Software Standardization and The Agile Supply Chain

We are all aware of the benefits of standardizing processes and I won’t address these obvious benefits here. What I would like to explore is the danger of going a bit too far, especially in the areas of software packages for supply chain planning. And then I will provide a vision for a better future.

Some ERP software houses are working very hard to convince manufacturing companies that their ERP packages – which are constantly expanding to fit new modules and functionalities – can be used to solve any kind of enterprise issue. Sometimes with success. Unfortunately we see again and again companies that – in the spirit of standardization – miss the opportunity to deploy excellent processes by force fitting their requirements to the limitation of the software package they happened to have installed. We have observed several times how best practice pull execution systems have been abandoned and replaced by substandard push systems on the ground that the company-wide ERP system could not “deal” with the existing best practice process.

What many companies failed (and still fail) to realize is that by implementing standardized ERP solution they are also standardizing their operational performance and kill the potential to become best-in-class supply chains. Therefore, if you are one of these companies that has – or is planning to – deploy the latest multimillion-dollar ERP solution in the hope to become best in class in supply chain management, then here is the bad news: you won’t. At most you will become average. Why? Because plenty of other companies have done the same and therefore you cannot hope to get better processes then they have. True excellence can only come from innovative and new approaches that put the process first, and the tool second, as an enabler of the process. The tool must support you in consistently execute the process in the way you want and not the other way around.

Fortunately, times are changing. There is now a new generation of supply chain leaders that start recognizing the issue. They are not satisfied about the way their expensive ERP package is limiting their ability to improve the performance of their supply chain. In today’s ever changing environment they need to have agile supply chains and they see their ERP system as a barrier to achieve that. And they are looking for creative and cheap solutions to overcome this barrier.

We all know, what form most of the time these “enhancements” and solutions looked like in the past: excel spreadsheet! But there is some good news: mini applications. They are fast to design and configure and agile to deploy. Their software-as-a-service and cloud based technology allow to deploy such solution fast and cheaply. These user-friendly mini applications allow collaborative planning, data integration and real time performance tracking on your notebook or iPhone or iPad. They exchange data with your core ERP system, which is still (and rightly so) the backbone of your company and the sole repository of master data and allow the users to complement these data with information from other sources. More and more companies are starting using these tools for anything from forecasting to resource management and continuous improvement. I strongly believe these tools will revolutionize the way companies will be managing their day-to-day business. The future looks like a stable standardized ERP backbone combined with an ecosystem of mini applications to build flexibility, adaptability and agility on top of it. This will allow companies to design innovative ways to manage their supply chains and quickly develop the IT solutions to support their processes, thus breaking free from the rigidity imposed by big, massive, inflexible ERP systems.

Is it really possible to achieve a fast & sustainable reduction in ‘end to end’ supply chain costs without hurting service?

Context

With the ever growing threat, and reality, of low cost competitors, as well as the need to meet Emerging Market demand, not to mention the never abating requirement to improve the corporate bottom line, the pressure upon Supply Chain, Procurement and Operations leaders to sustainably reduce costs is as great as ever.

Low cost sourcing, outsourcing of non-core activities, consolidation into focussed factories, huge investment in ‘end to end’ planning systems have, and are all being, tried with various levels of success. A key issue is that as supply chains have been getting longer through EM penetration and low cost sourcing, mature market service levels are being negatively impacted, inventory levels are increasing and supply chain alignment and efficiency is getting ever harder – not least because of sku proliferation, demand  becoming more volatile and forecast accuracy that much harder to achieve.

In these trying circumstances, is there another credible route, as yet largely untried, which could significantly improve cost, service and inventory performance across Procurement, Operations and Distribution?

Remarkably there is, it’s been around for a very long time and it doesn’t rely upon a ‘black box’ solution or a new and untested “here today, gone tomorrow” management fad. It does, however, need some counter-intuitive thinking to fully understand, some minor spend upon ‘cloud’ software support and a huge focus upon serious change management activities to get it installed and successfully implemented.

