White Paper - NEW Supply Chain Management Paradigm for Consumer Product Goods (CPG) Companies
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In recent years supply chain management (SCM) requirements have changed significantly in the CPG sector. The buzzword nowadays when managing global supply chains is adaptation to increasing global complexity and volatility. Growing pressure from financial markets and the difficulty of increasing operating margins and working capital in this environment require efficient planning and execution of global production processes. More and more companies are relying therefore on LEAN SCM— SCM —a planning concept for harmonized production and replenishment planning across the entire supply chain with close linkages to organizational processes and IT infrastructure. It is designed expressly to simplify existing planning processes and to improve the synchronization and variability management of global supply chains. This atile shall gie iteested pofessioals ad aages a oeie aout Caelots LEAN “CM concept and its key elements, its theoretical fundament, as well as proven recommendations for successful realization. LEAN SCM as you will learn from this paper is fundamentally about how to get rid of the need for certainty in operational planning in a highly volatile, uncertain, complex and dynamic business environment.
Global supply chain managers impressively emphasize the urgent need to adapt existing SCM concepts to the new reality. Market volatility is considered to be the biggest challenge to supply chains, followed by supply chain complexity. Many companies have chosen to adapt their business processes to the "VUCA" world— world —an acronym of the words "Volatility", "Uncertainty", "Complexity" and "Ambiguity"— "Ambiguity"—as a major strategic target. To ensure optimal responsiveness and efficiency in supply chain processes, CPG companies have in recent decades established global planning departments and invested heavily in their planning sstes. The halleges of todas VUCA old sho oe ad oe the ajo fla of Adaed Planning and Scheduling (APS) and Enterprise Resource Planning (ERP) systems that form the planning backbone of their global value chain: They work effectively only when extremely reliable forecasts are available, preferably as detailed and accurate as possible at SKU level. In such a
forecast based SCM approach the supply chain performance heavily depends on the forecast quality. Consequently companies have been undertaking significant efforts to improve forecast accuracy with the result that forecast are better but still mostly wrong. How can sales be expected to know what the future holds in volatile marketplaces at a very detailed level of granularity? LEAN SCM has been developed by Camelot Management Consultants in cl ose collaboration with leading universities and supply chain experts from global key industry players. In this article, we introduce LEAN SCM as a concept that enables firms in the CPG sector to overcome the flaws of traditional ERP and APS planning approaches. ______________________ ___________________________________ ______________________ ______________________ _______________________ ______________________ _______________ ___ 1
White Paper - NEW Supply Chain Management Paradigm for Consumer Product Goods (CPG) Companies
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LEAN SCM is designed to enable production and replenishment planning across the entire supply chain in a synchronized way. LEAN SCM is influenced by two main developments: first, traditional supply chain planning and, second, the rise of lean operations. On the one hand, LEAN SCM aims to overcome the well-known drawbacks of (traditional) ERP, material requirement planning (MRP), or APS—dependency on forecasts and their inherent complexity. On the other hand, it also aims to translate lean manufacturing principles such as production leveling, takts, and pull production into supply chain planning in order to allow for more simplified and consumption-driven processes. Here it is important to emphasize that LEAN SCM is designed as a holistic business concept, also incorporating guidelines for alignment with organizational processes and integration into IT infrastructure.
Three planning and management concepts are particularly emphasized in order to effectively align planning processes in CPG companies with the requirements of the VUCA world. They also form the key elements of LEAN SCM. Cyclic Planning with Rhythm Wheels: Many companies have achieved great success incorporating
lean manufacturing principles when designing their manufacturing operations to achieve greater efficiency. With cyclic planning and control of entire supply chains is it now possible to transfer these ideas to global end-to-end value-added processes. In CPG supply chains it is especially important to devote attention to the optimal design of set-up procedures and campaign sizes, as well as to orient them in accordance with rapidly changing market demand. Without optimal set-up sequences companies risk substantial production losses, cost increases, and a general loss of agility in the endto-end supply chain. To reduce i nventory and increase the utilization of c apital-intensive equipment, more and more companies rely on "Rhythm Wheels." These planning models make it possible to efficiently plan a variety of products at a plant or production asset while at the same time smoothing capacity load to avoid costly production peaks. Figure 1: Real consumption should trigger production to avoid use of unreliable forecasts
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White Paper - NEW Supply Chain Management Paradigm for Consumer Product Goods (CPG) Companies
