Nine Ways Food and Beverage Companies Can Use Supply Chain Design to Drive Competitive Advantage

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1 Nine Ways Food and Beverage Companies Can Use Supply Chain Design to Drive Competitive Advantage From long-term, strategic decision-making to tactical production planning, supply chain modeling technology can enable food and beverage companies to reduce cost and risk and edge out the competition. Supply chain and transportation network design technology is enabling global food and beverage companies to model, optimize and simulate supply chain and transportation network operations and right-size inventory levels, leading to major improvements in cost, service, sustainability and risk mitigation. From long-term and strategic initiatives to short-term and tactical planning, here are nine ways food and beverage companies around the world are using modeling technology to tackle industry challenges and drive competitive advantage: 1. Manufacturing Strategy 2. Merger and Acquisition Strategy and Execution 3. Cost-to-Serve Optimization 4. Production Capacity Planning 5. Inventory Optimization 6. Ensuring Product Freshness 7. Transportation Route Optimization 8. Sales, Inventory and Operations Planning 9. Risk Management 1. Manufacturing Strategy: What Should We Make and Where? One of the most important decisions food and beverage companies face occurs prior to any decisions about how they will make and distribute their products: should they make those products at all? This question is often referred to as the make vs. buy decision. A second critical decision in this stage is where to make things. This challenge is often referred to as the off-shore vs. near-shore or low-cost vs. local question. In making these fundamental decisions, companies often fall into the trap of focusing only on the production costs or investment costs and forget to focus on the entire end-to-end supply chain, which includes the interdependencies of many cost factors including transportation, inventory, raw material costs and tax. Modeling technology can help companies identify the tradeoffs across all the different cost elements to develop the most cost effective way to serve customers. This also provides data to support decisions such as how much material to buy and when, hedging strategies and pre-build considerations.

2 Case Example: Make vs. Buy Challenge: A major global beverage retailer was planning to introduce a new product line. The big question was, should they produce the new product in their own facility or use a contract manufacturer? There was considerable risk involved in the launch. The new product was untested; it was uncertain whether it would be successful or not. Solution & Results: In order to determine the optimal strategy, the company, taking into consideration the demand forecast, looked at the cost structure over three, five and 10 years of investing in the capital required to make the new product compared to outsourcing production. Outsourcing would be costlier on a per-unit basis, but given the risk and up-front investment cost required to produce the product themselves, this alternative may be better in the short term. Once the initial model was built, the company did sensitivity analysis around fluctuations in demand to determine the best production decision at varying demand levels. Service-area mapping precisely displays service distance to various geographic regions using shaded areas bounded by actual street-level details 2. Merger and Acquisition Strategy: Integrating New Supply Chains into an Existing Network Mergers and acquisitions (M&A) present an incomparable number of options for the design of the new organization s supply chain; a staggering percentage of initiatives fail to meet executive and shareholder expectations. Supply chain design technology enables companies to model their supply chains, evaluate alternatives, optimize the structure and simulate multiple scenarios in order to predict the resulting operational performance of the merged organizations. There are ways to apply supply chain modeling at each stage of the M&A process: pre-merger, post-merger and divestiture/spin-off situations. Supply chain design technology enables companies to build models that include all of the potential inter-related operations and incorporate time and variability in order to identify the best M&A opportunities and the resulting strategy for combining the organizations. This includes identifying the optimal footprint (i.e. number and location of facilities, production capacity, suppliers, transportation assets, etc.) and capitalizing on economies of scale, such as combining customer deliveries for fuller truckloads. Case Example: Making Data-Driven Site Selection Decisions Challenge: One of North America s largest packaged foods producers acquired a major frozen food manufacturer. With fuel costs on the rise, the company needed to re-evaluate their inbound and outbound distribution strategies given the expanded network. Specifically, which DCs should service which customers and what was the optimal quantity and location for DCs and what the fuel cost tipping point would be where the optimal network would not be advantageous. Solution: A network optimization model was used to establish and validate the baseline merged supply chain, determine the optimal network configuration and conduct sensitivity analysis. Results: The analysis showed that savings could be achieved by simply realigning which customers were sourced by which DCs, eliminating redundant shipments coming from multiple sources and reducing expensive cross country shipments. Because of the high construction cost and costs associated with closing an existing distribution center, Memphis was not a good option to build a new distribution center. The most significant savings could be found by expanding the existing Southeast warehouse and moving the West distribution center east out of California. Production Footprint Optimization: Where and How Much Should We Make? Often times demand for products shifts over time to new regions or different quantities, and suppliers and cost structures change as well. As these changes occur, the production footprint should also change to maximize and balance available production capacity. This may mean investing in additional capacity in certain locations or perhaps completely moving production capacity to other facilities within the network. Modeling the production footprint and analyzing varying scenarios helps a company balance existing capacity with the investment required to add additional production. 2

