LEAN SCM Part 3: LEAN Inventory and Replenishment Management for VUCA Challenges* )

Transcription

1 LEAN SCM Part 3: LEAN Inventory and Replenishment Management for VUCA Challenges* ) Dr. Josef Packowski and Ernesto Knein Camelot Management Consultants AG, Mannheim, Germany Supply chain management (SCM) requirements in the pharmaceutical sector have changed significantly in recent years. The new buzzword in global supply chain management 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 inventory and replenishment processes. Companies are thus increasingly relying on LEAN SCM harmonized production and replenishment planning along the entire supply chain, closely managed by IT applications. LEAN SCM is designed expressly to simplify existing planning processes and improve synchronization and variability management of global supply chains. A series of five articles provides further insights into LEAN SCM, focusing on its key elements: LEAN SCM production planning, LEAN SCM replenishment planning, organization and performance management, and IT integration. This article, the third in the series, provides an overview of global inventory and replenishment planning based on the new end-to-end LEAN SCM philosophy, emphasizing a paradigm change in managing increasing variability and uncertainty along synchronized supply chains. First, we explain why we must rethink current inventory and replenishment planning concepts that are embedded in ERP and APS systems. Second, we discuss how LEAN inventory management with dynamic parameter adaption can buffer variability and keep it out of operations in pharmaceutical supply chains. Third, we highlight how LEAN replenishment planning connects to such organizational concepts as constraint-based vendor-managed inventory (VMI) and pull replenishment strategies. Finally, we explain the link between replenishment planning and flexible, capacity-constrained production-campaign planning to synchronize supply chain operations for greater agility and flexibility. 1. The Need to Re-think Current Practices Today s pharma supply chain networks feature an increasing number of contract manufacturers (CMOs) * ) Part 1 and Part 2 see Pharm Ind 2014;76 (1):69-73 and Pharm Ind 2014;76(2): , respectively. and vastly differentiated product portfolios. Increased volatility and uncertainty in market conditions pose new challenges to planning and coordinating within these networks. For this the term VUCA has been coined an acronym of the words Volatility, Uncertainty, Complexity and Ambiguity to precisely describe the rising challenges to global manufacturing organizations [1]. Increased use of personalized drugs, stricter regulations, and higher service-level requirements leave pharmaceutical supply chains particularly vulnerable to rising variability and uncertainty in customer demand. 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 Advanced 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 fixed planning parameters with no buffering of variability, since they are never touched from a planning perspective. In this way the traditional planning approaches represent a conceptual dead-end for solving today s variability management problems. 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 chain planning. ECV Editio Cantor Verlag, Aulendorf (Germany) Packowski and Knein Lean SCM 1

2 2. LEAN Inventory Management Dynamic Parameter Adaptation to Actively Buffer Variability Figure 1 Demand variability management changes significantly under the LEAN SCM planning paradigm, which entails a twosided approach that applies LEAN planning principles to both manufacturing capacities and inventories. [2] 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 (see Fig. 1). The active use of safety buffers particularly safety stocks to hedge AUTHOR Dr. Josef Packowski is co-founder and Managing Partner of the Camelot Consulting Group, an international organization of leading specialists focused on value chain management in core industries comprising chemical, pharmaceutical, and consumer goods manufacturers. 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. During this time he has worked for several of Camelot s most prominent clients and global industry leaders such as Astellas, Astra- Zeneca, Bayer, BASF, DSM, Henkel, Lyondell Basell, Merck, Novartis, Roche, Sabic, and others. Market demand variability is managed on two sides (all graphics courtesy of Camelot Management Consultants AG). against variability represents a major improvement in LEAN SCM Planning. In most companies this alone would be a paradigm change AUTHOR Ernesto Knein is a consultant and LEAN SCM expert at Camelot Management Consultants. He received his diploma in business administration from the University of Cologne (Germany), focusing on supply chain management and controlling. He has several years of international consulting and industry experience with a focus on supply chain management and process re-design for clients in process and discrete industries. In addition to his consulting work he has been a regular guest lecturer at the University of Cologne for supply chain management. 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 (see Fig. 2), even though they have been created to buffer variability. Consequently, high levels of planned dead stock 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 scheduling problems. This might sound intuitive, but it represents a paradigm shift in today s planning processes and systems. Some pharmaceutical companies, such as AstraZeneca and Novartis Animal Health, have already taken steps along this path to improve supply chain performance [3, 4]. Inventory management, in which a dynamic inventory target-setting process supports active variability management, is a key conceptual lever for LEAN SCM. Since safety 2 Packowski and Knein Lean SCM ECV Editio Cantor Verlag, Aulendorf (Germany)