__________________________________________________________________________________ Fig. 1 illustrates the nature of Rhythm Wheels: A Rhythm Wheel continuously repeats a given production sequence. Each spoke of the wheel symbolizes the production of a certain product. The Rhythm Wheel arranges the products in an optimal order to utilize assets and operate more cost effectively. When planned according to Rhythm Wheels, production processes can even be perfectly aligned with fluctuating market demand. The lengths of the wheels spokes—and thus production volumes—are continuously synchronized based on a pull-logic according to existing stocks and customer orders, also increasing the agility of operations. A key milestone in LEAN SCM was Caelots development of so-called "High-Mix Rhythm Wheels," which enable cyclic planning in packaging plants that produce a variety of SKUs. Besides reducing dependency on accurate forecasts and providing more efficiency for high-mix manufacturing, they are also recognized as a highly intuitive planning tool for operations managers. End-to-end synchronization along the supply chain: In nowadays globalized business world value
chains comprise often several production stages spread over several plants around the world. In order to ensure cost effectiveness and alignment with markets, supply chain synchronization i s of utmost importance. Only effective synchronization can relegate production delays or even failures to the past. In this context Rhythm Wheels can achieve significant improvement; they not only optimize processes in order to determine the load on a production machine, they also help to achieve effective global timing mechanisms for production processes along all parts of an international supply chain. Two dimensions are important for end-to-end synchronization: first, the alignment of cycle times across different Rhythm Wheels in order to avoid starvation or idle times; second, the alignment of production and inventory planning along the supply chain. In the context of Rhythm Wheels, such synchronization is achieved by aligning the cycle times of the various Rhythm Wheels across the supply chain. Furthermore, to achieve stable synchronization inventory buffers are always aligned with the cycle times in production in the LEAN SCM concept. Variability management on the capacity and inventory side: It has been traditionally common
practice to counteract demand fluctuation primarily through adjustments of production plans. However, (safety) stocks—although the name suggests they are meant to absorb the impact of market volatility—were previously thought of only for planning a red line such that tapping into such (safety) stocks would spread panic through planning departments. The consequences of such onesided variability management, however, are no longer acceptable in the VUCA world. While stocks and thus capital costs continue to rise, production peaks can be met only by maintaining costly excess capacity and incurring overtime costs in the workforce. In addition, the resulting high inventory levels are a burden for balance sheets and exposed to obsolescence due to shelf-life constraints.
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White Paper - NEW Supply Chain Management Paradigm for Consumer Product Goods (CPG) Companies
__________________________________________________________________________________ Figure 2: Market demand variability is managed on two sides
LEAN Supply Chain Planning helps companies to manage variability efficiently. By adjusting cycle times in production, capacity can be utilized consistently to actively counteract production peaks. If actual demand is significantly above expectations, stocks are actively used in planning. Indeed, it is among the great advantages of LEAN Supply Chain Planning that planning cyclically with Rhythm Wheels makes it possible to match production capacity with stocks more efficiently (see Fig. 2).
Companies that have implemented LEAN Supply Chain Planning report consistently positive experiences with the new approach. Through better variability management (addressing a major challenge of the VUCA world) it is possible to significantly improve the management of stocks, service levels, and lead times. The results shown in Fig. 3 are based on our project experiences. Due to concerns with confidentiality the results are averaged. Figure 3: A step-change in variability management improves key supply chain metrics
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White Paper - NEW Supply Chain Management Paradigm for Consumer Product Goods (CPG) Companies
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Todas suppl hais, ofte astl diff eetiated though increased product portfolios, must manage highly challenging market conditions. Increased volatility and uncertainty have been repeatedly cited as major pain points for supply chain managers and local production planners. Hence, managing those factors is a key challenge for planning, the backbone of any supply chain. Traditional planning concepts such as Enterprise Resource Planning (ERP) or Advance Planning Systems (APS) struggle, however, in this effort due to their strong dependency on forecasted demand and on unrealistically high levels of forecast data accuracy. Furthermore, traditional planning approaches lack efficiency due to their one-sided approach to variability management. Inventories such as safety stocks are not used actively in planning as a means of dampening variability. Instead, all variability is buffered by asset capacity. The true heroes of the supply chain are often the local production planners who are continuously firefighting on the shop floor. Nonetheless, perpetual re-planning and frequent re-scheduling activities lead to ineffective usage of both capacity and inventory. This results in low overall equipment effectiveness (OEE), high inventory costs, and poor customer service levels. Many CPG companies have undertaken oe o less itesie lea aufatuig i itiaties over the past few years and have thereby benefited from applying such lean principles as waste reduction, simplification and shop floor transparency. Encouraged by their first significant performance improvements, they have also tried to apply production planning and scheduling methods from lean manufacturing champions of discrete manufacturing: simple Kanbans and Heijunka boards. However, those methods were quickly found to be limited for process manufacturing (food, bottling, personal care, etc.) because it was still difficult to cope with product sequence –dependent changeover times and they lacked visibility into corporate information systems for global end-to-end supply chain synchronization.
