Building a Supply Market Intelligence Community

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Building a Supply Market Intelligence
Community Rob Handfield Bank of America
University Distinguished Professor Director,
Supply Chain Resource Consortium
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Agenda

• Background - Supply Chain Resource Consortium at
  NC State University
• Discuss the need for supply market intelligence
  in world class supply management
• Share some best practices in developing supply
  market intelligence communities

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Partner Companies
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What We Provide

• The SCRC is a resource to enable partner
  companies to achieve supply chain excellence.
• We are a focal point for
• Matching of students to company recruiting needs
• Focused student research projects
• Faculty consulting projects
• Executive education and knowledge management
  initiatives
• Web-based portal for supply chain information
  products

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Commodity Performance in 2004
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Developing a Community ofBusiness and Market
Intelligence
Customers
Product/Service Volume and Mix Forecast
Purchasing
Operations
Sales / Distribution
Component, Option, Service Requirements
Capacity, Pricing Material Forecast
EARLY INDICATORS ARE OFTEN RELIABLE
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Supply Chain Design
Business Market Intelligence
Corporate Strategy
Supply Chain Vision
Corporate Business Plan
Supply Chain Strategy
Program Development
Review Supply Chain Design
SC Policy Buying channels
Business Unit Plans Goals
Supply Chain Stewardship



Supply Chain Functional Goals Plans
SC Results
Integrated Functional Strategies Deployment Compan
y-Wide
Manufacturing Functional Goals Plans
Finance Functional Goals Plans
Business Unit Results
Continuous Improvement
CorporateResults
Relationship Management
Benefits Realization
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Informed Decisions Require Effective Data
Collection Mechanisms
Competitive Market Intelligence
Future Market Requirements
Forecasts and Market Analysis
Product Lifecycle Management

• Order Winners / Qualifiers
• Regional Demand Forecasts
• New Product Introduction
• Regional Market Conditions
• Global Logistics Needs

Sales and Operations Planning
GAP ANALYSIS
Supplier Technology / Capacity Roadmaps
Quarterly Goals and Objectives Review
Commodity Research
Supply Market Intelligence
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Annual Sales and Operations Planning Process
Logistics and Supply Network Forecast
Product or Product Group Demand Forecast
Global and Regional Facility Capabilities
Impact on Market / Technology Strategy?
Impact on Customer?
Market / Technology Filter
Impact on Supply Chain Partners?
Impact on Commodity / Logistics Network Strategy?
Supply / Logistics Mgt Filter
Impact on Shareholders?
Impact on Cash Flow / ROA/ EVA?
Financial Filter
EXECUTABLE SALES AND OPERATION PLAN
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On-going Quarterly Reviews
Sales and Distribution
Sales and Customer Satisfaction Metrics
(from prior slide)
Regional Market or Commodity-Specific SOP Impact
Statements
Executable Sales and Operations Plan
Suppliers
Supplier Scorecard Metrics
Logistics Channel Members
Customer Service Metrics
Balanced Scorecard Dashboard
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Centralized Supply Market Intelligence Team

• Prioritize key areas and products
• Maintain information for key areas of the
  business
• Feed budget process
• Communication internal and external
• Market knowledge including competitive
  benchmarking intelligence on market share /
  positioning
• Run analytical models of supply chain performance
• Coordinate with SCM thought leaders to identify
  key trends and issues

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Process for Building a MI Community
Learn the Basics!
Secondary Research
Collect Field Data
Understand Cost Drivers
Understand Business Environment
Understand Customer Needs
Filter Information into Knowledge Bundles
Desseminate PUSH or PULL to Key Decision Makers
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Market Intelligence in Action

• Jennifer, a sourcing specialist at a global
  manufacturer of consumer and industrial
  packaging, was first assigned to lead a
  commodity group focused on commodity papers in
  1999.
• Although she had taken a Market Research course
  while taking her MBA, this was her first
  experience in developing a commodity strategy.

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Step 1 Learn the Basics

• The first thing I had to do was learn about
  paper! I didnt know a whole lot about it , so I
  had to learn all of the terms and lingo of the
  paper industry. I had to become a paper expert
  I spent a lot of time mucking around learning
  as much as I could about paper.
• Also begin with a current spend analysis, and
  understand what your requirements will be across
  each division.

