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FeedsHome: Issue 1 2010 › Cover Story › Synchronicity in motion
Synchronicity in motion
29/01/2010 | Channel: Business
Since many supply chains are struggling to react to a highly volatile market, Filippo Focacci and David Simchi-Levi highlight how companies could impede being caught short of stock when the economy bounces back
The current economic instability has left companies’ supply chains in a fragile position. Suppliers are facing tough times and many are responding with a knee jerk reaction of destocking now and facing the consequences later. However this strategy is detrimental to the health of supply chains, as it will leave producers short when the economy inevitably rebounds. In order to weather the storm, suppliers need to think beyond the immediate short-term needs and instead focus on key improvement programmes to increase flexibility in their manufacturing and supply chain processes.
The close of 2008 saw unprecedented destocking within supply chains as companies were keen to maximise the cash on their balance sheets and avoid the potential need to write down losses on inventory resulting from declining product value during end of year accounting. Worryingly, this trend looks set to continue in 2009 across most supply pipelines, as raw material prices plummet and companies wait longer to buy products that are getting cheaper in order to maintain profit margins. The knock-on effect of these actions across the supply chain is that many small or weak suppliers may fail as they are unable to take the resulting hit in profits from a sudden dip in demand.
In the current economic environment, companies face unprecedented volatility, and unlike in standard times where forecast accuracy is the main challenge, today companies must also deal with enormous fluctuations in fuel and commodity prices. Nothing exemplifies this more than the massive fluctuations in oil price, with prices hitting $147 per barrel in July and returning to $50 in December 2008. As a result companies are feeling the need for increased flexibility to adapt to these changes now more than ever before.
At the same time, supply chain executives face significant pressure to reduce cost and cut working capital through inventory reduction. While reducing inventory is always possible, the challenge is to reduce cost and cut working capital while maintaining or increasing service.
Before taking the decision to destock, suppliers need to carefully consider the negative impact this may have on their business. Firstly, a reduction in inventory that is not accompanied by a better synchronisation between demand and supply may generate an increase in expedite orders and hence an increase in manufacturing and transportation costs. Secondly, a general and poorly thought-through reduction in working capital will prevent companies from taking advantage of the rebound when it occurs and could impact market share.
In response to these challenges, what can the firm do to better match supply and demand and improve supply chain performance? Building flexibility in the manufacturing and supply chain strategy is critical if companies are to reduce costs and working capital and better respond to market changes. One way to achieve flexibility is by holistically analysing the supply chain and identifying the appropriate level of capacity redundancy that should be built into the network without increasing costs. This is typically done using strategic network design technology.
To illustrate this idea, consider the example provided in David Simchi-Levi, P Kaminsky and E Simchi-Levi’s Designing and Managing the Supply Chain: Concepts, Strategies and Case Studies – McGraw-Hill, IL, third edition (2007) – where executives in a Consumer Packaged Good (CPG) manufacturing company with a global network of 40 plants were looking for way to cut cost in their supply chain. Initial analysis suggested that closing 17 facilities and keeping 23 would save the firm about $40 million annually. The problem was that the resulting network was not flexible and thus not able to respond to customer demand if unexpected disruptions occur. Fortunately, a total supply chain cost analysis suggests that closing only ten plants and not 17 plants would have a small impact on cost savings while providing the supply chain with ample amount of redundancy.
A second way to achieve flexibility in the supply chain is by effectively implementing push-pull supply chain strategies. Here the focus is on positioning inventory effectively in the supply chain by identifying which facility should keep inventory (push) and which should not (pull). This is done using a multi-echelon inventory optimisation technology that is capable of modeling the entire network including raw material buffers, plants producing intermediate products and finished goods and distributions centres and warehouses. This type of technology, together with the appropriate business process, allows companies to significantly cut inventory while maintaining or increasing service levels to their customers.
Similar challenges and opportunities can be identified in manufacturing. Typically large amounts of inventories are kept at warehouses at the manufacturing site. Part of this inventory is cycle stock and is due to batch production where high changeover costs push manufacturers to produce large batches, creating high inventory levels. But part of this inventory is safety stock that enables manufacturers to manage demand and manufacturing variability. Reducing this type of inventory is a must in the current economic climate, and provides a strong competitive advantage for manufacturers where shelf life or product obsolescence is a significant business risk.