In the CPG sector, planning must address a variety of manufacturing factors. Efficient changeover operations are essential success factors. They do not add value and represent downtime for production assets. Hence, effective planning of changeover operations is crucial for maximizing OEE. Cyclic scheduling methods, such as the product wheel concept, address this issue. As shown in Fig. 5, a product wheel is a visual metaphor for a structured, regularly repeating sequence of all products to be made on a certain asset or piece of equipment. It is designed to make it possible to manufacture products in a repetitive, changeover optimal sequence, producing every product in every cycle in constant production quantities.
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White Paper - NEW Supply Chain Management Paradigm for Consumer Product Goods (CPG) Companies
__________________________________________________________________________________ Figure 4: The idea behind product wheels
The major benefits of the product wheel concept are the following:
Optimal production changeover sequences lead to the shortest possible changeover times and consequently to increased available capacity
Repetitive production sequences enable learning effects, constant capaci ty utilization and visible production schedules
Leveled capacity utilization and visible schedules allow for improved planning of upstream processes and reduced inventories
In spite of these benefits, the product wheel concept is limited in some respects. First, traditional product wheels call for scheduling every product in every cycle with constant production quantities. This limits their application to comparatively stable and fast-moving product portfolios. This is a major constraint in a production environment that increasingly includes volatile products. Second, the product wheel concept is not embedded in ERP or APS. Product wheels that have been introduced into industry practice are often locally managed and are mostly applied manually or with simple Excel-based solutions that run outside of existing corporate information systems. Site-specific product wheels do not foresee real-time sharing of detailed information as an ERP or APS would. Poor visibility of demand, planned production, and inventory levels along the entire supply chain reduces the flexibility needed to react to unforeseen changes. This makes global end-to-end synchronization virtually impossible. Lack of support by corporate planning systems combined with a lack of tailored business concepts impedes the realization of the full benefits of the product wheel concept, especially when it comes to end-to-end supply chain planning
The conceptual foundation for managing variability and leveling capacity utilization at local manufacturing sites is cyclic scheduling with product wheels. Industry experts have already been connecting general lean (manufacturing) concepts and the underlining elements of simplicity, flow and pull with physical restrictions that are typical in process industries, such as CPG companies. However, traditional product wheels do not incorporate concepts designed to mitigate short-term volatility or adjust to changing conditions. They quickly lose effectiveness when exposed to highly __________________________________________________________________________________ 6
White Paper - NEW Supply Chain Management Paradigm for Consumer Product Goods (CPG) Companies
__________________________________________________________________________________ dynamic business environments. Consequently, the concept needs to be extended to be able to cope with such challenges. The Breathing and High-Mix Rhythm Wheel concepts of LEAN SCM Production Planning have been designed for this purpose. Figure 5: Breathing and High-Mix Rhythm Wheels enable cyclic planning while responding to variability
The idea behind the Breathing Rhythm Wheel is that production quantities are not constant in every cycle, but are determined dynamically according to actual demand. This allows for greater flexibility in cases of medium-to-high demand variability. The High-Mix Rhythm Wheel goes a step further: besides enabling flexible production quantities, it also facilitates the manufacturing of products that are scheduled not in every cycle but instead only in every second or third cycle. This benefits the manufacturing of low-volume, lower-feue poduts ad falls e uh i lie ith campaign planning’ principles.
Both the Breathing and the High-Mix Rhythm Wheels account for increased market variability by enabling flexible production quantities. However, when adjusting production quantities to meet customer demand, the duration of a Rhythm Wheel cycle will vary over time. As demand variability increases, the Rhythm Wheel cycle time may start to fluctuate more than desired. To address this issue, two fundamental parameters of the R hythm Wheel exist: the minimum and maximum cycle time boundaries. Minimum and maximum cycle time boundaries maintain the cycle time within a
lower and upper limit and prevent the cycle from fluctuating too widely. These conceptual elements provide appropriate flexibility in manufacturing to enable companies to manage increasing market volatility, but also enable smoothing of variability and volatility propagation upstream along the supply chain. In addition to cycle time boundaries, dynamic safety buffers play a major role in LEAN SCM Production Planning. By limiting production flexibility with cycle time boundaries, demand outliers need to be adjusted, as illustrated in Fig. 6. This moves the buffering of variability from production to inventories and allows for smoothing of capacity utilization. Rush orders or short-term adjustments of a production plan are allowed only to a l imited extent, namely until the cycle time boundaries are reached. Demand peaks outside these limits are satisfied by safety stock, which is refilled in upcoming production cycles with lower overall demand. Thus, cycle times and capacity utilization __________________________________________________________________________________ 7
White Paper - NEW Supply Chain Management Paradigm for Consumer Product Goods (CPG) Companies
__________________________________________________________________________________ are smoothed and stabilized and the potential efficiency of repetitive production patterns can be leveraged more effectively. Figure 6: Cutting-off of demand outliers and active use of safety stock
To keep the cycle length within the defined range of the cycle time boundaries, upper and lower factoring methods come into play. Upper factoring involves shortening the Rhythm Wheel cycle in
response to violations of the maximum cycle time boundary. Lower factoring is applied if the actual cycle time falls below the minimum cycle time boundary. In this case idle time is added in order to lengthen the production cycle as required. The idle time can be used for maintenance, training, continuous improvement or other frequently required activities. Although a suboptimal setting can lead to backlogs and poor service levels, cycle time boundaries are a highly powerful means of controlling and stabilizing production. If used appropriately, cycle time boundaries help to reduce the var iability of capacity and stock requirements. Furthermore, they make production more predictable and as a consequence prepare the ground for end-to-end synchronization of the supply chain.
