In what I think was probably my favorite session of the day, Anna Ross from New Zealand’s Fonterra Cooperative Group Ltd. provided an excellent overview of her company’s operations and the many supply chain issues, challenges, and risks that Fonterra faces every day when competing in global markets.

True to the title of her presentation, Anna began with a quite extraordinary list of facts about her employer. Her first slide, and the subsequent statistics, made it quite clear that Fonterra is by no means a jack-of-all-trades kind of company. They are quite emphatically master of one trade: Dairy. Not only is Fonterra New Zealand’s largest company, they alone account for 20% of the country’s exports and 7% of New Zealand’s global GDP. They are responsible for over 1/3rd of all global dairy trade and are the world’s largest exporter.

Among the company’s suppliers are more than 4 million cows from 85 different New Zealand farms. Fonterra supplies over 5,000 customers and millions of consumers worldwide. Probably their most well-known brand is Anchor butter (which my mum’s been spreading on her toast since as long as I can remember, so it must be good stuff!)

I, for one, could not have imagined the insanely complex logistical issues that Fonterra must tackle every day to ensure that my mum can find her favorite brand of butter on the shelf at her local supermarket. Fortunately, Fonterra is an avid user of Logic Tools’ LogicNetPlus which has enabled them to capture and manage the complexity and risk inherent in their global operations.

To start with, it takes about 5-6 weeks for Fonterra to ship its products to their main target markets. Add to that the fact that many of Fonterra’s products have a limited shelf life, and that month-by-month production volumes can vary considerably depending on the season. The company has 24 plants, 130 warehouses, and roughly 535 million different combinations of parameters affecting their supply chain network.

Fortunately, LogicNetPlus is able to handle this kind of complexity on a day-to-day basis without even flinching. It provides Fonterra with a holistic view of their supply chain, and also serves as a tool for long range strategic supply chain planning decisions. For example, Fonterra uses LogicNetPlus to plan new warehouse development projects (where should it be located? How big should it be? What mix of products should we store there?)

LogicNetPlus also helps Fonterra with optimal product mix decisions in their production plants, and helps them reduce the cost of third party storage and distribution centers. And if that weren’t enough, Fonterra has also integrated their supplier’s own supply chains into their model, further increasing the potential for global cost savings.

Food miles is a key concept for Fonterra. Food miles can be used as a measure of carbon effectiveness by measuring how long it takes for the product to arrive at the customer. One of Fonterra’s main markets is England, where around 41% of consumers are apparently purchasing products based on how carbon efficient they are, so Fonterra is keen to appear as green and lean as possible.

Geopolitical risks can also affect Fonterra’s supply or demand which can cause huge storage bottlenecks if delivery is disrupted to certain key markets.

Fonterra also faces climate-related risks. Several years of drought in New Zealand have pushed up prices and competitive pressures to the point where other companies are prepared to “poach” some of Fonterra’s farmers, therefore affecting their milk supply.

When thinking of risk, many people think of major catastrophes such as a warehouse catching fire, ships sinking, and so on. However, Anna explained that a lot of the risk they must deal with on a daily basis, is actually internal - and in particular IT-related risk.

Fonterra uses an e-documentation system to process exports (they export 95% of what they produce). Since they are looking to upgrade this system, they used LogicNetPlus to simulate different scenarios and determine whether their network could cope if for some reason the migration failed and they were without access to their e-documentation system. It turns out that their local storage and distribution network probably couldn’t cope, so they were able to take the necessary steps to mitigate the risk and keep costs to an absolute minimum if things did go wrong.

Food miles is just one component of the entire supply chain, though. Just because Anchor butter has to be shipped frozen all the way from New Zealand doesn’t necessarily mean that it is less carbon efficient than locally-produced brands. Many UK farmers, for example, house their cows indoors and therefore require heating and lighting. In New Zealand, cows roam free in fields - which, unsurprisingly, generates far less CO2.

Fonterra is piloting an RFID tracking system for their shipments and gets data direct from their shipping partners so that they can track precisely where their deliveries are at any moment in time.

New Zealand has a reputation as a green and pleasant land and the PR and image value of green logistics is a vital factor that explains Fonterra’s obsession with green logistics issues.