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Interview Internal SMEs

• One of the best sources of information is your
  own technical people who are familiar with the
  product and the process in which the commodity
  will be used.
• Jennifer noted, We make paper so it was
  natural for me to visit with the paper division
  people internally and ask them for information.
  I started out by building a spiral binder to take
  notes, and filled it up with all kinds of useful
  information, including how to make conversions,
  interpret process data, and lots of other
  important details. This wasnt a problem for me
  - I like to do it. But I also realize that some
  people would like to have it all put together for
  them, and thats why its important to document.
  
• I also do a lot of research online I learn a
  lot from my supplier websites, in addition to
  public websites!

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What is Corrugated

• Corrugated board is a combination of at least
  three sheets of paper, collectively called
  containerboard. The paper layers on the outside
  are known as the liners, or linerboard, while the
  fluted or wave-shaped material in the middle
  layer is called corrugating medium. Corrugated
  board comes in different thicknesses, depending
  on the height of the flutes, and number of flutes
  per foot.

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Step 2 Secondary Research

• Market Share Reporter
• PPI Detailed Reports
• Industry Trade Outlook
• Directory of Corporate Affiliations
• Annual Reports for Various Corporations
• International Paper Directory
• Lockwood Posts Directory of the Pulp, Paper
  Allied Trades

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Mergers and Acquisitions

• With all of the changes in the market, it is more
  important than ever to keep abreast of current
  events
• In paper, Jennifer must keep on top of what mills
  are out there, who is consolidating, and most
  importantly, what mills are shutting down
  temporarily or permanently with the downturn in
  the economy! She regularly checks Paperloop to
  read the newsclips on all of the mills that are
  being bought out, as there is a tremendous amount
  of consolidation in the industry.
• With buyouts, a big threat is a mill closure.
  Jennifer notes that If there is a plant closure
  and the paper you are purchasing happens to be
  made at that plant that will kill you. If you
  are given enough warning, you have enough time to
  run some trials and develop an alternative
  source. Otherwise, you need to buy a years
  worth of supplies and stockpile it.

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Step 3 Understand Cost Drivers

• An important part of developing a commodity
  strategy is to develop an understanding of the
  cost drivers within the targeted commodity area.
  For example, Jennifer notes that in paper a
  paper made from pulp, (not recycled material),
  the average cost breakdown is
• Raw Materials (Pulps, Chemicals, Dyes) 50-60
• Energy 5-10
• Direct Indirect Labor 8-13
• Scrap 5-8
• Other (Overhead, Downtime, etc) 5-10
• Profit 10-20

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Global Sourcing Information

• Information on global supply conditions is
  published by the CIA World Fact book
  (http//www.cia.gov/cia/publications/factbook/inde
  x.html),
• Provides an overview of every country worldwide.
  This is important for purchasing from sources in
  Asia or India gives you lots of information on
  that country, including
• Local conditions
• country economy
• Government
• Political threats,
• Other critical issues that you need to be aware
  of before when sourcing from global suppliers.

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Corrugated Spend by Division
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Corrugated Market - Suppliers

• These 8 companies make up 75 of the 29.4MM ton
  US corrugated market
• Weyerhaeuser and Inland numbers reflect the
  Willamette Gaylord acquisitions, respectively.

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Step 4 Collect Field Data

• An important part of the learning takes place by
  simply visiting the supplier mills, and
  understanding the local conditions that they are
  facing. The plant people are happy to explain to
  you what the raw material cost drivers are, as
  well as how they are changing. It is also a good
  idea to visit several mills. You dont have to
  go to a lot of them but by visiting a handful
  of mills, and speaking to different people, you
  can learn a lot. Dont be afraid to ask a lot of
  questions, even if they seem naïve. If you want
  to learn from the people at the mills, you have
  to be friendly, but it is important to be
  professional. You cant be their buddy. Your
  sales person understands this, and will make
  every attempt to ensure that the relationship is
  professional.

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Dealing with Private Companies

• Financial ratios obtained from Pulp and Paper
  Week can be used and summarized to get a good
  picture of how the company is doing.
• However, private companies are different so you
  have to ask them the right kinds of questions to
  get the answer to the question through indirect
  means.
• You start out by asking How is business? Of
  course, you also need to learn and understand
  what their other businesses are. For example,
  company is a major supplier to us, but by
  comparison to their sales in the food industry,
  we are very small. The major portion of their
  sales is supplying baking sheets to cookie
  companies so when you ask them about how their
  business is going, you should be aware of how the
  cookie business is doing!
• Also, be aware of whether a newer technology
  could potentially put them out of business. If
  the cookie industry is not going well, we could
  lose them as a supplier!