Altogether, LEAN SCM Production Planning aims to overcome the shortcomings of both traditional production planning and lean manufacturing. The positive impact can be summarized as follows:
Minimization of changeover times and leveling of production planning leads to improved OEE
Reduced supply chain variability and active usage of inventories allows reduction of total inventory stocks
Leveled production flows and reduced supply chain and production planning nervousness improve customer service level
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White Paper - NEW Supply Chain Management Paradigm for Consumer Product Goods (CPG) Companies
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Active buffer management and two-sided variability management reduces the bullwhip effect
Integrating Rhythm Wheel planning into corporate supply chain planning platforms creates staying power for globally harmonized planning processes and local visibility for end-to-end, global supply chain synchronization
In an increasingly uncertain world, continuing to struggle with the unrealistic prerequisite of high forecast data accuracy when planning with Enterprise Resource Planning (ERP) systems or Advance Planning Systems (APS)and perpetually seeking better demand forecasts is unwise. Moreover, even at their best these systems are unable to manage variability effectively, simply passing incoming demand variability along the entire supply chain. Variability is not buffered actively, but passed on to production sites, which then need to reschedule operations and increase shifts on short notice, jeopardizing cost targets, timely order completion, and customer service. Under current supply chain practices and the ERP or APS systems that support them, target and safety stock levels are used as fied plaig paaetes ith o uffeig of aiailit, sie the ae ee touhed fo a planning perspective. In this way the traditional planning approaches represent a conceptual deadend f o solig todas aiailit aageet poles. To effectively address the challenge of
rising variability and its propagation along the supply chain, companies should adopt two-sided variability management by systematically buffering variability in capacities as well as (planned)
inventories. This can be achieved through dynamic target stock-level setting in supply c hain planning.
Demand variability management changes significantly under the LEAN SCM planning paradigm, which entails a two-sided approach that applies LEAN planning principles to both manufacturing capacities and inventories. To be more precise, the safety stock elements in all SKU-based inventories are now actively used in planning runs, as they have been designed for, to level
replenishment signals and keep as much market noise as possible out of manufacturing (Fig. 7).
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White Paper - NEW Supply Chain Management Paradigm for Consumer Product Goods (CPG) Companies
__________________________________________________________________________________ Figure 7 : Market demand v ariability is managed on two sides
The active use of safety buffers—particularly safety stocks to hedge against variability—represents a major improvement in LEAN SCM Planning. In most companies this alone would be a paradigm change in supply chain planning, because in traditional supply chain and tactical production planning processes safety stocks are never touched in the planning horizon ahead of typical order lead times (Fig. 10), even though they have been created to buffer variability. Consequently, high levels of plaed dead stok remain in overall inventory profiles, which only increase further as variability increases. To overcome this conceptual dead end, LEAN SCM pursues a disciplined approach to the dynamic adaptation of inventory target levels to changing conditions along the supply chain. This
allows SCM to keep a key component of demand variability—demand peaks—out of manufacturing, smoothing capacity utilization and reducing time spent resolving production planning and schedule problems. This might sound intuitive, but it repesets a paadig shift i todas plaig p oesses and systems. Figure 8: Safety stocks in the fulfillment and the tactical p lanning time horizon
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White Paper - NEW Supply Chain Management Paradigm for Consumer Product Goods (CPG) Companies
__________________________________________________________________________________ Inventory management, in which a dynamic inventory target-setting process supports active variability management, is a key conceptual lever for LEAN SCM. Since safety stocks play a very important part in buffering variability, it is important to hol d the right levels at any given position along the supply chain. Therefore, systematic placement of stocks must be addressed from a global end-to-end perspective; this is best achieved through multi-stage inventory allocation and optimization.
