Originally published in Brushware, July-August 2023

Manufacturing is in a state of flux. After seven straight months of contraction in manufacturing, it is not surprising manufacturers are thinking about cutting back. On the other hand, in many industries, manufacturers continue to have a robust backlog and are growing faster than their capacity. Simultaneously, there is significant transition and movement around the globe including dual source suppliers, reshoring, nearshoring, consolidation, and other changes. In this volatile environment, opportunities will abound for those manufacturers focused on creating predictable revenue and resilient operations.

How to create predictable revenue?

Smart manufacturers are getting ahead of customer demand instead of waiting to respond to changing conditions. A few of the best practices in addition to reviewing historical trends and growth patterns include getting on top of sales quotes, getting in sync with key customers, bringing market and industry conditions into the mix, and asking your customer facing team members for input.  proactively and aggressively managing inventory. These factors roll up into the demand planning and sales forecasting process within your SIOP (Sales Inventory Operations Planning), also known as S&OP process. Once you establish a sales forecast, you cannot rest. Depending on your situation, you must review exceptions and changes on a monthly if not weekly cadence.

For example, in working with an aerospace and defense manufacturer, the team was unsure if the demand was predictable enough to order materials and hire resources. Thus, we analyzed data, collaborated with sales and marketing, reviewed customer portals, and evaluated historical trends with contracts. Although the team was uncomfortable, we didn’t enable analysis paralysis. Instead, we took the plunge and piloted forecasts with 70% confidence. The team’s success seemed in direct opposition to their discomfort as their forecast accuracy was one of the highest in almost 20 years of consulting. Most importantly, by creating predictable revenue, Operations had time to prepare. Customer service rates (OTD, on-time-in-full) shot up and costs went down. Margins improved by 5%.  

How to create resilient operations?

Although having a directionally correct demand plan will provide an automatic boost in operational performance with solid leadership, it is no longer enough. To navigate volatility and prepare to take advantage of opportunities, manufacturers must be ready to scale on a dime or pull back without losing momentum. Creating resilient operations is key to success. SIOP remains integral to evaluating alternate strategies to fulfill demand such as make vs buy, dual source suppliers, reallocating production among sites, etc. Adding flexibility into operations is also important by cross-training, utilizing temporary employees, evaluating contract resources, outsourcing support functions such as maintenance, evaluating shift configurations and overtime strategies, and much more. Utilizing technology with automation, robotics, 3D printing/ additive manufacturing, and other strategies can provide quick scalability while maintaining profitability.  

For example, a food and beverage manufacturer invested heavily in cross-training and advanced skills development so that critical resources could respond quickly, and they developed strong relationships with temporary resource partners to be prepared to fill in rapidly when needed or scale back without losing meaningful critical talent. They also focused attention on automation, technology, and labor scheduling to ensure efficiency and scalability, and they were able to take advantage of opportunities to substantially grow the business.

The bottom line

Smart manufacturers will prioritize key customers’ needs and monitor quotes, sales orders, changing market conditions, and forecast closely. From an operations perspective, they will create flexibility, resilience, scalability, and utilize technology to not only save money and create a superior customer experience but also to ensure rapid scalability and flexibility. Leverage SIOP, best practice demand planning processes and uncommon common sense operational programs to ensure manufacturing success.

The post Predictable Revenue & Resilient Operations for Manufacturing Success appeared first on LMA-Consulting Group, a supply chain consulting firm.

Why Balance Customer Orders, Inventory, & Profitability?

If you want to serve your key customers successfully (with high on-time-in-full (OTIF), short lead times, and proactive service) so that you can take advantage of the opportunities coming down the pike while addressing the hard realities of the current business environment (potential recessions, high interest rates, and less access to capital), you MUST balance sales, operations and inventory.

Otherwise, you will have one or more of the following issues arise:

• Inventory Overload: Too much inventory of the wrong products and WIP (work-in-process) in the wrong place at the wrong time.
• Slow Moving Inventory: Too much slow moving or obsolete inventory
• Production Schedule Disruptions: Not enough of the right inventory in the right place to keep production running smoothly.
• Weak Service: Not high enough service levels to ensure you can maintain and grow your business during turbulent times, let alone meet business plans
• Not Prepared for Growth: Not able to take on significant opportunities coming down the pike. For example, as companies expand manufacturing in North America, customer orders continue to increase down-the-line in the supply chain
• Skyrocketing costs: If you aren’t balanced, you have to spend more to meet customer objectives.
• Inflation cost increases: The only way to offset the massive cost increases related to inflation is to be able to get in front of what’s coming.