Why you shouldn’t use a forecast to drive replenishment

The ‘it’ is the replacement of the long standing and ubiquitous forecast push DRP/MRP replenishment processes with Demand Driven Replenishment (& Planning). The rationale for this change is that ‘forecast push’ simply blows forecast error into your operations which means that you are continuously moving the wrong stock to the wrong places and making/buying the wrong product mix. These activities, usually defended by excessive lead times and time fences, inevitably lead to high and unbalanced stock levels with service issues and, if the schedules are ‘crashed’, as they inevitably are due to service threats, the result is use of unplanned change overs and capacity which generates costs. Schedule crashing, as the queuing theory behind Hopp & Pearson’s “Factory Physics” demonstrates, also has knock on effects within the factory and right across the supply chain causing changeable and longer lead times which generate future service issues (MRP requires stable lead times) and inventory growth  (inventory is directly proportional to lead time)  – and these negative consequences increase exponentially if you’re trying to work at high levels of capacity utilisation.  In addition, across the end to end supply chain (and the longer it is the worse it gets), the forecast error and demand variation is amplified through batching and the unfortunately binary and over compensatory impact of attempts by hard working Planners to ameliorate the problems……………….this, of course, is called ‘bullwhip’ and it hugely exaggerates the negative cost, service and inventory effects of driving replenishment with an inaccurate forecast. 

‘Demand Driven Planning & Replenishment’ (DDPR)

How does DDPR avoid these problems? Well for a start, although it uses the forecast for product family capacity, material and financial planning, it always uses a 100% accurate replenishment execution trigger which is that activated by real demand, not the forecast. It is therefore not reliant upon sku level time phased forecast accuracy for effectiveness (in a DDPR environment, such forecast accuracy has no relevance) and it also prevents the inevitable forecast error being amplified up the supply chain. Eradicating the impact of such demand amplification or ‘bullwhip’ has been demonstrated by Metters (1) to improve product profitability by up to 30% while right sizing inventory (always reducing) and meeting desired service levels. Similar improvements have also been reported by those companies which have completely dispensed with ‘forecast push’ execution and adopted DDPR instead.

Broadly, there are three demand driven replenishment techniques available which can be used for different items at different echelons within the supply chain. The following explains how they work and when they are appropriate. The important point to remember is that to achieve stability across the supply chain echelons, the parameters and buffers used in the design of these ‘de-coupled’ replenishment techniques, must be aligned so that they support each other in meeting end customer demand.

  • Consumption-based pull or Rhythm – in which inventory buffers are located, as appropriate, in the supply chain to decouple processes and minimize lead times. Supply activities  (eg. inventory movements, production and purchase orders) are scheduled according to an efficient time phased cycle and the quantities triggered, rounded as necessary, replace what has been taken from the location immediately downstream. This affords protection against demand uncertainty and minimises amplification by only building to a replenishment signal, not to a forecast. This technique can be used even if demand has trend or is seasonal so long as the replenishment parameters reflect future demand patterns appropriately.
  • Rate-based or Level schedule – where demand is high and relatively stable (as it often is for mature products and for upstream items before sku specific customisation takes place), supply can be levelled at a suitable fixed rate, subject to periodic review . In Lean language this is called ‘heijunka’ or ‘mixed model scheduling’ and it works best when it involves high frequency batch production.  Ironically, products which are suitable for level schedule are also those which are easiest to forecast – but why use a forecast driven replenishment technique when a far more effective and simple alternative is available? Level schedule, with regular review, is also very useful for product launches as it generates the stability that operations need to enable them to focus upon improving the, possibly, new manufacturing processes.
  • Time buffered – in general, the more volatile is demand the more important it is that replenishment is not driven with a forecast due to the inevitably high levels of consequent forecast inaccuracy and ‘bullwhip’. When volatility is very significant, and ex-stock service is not an option, time buffered techniques can be selected. Depending on the required service strategy, the technique chosen might be ‘assemble to order’ (ATO) in association with postponement, or ‘make to order’ (MTO). These techniques can be used when customer demand is genuinely volatile (eg. response to tenders and price promotions) as well as forming part of an ‘abnormal demand’ management process. Postponement, if supported by appropriate ‘design for manufacture’ and asset configuration can deliver stable demand on capital intensive or bottleneck production assets, which is highly cost effective and yet very responsive to demand volatility – ‘Agility with Stability’. Other low volume/highly variable products should, of course, simply be infrequently slotted around the schedules as required and with maximum notice.