Searching for new ways to approach planning and forecasting is on many supply c hai plaes agendas. But how can companies cope with the forecasting dilemma? We strongly suggest to accept uncertainty and eliminate the need for c ertainty in operations. This means, no longer using
forecasts to trigger manufacturing orders—but responding to real consumption instead, implicating pull replenishment. I pull ode, epleishet is tiggeed eal ustoe dead, ot doubtful forecasts in push mode. In other words, production processes are initiated in response to actual customer orders, not in uncertain anticipation of those orders. Again, this is a shift in mindset: ake hat ou sell, dot sell hat ou ade! Yet, to adopt pull ode effetiel ou ust prepare your strategic supply chain footprint and pre-configure your tactical capacity and inventory buffers for increased supply chain agility and velocity.
Successful SCM requires effective synchronization of demand and supply. Depending on the underlying replenishment mode (push/pull) and organizational responsibility (VM), supply chain processes differ significantly. Typically, in SCM, replenishment signals from a distribution center (DC) are passed on to aufatuig i etai tie ukets, usuall oths o eeks. Loal o peatios then have to schedule production in some way to more or less meet replenishment demand within the given time buckets. At the DC, however, there is no real visibility into which products are going to arrive at what times until a short-term delivery note is posted. Under LEAN SCM, this approach is changed fundamentally, since it follows a capacity-constrained VMI concept with pull replenishment. Unrestricted replenishment demand is now managed
through pre-defined campaign planning at the production site (see first and second points in Fig. 9). From the network perspective, production dates are no w known due to the seueed apait ie, hih is fa oe auate tha planning from the classic bucket perspective
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White Paper - NEW Supply Chain Management Paradigm for Consumer Product Goods (CPG) Companies
__________________________________________________________________________________ Figure 9: Linking replenishment-demand with flexible production-campaign planning
Local operations at the production site in turn need flexible campaign planning, linking replenishment signals with the right c ampaign size and sequence. The Rhythm Wheel concept accounts for exactly this market variability by enabling flexible campaign-building . Rhythm Wheels
schedule campaigns in optimized sequences and adjust campaign sizes dynamically in response to unrestricted demand signals. This procedure leverages the full benefits of flexibility within the VMI concept, since it gives local operations the freedom to optimize and adjust schedules while maintaining full transparency for global planning. The dynamic productio apaigs ae the ioed fo the loal site ie to the seueed apait ie i suppl etok plaig. The esultig epleishet pla is adapted aodigl (see third point) and capacity-checked supply network confirmations provide a realistic picture of ieto leels ad deelopets see the fouth poit. “till, e aae that ithi a apait ostaied VMI oept the use of safet stoks i the DC is epliitl alloed, sie thei leels have been to actively buffer variability.
Realized sustainable performance improvements by means of LEAN inventory management and replenishment planning:
Dynamic safety stock-setting reduces blocked stock in planning and overall inventories along
the supply chain; the potential benefit is in the range of 30 –40%.
Pull strategies and VMI for replenishment planning in volatile markets improve customer
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White Paper - NEW Supply Chain Management Paradigm for Consumer Product Goods (CPG) Companies
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Linking replenishment planning with flexible campaign building in local operations reduces
COGS by 3 –5%.
Volatile global demand and increasingly shifting markets are putting pressure on SCM to a degree rarely seen before. CPG companies must manage gl obally dispersed production processes and supply networks in the face of hitherto unknown challenges. SCM therefore has become a serious issue for top management. To master the rapidly increasing volatility and complexity of their global supply chain networks, companies are acknowledging the need to organize SCM in a more integrative and collaborative end-to-end fashion. Ultimately, however, the success of LEAN SCM depends on people and the organizational set-up in which they work. In order to ensure that LEAN principles are implemented effectively and yield sustainable benefits over the long run, it is vital that companies develop effective SCM organizations and establish understanding, acceptance, and commitment to L EAN SCM throughout their organizations.
Today, a SCM organization must guarantee high supply chain performance and bring greater agility and resilience to the overall supply chain. LEAN SCM fully supports these objectives with efficient and responsive planning processes along the entire supply c hain. To establish an end-to-end supply chain organization that is fully compliant with LEAN SCM principles, it is vitally important to create and sustain tailored organizational processes and policies.
LEAN SCM employs the regular renewal of LEAN parameters for supply chain planning as well as systematic review of production and replenishment modes. Renewal is performed in response to changes in internal or external business requirements. When supply chain planning works in this way, daily planning and scheduling run smoothly, reducing complexity and costs. As shown in Fig. 10, the strategic and tactical renewal process lies at the heart of the LEAN Supply Chain Planning landscape, ensuring alignment and coordination at all planning levels in an organization.
