For food and beverage manufacturers, aligning your business to be “demand-driven” means aligning both demand and supply trading partners as part of a new business model, in an industry that deals every day with unique business processes and requirements. This series of columns highlights practical guidelines to help you identify opportunities, as well as benefits, around delighting your customers with improved perfect order performance.
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Explore this issueApril/May 2006
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By recognizing and responding within your organization, as well as with upstream and downstream supply partners, you can more competitively position your entire supply chain and expand your ability to provide higher levels of customer service, for a positive impact on profitability and significant added business value.
For food and beverage manufacturers, there are added levels of complexity when applying a demand-driven business approach to delivering perfect order performance within your overall supply chain. Given the most basic goals, to deliver consistent product quality on time, for the right price, based on both customer and internal targets – all while using nature’s less-than predictable ingredients (and often perishable state) – requires added levels of operational management, visibility and control. They must adhere to government regulatory controls while handling, processing, and moving raw ingredients, intermediates, and finished products. This includes managing the planning and production of primary products with demand “pull,” as well as resulting by- and co-product inventories that occur during processing, and which may have no immediate sales demand.
So food and beverage manufacturers who want to improve the performance of their demand-driven supply chain, to deliver more consistently against the perfect order goal, must address both products and processes. In a market legendary for razor-thin margins, and with the added goals of providing value-add customer services and improved velocity to meet short-term demand and supply changes, the challenges of aligning a demand-driven supply chain in the food and beverage industry begin to emerge.
The notion of a demand driven supply chain is based largely on one central goal – changing a manufacturer’s view of its own business processes, as well as its relationships with fulfillment partners, in an effort to provide more flexible and responsive product delivery, and a new level of customer service. This new service level goes beyond the timely delivery of products sitting in inventory, waiting for customers’ sales orders. It includes aligning business processes to manage demand and supply activities both within and beyond the four walls of manufacturing – outside one’s own organization. This means relating to your customers – and their customers – in a whole new way, from forecasting and planning, through fulfillment of sales orders, given unexpected changes in both planned and actual demand. This is achieved by setting inventory supply levels based on the end customer’s evolving needs – not just on targeting static “make-to-stock” product forecasts with fixed inventory stocking levels.
To improve your entire supply chain’s ability to sense and respond to demand, you can improve the timeliness and accuracy of forecasts and better manage inventory replenishment by improving production material and capacity planning, and be more responsive when promising customer delivery for sales orders, based on an accurate actual demand/supply picture. Manufacturers who adopt this new demand-driven business model stand to gain a distinct competitive advantage within their overall marketplace. And while food and beverage manufacturers greatest assets are usually thought of as being its plant people and equipment, by far the greatest assets reside outside the plant walls, in customers.
Understanding and Focusing on Planned Customer Demand
In a demand-driven culture, the forecast drives demand for the entire supply network. It dictates capacity and production planning at the factory, and material planning and purchasing to support production. It also drives warehouse replenishment and distribution center planning.
Because demand is neither steady nor predictable, it makes demand variability one of the greatest challenges to manage across the entire supply chain.
Some claim that inventory is the result of “imperfect information,” i.e. unpredicted demand. Certainly unexpected demand and demand variability – especially in the food and beverage industry – result in excess inventories of wrong products, at the wrong time, for customers who want something else.
Demand peaks and valleys can’t be eliminated completely for food and beverage manufacturers, i.e. when key ingredients are only available once during a year. Finding options such as alternate substitute ingredients (i.e. frozen vs. fresh fruit and vegetables), helps balance these hard constraints. Another option is to smooth sales demand to more manageable and consistent levels. Marketing tools are available, but also require adequate visibility across the entire supply chain. Managing variable sales demand by applying planned capacity-based pricing, has also proven effective in migrating customer demand to smoother, more predictable demand patterns.
Understanding your customers’ own demand and business needs from their perspective is also critical. Do you know your customers’ sales channels? Selling direct to end customers, through retailers, or via foodservice, distributors and wholesalers – each channel has unique requirements and opportunities. For manufacturers, this means it’s becoming more critical to forecast your customers’ end user demand. By understanding and effectively applying true demand beyond the distributor’s warehouse, using actual point-of-use information as part of the forecast process, the quality and accuracy of your own planned demand will improve.
With improved forecast accuracy, manufacturers can reduce demand uncertainty and favorably impact every aspect of their fulfillment network, offering bottom line improvements of customer service and cost reduction. The more this improves, the better customer service levels will be, and the lower safety stock “insurance” levels can fall. Lower safety stocks means literally reducing the physical quantities of material to purchase, manufacture, store and ship. Such reductions favorably impact the availability of plant and warehouse capacity, as well.