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Step 5 Business Environment

• An understanding of the commodity relative to the
  broader economic and market trends is critical in
  developing a commodity strategy.
• Global trade and supply/demand conditions have a
  major impact on many commodities purchased by
  this company. For example, in paper, a shortage
  of pulp due to government sanctions, natural
  weather patterns, natural phenomena, and
  restrictions of imports are almost surely going
  to cause pulp prices to escalate.
• Similarly, cold weather is driving current
  natural gas inventories to be depleted, which
  will naturally cause prices to escalate.
  Additionally, the war with Iraq is having an
  influence on natural gas prices.

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Example of Economic Predictions

• Halfway through 2004, most economists were
  prepared to dismiss an increase in U.S. consumer
  prices early in the year as a temporary blip
  driven by volatile oil prices. Jim Meil and Arun
  Raha, economists at Eaton Corp. weren't as
  dismissive. The two economists got some of their
  clues from China, where Eaton has been investing
  aggressively.
• What they saw at midyear was a Chinese economy
  that was still growing more briskly than
  authorities wanted, driving up prices of globally
  traded commodities, from steel to nickel to
  copper. They also saw signs that commodity-price
  increases were gradually being passed on by some
  manufacturers to their customers.
• The economists projected that the consumer-price
  index would rise by 3.5 in the 12 months through
  November. Other economists projected that the
  annual change in the index would be 2.9 in
  November.
• "It is an important part of our planning
  process," says Richard Fearon, Eaton's chief
  financial officer. He says the economists helped
  to spot a pickup in demand for heavy trucks in
  2004 that kept Eaton ahead of the curve.

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Step 6 Understand Customer Needs

• Another important market factor is the frequency
  with which your customers re-negotiate contracts.
  
• Jennifer notes that In a lot of our contracts
  our customers may only allow for changes to
  product pricing twice a year. Clearly, we cant
  push our cost increases through to customers
  unless we have aligned supply strategies. If we
  change customer contracts on July 1, then our
  paper prices also have to change on July 1. To
  re-negotiate, we will most often use average
  prices published in Pulp and Paper Week.
  Although the Producer Price Index
  (http//www.bls.gov) also has price increases,
  our experience is that this information tends to
  lag too far, and is not as in-depth for specialty
  papers.

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Step 7 Filter and Process the Information into
Bundles

• Questions Jennifer used to filter the
  information
• Does this fit into this category?
• How up to date is the information?
• How does this information compare to what my
  sources are telling me?
• What are the trends?
• What are the underlying drivers for these
  changes?
• What are the possible worse case scenarios that
  could impact this commodity, and what contingency
  plans should I put in place?

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Step Develop the Strategy and Disseminate the
Information

• Develop a brief presentation in Powerpoint for
  communication with key decision-makers
• Desseminate information via brown bag lunches,
  review meetings, email notices.
• Post on a website ideally customized for each
  individuals desktop.
• All of the information collected is useless
  unless bumped up against the reality of the
  situation within the company applying it.
• Jennifer comments that I was managing 4
  commodities that had not received focused
  attention in the past, which was probably too
  much for someone new to the supply management
  discipline. We have brought more people into
  this commodity group, but with re-assignments,
  they often leave which underscores the need for a
  document detailing everything about the
  commodity.

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• Strategy without tactics is the slowest route to
  victory. Tactics without strategy is the noise
  before defeat.
• - Sun Tzu, c. 500 BC, Chinese military strategist
• I was able to put together a documented focused
  strategy in corrugated but after a year, this
  also needs updating. If you dont know what is
  happening in the market or dont have
  documentation which can be updated relatively
  quickly, it is difficult to manage the commodity
  on an on-going basis.
• Jennifer, Commodity Specialist

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Key Takeaways Building a Market Intelligence
Community

• Management Challenge
• 1. Focus on topics important to the business
  and community members.
• 2. Find a well-respected community member to
  coordinate the community.
• 3. Make sure people have time and
  encouragement to participate.
• 4. Build on the core values of the
  organization.
• Community Challenge
• 5. Get key thought leaders involved.
• 6. Build personal relationships among
  community members.
• 7. Develop an active passionate core group.
• 8. Create forums for thinking together as well
  as systems for sharing information.
• Technical Challenge
• 9. Make it easy to contribute and access the
  communitys knowledge and practices.
• Personal Challenge
• 10. Create real dialogue about cutting edge
  issues.