Fonterra’s global supply chain model, which manages over 535 million parameters, takes about 10 hours to run. For the sake of efficiency, Fonterra breaks down this global model into several smaller models. For example, they distinguish between ambient and temperature-controlled stock, and also by region. Their ambient stock model, for example, takes about 2 hours to run. Their China model takes 1 hour, and their US model takes about 40 minutes.

Some companies use LogicNetPlus as a one-time process optimization tool, but Fonterra uses it on an ongoing month-by-month basis. They have found it invaluable in managing their day-to-day business, as well as planning both their short and long term strategies for growth.

Thanks Anna for introducing me to the thrills and spills of global supply chain management!

In this session, Andrew Reese hosted a discussion with Rob Wehrman from 3M, Anna Ross from Fonterra and Derek Nelson and David Simchi-Levi from ILOG. The session explored strategies for handling complex supply chain networks and touched on challenges like green logistics, risk management and rising transportation costs.

The session provided real insight into the complexity inherent in manufacturing and shipping on a global scale. Below are a few snippets from the discussion…

Fonterra: We use local offices (”mini-Fonterras”) around the world staffed with people with local knowledge to reduce the complexity of managing our global supply chain.

3M: Our biggest issue is data availability. Global infrastructures are expensive to manage and hard to standardize. You probably wouldn’t think of Post It Notes as complex, for example, but with over 300 colors (including at least 15 different shades of yellow!) to manufacture and deliver to markets worldwide, the humble Post It note is perhaps more complex than you might think!

Fonterra: We involve people in the modeling of the supply chain and explain to them how the data is processed. People are less likely to trust a new kid on the block who comes in with a fancy new solution that changes the way they’ve been managing their warehouse inventory for the last 20 years. Involving employees in the process helps everyone learn more about the product and fosters employee buy-in for improving these processes.

3M: Reducing complexity should not be an objective in itself, though. It’s likely that you can actually make more money by making your supply chain more complex. At the same time, there’s a certain amount of chaos built into the system. If left unchecked, a supply chain will always tend towards complexity because of the push towards local solutions that optimize local processes but fail to take into account the bigger picture.

Fonterra: We thrive on complexity. Staying on top of that supply chain is invigorating. If your supply chain isn’t complex, then you probably don’t have a very good supply chain or a competitive business model. Tools like those from ILOG are making the challenge of managing that increasing complexity easier and easier, so don’t be afraid of complexity. If you have the right tools to manage that complexity, you stand to generate considerable competitive advantage.

3M: Another import issue to take into account is the skill sets of your staff. Very few projects fail because of technical issues. People in your team who are able to identify the real problems behind your supply chain inefficiencies are invaluable. They need to be able to interpret your SCM data intelligently and use the system to identify appropriate adjustments. If your system reveals inefficiencies in shipping semi-finished goods between two different plants, it might suggest investing 60 million dollars or more to consolidate the production into a single plant to improve efficiency. However, if the underlying problem is in fact a simple issue of insufficient stock level management in one of the plants, you could save yourself a whole lot of money by digging a little deeper into the problem. Your staff need to be able to identify those failure modes and go beyond the surface data to investigate ways to improve the system in the most intelligent way.

Fonterra: We have a mix of older, more experienced supply chain planners and younger graduates with more up to date operations research and supply chain theor. The challenge is getting these two groups to work together effectively. We need to stay aware of new techniques, but also temper the enthusiasm of the younger generation with the reality of what is possible.

David Simchi-Levi: 10-15 years ago, supply chain management systems were designed for leading experts. These days they are aimed at business level users. It’s like purchasing a car. You don’t need to be an experienced mechanic to purchase a car these days. You’re concerned about issues of usability and practicality for your needs, but you don’t want to have to get under the hood with your oil can and wrench every time you want to go for a drive.

Fonterra: Green logistics is a huge issue for Fonterra. Every project we embark upon must include a carbon emissions impact study or it doesn’t get funded. Find out more in my session later today.

3M: One of our corporate values is to minimize our impact on the environment. We’ve not yet implemented carbon footprint evaluation into our supply chain, but we are following progress in this area carefully.

David Reese: To sum up, complexity is increasing. It’s unavoidable. Deal with it. When handled effectively, complexity can bring you significant competitive advantage. Think global when optimizing your supply chain activities. Technology itself can create unnecessary complexity if not managed correctly. Ensure you involve cross-functional and interdisciplinary teams in your SCM decisions.