Simple formulas exist to compute the minimal inventory to guarantee a given service level, or a given fill rate. Most companies look for tradeoffs between changeover costs, inventory costs and service levels in two separate steps. In the first step, companies compute safety stock levels, while, in the second step, they compute a production plan by applying the safety stock levels ‘constraints’ for the plan. The safety stock levels are then fed into a production planning system that computes the production frequency of every product. However, these frequencies may be far from the initial assumptions and therefore invalidate the stock targets. This results in the maintenance of incorrect amounts of inventory causing both unnecessarily high inventory levels and stock-outs, which are both costly and detrimental to service levels.
The problem with this approach is the sequential process by first determining safety stock and then identifying a production plan. A more appropriate approach is to consider production plans and safety stock simultaneously. With such an approach, safety 11stock is based on demand variability in actual time until the next production event. This dynamic safety stock approach works on the assumption that the closer a manufacturer is to the next production event, the lower the level of safety stock. Since safety stock is determined at the same time the next production event is computed, this eliminates the need to apply average production cycle time. As a result, production variability only needs to be considered in relation to the probability of unexpected events in manufacturing (for example a machine breakdown).
By simultaneously optimising safety stock and production plans, manufacturers are able to trigger a positive cycle whereby the reduction of safety stocks imposes fewer constraints on the inventory levels, which consequently enables the optimisation of lot sizes and changeovers. Fewer changeovers increase operational efficiency and create capacity buffers that can be used either to increase throughput or to reduce the impact of manufacturing variability.
Preliminary analysis comparing the traditional approach with the more dynamic shows one a 20 to 25 per cent reduction in inventory, a 20 to 30 per cent reduction in changeovers and a five to ten per cent improvement in operational efficiency. All these improvements are obtained with no impact on service levels.
This approach to managing inventory should be accompanied by a better synchronisation between manufacturing, supply chain and demand. This allows manufacturers to significantly reduce the inventory positioned at the plant warehouse and reduce waste and manufacturing costs, while improving service levels.
Better synchronisation can be achieved by implementing improved production planning and detailed scheduling systems. Planning and scheduling has traditionally been considered as two separate tasks. Typically, a master production schedule (planning) is generated by supply chain planners and communicated to manufacturing schedulers responsible for generating a finite schedule for the shop floor. A clear separation between Master Production Scheduling (MPS) and Finite Scheduling (FS) has its merits, however it also generates efficiency problems and, worse, the inability to make the right decisions quickly. Both these factors create critical problems during an economic downturn or in fluctuating markets. A master production schedule that ignores important manufacturing constraints, such as tanks, cleaning-in-place and sequence dependent changeovers, is often untenable. Schedulers are therefore unable to meet the MPS and make decisions that may lead to low service levels and high inventory. Improving integration between these two business processes enables companies to make decisions faster concerning unexpected events and reduces the time necessary to transform business decisions into operational actions on the shop floor. As a result, responding to changes such as delayed deliveries and reduced demand becomes more manageable and less costly to the manufacturer.
Today, many supply chains are struggling to react to a highly volatile market and face being caught short of stock when the economy bounces back. By adopting network design and inventory optimisation tools combined with a dynamic safety stock approach and better synchronisation between manufacturing, supply chain and demand, manufacturers will be able to be more flexible and better able to match stock levels to actual demand. With this increase in flexibility, suppliers could emerge from the economic crisis with well weathered but flexible, adaptable and inherently strong supply chains, able to make the most of a rebounding economy.
Filippo Focacci
')";>
Filippo Focacci is product manager for ILOG’s planning and scheduling solution, Plant PowerOps. He received a PhD in Operations Research
(OR) from the University of Ferrara (Italy). He is the co-author of over
30 operations research publications on international journals, conferences and books and served in the programme committee of Operations Research and Artificial Intelligence conferences. He has ten years’ experience applying OR techniques in industrial applications in several optimisation domains.
David Simchi-Levi
')";>
David Simchi-Levi, ILOG chief scientist, co-founder and former CEO of LogicTools and professor of engineering systems at MIT. David has won awards for his work in supply chain, logistics, and transportation. He has consulted and collaborated extensively with private and public organisations. He is the co-author (with Julien Bramel) of The Logic of Logistics, published by Springer in 1997. His new book, Designing and Managing the Supply Chain, co-written with P Kaminsky and E Simchi-Levi was published by Irwin/McGraw-Hill in August 1999. The book received the Book-of-the-Year award and the Outstanding IIE Publication award given in 2000 by the Institute of Industrial Engineers. David received his PhD in operations research from Tel-Aviv University.
