Competing Globally-Predicting Demand and Delivering Optimally
Written By: Predrag Jakovljevic
Published On: November 6 2006
Becoming Globally Competitive
To benefit from globalization (or to meet its threat), a food manufacturer must, above all, be prepared. To sell into new markets, the manufacturer needs to be a better partner, and collaborate with customers who have different needs from its traditional customers. The midsized food manufacturer in particular has to be able to deal with the increased complexity of a global supply chain. Product development must look at non-local issues such as banned ingredients and local label requirements.
Part Six of the series Food and Beverage "Delights."
To benefit from global sourcing, the midsized manufacturer requires excellent control over quality and shelf life, and planning systems that are both accurate and proactive. With dynamic recipe adjustment capabilities, some software applications can help manufacturers minimize the effects of variability throughout their manufacturing process and supply chain, while meeting compliance and specification constraints. In the food industry, variability can take the form of, for example, the Brix factor for sugarcane producers, or other factors of seasonal variability. Shelf life planning capabilities should also enable optimized production and inventory usage to reduce the expiration of materials and finished goods, and to maximize the shelf life of shipped products.
Costing systems become even more important in the context of globalization. We find that most midsized food manufacturers fail to have competitive cost tools. Without the right costing tools, pricing and cost reduction programs are less than effective. For global markets, the manufacturers need systems that can help them rationalize formulas and raw materials worldwide, and optimize costs of local raw materials in local currencies.
The fast-moving, short life cycle characteristics of consumer goods products make for a very complex supply chain. No matter how complex the manufacturing process, the foremost supply chain challenge is developing a good prediction of customer demand—that is, knowing what customers are going to buy, how much they will buy, and where and when they will buy it. Food companies must account for the impact of events and market conditions, and understand demand patterns to accurately forecast demand down to lowest levels. Some applications integrate "best fit" forecasts based on historical demand, with user-anticipated differences, whereby the system continually improves each forecast by learning from the most recent period of demand, measuring forecast error, and highlighting exceptions. Demand planning applications also often have to support attribute-based forecasting, incorporating compliance and product platform information. As a result, operations can be optimized while minimizing the cost of inventories, and ensuring customer service levels.
For more information, see earlier notes on the food and beverage industry:
A reliable global demand plan provides the foundation for sales and operations planning (S&OP), which should help consumer goods companies better align daily operational activities with strategic corporate objectives. It should also help them to more effectively balance supply and demand, and make better-informed decisions that impact both the top and bottom lines. Company leaders must create a forum (in which people formulate strategies of balancing demand and supply) that entails all factors and participants in the enterprise, integrates key data, and provides a strong framework for improved business processes (see Sales and Operations Planning).
The APICS Dictionary (eleventh edition) defines S&OP as a process of developing tactical plans to provide management with the ability to strategically direct business to achieve competitive advantage on a continuous basis, by integrating customer-focused marketing plans for new and existing products with the management of the supply chain. The process brings together all the plans for the business (sales, marketing, development, manufacturing, sourcing, and finance) into one integrated set of plans. It is performed at least once a month and is reviewed by management at an aggregate (product family) level. The process must reconcile all supply, demand, and new product plans at both the detail and aggregate levels, and tie to the business plan. It is the definitive statement of the company's plans for the near-to-intermediate term, covering a horizon sufficient to plan for resources and to support the annual business planning process. Executed properly, the S&OP process links the strategic plans for the business with its execution, and reviews performance measurements for continuous improvement.
Food manufacturers are looking for astute systems that drive forward planning and deal with order expectations. These systems should be able to manage forecasts from a number of sources (which might be customer- or product-specific, or for pre-production runs, or for interplant or company demand). These systems should also allow the creation of a reliable forecast at a lower level in the product structure than the top-level (finished goods) item. This lower-level forecast can be consumed by production (as with all forecasts), and its purpose is to support the volume manufacture of products where a wide variety of finished options is available, based on a standard base product. In theory, the end product is made specifically to customer order—and the possible variations at the top-level saleable item are so great that forecasting at this level will always be very inaccurate.
By forecasting at a lower level that is probably common across a variety of products, a more predictable forecast can be maintained, and manufacturing can go according to customer specific call-offs. When this is integrated into product design and manufacturing planning, it is called decoupled manufacturing or mass customization. For example, a manufacturer of cosmetic face creams may forecast total demand for a face cream regardless of how it will be packaged; the face cream will thus be made in bulk, and its packaging will be driven by specific customer orders.
