Taking stock – Supply chain optimisation

Posted on 9 Sep 2010 by The Manufacturer

It may be the best £100 that Nicholl Food Packaging has ever spent. Or will ever spend, for that matter. At a stroke, the Cannock-based aluminium foil food container manufacturer — a supplier to companies such as Heinz, Danone, Unilever and Manor Bakeries — was able to eliminate huge swathes of expensive inventory. Malcolm Wheatley reports.

Fairly typically, Nicholl had long relied on high levels of ‘just in case’ stocks of both finished goods and raw materials — the only practical solution, it thought, to an unholy trinity of unpredictable demand, periodic capacity constraints and seasonal ‘spikes’.

For with production planning and supply chain optimisation constrained by a reliance on an elderly Movex ERP system and a variety of Lotus 123 spreadsheets, neither the forecasting or optimisation capability required in order to match inventories more precisely to demand was present.

The solution? Preactor Lite, an entry-level planning and scheduling solution from Preactor International.

“We paid less than £100 to download the software, and within a matter of days Preactor was providing levels of planning and scheduling visibility and control previously unknown for us,” says Chris Scattergood, operations analyst at Nicholl.

A subsequent upgrade to Preactor’s P400 ‘full service’ system delivered still further improvements, reducing stock levels even more.

“Prior to the upgrade we would keep between three to four weeks’ usage of raw foil stock on site at any one time, with this rising to around six weeks in our busy Christmas periods,” says Scattergood. No longer, it turns out.

For while there have been other inventoryeliminating initiatives within the company, the new system has undoubtedly played a large part in enabling Nicholl to reduce stocks to approximately one to two weeks’ usage, he explains. Finished goods inventory levels have seen an even steeper reduction, with stocks of some items dropping from over three months’ worth to less than three weeks’ worth.

Demand shock
For many manufacturers, the recession has placed the issue of supply chain optimisation centre-stage.

As demand collapsed, inventories quickly ballooned, often prompting frantic de-stocking measures, as banks refused to lend more to finance the growing mountains of unsold goods and materials.

Yet, as is often the case, taking an axe to inventory levels delivered only partial relief. For the inventory that actually reduces tends to be of the products that are selling, leaving manufacturers with obstinately high levels of stocks of slow-moving or non-selling lines.

Come an economic recovery — as now — pressures then mount for higher inventory levels to support rising sales. The problem? Unhappy banks, again, who see cash levels plummet and working capital again start to increase.

“Re-stocking is never as simple as businesses believe,” says Cathy Humphreys, UK country manager for German supply chain optimisation specialist INFORM. “Having de-stocked arbitrarily, they have the wrong stock profile — but re-stocking to meet the demand that is actually being met can consume far more cash than is readily appreciated.” The result? “Companies have been backed into a corner,” she says. “They’re living with dangerously low inventory levels, but are still dealing with the legacy of over-ordering in the past.” Yet what might appear to be the obvious solution remains tantalisingly out of reach. Because for many companies, it’s simply not possible to just eliminate stocks of slow-moving or obsolete items in order to create headroom for stocks of saleable items.

“Companies are hesitant to write them off as this will ring alarm bells for investors,” says Andrea Harris, a senior consultant at Northampton-based supply chain consultants Davies & Robson. “In a number of instances companies are re working slow-moving or obsolete stocks into saleable items, but are finding that the value they’re adding to the product is not repaid by the eventual selling price.”

Culture clash
In which case, of course, rather than buying in stocks in order to meet poorly-forecasted demand, why not move to pull-based ordering to meet real demand? Views on this, though, are mixed. Davies & Robson’s Harris, for instance, is openly sceptical.

Many manufacturers, she charges, “Simply don’t have the skills to set up robust pull systems — or, quite simply, they would have done so prior to the recession.” In the long run, she reckons, “Companies that are not orientated towards lean manufacturing thinking will return to their safety stocks the minute the market is strong enough for them to do so — if they survive.” Others are less convinced by this argument. Dr Christos Tsinopoulos, a lecturer in operations and project management at Durham Business School, for instance, sees the severity of the recent recession as creating a significant shock to both supply chains and management thinking.

“It’s a shock that should create an impetus — and a reason — for manufacturers to switch from a push system to a pull system,” he asserts. “It helps the internal persuasion process, and creates a consensus that something needs to be done.” And so, for many manufacturers, a more practical solution to the post-recession supply chain optimisation question may be — as at Nicholl Food Packaging — to firmly harness that changed culture to systems designed to rigorously enforce inventory management objectives through better forecasting, planning and control.

At Grantham-based 200-employee sofa manufacturer Quality Furniture Company a journey towards Oliver Wight-accredited Class ‘A’ business excellence has seen earlier outsourcing-led supply chain initiatives supplemented with a rigorous focus on master production scheduling and improved demand planning.

Stock levels are down, freeing-up £400,000 of cash, with both sales-per-employee and profit-peremployee measures showing increases. And master production scheduling is greatly improving supply chain visibility for both Quality Furniture as well as its customers and suppliers, says operations director David Bramwell.

“We recognise that reducing lead times is very important, because it will enable us to hold less stock and be more responsive to upswings in demand,” he notes. “While we are located at the same premises and employ many of the same people, the way we work is totally unrecognisable from a few years ago.” While overall raw material lead times are still long, the company has now synchronised the supply chain through the entire build schedule, virtually eliminating fire-fighting. “We can look ahead with confidence, as we are much more proactive about planning our own capacity,” concludes Bramwell.