Instead of these dire consequences, the smart are proactively balancing customer orders, inventory and profitability.

How Do You Balance Sales, Inventory & Operations?

The good news and bad news is that balancing these factors does not require significant capital investments, the latest technologies like ChatGPT, and a mountain of resources. It simply requires rolling out the appropriate strategy and tactics that is uncommon common sense. Roll out the appropriate strategic processes largely encompassed with Sales Inventory & Operations Planning (SIOP), also known as S&OP, processes. Focus solely on achieving directional progress, and you’ll gain quick wins.

However, strategy alone will not “work”. It has to be accompanied with the appropriate tactics which is the execution of the fundamentals required to support Sales & Operations Execution (S&OE). If you aren’t familiar with S&OE, don’t fret. It is a common term in software circles, but in manufacturing and supply chain circles, it is known as supply chain planning and includes demand planning/ forecasting, supply planning (master scheduling, production planning, material planning, replenishment planning, inventory planning, production & labor scheduling, etc.), operational execution, shipping, receiving, etc.

Client Examples: Using SIOP / S&OP To Balance Sales, Inventory & Operations

The SIOP process is geared to aligning sales with operations, customers with suppliers, and demand with supply.

How SIOP Fueled Growth for a Biotech Manufacturer

For example, a biotech manufacturing client couldn’t meet aggressive sales goals with high enough service levels to ensure customer loyalty and future growth. Sales was frustrated and executives were concerned about how to support future growth goals. On the other hand, Operations didn’t have the information to prepare in advance to meet the service objectives with the aggressive goal goals. They were concerned about spending money until they knew the product wouldn’t go to waste, and management was concerned about hiring manufacturing employees until volumes were confirmed in enough detail to know the work centers and skills required. The bottom line: Sales was out of balance with Operations. Thus, the right inventory was not available in the right place at the right time.

After rolling out SIOP in combination with S&OE (as you cannot have one without the other), we developed a directionally correct sales forecast by geography, product and unit of measure that “added up” to the growth goals (in dollars) in a way that made sense when viewing by customer, product groupings and growth rates. Simultaneously, we focused attention on understanding capacity (production requirements vs. available capacity by key work area and equipment). It quickly became clear that we had to reallocate a few resources to the bottleneck operation, and we gained approval to hire a few people to support the growth plans. Once the bottleneck operation smoothed out, we gained efficiencies in down-the-line operations, and most importantly, customer service improved and customers gained confidence. Sales, Operations and Purchasing also had insights that enabled cost reductions, product rationalization plans, and key pricing decisions. Nice side benefits to the aggressive growth goals!

How SIOP Accelerated Cash Flow & Reduced Debt by Increasing Inventory Turns

In another example, an aerospace manufacturer had turned the company around following the 9/11 downturn and was interested in selling the business. Thus, they wanted to maintain their excellent service levels while maintaining/ improving profitability and reducing unnecessary debt. We had to balance sales with operations and inventory to reduce unnecessary inventory (not required to support service, spikes in sales and predictable disruptions in supply) while focusing on operational performance. Thus, we assigned executive leadership to the topic to emphasize the priority, clarified the sales plans, and focused attention on inventory planning processes (again, the combination of SIOP/ S&OP and S&OE).

In this case, we had to balance profitability/ margins by site with customer orders and inventory plans. We rolled out improved business processes, better utilized the ERP system, provided training and education to the inventory teams, and we aligned the goals of the Site Leaders with corporate objectives and the Inventory Leaders. Inventory levels came down by 30% in key product lines while maintaining/ improving service levels and growing the business. The company was also better positioned for sale and for continuing operations so that no matter which path was chosen, the company was in a healthy, robust position.