ILOG
ILOG delivers software and services that empower customers to make better decisions faster and manage change and complexity. Over 3000 corporations and more than 465 leading software vendors rely on ILOG’s market-leading business rule management system (BRMS), supply chain planning and scheduling applications, and optimisation and visualisation software components, to achieve dramatic returns on investment, create market-defining products and services, and sharpen their competitive edge. ILOG was founded in 1987 and employs 850 people worldwide.
www.ilog.com
The close of 2008 saw unprecedented destocking within supply chains as companies were keen to maximise the cash on their balance sheets and avoid the potential need to write down losses on inventory resulting from declining product value during end of year accounting. Worryingly, this trend looks set to continue in 2009 across most supply pipelines, as raw material prices plummet and companies wait longer to buy products that are getting cheaper in order to maintain profit margins. The knock-on effect of these actions across the supply chain is that many small or weak suppliers may fail as they are unable to take the resulting hit in profits from a sudden dip in demand.
In the current economic environment, companies face unprecedented volatility, and unlike in standard times where forecast accuracy is the main challenge, today companies must also deal with enormous fluctuations in fuel and commodity prices. Nothing exemplifies this more than the massive fluctuations in oil price, with prices hitting $147 per barrel in July and returning to $50 in December 2008. As a result companies are feeling the need for increased flexibility to adapt to these changes now more than ever before.
At the same time, supply chain executives face significant pressure to reduce cost and cut working capital through inventory reduction. While reducing inventory is always possible, the challenge is to reduce cost and cut working capital while maintaining or increasing service.
Before taking the decision to destock, suppliers need to carefully consider the negative impact this may have on their business. Firstly, a reduction in inventory that is not accompanied by a better synchronisation between demand and supply may generate an increase in expedite orders and hence an increase in manufacturing and transportation costs. Secondly, a general and poorly thought-through reduction in working capital will prevent companies from taking advantage of the rebound when it occurs and could impact market share.
In response to these challenges, what can the firm do to better match supply and demand and improve supply chain performance? Building flexibility in the manufacturing and supply chain strategy is critical if companies are to reduce costs and working capital and better respond to market changes. One way to achieve flexibility is by holistically analysing the supply chain and identifying the appropriate level of capacity redundancy that should be built into the network without increasing costs. This is typically done using strategic network design technology.
To illustrate this idea, consider the example provided in David Simchi-Levi, P Kaminsky and E Simchi-Levi’s Designing and Managing the Supply Chain: Concepts, Strategies and Case Studies – McGraw-Hill, IL, third edition (2007) – where executives in a Consumer Packaged Good (CPG) manufacturing company with a global network of 40 plants were looking for way to cut cost in their supply chain. Initial analysis suggested that closing 17 facilities and keeping 23 would save the firm about $40 million annually. The problem was that the resulting network was not flexible and thus not able to respond to customer demand if unexpected disruptions occur. Fortunately, a total supply chain cost analysis suggests that closing only ten plants and not 17 plants would have a small impact on cost savings while providing the supply chain with ample amount of redundancy.
A second way to achieve flexibility in the supply chain is by effectively implementing push-pull supply chain strategies. Here the focus is on positioning inventory effectively in the supply chain by identifying which facility should keep inventory (push) and which should not (pull). This is done using a multi-echelon inventory optimisation technology that is capable of modeling the entire network including raw material buffers, plants producing intermediate products and finished goods and distributions centres and warehouses. This type of technology, together with the appropriate business process, allows companies to significantly cut inventory while maintaining or increasing service levels to their customers.
Similar challenges and opportunities can be identified in manufacturing. Typically large amounts of inventories are kept at warehouses at the manufacturing site. Part of this inventory is cycle stock and is due to batch production where high changeover costs push manufacturers to produce large batches, creating high inventory levels. But part of this inventory is safety stock that enables manufacturers to manage demand and manufacturing variability. Reducing this type of inventory is a must in the current economic climate, and provides a strong competitive advantage for manufacturers where shelf life or product obsolescence is a significant business risk.
Simple formulas exist to compute the minimal inventory to guarantee a given service level, or a given fill rate. Most companies look for tradeoffs between changeover costs, inventory costs and service levels in two separate steps. In the first step, companies compute safety stock levels, while, in the second step, they compute a production plan by applying the safety stock levels ‘constraints’ for the plan. The safety stock levels are then fed into a production planning system that computes the production frequency of every product. However, these frequencies may be far from the initial assumptions and therefore invalidate the stock targets. This results in the maintenance of incorrect amounts of inventory causing both unnecessarily high inventory levels and stock-outs, which are both costly and detrimental to service levels.
