Demand-Driven Transformation at Shell

 

Nick Lynch is the Global Excellence Manager at Shell Lubricants, a division of Shell Global. Located in the United Kingdom (UK), he has more than twelve years of experience in progressive roles driving demand-drive projects for their global supply chain. Nick is a master of influence skills and building cross-functional, horizontal processes.  At the Supply Chain insights Global Summit, Nick shared his story on driving demand-based improvements. In this post we share our take on his journey.

Incrementalism Is Not Enough

Nick strongly believes that it is insufficient to drive supply chain improvement through incrementalism. His take? It is just not enough to do a software upgrade or slowly push continuous improvement projects. He has personally experienced the results from this type of incrementality and believes that the greatest success happens by challenging existing paradigms. Nick does this well.

He did this first by implementing demand sensing from Terra Technology (now E2Open) eight years ago. The implementation of a Demand-Driven Materials Requirements Planning (DDMRP) using Orchestr8 followed in 2017. Nick thinks that the demand driven journey can exploit a combination of demand sensing, demand translation and demand orchestration. The Terra Technology implementation is an example of demand sensing while the DDMRP implementation is an example of demand translation of the probability of demand into materials requirements.

Nick also believes that changing an organization paradigm to move from a supply centric mindset to accept a demand-driven vision is a major change management issue. To our knowledge, Shell is the only company globally to have used both demand sensing and DDMRP capabilities.

Figure 1. Components of a Demand-Driven Journey

Understanding the Lubricant Supply Chain

To understand Nick’s opportunities and challenges, let’s start with some company numbers to give the reader perspective. Shell is the sixth largest company in the world and the largest global provider of lubricants. While the lubricants business is a small sector within the vertically integrated conglomerate of Shell, it is important for growth and margin.

There are 92,000 employees within Shell and 3,000 work in the lubricants business. The lubricant business supply chain acts similarly to a mix-and-pack consumer products supply chain.

Figure 2. Overview of Shell

The lubricants are oils and greases to reduce friction and prevent moving machine parts from grinding. Ubiquitous, motor engines, machines in a factory, or a turbine on a wind farm run easily based on lubrication from companies like Shell.

Shell’s goal is to provide a variety of products to enable usage in multiple applications.  The company sells product globally through both B2B and B2C channels. The Company also has franchised aftermarket services in automotive repair shops, retail outlets, and everything in between. Shell’s current shift to the global supply chain is impacting North America, Latin America, Europe, Middle East, Asia, Russia, and China. The variety of products coupled with channel proliferation results in complexity in the global supply chain.

A Brief History of IT Investments

Shell operates as a single-instance of SAP Enterprise Resource Planning (ERP). Completed in 2012, the ERP project forced the company to standardize organizational design, roles, and metrics. However, the goal of having a single integrated ERP system with the embedded functionality and modules was never achieved. The reason? While the company leadership expected everyone to follow one process, it did not happen. The Company implemented SAP Advanced Planner and Optimizer (APO) including the standard functionality of Demand Planning (DP), Supply Network Planning (SNP), and Production Planning and Detailed Scheduling (PPDS), yet many planners also used Excel. What can often look like compliance in APO could actually be numbers calculated in Excel and posted into the SAP system.

The Demand-Driven Journey Begins

In 2010-2011 Shell partnered with Terra Technology to roll-out demand sensing as a bolt-on to the SAP environment. The implementation was very successful. They saw a steady drop in inventory and reduced working capital by about 50% over the period of 2011-2015.

Figure 3. Impact of Demand Sensing on Inventory Levels

This enabled improvements in Sales and Operations Planning. To drive adoption of S&OP, Nick named it Integrated Business Value (IBV).  He knew Integrated Business Planning (IBP) tools were out there, but he couldn’t sell IBP within the organization. As soon as his sales and finance managers heard the word “Planning,” they switched off resisting change. Nick and his collaborators decided to call it IBV, since everyone in the organization could align on value. By emphasizing value instead of planning, he was able to move the conversations forward. By leveraging demand sensing and the Multi-tier Inventory Optimization (MEIO) platform– using machine learning and some cognitive technologies–from Terra Technology on top of SAP APO, Shell successfully launched an analytics platform initiative to improve the demand signal and reduce safety stock.

Over this period of 2013-2014 Shell made good progress on inventory, but faced unprecedented supply price volatility. When the price of oil dropped from $120 per barrel in 2012 to the staggering $29 per barrel in 2015, everyone in the oil and gas industry felt the impact. It intensified the company’s focus on performance: business benefits, cost platforms, value delivery, and balancing upstream spending, such as digging wells and searching for oil reserves, with money-making downstream activities. In the new business environment, the nine-digit numbers of financial improvements in 2011-2015 from implementing IBV were now not sufficient. The first project was well done, but not sufficient.

The single instance of ERP within the vertically integrated Shell supply chain exacerbated the bullwhip effect causing Shell to suffer from shifts in oil prices to a greater degree than their competitors as shown in Figure 4.