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White Paper - NEW Supply Chain Management Paradigm for Consumer Product Goods (CPG) Companies
__________________________________________________________________________________ Figure 10: Renewal processes form the core of the LEAN SCM planning process landscape
The strategic renewal process is designed to provide regular reviews of the production and replenishment modes used along the supply chain. We recommend establishing a regular review le that fits ou opas suppl hai odes ad podut segets to assess the eed fo improvements or changes due to altered strategic conditions. The frequency of this pr ocess should reflect the dynamics of the opas usiess eioet. Tpiall it should take plae at least yearly to ensure that it fits into the planning process for the annual budget cycle. Tactical renewal is a regular, routine process that aligns operational and tactical supply chain
planning along the supply chain. Its core responsibility is to confirm and, if necessary, adjust tactical production planning parameters (e.g., production sequences, Rhythm Wheel cycle times) and replenishment parameters (inventory replenishment components such as cycle, safety, and policy stocks), and to ensure synchronization of parameters along the entire supply chain. Tactical renewal will typically be set in motion every 1 to 3 months. A clearly defined interface to monthly or quarterly S&OP (or similar processes that conduct the respective tasks) ensures that the latest information about demand and supply profiles is used for planning purposes.
Companies implementing LEAN SCM are well advised to assign accountabilities and responsibilities to new harmonized global, regional, and local roles. The organizational roles for LEAN Supply Chain Planning should combine three dimensions: the local view of assets, the global view along the supply chain as a whole, and the view from the market. All three views must be taken into account by planning organizations to properly align operations with products and customer needs. The three key dimensions can be addressed through the roles of the local planner, the supply chain planner, and the market planner, as shown in Fig. 11.
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White Paper - NEW Supply Chain Management Paradigm for Consumer Product Goods (CPG) Companies
__________________________________________________________________________________ Figure 11: Key roles for LEAN Supply Chain Planning and their responsibilities in a global org anization
The suppl hai plaes ie eopasses the entire supply chain and value stream, and focuses on optimizing the end-to-end supply chain. The local planner ensures that predetermined planning parameters meet local requirements and is responsible for their implementation. To balance supply with market and demand requirements, the market planner acts as an interface between operations and sales & marketing.
If a company wants to manage volatility effectively and establish a synchronized and consumptiondriven supply chain, it should also adapt its performance management to LEAN SCM principles. Performance management for LEAN SCM ensures that all planning processes are tightly synchronized and intermeshed along the entire supply chain. Effective set-up and execution of planning lie very much at the heart of LEAN SCM, which must be supported by appropriate performance management practices. The good news first: if a company already has an effective performance management system in place, it does not need to change much. It just needs to extend its framework in accordance with tailored LEAN SCM metrics and corresponding design principles.
As summarized in Fig. 12, performance management must translate the central LEAN SCM objectives __________________________________________________________________________________ 15
White Paper - NEW Supply Chain Management Paradigm for Consumer Product Goods (CPG) Companies
__________________________________________________________________________________ into manageable and measurable targets. The parameter-driven concept behind LEAN SCM requires the use of meaningful metrics to effectively plan cycle times, inventory levels, and production sequences. An important novel idea here involves dividing planning operations into the configuration of parameters and the execution of those configurations in daily operations. This improves variability management and considerably reduces the need for short-term firefighting in operational execution. By efficiently evaluating past performance as well as projecting future supply chain performance, performance management for LEAN SCM is a key enabler for rapid renewal of global planning processes. By linking operational and strategic planning processes, LEAM SCM also provides a strong platform for strategic decision-making along the supply chain. Figure 12: Performance management for LEAN SCM
To fil aho LEAN “CM i a opas pefoae aageet processes, it is essential to identify those elements that require special attention when transforming the supply chain:
Integration into renewal processes: Performance management should be linked to strat egic and
tactical renewal processes. This requires measuring and analyzing KPIs that support LEAN SCM objectives. Effective renewal processes will ensure that LEAN SCM KPIs are used to set targets and evaluate performance on a regular basis.
Focus on organizational behavior : LEAN SCM emphasizes sound organizational behavior along the
supply chain. To ensure adherence to predesigned Rhythm Wheel sequences and avoid unwanted rescheduling, for example, the newly implemented behavioral norms should be measured and eaded ou opas pefoae aageet sste.
Establish a prospective performance view : Traditional supply chain performance management has
typically taken a strongly retrospective view by focusing on past performance. LEAN SCM performance indicators in contrast provide a prospective view of supply chain behavior. This allows a supply chain organization to focus on preventing fires instead of fighting them.
