It’s a classic scenario in food and beverage manufacturing – struggling to co-ordinate the opinions of sales and marketing with manufacturing and supply chain initiatives on what should be produced, when it should be produced, and where it’s needed, says Ian Huntly, CEO of Rifle-Shot Performance Holdings, official representatives of Aptean in South Africa.
The lack of good supply chain co-ordination can lead to frequent changes in production schedules, expedited transfers and shipments in distribution, excessive stock-outs, erratic levels of customer service, lack of visibility into future demand, and inventory in the wrong place and at the wrong time. Worse still many food products have limited shelf life, and overstocking can lead to lots of spoilage and returns, with the subsequent wastage.
With the proliferation of brands and special recipes or endorsements, this further complicates the life of a food producer. For Example two weeks after Hanukkah, many Jewish festive foods would be heavily discounted, if saleable at all.
Moreover, packaging lines remain for many companies the greatest point of failure or stoppages, which is bad news for perishable HACCAP controlled product and the packaging materials.
For many food and beverage companies, these problems are not new. In fact, their root cause typically revolves around a few basic issues – mainly, a lack of shared knowledge about the supply chain planning function, inadequate decision support systems, and unavailable or inconsistent data due to lack of integration to the core business system.
Part of the challenge many food and beverage companies face has to do with a lack of knowledge regarding forecasting and planning techniques. Often, key decision makers have little formal training in the areas of forecasting, inventory planning, production planning, distribution planning or scheduling theory and processes. Many are simply following past practices, which may be outdated, overly simplistic, and yield undesirable outcomes.
Yet knowledge of basic forecasting techniques, combined with an understanding of the forecasting process, is absolutely essential in today’s highly competitive environment. A greater knowledge of forecasting techniques and the systematic process of forecasting can improve forecast accuracy and forecast credibility. This can result in better coordination between organisational units and greater stability in the production plan.
Forecasts at the item/location levels are often the least reliable. Through the process of aggregation a more credible forecast can be generated. So while item/location forecasts may be unreliable, the aggregate forecast at the overall item level is more stable.
Aggregation from the item to the brand level, across a wide range of items, tends to produce a yet more reliable forecast. Through a method of proration, adjustments to the forecast made at the higher brand levels can be prorated down to the item/location level.
This gives distribution a better expectation of shipping requirements, while giving production a better demand number for planning and scheduling at the plant level.
Production plans, based upon intermediate product forecasts, tend to become more stable through this method of forecasting, since forecasts are more credible when built over a longer time horizon. With today’s technology, this process can occur instantaneously at the desktop, and the results can be easily shared throughout the network for use by multiple divisions within the organization.
Another key area in which planners and decision makers should be more proficient is inventory policy. Knowledge of basic inventory policies, and how they interrelate, can benefit planners by deriving an inventory replenishment plan, which achieves stated customer service levels consistent with lower levels of inventory.
Planners should have enough supply chain management understanding to know where to look, what questions to ask and how to interpret the information they are receiving. They don’t need to know all the underlying statistical techniques. But they do need an easy-to-use system that can perform the calculations quickly and generate credible results. The combination of an effective system, along with forecasting and planning know-how, can yield significant results.
Once a credible forecast is developed, planners can immediately plan distribution requirements, inventory levels, allocation of demand to plants (demand planning) and capacity planning (at the plant level).
In order to develop a long-range Master Production Schedule (MPS), the planner must first establish inventory levels for the finished products at each location. An inventory policy system provides essential help with this process. The objective of an inventory policy system is to help the planner establish safety stock levels, reorder points and reorder batch sizes over time, consistent with meeting a target customer service level. The location of the inventory is also considered during this process.
The inventory policy system builds upon the forecast and is the driver for distribution and production planning. It formalises the process of setting stock policy and allows the planner to look at the trade-offs between inventory investment and service levels. Naturally, the aim is to meet the target customer service levels while holding the minimum level of inventory.
Once inventory levels are set at each location, the planner can then decide when and where (assuming multiple plant choices) production should occur. This is the function of the production planning system. The production planning system covers months, weeks and days as it resolves the trade-off between capacity, labour and inventory. By planning the inventory requirements over time in demand forecasting and inventory policy, the planner can see the long- and short-term effect on plant capacity.
Benefits of improved planning using advanced planning and scheduling (APS) techniques include faster planning and re-planning, increased stability of plans, reduced overtime, improved labour utilisation, reduced changes in daily schedules, improved customer service levels, improved morale, greater confidence in the plans, reduced inventory levels, increased plant throughput, and fewer changeovers due to better sequencing.
In most production planning scenarios, the objective is mainly to resolve staffing, materials and capacity issues over weeks and months, rather than minute-by-minute or hour-by-hour – which is traditionally the realm of scheduling. Some modern APS tools, include sophisticated facilities for modelling production, even at the planning level – i.e., batching rules, alternative routing and recipes, changeover logic, sequencing rules, etc. – to ensure the plans produced are both realistic and optimal.
In a typical packaging line, the ability to rapidly re-assign production to another line taking into account allergens, colour sequence, expiry dates and special religious requirements is a massive boon.
Production planning drives longer-range plans from demand forecasting. Shorter-range production plans must also resolve the replenishments of stock for the network of distribution centres, such as regional and local warehouses that ship to customer locations. The system considers each warehouse when deciding what products will be stocked and how much to stock in each location.
Warehouse replenishment is based upon the frequency and volume of shipments from the plant to the warehouse. This function is typically performed by a distribution requirements planning system. Distribution requirements planning systems plan the transportation frequency among the network of distribution centres, while considering the plant capacity established in the production planning system.
By varying the frequency and capacity of transportation, the available to promise – at the outlet – can be simulated. Distribution requirements planning systems help reduce transportation costs; improve customer service levels; reduce stock-outs at distribution locations; improve communication between sales, distribution and production; increase stability of plans; boost confidence and morale; and ensure the right product is at the right place at the right time.
High quality planning is simply not possible if the inventory data is inaccurate or out of date – or if the formulation information is incomplete. The forecasting system requires accurate sales history. The distribution requirements planning system requires accurate inventory balances. The capacity planning system requires meaningful plant capacity and product structure (recipe) information. Such data is generally available in most of the better ERP systems available today.
Because the ERP system will be integrated at several data points, careful consideration must be taken to ensure all data is up to date and accurate. Interfaces become very complex if the underlying ERP system is highly customised and/or spread over multiple servers and databases. Therefore, the best results are usually achieved through an integrated ERP system that covers all the underlying business functions.
In order to make sound tactical and strategic decisions that impact profitability, decision makers must have better control over the planning function. It’s precisely in the area of forward decision-making where companies can have the most impact on improving business results.
To achieve these benefits, however, manufacturers must first invest in supply chain planning education, systems and practices that deliver visibility into the future and therefore empower decision makers.
When one considers the fact that improvements in forecasting can reduce forecast error by 15% – and a system can help increase plant output by 10% while reducing inventory levels by 20% – it’s easier to see why this is such a critical area for business success in today’s highly competitive food and beverage industry.