All this is to say that across the manufacturing sector in general, companies are realizing that the demands of customers for rapid delivery responses, combined with corresponding requirements for greater variation of products (whether in terms of color, pack size, or specification) can only be met by manufacturing in separate stages. While this can be done easily enough (if one is prepared to stock vast quantities of the partially finished product, and simply configure, finish, pack, and so on, when the customer places the order), this is hardly a practical option, not least because of inventory handling and cost issues. Supporting decoupled manufacturing is rather about forecasting more accurately at a common intermediate or part-finished level (as with face cream), and being able to finish—and therefore customize—to a particular order.
The second challenge, assuming the company first has a good demand plan, is optimally manufacturing the right product at the right time, and optimally getting the products to the proper distribution point to meet customer service requirements—always while considering cost. To that end, during the product launch, enterprise resource planning (ERP) and supply chain management (SCM) solutions have to continually update compliance-based information, while advanced planning applications must take advantage of approved alternate materials by recipe and compliance risks to speed quality production. The aim of specialized inventory optimization products is to enable clients to reduce investment in stock, while at the same time maintaining or improving customer service levels. Managing risk is about managing the cost of maintaining unnecessarily high inventory levels against the risk of running out of stock at the crucial point when a customer actually wants something (the "moment of truth"). For more information, see Inventory Planning and Optimization: Extending Your ERP System.
It is well known that in an ideal world, one would hold exactly the amount of inventory required to never be out of stock, for anything. However, real life is obviously a far cry far from this, as there are both financial and physical constraints. Some products have a shelf life, or new products might flood into the market. And there are a host of other reasons for having to strike a balance between anticipated demand and expected supply. Supply chains are indisputably complicated, and one can never know all there is to know. The only certainty is that supply chain efficiency depends on minimum buffer stocks, integrated processes, efficient use of resources, and shorter lead times. Nonetheless, experience shows that companies either struggle with a surplus of reliance on local knowledge, chance-taking, and effective fire-fighting; or else spend time and effort developing their own supporting systems (usually glorified spreadsheets) to help to better manage inventory levels.
To support a demand-driven supply chain, consumer goods companies must employ performance-driven supply chain practices, such as continuous business monitoring and proactive alert notification, that give them complete global visibility across their supply networks. This should help adapt to changes in demand, and to adjust accordingly based on real-time insight into worldwide operations (see Using Visibility to Manage Supply Chain Uncertainty). Yield planning and analysis capabilities must allow manufacturers to establish standard benchmarks and identify out-of-tolerance conditions. When thresholds are exceeded, users should receive early notifications so that problems can be corrected quickly while the impact can be minimized.
Near real-time visibility of food and beverage inventories in the supply chain can also provide process improvement opportunities. Using real-time reporting and alerting mechanisms, food and drink suppliers can optimize their distribution processes by being proactive instead of reactive in addressing logistical issues and managing the flow of products and orders. For example, by monitoring lot and date tracking, suppliers can identify when a perishable good is nearing its expiration date, and can send an alert to notify marketing or sales departments to run a special promotion on that product, to hopefully incite orders and avoid inventory expiration and spoilage.
Furthermore, well-devised advanced scheduling applications must let manufacturers reduce changeover costs, downtime, and the risk of cross-contamination, with clear visibility into equipment and material compliance. With integrated specification-matching from product "cradle to grave," quality and compliance should become closed loop processes that eliminate errors and mitigate compliance risks. Namely, in the execution phase, such solutions should feature specification-matching that is compliance-aware, whereas quality, quantity, and price variances should also be considered, as well as allergen, genetically modified organism (GMO) concerns, religious certification, and other requirements to ensure compliant lots are allocated, picked, and consumed in batches. This way, products are made right the first time, and food manufacturers can eliminate non-value-added tasks, costs, and ineffective use of capacity. Also, this way they can produce forecasts and production plans that not only are optimized for cost, material usage, and throughput, but also for product quality and compliance.
