Lean supply chain management in the chemical industry

1 2 3 4 5 6 7 3 Lean supply chain management Chemical supply chain management is Forecast facing increasing volatility, both on the market and supplier side. This is caused by the effects of global networks and the emerging markets, price fluctua- tions and changing customer buying Production Inventory Customer patterns after the recession. Capacity utilization Inventory Consumption This increasing volatility is adding more uncertainty to estimated future demand. Uncertainty is the driver of 160 the bull whip effect. Preparing for the 140 unexpected, adding a a safety buffer 120 100 element to every stage of the value 80 60 chain is creating an amplifying effect 40 of impressive magnitude. Upstream 20 0 1 2 3 4 5 6 7 8 9 10 11 12 producers in particular are facing tre- mendous demand fluctuations. Often Capacity usage Inventory Demand qty Production qty these exceed capacity flexibility and cash constrained buffer stocks, leading Figure 10: Traditional planning approach inevitably to stock outs (Figure 10). In the to-be model inventories are Consumption trigger Order specifically used to synchronize prod- uct flows and to mitigate the effect of demand and supply variability (Figure 11). This approach increases added value contributed by operations Production Inventory Customer and results in more stable capacity Capacity utilization Inventory Consumption utilization as well as in reduced aver- age levels of inventory across the supply chain. 160 140 120 100 80 60 40 20 0 1 2 3 4 5 6 7 8 9 10 11 12 Capacity usage Inventory Demand qty Production qty Figure 11: Innovative planning approach 15 I n d u st ry Pap er Focus Topics 2012 for th e C h e m ica l I n d u s t ry Collaboration may be a remedy, but is a planning approach and therefore could still be infected by the bull whip virus. If we are looking at the value chain within the boundaries of your company, there is a simple antidote: Apply the principles of LEAN SCM First principle: Replace demand planning by pull signals to schedule short term production and cap the inventory Figure 12: Pull signal leads to Push Pull minimum inventory Stocks Stocks Minimum inventory Applying pull signals to schedule production is the key lever to get rid of the bull whip effect. Pull signals prevent bullwhip buffer stocks building up. If there is not enough demand from the market, they simply switch off your production. This creates an intrinsic cap on your inventory levels. The times when production is terminated only when running out of warehouse space are over. The pull signals are created by comparing your actual stock levels with predefined target stock levels – what we call the inventory replenishment level. These levels include safety stock levels, strategic inventory and what is required to cover demand until the next production run. In order to come up with these values you still need to estimate your future demand. But this estimate is done on an aggregated level compared to forecasting on SKU level. Second principle: Combine pull signals with rhythm wheel to ensure optimal production sequencing In chemical operations, production lines normally produce a range of products. Changeover procedures are quite often time consuming, create changeover output with limited quality and take away capacity. Therefore producing in a changeover optimized sequence is essential for optimizing production cost and output. LEAN SCM takes care of that. The scheduling sequence is mapped into a rhythm wheel. This is then used together with historical and future sales information to define a capacity reservation for the individual products. However, the actual amount produced is scheduled according to the pull signals. 16 1 2 3 4 5 6 7 In Figure 13 you can see the basic design. The products are lined up on the wheel in the optimal changeover sequence. When the individual product in the row is to be scheduled, the inventory replenishment level creates the according pull signal. If the inventory level is above, the production campaign is skipped. Figure 13: I Inventory The basic consump- Consumption pull R Replenishment tion pull based L Level rhythm wheel approach Rhythm wheel Stock Customer leveled asset Real life is of course more complicated. In most cases in chemical production you have minimum production quantities. And the production range is quite often a mix of fast moving products and special products that are only produced once in a while. However, Camelot has developed an approach that is able to take these constraints into consideration. On top of that, the approach determines the campaign allocation of the different materials that optimizes your inventory levels for a given changeover scenario. The according modules have been developed to realize this approach in R/3 as well as in APO. Third principle: Introduce production levelling to balance capacity utilization and inventory In the classical planning approach using MRP logic, replenishment volumes are calculated to balance the estimated demand, ensuring the coverage of the safety stock levels at the end of the planning period. This means that all demand fluctuation is mapped directly into production planning. Following this logic, the increasing volatility of the market needs to be covered by the production units. However, up to now the flexibility of the units falls far short of meeting that challenge. Short term changeovers create additional cost and reduce the overall capacity. In the IRL driven LEAN SCM approach, the introduction of a single parameter can prevent this from happening. Like a filter it controls the level of volatility that is allowed to impact the scheduling of production. The remaining volatility is buffered by the inventory. By using this parameter, the balance between varying capacity utilization and inventory can be easily adjusted to the overall situation. 17 I n d u st ry Pap er Focus Topics 2012 for th e C h e m ica l I n d u s t ry Fourth principle: Apply demand and supply focused segmentation to allocate the optimal planning and replenishment approach Not every chemical product is suitable to pull strategies. This depends on the level of demand fluctuation as well as on the characteristics of the production setup. Therefore the introduction of pull principles in chemical production is not just a simple shift from a one size fits all approach, from ‘make to forecast’ to ‘pull’. This transformation is a supply chain planning redesign that is based on upfront product segmentation.