Management of end-to-end variability : Mastering variability is a key imperative in the VUCA world.
Tailoring performance management to this central objective of LEAN SCM requires the use of appropriate metrics as well as their systematic use in planning.
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White Paper - NEW Supply Chain Management Paradigm for Consumer Product Goods (CPG) Companies
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Integration of LEAN SCM KPIs: Traditional KPIs such as customer service level and inventory turnover
ae still alid ad poide isight ito ou suppl hais pefoae. To full eale pefoae management for LEAN SCM and conduct the r equired changes, however, we recommend the use of several new and very effective metrics such as cycle time for planning.
Companies have invested heavily in IT system infrastructure in recent decades. Extensive investments in ERP and advanced planning systems have already greatly improved the efficiency and agility of supply chain planning processes. However, there remains significant room for ipoeet. As todas plaig sstes ae desiged, the ust ieital depend on the quality and accuracy of forecasts to create production plans. Forecasts are used not only f or long- and midterm planning but also to trigger production in the short-term. This approach has been treated as a fundamental axiom and has never been questioned, which is astonishing considering that supply chain managers have always faced severe challenges due to poor forecasting accuracy for most of the produts i a opas potfolio. High inventory levels and poor customer service often result, because due to inaccurate forecasts the wrong products are in stock. I todas VUCA old, the depede of IT sstes o eliale foeasts epesets a theat to companies, as the increasing variability and volatility of the global business environment makes it hard to create accurate forecasts, which in many cases leads to meaningless planning results. It is, however, possible to move past this obstacle of forecast-dependency by incorporating LEAN Supply Chai Plaig piiples i todas IT plaig systems. LEAN Supply Chain Planning accepts lowquality forecasts as a given condition. Following LEAN Supply Chain Planning principles, only real consumption signals—not forecasts—are used to trigger production. This pull-based approach reduces dependency on forecasts while yielding much better r esults. As pull replenishment is not suffiietl suppoted todas ERP/APS system architectures, there is in fact a need to adjust current IT system landscapes.
We have argued that todas oetioal E‘P/AP“ sste ahitetues ae ot suff iiet for implementing LEAN Supply Chain Planning within an organization. Does this mean that your company will need to replace its existing planning system platforms to implement the new LEAN Supply Chain Planning approach? Do past investments in IT system architecture mean wasted money? No, ot at all! It is athe the opposite that is the ase. The eleets of todas oetioal ERP/APS system architectures provide an important backbone on which to implement LEAN SCM. To allow for an effective transition to LEAN SCM, only a few additional software add-ons are required to enhance existing planning systems. Fig. 5 shows the IT add-ons fo CAMELOTs “AP-certified LEAN Suite and its integration into a SAP based system architecture. __________________________________________________________________________________ 17
White Paper - NEW Supply Chain Management Paradigm for Consumer Product Goods (CPG) Companies
__________________________________________________________________________________ Figure 13: Integration of Camelot´s LEAN Suite
These LEAN enhancements of the existing IT infrastructure address both of the key layers of supply chain planning—global and local planning: 1. End-to-End (global) LEAN SCM Planning Add-on 2. Site-level (local) LEAN SCM Planning Add-ons
The key challenge regarding end-to-end tactical supply chain planning is achieving real-time visibility into capacity and inventory. Companies already using integrated global supply network planning (SNP) on top of their ERP systems are well-prepared for the next step: adapting the new LEAN Supply Chain Planning approach to global planning. To provide the right system support, CAMELOTs LEAN Suite contains an IT-enabled planning decision support component for regular tactical supply chain parameter (re-)configurations on top of SNP. This so-called tactical renewal cockpit embeds a range of functionalities that support the decision on the right buffer size for capacity and inventory according to the identified variability, lead times, and assigned service levels in the individual customer supply channels. The inventory target-setting component (Stock Parameter Optimizer) is a core element of the tactical renewal cockpit, making dynamic inventory replenishment level (IRL) calculations possible. This is further supported by optimization capabilities for multi-echelon inventory target-setting. In addition, the optimal inventory levels depend directly o n the Rhythm Wheel –managed cycle times. Both cycle time and inventory targets must align with the global takt to achieve end-to-end product flow synchronization. Finally, simulation and what-if analysis features have been embedded into the
IT add-on to make optimal evaluation of scenarios possible and to provide options regarding supply chain performance.
