Chain gang chat

Most manufacturers don't know the net margins of their products. That's the view of a number of supply chain experts - if not always those involved in the industry itself, it appears.

It is certainly a view held by Michael Neal, chief executive of US company SignalDemand, which has developed a web-hosted demand-price management system for use by food manufacturers (see p18).

And it is supported by Mike Novells, md of software supplier Preactor International, which - together with systems supplier Infor - sponsored Food Manufacture​'s first supply chain optimisation round table last month. Preactor supplies advanced planning and scheduling systems to the food industry around the globe. UK customers include the likes of Bakkavör and Ardo.

Round table chairman Tim Knowles, an expert in supply chain with many years' experience helping manufacturers punch above their weight with retailers, blamed firms not factoring in true distribution costs for servicing retailers. "True costs are rarely built into the corporate account," he said. In contrast, people in the supply chain always know where money is being wasted, he added.

Not everyone agreed with this view. Ian Ashbrook, supply chain director for Young's Seafood, said that if firms had no idea of their margins they wouldn't remain in business long.

Ashbrook remarked that while "activity based costing" could show benefits it was a complex process that involved a lot of work. In contrast, he said, businesses could benchmark activities to determine how well different accounts adhered to sales forecasts.

Clearly, some firms have a better idea of where they are making - or, more importantly, losing - money than others. But, what is indisputable is that many are continuing to carry product lines that should have been killed off a long time ago; their contribution to the bottom line being at best marginal.

Marginal product lines

The continued presence of a marginally profitable product on supermarket shelves is primarily fuelled by fears among marketing departments that killing it off would open up space to competitor products. "Sales and marketing people always want to keep it but supply chain people want to remove it - so you've got issues to resolve," said Knowles.

Those in supply chain bring a different perspective to such considerations and, arguably, their voices are not always heard as loudly as they should be when it comes to making important decisions about product retention. "If you make it simpler, the whole supply chain is more effective," said Ashbrook. "You can't expect to win every challenge, but some products do get removed."

Introducing the round table, Knowles set the scene by saying: "Demand management is most definitely a game for consenting adults only - not suitable for people of a nervous or self-seeking disposition." It's about aligning sales forecasts with manufacturing capacity and supply chain knowledge, with the capacity to react to change, he added.

Knowles described the elements involved: people, process effectiveness and technology.

On people issues, he said: "In forecasting, we need to take the politics out of it." Sales departments should not be allowed to create forecasts, he added, since they tended to be overly influenced by their targets, while often failing to account for production constraints. "Very often sales people do not understand the importance of forecasting," he said, adding that it was necessary have uniform disciplines and clear ownership of forecasts.

For process effectiveness, sales and operations planning (S&OP) needed to be aligned; factories had to adhere to schedules; and there needed to be collaboration and discipline when dealing with customers. "Very often firms do not use the right level of seniority in S&OP," said Knowles, arguing that director level involvement was essential.

For forecasts to be met, it was essential that everyone in the business was working to a single set of numbers, he argued. However, he accepted that "a single truth" was sometimes difficult to achieve - especially when sales teams were hell-bent on achieving their own targets. In addition, clean data and clear metrics, were both necessary, he added.

Ownership of forecasts often appears to be lacking. While forecasts may be arrived at collectively, it is quite common for the blame to directed at individuals when things go wrong. Jeff Stanton, non-executive chairman of wine and spirits warehousing and logistics specialist London City Bond, said: "If it is a bad forecast at the beginning, it is a very bad one by the time it gets to us." Ashbrook added: "The more you make it an absolute blame, the harder it is to get someone to take responsibility."

Matching supply to demand

Rachael Lorman, supply chain director for Dr Oetker (UK), which ships goods to the UK from its manufacturing facilities in Germany, said her biggest issue related to cultural differences between the two countries. The tendency for UK supermarkets, for example, to make late demand changes and expect their suppliers to respond accordingly was sometimes a source of problems, she said.

Similarly for Paul Jaggard, supply chain manager for Jordans (which is currently merging with Associated British Foods' Ryvita business), mismatch between demand and 'perfect' supply, was the biggest problem. Factories, he said, were geared up to deliver a performance target, usually 'overall equipment effectiveness' based. To achieve this, minimum runs were set and changeovers were avoided. This keeps the machines running, and avoids idle time, but limits flexibility.

To complicate matters, Jaggard noted most raw material/packaging suppliers asked for economical order quantities, typically a container-sized load if coming by sea. However, sales demand often fluctuated, due to seasonal demand or promotional activity and retailers insisted on a minimum product life at point of receipt, which limited stock build options.

He added that while product demand was steady, waste could be managed, but as soon as products were changed, or demand fell, the economics became increasingly difficult to manage. Remaining competitive meant continuous change in line with market demands, therefore managing the risk of loss became increasingly important, he concluded. "The best you can do is risk assess a material and adjust your inventory."

But balancing supply to demand while minimising waste, is clearly a big issue for many food producers and Ashbrook said it was a critical issue in demand planning. "It will always influence the way you demand plan," he said. "Demand planning will dictate how full and efficient your lorries are."

For those primarily involved with short shelf-life manufacture, the biggest problems are inevitably related to the compressed timelines inherent in doing business.

The UK's unpredictable weather, for example, often proved a headache for Richard Thorold, business planning manager for Bakkavör-owned Wingland Foods, which supplies bagged salads. It not only affected demand, but also supply if crops failed or could not be harvested due to adverse weather conditions. "We use data on weather to track demand," he said. "We try to index whether the weather pattern drives the buying pattern, rather than the actual weather itself."

Changeable weather was also an issue for Alex Millington, planning manager for short shelf-life fruit juice and smoothie producer Orchard House Foods. "It's not just taking historical data, it's about understanding how the retailer works," she said.

Promotional planning problems

As retailer competition hots up, promotional activity is increasingly problematic.

Knowles said: "We are probably stuck with bogofs [buy one, get one free offers], even if the government doesn't like it." He added: "Cost is not given the degree of prominence it should be regarding promotional activity."

But cost was not the only issue to be considered when it came to promotions, argued Lorman. "It has to do with market share, so you may be prepared to carry a higher cost," she claimed. However, Knowles argued that without knowing the real costs of promotions with different retailers, it was impossible to put a value on that business.

Technology has an important role to play in good demand planning, said Knowles. But it had to combine future compatibility, ease of use and availability across the supply chain. Too many companies relied on widely used top level enterprise resource planning systems (ERP) for their results, warned Knowles: "SAP does not solve all the problems."

Complex software systems can support and manage elements of the demand/supply balance, but unless clean, timely data is entered, they will fail, claimed Jaggard. Focusing on the speed and cleanliness of accurate information was key to S&OP.

While software systems clearly have a role to play in squaring the supply/demand circle, a recurring issue for Jaggard resulted from the use of a variety of systems from different vendors. When problems arose, much time was wasted contacting individuals to identify where problems lay, he claimed. What he really wanted was a single point of contact.

For other users, the incompatibility of software systems was the main bugbear.

However, this issue could be resolved if Infor is successful in a major development it is currently working on. Infor is developing its Process Essentials toolkit of software products to communicate with systems supplied by other vendors. The technology, known as "service oriented architecture", uses a form of "messaging" to allow communications between different systems, which - if successful - will overcome the need to write bespoke software to achieve the same end.

Infor's Mike Spragg compared this approach to designing a rail network with a common gauge of tracks on which different train companies could operate. "The last two years have been working on the tracks to decide what size they need to be," he said. "In the next five years there will be a lot more things to run on the tracks." FM