Supply Chain: Demand-driven production
Compared to a generation ago, today’s facilities are models of efficiency, incorporating automation wherever feasible and shifting personnel to value-added tasks. Rather than rest on their laurels, manufacturing teams use Six Sigma, TQM, lean and other continuous improvement frameworks to squeeze out more costs and build greater efficiency.
Outside the walls of the plant, however, waste abounds. Inefficiencies are compounded as responsibilities are handed off from one organization to the next, making the supply chain the piñata of controllable costs, ripe for a solid thwack to shake loose cost savings. It spans raw material management, demand forecasting, logistics, trading partner relations and a host of other business functions. How it is viewed depends on where an individual engages with the supply chain: at the strategic, tactical or operational level.
Supply chain management implies collaboration, and production managers often focus on opportunities in transport (see related story on page 44). For Mark Zelle, manager of Hormel Foods’ Dubuque, IA plant, opportunities exist in better coordination with retail customers to minimize the movement of empty trucks as goods are shuttled through the pipeline. For Vanns Spices, inventory optimization offers the most tangible return from its investment in an ERP system.
Vanns sources about 350 different spices, both directly and from 50-65 importers, then heat or steam sterilizes them before blending and packing for private-label accounts in retail and foodservice. Tracking raw materials through the global supply chain and managing the certificates of analysis and other records related to each delivery overwhelmed the Baltimore firm’s old inventory management system, according to Mick Whitlock, president. “We were putting a lot of information in, but it was difficult to get any information out,” he says. In August 2010, the company implemented business management software from Syspro Impact Software Inc. “We’re halfway along on the implementation,” estimates Whitlock, and the ability to extract special reports and other data has enhanced his standing with the board of directors because he now can respond to specific operational inquiries. But it is the built-in cycle counts of how much of each spice has been used and what remains in inventory that have yielded a direct payback from the investment.
“We’ve definitely seen some healthier profits,” he says, and most of the improvement can be attributed to reduced inventories for each spice to three months or less, based on demand forecasting and the cycle counts. “We wouldn’t have been able to do just-in-time before,” Whitlock explains.
As guidelines for the Food Safety Modernization Act crystallize, it is becoming clear that imported products will face the most stringent documentation requirements. For companies like Vanns, certifications and genealogy specifics will be more explicit, though the details still are not known. “Whatever the requirements are, the ERP system must have the flexibility to deal with them,” notes Rene Inzana, product manager at Costa Mesa, CA-based Syspro. The key is accommodating additional data fields without the expense of changing the source code, she adds.
One-up, one-down traceability is a legal requirement and an industry expectation, and Whitlock expects improved accounting for both finished goods and raw materials will pay off when Vanns undergoes its SQF audit in March, as it seeks certification under the Global Food Safety Initiative. While improving food safety and responding quickly and effectively when a product recall is necessary are important, those goals fall under the category of risk management. Instead of approaching track and trace systems as insurance policies, manufacturers would be better served by regarding them as tools to improve raw material quality and to lower manufacturing costs, suggests Mark Symonds, president and CEO for Plex Systems Inc., Auburn Hills, MI.
A supplier’s base price is only part of a manufacturer’s sourcing cost, Symonds points out. Order lead times, on-time delivery, material defects and machinability all impact manufacturing costs, and food companies are tracking those attributes to refine their supplier selection processes. An early example is USDA’s school lunch program, until a decade ago a dumping ground for low-quality beef trim. By requiring grinder operations to track bacterial plate counts from incoming trim and record results in a statistical process control (SPC) program, the program was able to screen out suppliers of poor-quality trim while lowering finished goods costs for hamburger patties. In another SPC application, quality inspectors at Sorrento Cheese track deviations in quality parameters and their impact on manufacturing costs, feeding the results back to suppliers to help them improve the consistency of their cheese.
Those types of programs are common in the automotive industry, where Plex initially focused its sales efforts. “As far as reducing parts per million defects, those numbers have come down dramatically” in automotive, where adherence to ISO 9000 and related standards over the last 11 years has forced “the whole supply chain to clean up its act,” says Symonds. A degree of visibility to trading partners’ systems is necessary to push quality management outside the plant, however, and the food industry lags in achieving a comparable level of supply chain management. “Those who are on top of their processes are happy to show what inspections and quality checks they’ve done,” he says, “but there’s a lot of fear.”