These techniques don’t just apply to a company’s internal supply chain of course, they can also be the basis for collaboration with suppliers and customers.…… clearly the benefits from DDPR increase in line with the share of the supply and demand network that is managed using its principles.

S&OP

DDPR allows the supply chain to autonomously respond to genuine demand variations and enables Planners to concentrate properly upon Supply Chain Conditioning. Supply Chain Conditioning is how Planners ensure that end to end capacities and material availabilities are accurately planned (S&OP) and  the inventory parameters and buffers are calculated and aligned . Despite the criticality of effective parameter management, however, the replenishment buffers  and triggers should not be changed every month (if they were you may as well use the forecast!); they should certainly be reviewed regularly but only  c5% will actually need amending at any one time.

There is a significant additional benefit to S&OP from implementing DDPR. Reductions in operational variability  actually makes the S&OP process more accurate as there is far less likelihood of the  operational plans being confounded by variability induced lost capacity. In addition, companies that use DDPR also experience vastly improved S&OP collaboration between the Commercial, Supply Chain, Operations and Procurement functions. Not only is this due to the generally better relations that might be expected from a more successful process, but also because there is less unreasonable ‘blaming’ of the forecast for service misses (and the bad feeling this inevitably creates) and less short term schedule changes which reduces stress, pressure and the need to ‘achieve the impossible!’

Why isn’t DDPR more common?

If DDPR is so effective, it’s reasonable to ask why it isn’t practiced more widely? ‘Bullwhip’ was first written about by Forrester and Burbidge in 1961 which was the same year Kingman mathematically formalised the relationship between average queue times with process time,  variability and capacity utilisation. ‘Pull’ has been part of the Lean toolbox since at least the early 1980s and, in fact,  is increasingly common within the factory walls and, in some industries, with suppliers (eg. grocery multiples and automotive). ‘Pull’ is rarely seen, however, all the way across companies’ distribution channels and linked into their factories through to suppliers. This might explain why many companies often find that all their Lean Factory and Supplier Engineering efforts haven’t translated into the significant performance benefits they expected. By now the reader will know why.

The reasons for the relative scarcity of “end to end” DDPR can only be speculative but might include the fact that it is counter intuitive, neither widely or fully understood and difficult to implement successfully without appropriate software support.

Clearly Factory Managers, and Procurement have an interest in how their company’s supply chain is managed if it has a significant impact upon their performance and their ability to contribute to the bottom line, let alone if it could prevent material shortages and service issues. In some companies the CEO might also be interested?

Fortunately, the outlook for DDPR is positive with the  impact of a Lean education upon the new generation of supply chain leaders and the emergence of specialist “software as a service” (SaaS) DDPR vendors such as Orchestr8(UK), Ultriva and Demand Driven Technologies (both US). Recent adopters of DDPR tend to be ‘blue chips’ working with very powerful customers, volatile demand and for whom cost effective service is an absolute key to success and survival – CPG and ‘own brand’ manufacturers (including consumer LifeScience).

DDPR implementation guidelines

It is important not to  assume that DDPR is an easy fix. Successful implementation requires a clear understanding of its rationale and benefits (a successful pilot is often an important element here), adequately robust, user friendly  and functionality rich planning systems (don’t use MS Excel for the critical Supply Chain Conditioning, it doesn’t have the credibility with users, let alone the functionality; you’ll be taking a service risk and the full potential benefits won’t come through), senior cross functional leadership support and a capable and interested supply chain team that includes Order Management through to factory Schedulers and Supply Management.

Successful implementation of DDPR can sometimes cause issues as production often has to be significantly ramped down for a time, due to previously excessive inventory levels,  so misleading but adverse standard cost variances may have to be planned for.