3 3. Using Cost-to-Serve Optimization for Pricing Strategies and Margin Analysis Cost-to-serve is the analysis and quantification of all supply chain activities and costs incurred to fulfill a customer s product demand. This is accomplished by modeling all the supply chain activities in the network, and properly allocating fixed and variable costs. An accurate cost-to-serve model enables informed decision making by answering questions such as: Is this customer or customer segment profitable, given the supply chain configuration and costs? Does it make good business sense to continue to stock and distribute this product? What is the right amount to charge to at least cover my costs? How does my cost-to-serve change when I make a network change such as adding a new DC, changing a customer s sourcing or adding a new supplier? How does my margin change in this new network structure? How should I price a specific product for a specific customer? These models provide fixed cost structures for facilities, processes, process steps, labor, equipment and transportation assets and also account for variable costs throughout the entire supply chain. Food and beverage costs included in this analysis are: raw materials sourcing cost (purchase, transport, store), variable production cost (labor, utilities), fixed production costs (production lines, facilities), transportation costs, inventory costs, DC costs and taxes. Top image shows a dashboard comparing baseline to optimized profit, landed costs and margin; bottom image shows comparison of baseline to optimized customer lanes. Green lines are profitable, red are not 4. Production Capacity Planning: Utilize Existing Capacity for Lowest Total Cost Network optimization can also perform more detailed production modeling to right-size the production footprint as well as to optimize production capacities globally, or with drill-down detail for individual facilities. Depending on corporate goals, companies may choose to optimize for maximum utilization or maximum profit. Models can incorporate all production-related details, including production lines, labor resources, production processes within the plant and for each line, bills of material and converting semi-finished goods to finished goods, throughput rates, costs and yields. Modeling results can also determine lot sizing, labor shift allocation, working hours or best utilization of changeovers. Four-week production plan for three lines, showing production quantities and production hours for each product 3

4 Case Example: Product Allocation Challenge: A large food manufacturer had already made investment decisions around facility locations and production footprint. The next question was how best to utilize that footprint. Over time, demand for its product fluctuates to different regions of the U.S. and the company wanted to evaluate the impact of shifting locations from which raw materials were sourced in order to provide a lower total cost. For example, if the company has 10 plants where a certain kind of soup is made, where and in what quantities should the soup be made, based on current raw material sourcing costs, transportation and facility costs? Solution and Results: By utilizing capacity modeling to simply balance variables and capacity, the company uncovered $50 million in cost savings in just one year, without any changes to the physical production footprint. 5. Inventory Optimization Multi-echelon inventory optimization enables food and beverage companies to create accurate models across all echelons of the supply chain, with a full inventory plan that includes optimal safety stock, cycle stock and pre-build inventory, as well as strategies for promotional products. Companies can also use supply chain simulation to predict the service rates, inventory levels and site capacity constraints for any potential supply chain structure. Inventory optimization allows companies to answer questions such as: How much inventory do we need to meet our service requirements? Where should we stock product? When and how frequently should we replenish? How do we buffer against risk factors such as lead time variability and demand uncertainty? How frequently and in what lot sizes should we produce? What is the optimal transportation mode to use to properly balance working capital? How should we plan our inventory to accommodate for seasonality and/or production constraints? How can we take advantage of volume discounts? What is the space requirement for a given facility? Using supply chain modeling for inventory optimization enables: Production volume, capacity and inventory Automatic demand analysis and classification to identify different buying behaviors and unique variability traits True multi-echelon inventory right-sizing for all product types, including fast movers, slow movers, intermittent demand, etc. The optimal mix of postponement versus finished goods inventory placement The ability to simulate any inventory strategy to test service level performance and capacity utilization 4

5 6. Ensuring Product Freshness Product freshness is defined in many ways, including by shelf life, sell-by date and use-by date, and date-of-minimum-durability. Additionally, different food industries have different priorities and requirements for freshness. For example, soft drink companies require speed-to-market, durability on display and need to balance stock-outs vs. dumping. Dairy product manufacturers need to adjust to continual price fluctuations and require specific temperature, humidity and micro-organism control. Food companies must consider all of these variables and constraints in order to ensure product freshness and availability and minimize spoilage and dumping. A beer producer created this dashboard to understand inventory behavior across scenarios with varying service level requirements Traditionally, freshness has been considered as only an inventory issue in the warehouse, not taken into account in production planning. Modeling technology can be used to balance the production and distribution supply chain to help ensure freshness and reduce risk of product wastage and shortage: Network optimization identifies the optimal path from production to final customer within the shelf-life requirements Inventory optimization takes into account shelf life, production inventory, and lead times in order to meet service level requirements Simulation, using the policies and targets set in inventory optimization, can be used to track product age at each echelon and throughout the model time horizon Product duration in the supply chain can be tracked by considering transit times, production time, average time in facilities and other time considerations Scenario analysis can analyze trade-offs of alternate production and distribution scenarios to reduce the probability of dumping 7. Transportation Route Optimization: Routing Inbound Shipments and Customer Deliveries For many food and beverage companies transportation and logistics cost is a huge portion of total supply chain spend, whether they own a fleet or use contracted shippers. Businesses need to answer questions such as: How will our transportation routes change with the implementation of the new network design? Will our new network design deliver even more savings through new transportation routes? Could there be a more efficient way to get our product from the supplier to production? How can I build efficient truckloads and routes that cube out or weigh out as much as possible? How much savings can be achieved through multi-stop customer deliveries versus LTL? Is there an opportunity to do milk-run pick-ups and drop-offs to find even more savings in my transportation routes? Should we ship directly or through a mixing center? 5