3 stocks play a very important part in buffering variability, it is important to hold 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. Significant benefits can be realized by jointly optimizing inventories along the entire supply chain, accounting for dependencies between stages and optimizing inventory allocation (see Fig. 3). Several recent projects conducted at Top 10 pharmaceutical companies indicate that multi-stage inventory planning approaches can typically generate % inventory reductions while simultaneously preserving or even increasing service levels. 3. LEAN Replenishment Planning Differentiation of Push/Pull Modes and VMI/CMI Organizations Predicting the future has always been a challenge. Under current demandmanagement practices in pharmaceutical companies, most companies perpetually seek to predict future demand but continually fail to do so with sufficient accuracy. In today s VUCA world forecasting accuracy is more difficult to achieve than ever and growth in tender business and smaller order sizes will further reduce accuracy. Nevertheless, all planning activities today are based on inaccurate sales forecast input, resulting in even less accurate planning outputs. This dominant planning approach is known as push-mode producing based on inaccurately forecasted demand. Searching for new ways to approach planning and forecasting is therefore on many supply chain planners agendas. So how can companies cope with this forecasting dilemma? We suggest the following guide to SCM: Accept uncertainty and eliminate the need for certainty Figure 2 Safety stocks in the fulfillment and the tactical planning time horizon. Figure 3 Multi-stage inventory optimization considers all inventories along the supply chain simultaneously. in operations, as a Senior Director Supply Chain at Eli Lilly so fittingly postulated. [5] This means, in the first place, no longer using forecasts to trigger manufacturing orders instead responding to real consumption, implicating pull replenishment.in pull mode, replenishment is triggered by real customer demand, not by doubtful forecasts. 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: make what you sell, don t sell what you made! Yet, to adopt pull mode effectively you must prepare your strategic supply chain footprint and pre-configure your tactical capacity and inventory buffers for increased supply chain agility and velocity. Directly linked to demand-driven pull replenishment and end-to-end supply chain synchronization balancing capacity (OEE, utilization) and inventory (service level, working capital) objectives is organizational alignment of inventory ownership and replenishment responsibility. To enable end-to-end supply chain optimization for leveled flow and greater supply flexibility in today s VUCA en- ECV Editio Cantor Verlag, Aulendorf (Germany) Packowski and Knein Lean SCM 3

4 Figure 4 Linking replenishment demand with flexible production campaign planning. vironment, companies often consolidate ownership and global responsibility, shifting from local Customer Managed Inventory (CMI) through local sales organizations to regional or even global Vendor Managed Inventory (VMI) through a global supply chain organization. Most pharmaceutical companies have already shifted into VMI-replenishment mode after having established global supply chain visibility. Now, however, after reducing overall inventory levels, they face the next process requirement: balancing and synchronizing unconstrained VMI-replenishment demand with leaned, consolidated, or even virtualized supply-capacity constraints. 4. LEAN Replenishment Synchronization Linking Replenishment Demand with Flexible Production Campaign Planning Successful SCM requires effective synchronization of demand and supply. Depending on the underlying replenishment mode (push/pull) and organizational responsibility (VMI/ CMI), supply chain processes differ significantly. Typically, in SCM, replenishment signals from a distribution center (DC) are passed on to manufacturing in certain time buckets, usually months or weeks. Local operations 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 predefined campaign planning at the production site (see first and second points in Fig. 4). From the network perspective, production dates are now known due to the sequenced capacity view, which is far more accurate than planning from the classic bucket perspective. Local operations at the production site in turn need flexible campaign planning, linking replenishment signals with the right campaign size and sequence. The Rhythm Wheel concept accounts for exactly this market variability by enabling flexible campaign building [6]. Rhythm Wheels schedule campaigns in optimized sequences and adjust campaign sizes dynamically in response to unrestricted demand signals (please refer to the previous article in this series, LEAN SCM Production Planning, to learn more about the Rhythm Wheel concept). 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 production campaigns are then mirrored from the local site view to the sequenced capacity view in supply network planning. The resulting replenish- 4 Packowski and Knein Lean SCM ECV Editio Cantor Verlag, Aulendorf (Germany)

5 ment plan is adapted accordingly (see third point) and capacitychecked supply network confirmations provide a realistic picture of inventory levels and developments (see the fourth point). Still, be aware that within a capacity-constrained VMI concept the use of safety stocks in the DC is explicitly allowed, since their levels have been designed to actively buffer variability. 5. Benefits of LEAN Inventory Management and Replenishment Planning Leaders of the pharma industry have already experienced sustainable performance improvements along their supply chains 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 %.. Pull strategies and VMI for replenishment planning in volatile markets improve customer service levels by 3 8%.. Linking replenishment planning with flexible campaign building in local operations reduces COGS by 3 5%. The next article in this series on LEAN SCM, Organization and Performance Management, explains the setup that is best suited to successfully running LEAN SCM; the article following that one focuses on IT tools that facilitate LEAN inventory management and replenishment planning. Part 4 will be published in one of the upcoming issues of pharmind. REFERENCES [1] Packowski J. LEAN Supply Chain Planning: The New Supply Chain Management Paradigm for Process Industries to Master Today's VUCA World. New York: CRC Press; [2] [3] Vidonee C, Billo R. In: Packowski J. LEAN Supply Chain Planning: The New Supply Chain Management Paradigm for Process Industries to Master Today's VUCA World. New York: CRC Press; p.393ff. [4] Evans A. Managing complexity across AstraZeneca s Global Supply Network. A presentation held at the LogiPharma 2011, Geneva, Switzerland. [5] Bohl R. Lean Production Holistically Considering Both Supply and Demand to Optimize the Value to Customers. A presentation held at the LogiPharma 2010, Boston, MA, USA. [6] Packowski J, Knein E, Streuber P. Ein innovativer Lean Ansatz zur Produktionsplanung und -steuerung Das Multi- Echelon Rhythm Wheel Konzept am Beispiel einer pharmazeutischen Supply Chain. In: Schönberger R, Elber R, editors. Dimensionen der Logistik Funktionen, Institutionen und Handlungsebenen. Wiesbaden, Germany: Gabler Verlag; p Correspondence: Dr. Josef Packowski Camelot Management Consultants AG Theodor-Heuss-Anlage Mannheim (Germany) office@camelot-mc.com Chefredaktion: Claudius Arndt. Sekretariat: Gudrun Geppert. Verlag: ECV Editio Cantor Verlag für Medizin und Naturwissenschaften GmbH, Baendelstockweg 20, Aulendorf (Germany). Tel.: +49(0) , Fax: +49 (0) redaktion@ecv.de. Herstellung: Rombach Druck- und Verlagshaus GmbH & Co. KG / Holzmann Druck GmbH & Co. KG. Alle Rechte vorbehalten.