Additional benefits

Significant and noticeable benefits from DDPR will be that warehouses, factories and suppliers will all find that their daily ‘work to’ lists become far more predictable and stable.   In consequence, potential throughput goes up, unplanned overtime and adverse cost variances  diminish and more quality time can be spent on CI initiatives that minimise supply variability and cost  instead of chasing the latest backorder. Lead times will also come down and, due to reduced levels of Operator stress and error, quality will improve and reductions in rates of absenteeism have also been reported. Planners will be able to do a far more value add role (ie. S&OP and SC Conditioning etc) instead of continuous expediting and  Materials Management should be able to share their now relatively stable requirements with suppliers and allow them to reliably schedule their operations accordingly and, perhaps, even manage their own replenishment schedules if working with a collaboration platform. Perhaps, very importantly, suppliers will be able to operate far more efficiently and some of the consequent cost savings should accrue to their customers!

1 – Metters (1997)  “Quantifying the bullwhip effect in supply chains”.  Journal of Operations Management  15(2)  p89-100

If you don’t have Rhythm, you can’t dance !

Providing excellent customer service in volatile markets while keeping a tight leash on working capital is like dancing the tango, beautiful if you get everything right, but a nightmare when something goes wrong.

Over recent years the predictability of demand in many industries has diminished to a point where an accurate forecast which can be used to drive production is about as real as centaurs in Central Park. To get ahead of the game in these demanding commercial environments you have to have an agile and efficient supply chain. However, many companies in manufacturing industry have capacity constraints, budgetary targets and equipment and planning systems which were not designed for this environment. In addition major capital expenditure on new equipment to create capacity headroom or systems is not viable in the short-term either.  Often the solution has to be found using the equipment and technology you have with the minimum of upgrades, and it has to done quickly.

One of the key components of the agile supply chain is Rhythm: a simple inventory planning and scheduling approach based on Demand Driven Supply principles which allows the right amounts of the right products to be produced on demand while level loading the plant and minimising working capital.

Rhythm has its roots in the original Lean Planning Wheel concepts for minimising changeover downtime, but takes the approach to the new dimension by allowing batch sizes and production frequencies to flex while the sequence remains fixed.

This simple adaptation allows the ABC segmentation by volume and different approach to supply for runners, repeaters and strangers, and even make to order to be abandoned resulting in a supply process which is simple, consistent and able to automatically respond to demand changes. While Rhythm is best suited to a make-to-stock (MTS) VMI environment where there is visibility and management of inventory at the customer, it is not restricted to this, rhythm can also work well in a pure make-to-order MTO environment.

How it works.

The rhythm concept comprises four main processes: three as part of the periodic supply planning process and one as part of the production execution process.

Planning.

Inventory Replenishment Level (IRL) calculation – This is the level to which customer inventory should be replenished by production. The calculation is similar to conventional inventory requirements calculations taking into account demand and supply volumes and variability, and post production release and logistics lead times. However, production lead time is replaced by rhythm time – to be discussed later. The IRL can be forward looking to provide a required inventory profile to cater for seasonality and demand trends and is based on historic demand patterns and future forecast.

Forecast is only used to define the IRL and provide visibility of future materials and capacity requirements. It is not used in any way to plan production.

Rhythm calculation – Rhythm has three primary design parameters: sequence, rhythm time, minimum make quantity.  Products are grouped by like production process and allocated to a production line based on this. All products falling into the process family should be included, irrespective of demand profile or if they are MTS or MTO.

Production sequence for the line is determined by applying a changeover hierarchy to minimise the changeover downtime between the one product and the next in the sequence. The most critical design parameter for rhythm is the rhythm time, the time expected to complete one full cycle of the rhythm sequence. This should be no more than 1 week if the full benefits of rhythm are to be realised, this of course means that aggressively reducing changeover time is has to be a high priority.

Myth Buster #1 – A one week rhythm time does not mean that every product is made every week – it means that every product has the opportunity to be made every week if there is demand for it.

The actual production frequency for any product is governed by the actual demand and the “minimum make quantity”, the minimum practical and financial quantity of product which should be made on the line. This is further modified to balance available line capacity against aggregate average demand run time and combined changeover times.

Using these parameters, the line should be  loaded to a minimum of 85% of total available capacity based on design rhythm time and average aggregate demand for the products on that line. The unallocated 15% of capacity is to provide for maintenance and other planned downtime.

A further enhancement is to factor in product value so that high value or high margin products are triggered for production more frequently.

