIA con'td

Invest significantly in Information Systems support for improving Supply Chain efficiency.
- Systems to support store and distribution center replenishment based on actual demand at store level. - Use EDI and Internet for information exchange with suppliers. - Establish Vendor-Managed Inventory Systems if feasible. - Develop collaborative Planning, Forecasting and Replenishment Systems. - Install Warehouse Management Systems (WMS) based on RF-technology to improve distribution center efficiency. - Install transportation routing and tracking systems to improve transportation efficiency.

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6. STEPS TO IMPROVE SUPPLY CHAIN PERFORMANCE IN COLOMBIA cont'd

Establish internal and external service performance standards; routinely monitor performance against standards.
- Establish "realistic" service standards, both internal and external. - Routinely monitor and report performance against standards, preferably using Information Systems support. - Take corrective action, including penalties to improve poor performance - Remember -"YOU CANNOT IMPROVE WHAT YOU CANNOT MEASURE".

Both manufacturers and retailers must focus on product line rationalization.

- Use"ABC" ranking, based on sales, to eliminate significant portion of slow-moving "C" items from line. - No logic in having slow-moving items in line that consumers do not buy.

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6. STEPS TO IMPROVE SUPPLY CHAIN PERFORMANCE IN COLOMBIA cont'd

Both retailers and manufacturers must also focus on supplier rationalization.

- Use "ABC" ranking, based on purchases, to eliminate portion of "C" vendors with limited capability to grow. - Encourage "C" vendors to collaborate or merge, to enable them to invest in technology and systems.

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6. STEPS TO IMPROVE SUPPLY CHAIN PERFORMANCE IN COLOMBIA cont'd

Formally evaluate logistics trade-offs in developing supply chain network.
- Centralize "high value" merchandise in a few stocking locations -- pay transportation premium. - Decentralize low value merchandise -- position it as close to end markets as possible -- multiple stocking locations

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SERVICE PERFORMANCE ANALYSIS -- Example

Vendor Lead Time -- Supermarket -- Orders > $50,000,000

100%

Cum . % of Orders

80% 60% Cum . % Orders 40% 20% 0% 0-3 4-7 8-10 11-14 15-30 31-60 61-90 >90 Lead Tim e (Days)

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SERVICE PERFORMANCE ANALYSIS -- Example

$ Service Performance--Varieties-Orders > $50,000,000

100%

Cum. % of Orders

80% 60% 40% 20% 0% 50% 60% 70% 80% 90% 95% 98% >98% Cum . % orders

$ Fill level

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"ABC" ANALYSIS, SKU's -- Example

"ABC" National--Varieties Items-100% 90% 80% 70%

Cum. % Sales

60% 50% 40% 30% 20% 10% 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% Sales 100%

Cum. % Items

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"ABC" ANALYSIS, VENDORS -- Example

"ABC"--Varieties Vendors--1999 Purchases

100% 90% 80%

Cum. % Purchases

70% 60% 50% 40% 30% 20% 10% 0% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Purch

Cum. % Vendors

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