The purpose of supply planning at a high level is to analyze and manage the risks and opportunities in the supply chain to the benefit of the organization. At a more granular level, supply planning can be an inter-departmental function to achieve the same benefits with specific suppliers and materials.
Explore this issueJune/July 2018
The amount of planning time devoted to supply planning depends on the nature and operational culture of the organization. Some organizations are informal and ad hoc and others are highly organized and detailed in their planning. Whatever the nature of the planning functions, every operation can benefit from supply planning for its ingredients, materials, and packaging.
Supply Planning Review and Specifications
The ideal supplier is one who can consistently deliver fresh materials with maximum remaining shelf life and no food safety risk on spec, on time, in the exact quantities required by production, and at the lowest possible price. In reality, each supplier meets only some of the ideal requirements.
When considering a new material or a new supplier, the starting point of a supply planning review includes establishing the acceptable parameters for each input. These can be differentiated as the required and the desired characteristics. This review document is usually in the form of an extensive specification. The details in the specification inform the planning team of which characteristics are critical to the safety, quality, and functionality of the finished product and, therefore, non-negotiable. These characteristics may be any combination of organoleptic, compositional, microbiological, or functional.
A specification may include other requirements that the supplier must meet. These include standards of operation for food safety and quality, and increasingly, social and environmental stewardship. Other standards may include requirements for Good Manufacturing Practices, Hazard Analysis and Critical Control Points (HACCP), traceability, allergen management, and foreign material control. Additional requirements may be part of a product’s quality, origin, ethical, and environmental stewardship claims. Part of the supply planning activity can be to review performance against all requirements to determine if the supplier is adequately meeting them.
Supply planning must also integrate production requirements into the specification. These include things like lead times for ordering, minimum and maximum order quantities, emergency supply capabilities, and determining how much is going to be required overall for a defined contract period or the upcoming year. For seasonal production, the raw material needs to be available during the season. While the price may be affected by the level of service required, because short lead times may cost more, the capability of a supplier to actually meet the lead times and the risk of failing to deliver must be assessed.
For some functional materials, requirements may also include the availability of technical support from the supplier for day-to-day usage, product development, or troubleshooting modes.
A potential challenge to the supply planning function occurs when each department starts to inflate estimates and narrow specifications to drive “improvement.” This provides a skewed specification to the planning and purchasing team. Realistic numbers versus negotiating numbers should be used to inform the planning process and carry out meaningful assessments and cost impacts.
The impact of operational supply requirements on planning varies according to how dynamic their customer demand environment is. For example, with stable predictable sales and production schedules (every production manager’s dream), the supply system can be carefully planned and operated to minimize costs and maximize efficiencies. The more dynamic the sales and production environment, the more variable and dynamic the supply ordering process, and the more robust and flexible the supply base may need to be. In this case, minimizing supply costs and maximizing efficiencies may need to be balanced against a need for short lead times and variable order sizes. Another less desirable option is larger raw material inventories, which carry the risk of material expiring before they can be used.
The supply planning function requires knowledge of the organization’s short- and long-term production and development plans. This knowledge helps set priorities for the purchasing group and lets them know what new suppliers or materials may be needed. Potential suppliers can be sourced and assessed in preparation for planned projects. It also prepares the food safety and quality functions that must research specifications and hazards related to new materials.
The planning function should include food safety and quality personnel as part of the risk assessment management process. For a supply planning team to succeed, it must identify and understand potential hazards, threats, and vulnerabilities to the materials, the suppliers, and the supply chain. The planning process should then develop plans to mitigate any high-risk issues. For instance, the best price for an item may be linked to a specific single supplier that is geographically remote. The supplier may have several customers, and competition for the material is increasing, and continuity of supply is not predictable. Supply planning might recommend that having a second supplier available and purchasing some material from this second supplier is a robust strategy that offsets the risk of being shorted by the low-cost supplier. An alternative supplier is sourced and approved. Supply planning analysis may come to the opposite conclusion if there has been a long-standing arrangement with two suppliers. By going through the analysis and risk assessments, a switch to a single supplier may increase service and reduce costs without affecting the risk of running out of materials because the industry conditions that dictated the need for two suppliers have changed.
