A $400M per year consumer products company was experiencing problems with their Sales, Inventory, Operations Planning ( SIOP or S&OP ) process. Lead times for product were excessive and the supply chain wasn’t responsive enough to serve the needs of its markets. Inventory had swelled 25% to over $70M. This was due to their business processes not being able to handle increased business complexity, four channel strategies, significant growth, the acquisition of a competitor and expansion into international markets. This got management’s attention and they engaged Group50 to work with the leadership team to identify the root causes of the problem
Project Approach and Findings
Group50 consultants chose Value Stream Mapping, part of our Continuous Improvement / Six Sigma tool kit, as the vehicle for documenting the current state of the client’s SIOP process. We focused on two horizontal processes for review:
- Quote to cash
- Raw materials to finished goods
During the initial interviews we uncovered that over the years, the company had customized its NetSuite ERP system to the point that it required significant resources to install updates that had made many of the compatible modules unusable or, minimized the functionality of either NetSuite and/or the attached modules such as their WMS system. As we dug into the Value Stream further, we found the following:
- Forecasting was done sequentially and it took 30 days for the approval of the forecast before the operations team saw it. The operations team only saw a financial forecast and not a demand forecast limiting their ability to order pipe fill and advance order products for stretch goals.
- There were 76 shadow systems (work arounds) identified because of issues with the existing technology in the company.
- The lead time from the start of the forecast until the first units affected by that forecast reached the dock was between 108 and 180 days.
- The 4 planners used their own planning spreadsheet with different assumptions, because the company hadn’t installed MRP and hadn’t identified a single solution planning model.
- Every time there was a change in forecast which required purchasing more goods, the company issued a purchase order to their suppliers. Because there was some crossover of products, channel to channel, the suppliers would get PO’s for the same product and had to aggregate demand on their own. The company wrote 4,800 PO’s in 2018.
- The integration of an acquired company had lost or corrupted the warranty bills of materials and the company was scrambling to meet the replacement parts demands of their customers.
- Several years earlier, the company had decided to allow each of its 4 channels to have their own inventory. In order to support that they chose to parse the warehouse into areas that were dedicated to each channel, creating duplication of inventory and under utilization of the warehouse by 25%. As a result, they had to lease incremental warehouse space.
- When a channel needed the inventory, they had to purchase it from another channel in order to move it from one part of the warehouse to another requiring over 54 steps and 2-6 hours of labor.
- Suppliers wouldn’t order materials for production until they received a PO, extending lead times significantly.
- Consolidation for international shipments was done in the US.
- We identified 273 improvement opportunities.
No organization is capable of handling 273 improvement opportunities. After careful analysis, we identified the following projects to deal with over 70% of those opportunities.
- Do forecasting concurrently: Create working groups that consist of channel forecasters, ops planners and vendor planners to work on the forecast together taking 20-30 days out of the planning cycle.
- Implement MRP to eliminate planning worksheets and provide a systemized approach to aggregating demand and tracking material requirements.
- Implement one inventory system for the company and eliminate individual inventories for each channel which would also better utilize the warehouse and significantly reduce overhead costs.
- Implement a blanket PO system and issue releases against the blanket, eliminating the need to write PO’s. This would also make vendors more confident and provide incentives for storing inventory at its lowest cost levels: raw material, as well as allowing them more flexibility in production.
- Implement a cross functional supply chain council with the responsibility to lead the supply chain transformation.
- Implement flex fence planning to significantly increase the responsiveness of the supply chain.
- Implement a consolidation warehouse in the far east.
- Create a “machine down” part status that focused on criticial replacement parts.
By implementing these 8 projects the company had the opportunity to:
- Reduce working capital by approximately $15M
- Lower yearly costs by nearly $2.5M
- Reduce lead times from forecast to delivery to 70-110 days putting them in the top quartile of their customer’s vendors.
Middle market companies often find themselves in this dilemma as a result of experiencing significant growth and adding complexity to their business. Their systems backbone becomes a patchwork quilt that is incapable of supporting their new business needs. Value Stream Mapping is an appropriate tool for the dissection of business processes and the identification of waste, shadow systems and extended lead times. When coupled with Group50’s Brown Paper Exercise, the entire organization participates in identifying the existing strategic and operating gaps and works together to create appropriate solutions that will move them to the future state.
You can read more from our blog about Group50’s approach to supply chain optimization here.
About the Authors: Jim Gitney is the CEO of Group50 Consulting and Lara Abrams is a Senior Advisor. Founded in 2004, Group50 Consultants are subject matter experts in operations and global supply chains. We understand how to leverage technology, process, organization and vendors to optimize a company’s supply chain, and we bring best practices learned from well know middle market and Fortune 500 companies. Group50 works with middle market companies to significantly improve their supply chain performance from raw materials to delivered finished goods and quote to cash.
- Risky Business…Is your company wearing Tightie Whities?
- The Great Reassessment – Inflection Point
- Is Your Company at an Inflection Point?
- Strategic Maturity – An Imperative at This Economic Inflection Point
- Get on the Train or Get off at the Next Stop! – Inflection Point
- What is an Effective Sales Strategy? – Inflection Point
- Help! I Stopped Growing! – Inflection Point
- Podcast With Jim Gitney on What to do About Moving Through an Inflection Point
- Strategic Planning Playbook
- Virtual Strategic Planning and Strategic Execution