Path Forward

SIOP can be an important process in aligning people (within your organization and with your supply chain partners) and processes (demand and supply) to improve service, support growth, reduce debt, accelerate cash flow, and improve profitability. During times of volatility (inflation, recession, stagflation, technological advances, talent shortage), there will be more opportunities for those companies prepared for success. The winners will be separated from the losers and opportunities will abound. SIOP requires focus, but it doesn’t require capital intensive investments. There is no downside to becoming more profitable, having greater access to cash, and better serving customers and preparing for growth.

Refer to our SIOP webpage for more information, our blog (SIOP category) for hundreds of articles, and learn more about SIOP and what’s important for a successful implementation in our new release eBook, SIOP (Sales Inventory Operations Planning): Creating Predictable Revenue and EBITDA Growth. If you are interested in talking about how to improve profitability, free up cash, and/or improve service, contact us.

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SIOP/ S&OP Playbook: Creating Predictability & EBITDA Growth

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Improving OTIF and Reducing Cost and Inventory

Every client wants to support growth goals while improving service levels (OTIF, on-time-in-full), operational efficiencies and inventory turns. These are timeless objectives for every planner. During the pandemic, the priorities shifted to service levels because clients struggled to keep up with dramatic increases in demand and extreme volatility. There has been an all hands on deck focus to improving OTIF (on-time-in-full), OTD (on-time-delivery), and fill rates.

As we did whatever it took to service customers, logistics costs started to skyrocket, even before the dramatic increases in oil and gas prices. Thus, logistics costs also came into closer focus. Depending on the supply chain network, logistics costs could relate to container costs (which have gone up four-fold since pre-pandemic levels), drayage costs, storage costs, freight costs, e-commerce fulfillment costs, and more. For example, a consumer products manufacturer supplied outside distribution centers across the U.S. and Canada to support short lead time customer requirements. As volatility increased, freight and logistics costs went up accordingly. Thus, additional focus was put on how to optimize logistics costs.

As the pandemic unfolded, consumers switched from services to products, thereby increasing demand. Similarly, as stimulus packages were passed, consumers gained cash, further increasing demand. Finally, as lockdowns ended, demand has stayed at high levels even though services are skyrocketing, driving inflation. As supply chain disruptions abound, product availability is limited, thereby driving prices higher. There is a combination of inflationary and deflationary pressures going on simultaneously which is further exacerbated by the Russia-Ukraine war. These incidents have led to a return of focus on managing inventory to free up cash.
Utilizing Planning Best Practices to Optimize Service, Cost & Inventory Objectives
From a best practice point-of-view, in order to optimize service, cost, and inventory objectives, you’ll want to upgrade the appropriate planning processes. No matter your business type and complexity, demand planning will be a priority. From a supply planning perspective, the priorities will depend on your specific situation. If you produce internally, production planning, material planning and supplier management will be a priority. On the other hand, capacity planning, purchasing, and logistics planning will be important regardless of your supply chain network although to varying degrees. Replenishment will be more relevant if you have a more complex distribution environment or if you replenish your customer’s network for them (also known as vendor managed inventory or VMI).

If you have a more complex distribution network, replenishment planning (also known as distribution planning or DRP) will be a critical component to achieving your objectives. Replenishment planning should consider the following factors:

• Order frequency – are you receiving orders on a daily, weekly, monthly, seasonally, or sporadic basis?
• Order size – when you receive orders, are you receiving several small orders over a period of time, one large order covering the same period of time, or another option?
• Order volatility – how predictable are your customer’s ordering patterns?
• Lead time requirements – how much time do you have to react to customer orders vs. the lead time to replenish?
• Replenishment lead time flexibility – do you have options to decrease your replenishment lead time by shipping via a different mode of transportation (such as rail vs. truck)?
• Replenishment cost with various modes of transportation
• Replenishment frequency – how often do you replenish the distribution center.
• Service policies – can your customers change their orders after placed? Can they change it until the last minute prior to shipping?
• Network flexibility and stocking patterns – if you have a stockout in a distribution center, are you stocking that same product in another distribution center that could supply the customer within standard lead time?
• Safety stocks – how have you set safety stocks to cover for variability in demand and supply?
• Forecasts and/or consumption information – do you receive collaborative forecasts from customers, or, better yet, consumption information real-time? For example, when working with an absorbent product manufacturer, our key customer Allegiance Healthcare provided us with our consumption data from their distribution centers so we could sell real-time consumption. Additionally, when consulting with an aerospace firm, we received consumption information from Boeing so we could see when they used our parts in production of the plane.
• ABC value – are your items set as A B or C based on volumes, value or another method to designate frequency and importance?
• Storage constraints and warehousing costs
• Inventory objectives
• Sales orders, transfer orders, and purchase orders