The supply planning function thus integrates information on risk to food safety, quality, operational efficiency, and costs. Parts of this risk assessment may also be—and often are—driven by external standards such as Global Food Safety Initiative (GFSI) certification or regulatory requirements.
Risk assessment first identifies hazards. Food safety hazards identify biological, chemical, and physical hazards associated with the material that could potentially harm human health. Quality threats include material variations that cause failure of finished product to meet specifications and expectations. A relatively recent addition to GFSI certification requirements is assessing the risk associated with each supplier—something that the supply planning function should already include.
Low supplier risk usually requires a history of satisfactory delivery of safe material that meets specifications, so initially, new suppliers may be high-risk. Estimating the risk of new suppliers may involve researching recall or other reported databases to determine if there have been any issues with a supplier. Getting references from a new supplier and talking to their existing customers may also be a way to set an initial risk level.
Supplier risks include inability or failure to supply the ordered quantities in the promised time frames, shorted deliveries, damaged goods, and unexpected price increases or lack of effective technical support when needed. Supply and supplier risks are those which disrupt the capability of the operation to maximize efficiencies and meet customer demands, including last-minute orders and special sales.
If supply planning is starting to sound like a huge, time-consuming, and hard-to-manage activity, it doesn’t have to be. The list of materials and suppliers that undergo the supply planning process can be filtered down to the “significant few.” These might include problem performers, problem supply chains, suppliers affected by unusual crop conditions, new proposed suppliers of significant materials, high-cost materials of significance to finished product costs, new product or packaging offerings, planned product development activities, and newly identified “opportunities.” The selection of materials and suppliers to be incorporated in supply planning analysis might also be informed by new or emerging hazards, and recently identified frauds or vulnerability threats.
The hazard analysis method used for HACCP can serve the risk assessment aspect of supply planning. Much of this work is already required at regulated sites or sites certified to a GFSI benchmarked standard. Supply planning, like HACCP analysis, cannot be a one-time analysis because of the dynamic nature of the supply system.
For agricultural products, the growing season, the weather, the economy, crop yield/shortages, and market conditions can all affect food safety and quality risks. Poor growing seasons, drought, or disease may cause reduced yields and increase the vulnerability of the crop to damage and infestation. Difficult growing seasons in some supply regions may led to excess, off-label, more frequent use of agricultural chemicals, or, in certain jurisdictions, use of non-permitted chemicals.
Low yields may tempt suppliers to supplement a poor crop with product from farms that are outside formal contracts and oversight, increasing risk of out-of-specification and less safe product. Another possible risk with some commodities, such as spices, is the dilution with other substances (ground peanut shells in cumin for instance) that may not be food safe. The potential for substitution can increase when supply is short, although the risk of fraudulent dilution for economic gain is always present for some materials no matter what the weather.
The supply chain for agricultural materials can also be affected by market factors such as consumer trends. As the demand for GMO-free and/or organic product increases, the pressure on the supply chain goes up, which also increases potential hazards from new or unproven suppliers. For instance, the current price increases of natural vanilla have been affected by the decision of the major players to change to natural vanilla flavoring.
A Supplier Assessment Tool
A statistical process control tool that may be used to assess suppliers is Cpk, which measures the capability of a process to meet specifications. Some suppliers request that Cpk for each batch is reported on a certificate of analysis. Others may require that a specific process Cpk is reported routinely as a KPI used to monitor supplier performance.
Cpk can be used to assess risk of a supplier not meeting a particular specification or to compare the capability of different suppliers. It can also be used to determine if sampling and testing should be done. Some customers may require a Cpk >2 (or higher) for critical materials in which defect rates are likely to be extremely low (Cpk = 2 defects per 3.4 per million opportunities or 99.99966 percent defect free), see Table 1.
Food safety and quality managers should consider including statistical process control in their supplier requirements. It can be a powerful tool. Sites that use statistical process control are likely to have a better understanding of their processes and a continuous improvement approach to production.
Whether applied in a limited tactical way or routinely as part of supply management, supply planning can be used to improve and enhance the purchasing and supplier management processes. The supply planning process complements existing regulatory or GFSI benchmarked standard certification requirements. Using the expertise from quality, food safety, and production personnel, supply planning continually improves the management of suppliers and helps develop a more robust, safe, and reliable supply base.
Wright is a technical manager of training and education services at NSF International. Reach him at firstname.lastname@example.org.