At the local plant level, the Rhythm Wheel Designer has been added to existing tools such as the SAP PP/DS application, hih is “APs detailed plaig ad shedulig odule. The Rhythm Wheel Designer supports planners effectively when identifying and configuring the best production sequence, production quantities, and cycle times for their Rhythm Wheels. For such Rhythm Wheel __________________________________________________________________________________ 18
White Paper - NEW Supply Chain Management Paradigm for Consumer Product Goods (CPG) Companies
__________________________________________________________________________________ optimization, the latest findings from operations research have been considered and translated into appropriate algorithms. Following Fig. depicts a screenshot of the Rhythm Wheel Designer when fully integrated into the SAP APO solution. State-of-the-art technology has been incorporated to maximize user-friendliness. Such features as an advanced graphic interface and drag-and-drop functionality ensure effective and convenient use for planners. Figure 14: CAMELOT’s Rhyth Wheel Desiger
Once specific Rhythm Wheels have been pre-configured, they are combined with actual pull replenishment signals during local planning runs to generate only consumption-based production orders. In the LEAN Suite, this task falls to the LEAN Planning Heuristic, which creates the LEAN Rhythm Wheel –based production schedule. If the designed cy cle time boundaries are violated during execution, this heuristic also enables planners to apply short-term Factoring to move production back within the designed boundaries. The Factoring functionality provides the required fleiilit fo eatig to olatilit aused shot-term supply disruptions or unforeseen market events. Deviations of the executed, consumption-based Rhythm Wheel schedule f rom the forecast-based Rhythm Wheel design parameters will always remain i todas VUCA old. To monitor such deviations and overall performance, the Rhythm Wheel Monitor has been developed as one of the core components of the LEAN Suite. Here cycle times, run-to-target results, capacity utilization, and IRL developments are monitored. With this IT component planners can continuously evaluate the adherence of executed plans to the optimal pre-configured Rhythm Wheel set-up. The same locally __________________________________________________________________________________ 19
White Paper - NEW Supply Chain Management Paradigm for Consumer Product Goods (CPG) Companies
__________________________________________________________________________________ monitored data—indicating cycle time variation and inventory developments—are passed on to the global supply chain level to allow for end-to-end supply c hain synchronization and re-adjustments. In the next Fig., a see shot of CAMELOTs ‘hth Wheel Moito is depited. By applying the inmemory technology of SAP HANA, outstanding system performance is achieved, making it possible to run sophisticated real-time analysis. Corresponding results are plotted on an advanced graphical interface. Figure 15: Cycle ie i CAMELOT’s SAP-integrated Rhythm Wheel Monitor
Leading companies are increasingly adapting LEAN principles and concepts in their supply chains. They realized that the efficient management of variability results in sustainable performance improvement. By reducing variability in the supply chain, both customer satisfaction and cost efficiency increased to a large extent. However promising the results are, bear in mind that LEAN SCM is an ongoing journey. The idea of continuous improvement is embedded in many L EAN SCM processes (e.g. in the renewal processes) and represents a major part of the LEAN philosophy. If you are willing and committed to embark, welcome aboard and have a safe LEAN journey. LEAN SCM Publication For more details, see also Josef Packowski´s skillful and reader-friendly publication, containing dozens of self-explaining tables, charts, figures, case studies, etc. (available at Amazon). __________________________________________________________________________________ 20
White Paper - NEW Supply Chain Management Paradigm for Consumer Product Goods (CPG) Companies
__________________________________________________________________________________ Additional Resources www.camelot-mc.com www.leansupplychainplanning.com www.rhythm-wheel.com
About Camelot Management Consultants Camelot Management Consultants is an international consulting firm specialized in Value- and
Supply Chain Management in core industries Chemicals, Pharmaceuticals/Life Sciences and Consumer Product Goods. The company was founded 1996. 320 consultants work directly for Caelot Maageet Cosultats ad aoud 4 osultats ok i Caelot´s pate organizations in eight branch offices (Americas, APA, Europe). IT-related consulting services are provided via Camelot ITLab: ERP, APS, Master Data, BI, CRM. Since 1996 SAP Logo Partner and since 2007 exclusive Partner of the SAP Center of Excellence and Development Partner for Chemicals, Pharmaceuticals and Consumer Product Goods.
Dr. Josef Packowski (
[email protected]) is co-founder and CEO of the Camelot Consulting Group.
He received his doctoral degree in business and information technology from Saarland University, and in addition to his professional work he is today a lecturer on advanced planning systems and supply chain management at the University of Mannheim, one of the leading business schools in Germany. He is a respected industry consultant with over 25 years of experience, and a visionary leader in operations management and strategy in process industries. Peter Harder (
[email protected]) is Partner for Consumer Product Goods Companies at
Camelot Management Consultants. He received his MBA from the University of St.Gallen. He has more than 20 years of international consulting and industry experience with focus on complex Supply Chain Transformations, which require the combination of changes in processes, organizations and enabling technologies, combined with the human and behavioural success factors to ac hieve sustainable change.
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