Figure 4. Orbit Chart of Shell versus Industry Averages of the Oil & Gas Sector for the Period of 20016-2016 for Inventory Turns and Operating Margin

Planting the Seeds

Reducing inventory to the lower levels within lubricants drove a subsequent increase in risk. As the number of items being sold grew, they became increasingly more difficult to forecast. A chart from the Terra Technology annual study on demand depicts this relationship. Shown in Figure 5, it is a clear depiction of the implications of complexity.

Figure 5. Trade-offs in the Supply Chain

Consequently, Shell experienced service level hits, resulting in firefighting. Trying to find ways to soften the hits, Nick took a closer look at the product portfolio. The block chart below tracks the relationship between the stable, forecastable product, the variable product, and the unpredictable product.

When Nick analyzed Shell’s sales volume, excess stock, the number of SKUs being sold, and the revenue over a long enough time period, he saw a disturbing picture: the areas for growth in the company’s business were the hardest to forecast. Nick recognized that he was running out of levers to drive improvement. The regions who run the business were finding it harder and harder to stay on the projects. He needed to find new solutions. This led him to consider the adoption of Demand-Driven MRP.

Figure 6. Product Portfolio Analysis

Traditional MRP and the Shift to Adopt DDMRP

Most ERP platforms include traditional transactional-based MRP logic. By definition, in traditional MRP, the forecast is input into supply planning, and integrated into MRP. When MRP runs, the forecast translates into supply chain requirements. In the process, the initial forecast number first becomes a finished goods requirement, then a stock movement one, a production one, and finally a materials requirement – all based on the initial forecast. The problem is that demand should never be represented as an absolute number. Instead, it is a set of probabilities. As demand error increases, a focus on inventory buffers and push/pull decoupling methods increases in importance. Previously, Shell was only looking at safety stock levels and the not form and function of inventory. The adoption of DDMRP enabled the building of buffer inventories to reduce the ‘nervousness’ of the system.

In early 2015, Nick gathered the three senior regional planning managers to discuss the concept of demand-driven planning. Their regional business and personal success were directly tied to whether they succeeded on improving working capital and costs and they were becoming stuck.  The low hanging fruit was all gone.

To prove the concept, in 2016 Shell collaborated with SmartChain, a consultancy experienced at implementing DDMRP. Nick worked with them to provide intensive education of stakeholders, planning managers, general managers, process experts, and SAP specialists on the concept of DDMRP. To prove the concept, Nick decided to run a simulation and tested the North America market. Shown in Figure 7 are the results of the simulation. The red line of DDMRP was a substantial improvement to traditional MRP output shown as the blue line.

Figure 7. North America Simulation Output

DDMRP logic uses order flow sensing to build buffer strategies and as a result results in better results with less system nervousness. As a result, the system still experiences variations, but with less volatility and noise. The blue historical profiles clearly demonstrate the effect of the bullwhip and system nervousness.

First Results:

The simulation in North America projected a 35% drop in finished product working capital (the difference between the blue line and the red line in Figure 7). In addition, the simulation showed a 10-15% reduction in additive (active-ingredient) inventory requirements to support production. To gain organizational support to drive change, Nick ran two more simulations: one in Hong Kong and a grease plant in Belgium. This was to show the power of DDMRP with regional differences. Hong Kong has a lot of city transport, lengthy lead times, containerized products, and is much more fragmented when compared to the North American market. The two simulations were different flows, but both demonstrated similar benefits – about a 15%-reduction in finished goods in Hong Kong and a 20%-reduction in finished goods in Belgium.

To move forward, Nick needed a technology solution to drive the results. SAP was not in the game at this point and there was no way Nick would move forward with MS Excel solutions. Requirements included Software as a Service (SAAS), be globally scalable, and be accredited and certified by the Demand Driven Institute to ensure it was truly demand-sensing, demand-driven, and would perform to that documented standard. Shell selected Orchestr8 as their strategic partner to convert the simulations they had completed into a reality in the supply chain. The project was a two-digit investment for a three-digit payback, a quite lucrative one. The major challenge was change management.

Benefits:

By early 2017, after about 6 months of back-and-forth peer reviews, senior VP and EVP signed the investment proposal. The pitch was all business-case driven. Nick didn’t use buzzwords such as digital or cloud supply chain, but sold the project saying “Would you like saving X hundred million dollars in your supply chain?” The simulation results–the ability to see the results–made the conversation real. Talking numbers worked.

Nick formed a tight-knit implementation group with business users, and technologists used the backbone of SAP ERP to source master data and transactional flows from SAP and into Orchestr8. The planners would then drive all replenishment planning (for make, move or buy) directly in Orchestr8.The pilot went live in October 2017 in Spain, Italy, and Turkey and included the inbound materials planning managed by the planning service center in Krakow, Poland. To mitigate transition risks and validate target results, the team tested live numbers in parallel to the real platform. This way, they could be confident that going live wasn’t going to crash the business. The results accelerated global adoption.