This ERP’s for you
While the food industry trails some others in streamlining and improving its mastery of the supply chain, CDC Software Inc.’s Steve Halula believes great improvement has been made in recent years. “Companies have totally disappeared because they couldn’t trace back quickly,” points out the director of customer strategic solutions at Atlanta-based CDC, and their fate as a consequence of poor inventory management was a lesson to other manufacturers. Now, companies are turning supply chain software from a defensive shield to a proactive weapon to improve efficiency and bottom-line performance.
CDC characterizes its ERP components three ways: basic back office functions, regulatory compliance modules and supply chain programs that improve the organization’s efficiency and effectiveness. In the past, supply chain elements sometimes were viewed as discretionary, but organizations that don’t deploy them risk the same fate as the grinder that ships pathogenic hamburger patties, Halula suggests. Information sharing with trading partners is essential to get the most from these tools, he adds, and the Internet is proving to be a great facilitator in exchanging information.
Transportation management, warehouse management, advanced order management and demand chain planning are the modules in CDC’s supply chain suite that require collaboration between trading partners to achieve the best outcomes. Data re-entry and redundant information capture are counterproductive activities. “Sharing the information is key to everyone; you shouldn’t have to keep replicating it,” he says. “Even competitors see they can be more efficient by collaborating and letting the product being sold be the differentiating factor.” Cost-effective and timely delivery of the right product also is important, and the shift away from transaction-based production and toward forecast-driven manufacturing is possible with an integrated ERP solution.
Vendors of supply chain management solutions take issue with ERP’s competency in demand forecasting, inventory optimization and distribution efficiency. “ERP traditionally focused on the transaction and the system of records,” points out Danny Halim, vice president-industry strategy for process manufacturing at JDA Software Group Inc., Scottsdale, AZ. Cobbling supply chain modules to ERP won’t yield the kind of demand forecasting accuracy at the heart of programs like JDA’s, he insists.
Not surprisingly, Logility Inc.’s Karin Bursa seconds Halim’s position on the shortcomings of ERP. While excellent at managing transactions, “they’re not planning systems,” Bursa says of ERP. A reliable demand forecast must reconcile changes both upstream and downstream from the production facility, she adds, and adapt as scenarios shift. The forecast model either demonstrates its reliability over time or is scrapped. Best-in-class models for food products are accurate 60-90 days out 75 to 80 percent of the time, she suggests.
Vendor managed inventory (VMI) programs are on the rise, and food companies get involved both as “a category captain” for their customers and as customers collaborating with VMI suppliers, according to Bursa. Continental Mills, a client of Atlanta-based Logility, utilizes VMI to improve order fulfillment to its retail and foodservice accounts. On the supply side, “They know what they need from a procurement perspective, and they are likely to share that with their suppliers because they don’t just want bulk commodities; they want time-phased deliveries of those commodities,” she says.
Goya Foods uses a variation of VMI to manage a supply chain complicated by Goya’s dual roles of food manufacturer and distributor of finished goods sold under the Goya label. The company’s SKU portfolio mushroomed from 1,000 to 1,600 items in five years, and demand forecasts generated from Excel spreadsheets were not up to the management challenge. Black beans sold in a Caribbean neighborhood move at a faster velocity than in a Puerto Rican enclave, so aggregating black bean demand is insufficient: It must be store specific, according to JDA’s Halim. A year after implementation, demand forecasting continues to improve, greatly reducing out-of-stock rates and improving production scheduling and supplier scheduling.
JDA gives end-users the option of installing its software on their server or operating in the cloud environment, with JDA maintaining the program and providing analytical services. “A number of food and beverage clients are using the cloud,” Halim says. “It’s gaining a lot of users.”
The cloud delivered Vanns Spices’ program. Syspro relies on a network of resellers to reach food companies. In Vanns’ case, Operations Resource Group in Sunnyvale, CA delivered the solution. According to Whitlock, no one from the group had to make a transcontinental site visit.
Plex System relies exclusively on the cloud. Also known as software as a service (SaaS), cloud computing dramatically lowers installation and maintenance costs for manufacturers, according to Symonds. Companies that installed ERP in preparation for Y2K are entering their replacement cycle, and he believes this is “a ripe time to make the change” to SaaS.
For more information:
John Roberts, Bi-Phase Technologies LLC,
Steve Halula, CDC Software,
Danny Halim, JDA Software Group Inc.,
Karin Bursa, Logility,
Dan Luther, Mansfield Oil Co.,
Mark Symonds, Plex Systems Inc.,
Rene Insana, Syspro Impact Software Inc.,