The problem with this approach is the sequential process by first determining safety stock and then identifying a production plan. A more appropriate approach is to consider production plans and safety stock simultaneously. With such an approach, safety 11stock is based on demand variability in actual time until the next production event. This dynamic safety stock approach works on the assumption that the closer a manufacturer is to the next production event, the lower the level of safety stock. Since safety stock is determined at the same time the next production event is computed, this eliminates the need to apply average production cycle time. As a result, production variability only needs to be considered in relation to the probability of unexpected events in manufacturing (for example a machine breakdown).
By simultaneously optimising safety stock and production plans, manufacturers are able to trigger a positive cycle whereby the reduction of safety stocks imposes fewer constraints on the inventory levels, which consequently enables the optimisation of lot sizes and changeovers. Fewer changeovers increase operational efficiency and create capacity buffers that can be used either to increase throughput or to reduce the impact of manufacturing variability.
Preliminary analysis comparing the traditional approach with the more dynamic shows one a 20 to 25 per cent reduction in inventory, a 20 to 30 per cent reduction in changeovers and a five to ten per cent improvement in operational efficiency. All these improvements are obtained with no impact on service levels.
This approach to managing inventory should be accompanied by a better synchronisation between manufacturing, supply chain and demand. This allows manufacturers to significantly reduce the inventory positioned at the plant warehouse and reduce waste and manufacturing costs, while improving service levels.
Better synchronisation can be achieved by implementing improved production planning and detailed scheduling systems. Planning and scheduling has traditionally been considered as two separate tasks. Typically, a master production schedule (planning) is generated by supply chain planners and communicated to manufacturing schedulers responsible for generating a finite schedule for the shop floor. A clear separation between Master Production Scheduling (MPS) and Finite Scheduling (FS) has its merits, however it also generates efficiency problems and, worse, the inability to make the right decisions quickly. Both these factors create critical problems during an economic downturn or in fluctuating markets. A master production schedule that ignores important manufacturing constraints, such as tanks, cleaning-in-place and sequence dependent changeovers, is often untenable. Schedulers are therefore unable to meet the MPS and make decisions that may lead to low service levels and high inventory. Improving integration between these two business processes enables companies to make decisions faster concerning unexpected events and reduces the time necessary to transform business decisions into operational actions on the shop floor. As a result, responding to changes such as delayed deliveries and reduced demand becomes more manageable and less costly to the manufacturer.
Today, many supply chains are struggling to react to a highly volatile market and face being caught short of stock when the economy bounces back. By adopting network design and inventory optimisation tools combined with a dynamic safety stock approach and better synchronisation between manufacturing, supply chain and demand, manufacturers will be able to be more flexible and better able to match stock levels to actual demand. With this increase in flexibility, suppliers could emerge from the economic crisis with well weathered but flexible, adaptable and inherently strong supply chains, able to make the most of a rebounding economy.
Filippo Focacci
')";>Filippo Focacci is product manager for ILOG’s planning and scheduling solution, Plant PowerOps. He received a PhD in Operations Research
(OR) from the University of Ferrara (Italy). He is the co-author of over
30 operations research publications on international journals, conferences and books and served in the programme committee of Operations Research and Artificial Intelligence conferences. He has ten years’ experience applying OR techniques in industrial applications in several optimisation domains.
David Simchi-Levi
')";>David Simchi-Levi, ILOG chief scientist, co-founder and former CEO of LogicTools and professor of engineering systems at MIT. David has won awards for his work in supply chain, logistics, and transportation. He has consulted and collaborated extensively with private and public organisations. He is the co-author (with Julien Bramel) of The Logic of Logistics, published by Springer in 1997. His new book, Designing and Managing the Supply Chain, co-written with P Kaminsky and E Simchi-Levi was published by Irwin/McGraw-Hill in August 1999. The book received the Book-of-the-Year award and the Outstanding IIE Publication award given in 2000 by the Institute of Industrial Engineers. David received his PhD in operations research from Tel-Aviv University.
ILOG
ILOG delivers software and services that empower customers to make better decisions faster and manage change and complexity. Over 3000 corporations and more than 465 leading software vendors rely on ILOG’s market-leading business rule management system (BRMS), supply chain planning and scheduling applications, and optimisation and visualisation software components, to achieve dramatic returns on investment, create market-defining products and services, and sharpen their competitive edge. ILOG was founded in 1987 and employs 850 people worldwide.
www.ilog.com