Some benefits of switching to DDMRP are absolutely obvious, such as immediate impact on working capital and inventory levels. Others become apparent overtime. Change in logistics cost or production cost based on implementation, for example, accumulates with time.

The chart in Figure 8 demonstrates the full benefits.

Figure 8. Project Benefits Over Time

Benefits that are not as easy to quantify, but are of immense importance, include noise and waste reduction, supply chain stability, increased capacity. Country by country, people in planning roles are often more stressed and work longer hours, because of the necessity to constantly put out fires as supply chains become more complex and difficult to forecast: the lead times are shorter, while the expected inventory safety levels are lower. With noise out of the system – firefighting, urgent orders, stock out alerts, expediting expenses –a very tangible difference gained in the planners’ and logistics’ productivity. Another observable result, similar to that noted in the British Telecom’s case, is a noticeable climb in service levels. Shell was no longer loading up their production facility and all of the material purchases that were going to come in based on that, with all the products that might sell based on the questionable forecast. By loading the production capability with orders that were actually taking place based on real demand instead of orders based on guesswork, Shell freed up production capacity and increased agility. Waste reduction came from lowering excess stock levels and, consequently, reducing stock write-offs.

Another outcome, not fully anticipated, has been reaching an unprecedented level of process visibility and transparency. Historically, auditing order data in the ERP system was difficult, because only the current snapshot was available at a given point in time. It was unclear what the numbers should have been or who raised them and by what amount. After the implementation of Orchestr8, tracing production and supply orders and spot disturbing tendencies, such as overstocking became easier. The new architecture improved visibility between production planning and production operations more transparent and enabling improvement in process discipline and effectiveness in that area.

Current State:

With the company’s global and regional programs in place, Shell actively deployed the platform in the Americas, Europe, and Asia. By the time the company got to Egyptian implementation, they had enough successful deployments on their hands that they mastered up the courage to skip the APO. Shell went from no ERP system straight to the full DDMRP deployment, thus cutting the implementation time by about 6 months. The company went live in the Philippines in July 2018 and in France in September 2018, with North America and Russia following in October 2018, thus working their way around the global supply chain network. Because it’s a single global instance of SAP transactional backbone single-cloud instance of planning solution, the implementation methodology is identical for every location.

The regions are responsible for deployment. The Shell Global Supply Chain Team equips the regions with the methodology, the step-by-step process, and a consultant team.

 

Case Study Key Takeaways:

Incrementality is not enough.  Nick, with twenty years of experience, had to change his paradigm and that of his organization to drive business results.

  • Sell Projects by Speaking the Language of Business. Nick is a master at influence management. He sold the project by speaking the language of the business. Instead of drop-parachuting into a department or a leadership team and giving them tech-speak and acronyms, Nick sold the benefit of a demand-driven journey.
  • Drive Change Management Through Education. In this journey, the unlearn-learn process was paramount. By February 2019, more than 200 employees completed DDMRP training. The regional planning managers bought into the process so much, they put their entire department into the training to ensure that the entire team was on the same page.
  • Ask for Help. 80% of the work in this effort could be outsourced –process design, and configuration. Nick formed a broad cross-functional coalition and empowered the group to drive change. Partnering was critical to success.

 

Our Take:

Nick is at the forefront of defining and driving demand-based capabilities at Shell. By building a convincing, numbers-based business case, backing it with real-life data, and aligning the outcomes of digitalization with the managers’ motivation, Nick was able to persuade a large, and conservative company to invest in demand-driven transformation. His secret to successful implementation was building cross-functional, horizontal processes and actively investing in change management.

Thanks to Nick’s leadership, Shell is currently the only company that has combined demand sensing with DDMRP capabilities on a global scale.

Other Case Studies on Supply Chain Leadership

For additional insights on driving innovation and supply chain leadership, check out these case studies. Each is a different journey with a focus on improving agility and flexibility:

Campbell’s Soup Improves Flexibility

Clorox

Colgate

L’Oreal

Rockwell Automation

Sandisk

Lora Cecere

Author Lora Cecere

Lora Cecere is the Supply Chain Shaman. A shaman interprets and connects the evolving world to a group of followers. Lora does this for supply chain. As the founder of Supply Chain Insights and the author of Supply Chain Shaman, Lora travels the world to chart the course of supply chain practices and disruptive technologies. Her blog focuses on the use of enterprise applications to drive supply chain excellence.

More posts by Lora Cecere

Join the discussion One Comment

  • CashChain says:

    Lora and Nick fantastic case study ! What made this mistake even more difficult is execution with in an integrated oil firm is generally harder as not as market driven as many other industries. Really like the adept efforts to name and promote the program around value and avoid buzz words of vendors !

    What was the starting now plan / re-plan frequency ? Monthly ? weekly ? ondemand

    Also, would be interested to Nick’s view of how much he had to re-educate his constituents of what to expect from ERP / SAP ?
    Jon
    http://www.DCRAsolutions.com

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