Replenishment Planning Strategies

A replenishment plan should take the factors described above into account when building a plan. Typically, you’ll start with demand and determine your replenishment plan based on what’s needed to serve the customer with the agreed upon service policy, and then evaluate replenishment strategies, logistics options, and resulting inventory levels to determine the optimal schedule.

Depending on your network complexity, product and customer mix, your tools (ERP and related technologies), and your objectives, there are multiple replenishment strategies you could follow. Conceptually, consider the following options:

• Reorder point / Kanban strategies – in essence, you replenish the reorder quantity when you hit the reorder point inventory level
• MRP/ DRP strategies – in essence, you replenish to sales orders, transfer orders, and forecasts as needed when reviewing your inventory and orders in process.
• DDMRP strategies – demand-driven material requirements planning (MRP) which is more sensitive to variations in demand and supply.
• Advanced planning – these systems take what if scenarios, capacity, capabilities and costs across sites into account in replenishing

There are tradeoffs, benefits and costs to each approach depending on your demand, supply, factors, and objectives.

Incorporate Replenishment Planning into a Monthly Review Cadence

Review your replenishment plan summary information and related impacts as a part of your monthly SIOP/ S&OP process. Gather inputs from appropriate parties, compile and synthesize data, and design a monthly review of the replenishment plans required to support customer orders. This will result in transportation volumes by mode of operation (truck, rail, air), storage requirements by distribution center, distribution / supply chain network changes and stocking strategies (and resulting inventory levels) required to support service policies, and appropriate resources and system capabilities to support the plans.

Refer to our blog for many articles on planning, capacity and related systems. . Also, read more about these types of strategies in our eBooks, Thriving in 2022: Learning from Supply Chain Chaos and Future-Proofing Manufacturing & Supply Chain Post COVID-19. If you are interested in talking about what it would take to purse the replenishment planning and SIOP journey in your business, contact us.

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Recovering Capacity with Production Planning Best Practices

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According to a Wall Street Journal article, Kroger (#2 grocery chain in the U.S.) and Walmart are ramping up pressures on food suppliers.  There is too much lost money due to shortages!  Thus, the industry is waking up to the critical importance of on-time delivery and customer service especially as they compete with on-line retailers like Amazon.  Kroger is fining suppliers $500 per order that is more than 2 days late to any of its 42 stores.  That can certainly add up!  And, Walmart is charging 3% for late deliveries.  This could prove transformative.  

How are you performing in terms of delivery performance?   No matter the industry, delivery performance is having a significant impact on scalable, profitable growth – or lack thereof.  My best clients are paying close attention and finding ways to get ahead of this curve.

What Should We Consider and/or What Impacts Could Arise?

Let’s start at the beginning.  Do you know what levels of service you provide to your customers?  Is it the same level to your A customers as well as your C customers?  Find out.  On-time-in-full (OTIF) is rapidly becoming the standard for measuring this performance.  If you don’t have a metric, just start with this one as a base.  Or, worst case, start with whatever you can measure rapidly – and evolve over time.  Of course, service alone won’t cut it.  Lead times and other factors enter the equation….

Clearly, if you are not high performing in the food and beverage industry (and consumer products in general), you will not stay viable anymore.  Amazon will be happy to fill the gap.  However, since I work with small and medium, family-owned manufacturing companies to  private-equity backed firms to large multi-billion dollar enterprises across a wide variety of manufacturing and logistics industries, it is quite clear that food and beverage is not alone!  Actually they are late to the party.  For example, aerospace companies track OTIF but it goes beyond an internal exercise – their customers (ex: Boeing) provide scorecards to monitor performance on a monthly basis.  If you aren’t in the highest category over extended time frames, there are likely to be negative impacts to your business.  Get on top of your delivery performance as it is no longer a differentiator; it is a baseline requirement to enter the game.

January 18, 2018

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