Event Management – An essential part of the IRL renewal, this process determines the impact of demand and supply abnormal events on ability to supply the customer and factors these into the IRL to ensure that product is available to the customer when it is needed.

Execution.

Consumption Trigger – The first thing to understand about rhythm execution is that there is no fixed forward schedule or firm planning horizon. In theory, the next product to be made, the quantity to make and when to make it will be determined at the time the previous product run has finished. However in practice a report called the Consumption Trigger Report (CTR) is run at the start of each shift which gives a forward view of what is likely to be made in the next shift. Firm horizon is governed only by the length of time to stage and prepare materials for production.

The CTR is in rhythm sequence order and uses the following logic: for each product, current available inventory, in-transits and any open production orders are netted off against the IRL. The result of this is compared to the minimum make quantity and if greater, a production order is created for that amount (this can be modified to suit raw material batch sizes or packaging multiples if necessary). If the result is smaller, then the product is skipped and the next product in the sequence is reviewed in the same way. For MTO products, the requirement is simply the order quantity with no modification. A final check is made on material availability immediately prior to production and the production order is released and started. All of this happens a maximum of 24 hours before physical production of that product is started. Ideally, this should be within minutes of starting. At the start of the next shift or day, the current CTR is destroyed and new one created to manage the next period of production. The traditional weekly schedule which absorbs so much time being created, changed and changed again can be dispensed with freeing up time to manage events better.

Once a rhythm cycle is completed, the next starts immediately whether the design rhythm time has expired or not. The result of this is that: in cycles where there is less than average aggregate demand the rhythm cycle finishes early and the next is started; in cycles where there is greater than average aggregate demand the rhythm cycle finishes late. This “breathing” of the rhythm to demand allows production to be continuous and level loaded at the line’s design capacity, while output of product is in line with demand irrespective of the variability of the demand. With sufficient products in the sequence, the demand variability of individual products can be very large, but the aggregate variability will be within acceptable limits of +/- 20% of average on any one cycle.

Myth Buster #2 – Rhythm is applicable to almost any product demand profile, it is not restricted to products with stable demand with low week to week volatility.

Rhythm is self-regulating and will recover from most minor demand and supply events without intervention. In addition, if a product’s demand profile changes (say an increasing demand trend over time), the CTR calculation result will exceed the minimum make quantity more frequently and trigger production more frequently as a result. There is no predetermined ABC product classification which determines a fixed production frequency for a product. This is one of the major departures from Planning Wheel logic.

The primary KPI for rhythm is Rhythm Time Attainment (RTA). This monitors the actual rhythm time for each cycle and provides early warnings of changes in either overall product demand for the line and changes in capacity. This should be monitored using a control chart with the upper and lower process control limits set by the rhythm design parameters. Any trends identified which violate these control limits indicate that something has changed and action may be necessary to resolve it – either fixing a problem, or refreshing the rhythm design. Rhythm time trending low means smaller batches and wasted capacity on excessive changeovers, rhythm time trending high means that there will be more days of demand on the next cycle which will further increase actual rhythm time and ultimate lead to service issues.

The final key component of Rhythm which overarches all the others is discipline. Rhythm is a simple process with a few basic rules which can transform the efficiency and effectiveness of a supply chain. However all will be lost if the organisation does not understand the rules and does not have the discipline and leadership to stick to them when the going gets tough.

The rhythm concept has been tested and proven to be effective across industry sectors in blue chip companies by our consultants over a period of 15 years. SmartChain has developed Smart Apps and processes to support Rhythm as part of our Agile Supply Chain concept, to work alongside existing planning and execution systems, and which can be configured and installed at a significant discount relative to developing custom modules for SAP ERP or APO/APS systems.

For more information please contact us at info@smartchainllp.com

Current Advanced Planning Systems in the market: which are their weak spots?

 Subject Matter Expert: Planning, Scheduling and Execution Solutions for Manufacturing, Supply Chains and Services

Which are the industries where most implementations of APS have failed? And Why? Lack of functionalities? Lack of a suitable architecture? Lack of domain and product knowledge? …

Are there still Planning & Scheduling processes that are not yet well covered and that are business critical? Which ones?

Any feedback is highly appreciated,
Thanks Fabio