Reducing Costs in the Warehouse
As for managing operational costs, high product throughput in warehousing management dictates that there is a high demand on labor resources, and productivity levels are thus crucial to the performance of any warehousing operation. If the "direct" operational activities that go on within a distribution center (DC) (such as receiving, picking, packing, and shipping) are the productive aspects of a warehousing operation, typically accounting for approximately 40 per cent of total operational activity, it follows that "indirect" or non-productive activity (such as travel time, administration, or ancillary tasks such as maintenance and cleaning) typically account for approximately 60 per cent of total operational activity. In budgetary terms, Manhattan Associates believes that the labor component of this 60 percent is probably one-half, and so it follows that 30 percent of the total operational budget is being spent on labor resources carrying out non-productive tasks.
To that end, applications such as labor management, slotting optimization, and performance management can help food companies with savings in the way they deploy their resources. With a labor management solution, companies can record all activities while an employee is on the clock; monitor performance levels in real time; get visibility to fair performance targets; view workload across functional areas and zones; measure actual productivity against expected performance; calculate pay-for-performance data; and run off reports on productivity based on warehouse role. On the other hand, slotting optimization should improve DC velocity by determining the most beneficial and ergonomically correct placement of pick line items. "Fast movers" are dynamically placed near the shipping dock, which bypasses the put-away process and helps improve overall order throughput. Another type of optimized slotting is when the slotting system dynamically places like products together on the pick line, which cuts down on travel time in the DC. This achieves quickness in the picking process, and a reduction in labor effort. Optimizing slotting also ensures that inventory placement meets weight or temperature constraints to prevent damaged goods and minimize worker compensation claims. With thousands of items in a warehouse, food suppliers should not underestimate the value of slotting to maximize labor productivity and increase order throughput, while also reducing worker's compensation claims.
There are other examples of how food distributors can save on time and costs by implementing automated, fully integrated warehouse management systems (WMS), from the likes of IBS, Manhattan Associates, RedPrairie, Catalyst International, Infor/SSA Global, etc.:
- Cold store economics dictate that it is cheaper to store frozen products in bulk containers than to store them pre-packaged. A WMS linked to inventory forecasting and customer safety stock levels should thus enable better planning for the processing and pre-packaging of bulk produce, while the planning algorithms can also take account of run size, packaging line setup, and switching costs.
- Many cold stores optimize space utilization by using mobile racks and carriages that open for access, and then close to save space. If the WMS orders the programmable logic controller (PLC) for the mobile racks to open an aisle before a forklift's arrival, valuable waiting time can be saved (it can take up to sixty seconds to open an aisle). When a forklift enters and leaves an aisle, it can be reported to the WMS, while for safety and performance reasons, the WMS can ensure that only one forklift is directed to a dock or aisle combination at a time.
- Random location management has considerable benefits over fixed locations for seasonal products, which are stored for as long as twelve months. As produce is shipped, fixed locations become empty, and wasted space in a cold store is costly. A WMS can maximize the fill of random locations by operating on a "double run," or pick-and-replace principle, which means that once a rack is opened to remove a pallet for dispatch, it is immediately replaced with a new pallet from receiving, or from the production line. This requires a WMS that supports radio frequency (RF) scheduling and that is interfaced to the PLC controls.
- To load delivery vehicles more efficiently, the sequence in which pallets are picked to arrive at the staging areas should be in strict delivery unloading sequence. As forklifts load the pallets into the delivery vehicle, it is also useful to have a visual graphic image of the loading process, color-coded to ensure that the pallets have been loaded in the right sequence, and that nothing has been left in the staging area.
About the Authors
Predrag Jakovljevic is a principal analyst with Technology Evaluation Centers (TEC), with a focus on the enterprise applications market. He has nearly twenty years of manufacturing industry experience, including several years as a power user of IT/ERP and related applications, as well as being a consultant/implementer and market analyst. He holds a bachelor's degree in mechanical engineering from the University of Belgrade (Serbia [the former Yugoslavia]), and has also been certified in production and inventory management (CPIM) and integrated resources management (CIRM) by APICS.
Olin Thompson is Lawson's vice-president of industry strategy. He has over twenty-five years of experience as an executive in the software industry, and has been called the "father of process ERP." Thompson is a frequent author and award-winning speaker on such topics as gaining value from ERP, supply chain planning (SCP), e-commerce, and the impact of technology on industry. He can be reached at firstname.lastname@example.org.