6 Using modeling technology, businesses can identify alternate supply chain network configurations using network optimization and then model the precise transportation costs of each, or do stand-alone route optimization. This process can help businesses identify optimal DC-to-customer assignments, determine the ideal mode mix and LTL/FTL combination, create optimal multistop delivery or pick-up routes, determine the best utilization of assets, evaluate driver work schedules and even perform servicebased greenfield analysis. Create multi-stop routes including pick-ups and deliveries interleaved throughout 8. Sales, Inventory and Operations Planning (SIOP): Fine-Tune Production Plans in Response to Changing Conditions Seasonality, promotions, and other situations that influence product demand can place stress on production schedules and overall capacity. Therefore, it is important for companies to regularly review demand forecasts as the information becomes available so that they can best balance limited production capacity with demand volumes that often exceed this capacity. This requires production strategies such as prebuilding of goods or pre-positioning of inventory for certain products so that capacity remains available for the most critical items. Detailed modeling is an essential means of determining the SIOP strategy. These models can be built to include such detail as changeover times and bills of material information from ERP systems. Using simulation technology, businesses can get a detailed, accurate picture of exactly how production and inventory are balanced within lead times to meet orders, and the resulting service levels and order cycle times. Example sales and operations planning graph displays prebuild inventory, demand and production Case Example: Supply and Demand Balancing A global beverage producer wanted to analyze how its monthly tactical production planning could be adjusted based on demand changes. Seasonality, product promotions and new product introductions all had an impact on demand. A detailed model with a four-month rolling window of demand helped the company determine which products to schedule for production when, based on factors such as line capacity, cost and shelf life. As demand information becomes available, changes can be made on the fly in order to best utilize available capacity for lowest total cost. 6

7 9. Risk Management: Responding to Sustained Market Volatility Given the global reality of sustained volatility, complexity and rapid change, risk management has now become a hugely important topic. Utilizing supply chain design modeling technology has become a critical method for companies to examine how their supply chain will perform under a wide range of market conditions and assumptions, and analyzing the trade-offs between cost, service and risk. Companies that maintain these living digital models of their end-toend supply chain are able to mitigate business risk through the design of their supply chain operations and also quickly respond to supply chain disruptions in the most optimal manner, therefore enabling significant and sustained advantage over competitors. Case Example: Effects of Commodity Price Fluctuations For a milk and dairy products producer, commodity price fluctuations are a way of life. The company produces different products based on variable market conditions and pricing. Recently, the company began expanding into new regions and utilizing ocean carriers. The challenge was now pricing fluctuations as well as distribution variability. The ocean carrier could arrive at its destination in 45 days but could take as many as 120 days. By building a model and testing different scenarios, the company was able to make more accurate inventory stocking decisions based on unpredictability of new stock arrivals, thus lowering its risk levels in the face of lead time variability. Modeling can be used to pre-plan supply chain responses in response to various risks in supply, demand, weather and geo-political events. This example shows an alternate sourcing scenario in response to commodity pricing shocks. 7

8 What Makes LLamasoft the Most Complete Design Solution? LLamasoft occupies a unique place in the market as the only commercial software vendor dedicated solely to supply chain design. Some of LLamasoft s key strengths are: Mixed Mode Solving: The only network design application that integrates network, transportation, inventory and simulation algorithms into a single tool, with a unified database and user-interface for a powerful, efficient user experience Mapping and Visualization: Geographic Information System (GIS) mapping allows users to view, edit and analyze key inputs and outputs visually for geocoding, routing or solving for distance. Built-in supply chain visualization reports and mapping overlays such as service area and risk metrics can reduce the time it takes to understand complex information Automatic Scenario Generation: Powerful multiple scenario analysis within a single model database offers the ability to adjust any combination of key cost or model elements to do sensitivity analysis, simulate impact on the supply chain over time, and make the optimal decisions Cloud-Based Solutions: Providing our customers with cloud-based reference and benchmark data, a remote solving option to offload large and complex solving problems and Web-based access to models and data Product Development: LLamasoft invests greater than 30 percent of annual revenue in research and has the largest dedicated development staff of both software developers and operations research scientists in the industry Data Integration and SAP Connector: Strong data integration, editing and error checking capabilities; along with our Data Guru SAP Connector that enables easy access to supply chain modeling information from SAP with no coding v LLamasoft, Inc. 201 South Main Street, Suite 400 Ann Arbor, Michigan 48104, USA Phone: LLamasoft.com 8

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