Re-optimizing the supply chain – there’s a lot of that going on right now.

It seems to be especially pronounced in the food and consumer packaged goods industries, where giants such as ConAgra and Hershey Foods, among many others, have announced major supply chain transformation projects. From my vantage, a couple of themes can be found.

First, there is a startling recognition that the world has changed rather quickly – and that the supply chain has to catch up quickly. For many companies, especially large consumer goods manufacturers, that change doesn’t always come easy - long standing histories, traditions and paradigms - significant physical assets in terms of plants and DCs that serve as financial and psychological barriers to change.

But the pressures of late have become so great that the need to change has become urgent – and paradigms will have to be broken. In the face of that urgency, for example, Hershey last year announced that it would outsource chocolate production as an element of a massive supply chain network reorganization.

Second, companies are also urgently looking to increase agility. Large, asset-heavy networks have a hard time moving fast. That leads to supply chain network moves that increase the level of outsourcing and network designs that are less complex, and hence, less cumbersome (See Supply Chain Complexity Crisis).

Finally, no one is sure what the path will be for fuel and commodity prices – but many companies are doing what they can to take network costs out to offer some level of protection in case those costs continue to head North.

It was in that context that I had the pleasure to speak a few weeks ago with Mark Jamison, Vice President of North America Customer Supply Chain, for Kimberly Clark Corp. (KCC).

In 2004, KCC embarked on what it calls its “supply chain of the future” transformation – which seemed pretty smart then, but as it nears its completion, looks even smarter today. As suggested above, it also forced the re-examination of a number of paradigms, including one that may seem a bit counterintuitive in today’s dynamic supply chain environment.

The project, Jamison said, began in a sense when KCC went to its important customers and asked them what they were looking for, and maybe not surprisingly they said they would like to improve service levels and reduce inventories and cycle times.

While KCC felt it has always had a superior supply chain, it would be “hard to make much additional progress” against those goals with its existing network, Jamison said. “First and foremost we wanted to become more flexible with our supply chain design, and secondly we wanted to realize significant cost savings,” he added.

The existing KCC network included some 70 mostly smaller DCs in the US that were associated with nearby manufacturing plants. A network with 70 DCs is almost by definition complex, and meant, in general, KCC could only send customers a limited percent of its full product line, based on manufacturing plant, in any individual shipment.

Additionally, KCC, like many other companies, also decided it needed to make itself more “demand-driven.”

“That is a real change for us,” Jamison said. “We want to move to an environment where we let inventory get pulled through the supply chain, rather than be pushed.”

That meant redesigning the supply chain “from the shelf back,” not from “manufacturing assets forward.” It also meant getting more integrated with KCC’s retail customers and suppliers to achieve “end-to-end visibility within the supply chain,” Jamison said.

With those objectives in mind, Jamison said the company did some “intense network modeling” – a process that took about nine months. Part of that that time was spent using an informal group of advisors – experts in the industry from several disciplines (academia, logistics service providers, etc.).

“We asked the experts to review our plans and modeling efforts as we went through this,” Jamison said. “We met three or four times with them and asked them to critique our thinking, our modeling work, our ideas – and they gave us pretty good insight that helped us find some of our plans.”

That’s a smart idea I have not seen many companies do.

In parallel to the network design, KCC also began work to improve its visibility to actual consumer demand. That included being an early leader in looking at the potential for RFID, and acquiring some new technology to help better understand and monitor what was happening at the store shelf.

“Our vision, ultimately, is that we want to use POS to completely drive our replenishment production planning process,” Jamison said. The key challenge, he said, is that when you first try to really leverage POS data, “it’s like drinking out of a fire hose,” – and that takes some time to adjust to.

A really fascinating aspect of this to me is the change in KCC’s thinking on “dynamic sourcing.”  For KCC, that meant the ability to assign production to the facility that seemed to offer the best total supply chain cost and service trade-off at the time -  an approach the company had used for years, and which it believed gave it some competitive advantage.

In a time when being more “dynamic” seems almost like a no-brainer, Jamison said their analysis showed that there was a bigger price to pay for that “flexibility” than anyone realized – harking very much to our discussions here on “the supply chain complexity crisis” earlier this summer.

“What we have found is the dynamic sourcing model creates so much variability, and variability is the virus of the supply chain,” Jamison said. “What we didn’t really understand is that actually our fixed sourcing model can drive significant savings because we have taken a lot of that variability and complexity out.”

KCC is now in the final phases of a distribution network that will include the closure of most of the 70 previous DCs, replaced with nine large “mixing center” facilities – the largest - 1.8 million square feet. It was a fast-track project – eight of the mixing centers (managed by third parties) were rolled out in just 18 months.

The benefits, common to those cited by others that have taken this approach, include the ability to achieve more operational leverage from the larger facilities, a reduction in total network inventory, lower total transit times to customers, and reduced transportation expense. From a customer perspective, they can now order the full product line and receive it on a single shipment.

The fixed sourcing has also had another benefit – more predictability means KCC can move a greater volume of freight to more cost and environmentally friendly rail transport. Those moves looked pretty smart in 2004. They look really smart in 2008.

For Wall Street reasons, the company has been a little reticent to share too many specifics on the bottom line benefits of all this, but Jamison did say that KCC saved 2.7 million transportation miles in 2007 over 2006, and 2.4 million gallons of fuel.

It’s a good story – and there is a lot more of them out there, and we bring as many of them as we can to you. (Note: we plan to publish a full transcript of our interview with Mark Jamison next week.)

What if anything strikes you about the KCC story? Are our supply chain networks evolving as fast as they need to keep up with market realities? Does KCC’s decision with regard to dynamic versus static sourcing surprise you? Let us know your thoughts at the Feedback button below.

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