To effectively partner with demand-driven suppliers also means being able to collaborate effectively, based on adhering to evolving industry standards and best practices around how information moves between people in multiple organizations. Whether you’re sharing sales forecasts, advanced shipping notices, evaluating trading partner performance, identifying similar products with different product codes per supplier, or managing inventory availability and committing to new sales demand based on real-time inventory positions and movement – all of these critical business processes can be accomplished in a demand-driven world today, largely due to agreement about the standards for exchanging and communicating with dynamic networks of trading partners.
Timely collaboration – both internally with your own sales force and externally with your customers and suppliers – is a highly effective way of improving forecast accuracy, and providing significant benefits for yourself as a manufacturer, as well as for your trading partners. Collaborative forecasting allows manufacturers, customers and suppliers to share planned demand, identify and alert one another when significant differences exist, and provide opportunities to spot exceptions and disconnects early enough to respond effectively.
Alignment and constant focus on the end customer also provides new opportunities to improve perfect order performance. For example, when sales demand exceeds available supply, the option to outsource production to contract manufacturers provides added flexibility to increase available capacity, thus expanding sales and meeting customer commitments. But within this new demand-driven model, food and beverage manufacturers must adapt to added levels of product lot record-keeping control – to meet their regulatory mandates and provide a safe, secure supply chain, from ingredient inventories, to products, through distribution, and into the hands of the end consumer. Increasing regulatory pressures from both governing agencies and demanding channel masters, are also impacting food and beverage manufacturers, who are primary contributors to end-to-end lot trace and trace history across the whole supply chain.
Supply chain initiatives have introduced the gradual change from “pushing” the manufacture of products into inventory well ahead of demand, and holding stock until customer orders arrive, to a more customer-driven model where customers “pull” demand directly against manufacturing capacity, as needed. Companies are trying to more accurately forecast demand, shorten manufacturing lead times, reduce inventory at all supply chain levels, and generally move towards a “make-to-order” business model. But this is only the tip of the iceberg for food and beverage manufactures who want to be “fit for supply chain business” in a demand-driven world. Part of focusing on being demand driven includes balancing and smoothing both demand and supply levels. Emphasis on sales and operations planning is gaining momentum as a formal process to help manufacturers optimize and find this balance. As technology and business tools are being put in place to support real-time visibility and smarter decision making, this is also resulting in higher levels of perfect order attainment – by providing continuous access to information via collaboration, bar coding and RFID.
Customer service for food and beverage manufacturers has always been about having “the right quantity and quality product, at the right time, at the right location and the right price.” Until now, the de facto “right supply location” has been the distribution center, where finished goods inventory replenishment levels have been managed on a weekly basis. Carrying added safety stock – often at multiple locations – is still a common way of insuring enough supply to meet uncertain sales volumes, such as spikes in demand. But this certainty comes at a price.
In the food and beverage industry, the end consumer at the final point of sale is often based on the store shelf, the target replenishment point. But whether manufacturers replenish inventory directly to store shelves, or supply products to distributors’ warehouses who in turn manage their own supply channels – for food and beverage manufacturers this really still equates to having product quantities at the right point, in place, at the right time. To attain higher levels of perfect order customer satisfaction, manufacturers are shifting from relying solely on estimating product time-phased demand within their customer’s supply warehouse, to a more focused view of measuring and managing both demand and supply, based on actual feedback from the end point of use, as a true indicator of their own customer demand.
While making and stocking warehouse inventory levels for products is a traditional way of improving perfect order results, in a market known for demand highs and lows, hidden costs can begin to accrue, i.e. due to using manufacturing capacity, resources, and warehouse space well in advance of actual demand. Inventory aging dates and expiring shelf life concerns also contribute to potential sources of waste. Reducing the need for safety stock can improve your ability to respond to new or unexpected demand. Of course, such cost tradeoffs must always be balanced against the risk of failing to achieve agreed customer service targets. But, by gaining a better understanding of the tradeoffs, you can improve your ability to satisfy true sales demand, with improved customer service and overall market competitiveness. To squeeze out even more cost reductions within the supply chain, demand-driven initiatives target lowering inventory levels at all supply locations, which inevitably means more frequent deliveries of smaller quantities. In turn, more frequent deliveries of smaller quantities pushes changes in business behavior back on the manufacturer, to constantly produce a wider range of products, using smaller production batch runs.
So, being demand-driven is about more than just being responsive. Having real-time visibility of inventory at the point of use, and anticipating variable end customer demand, introduces new opportunities for manufacturers to influence and shape demand, as part of reducing peaks and valleys in market pull. This includes participating in new product development and market introduction, product end of life transitions, as well as collaboration and participation in both your own, and your customers, targeted marketing initiatives (i.e., promotions, seasonal buying patterns, etc).
Beth Berndt is director of industry solutions for consumer products at Ross Systems. Reach her at 770-351-9600 or firstname.lastname@example.org.