How to avoid unproductive bullwhip effects in a market-synchronized production?

Fluctuations in demand? No more problem for Orthomol!

Supply chain management is measured today and in the present market situation only by one single and undisputable standard: the desires and requirements of the customers and the market. Companies of almost all sectors of industry, who wish to meet this standard while the explosion of product variants continues, have to implement lean and flexible value chains, which can operate with as low inventories and as little consumption of resources as possible. Due to insecure market expectations and an increasingly stochastic customer demand, requirements to the supply chain management and especially to the flexibility of the companies are rising. The example of Orthomol GmbH, Langenfeld/Germany, shows how productivity can be increased despite missing economies of scale and market requirements can still be met.

Orthomol has developed into a leading expert in high-quality vitamin preparations and mineral nutrients. More than 100 products and more than 50 sample items are currently manufactured. As a delivery service, Orthomol guarantees its customers to dispatch orders received before 1 p.m. at 5 p.m. on the same day. Orders received later than 1 p.m. will be dispatched on the following day. In order to guarantee this quick service while products are increasingly individualized and demand is becoming more stochastic, the whole value chain from dispatch over confectioning to production requires a high degree of flexibility (see fig. 1). Optimized setup times, for example, allow for a relatively frequent change in production.

Fig. 1: Sales volume and number of bags produced in the course of time

The production supplies directly the finished goods inventory after passing the confectioning. The finished goods inventory is controlled over ranges of inventory on the basis of the sales forecast. Inventories and thus ranges have been run at a very low level for the sake of a high flexibility of production. However, withdrawals led almost immediately to new production. In order to guarantee a quick reaction and a high flexibility, human resources had to be available in all departments to secure short lead times and low inventories. In addition, no inventory was held for the packed but not confectioned mix. Therefore, the load situation of the confectioning department depended directly on the production throughput rate. This meaned that the production determined also the work load of the confectioning, which requires more staff than manufacture does. For a longer period now, production peaks have been balanced in the confectioning department by very flexible external suppliers. Nevertheless, fluctuations in the market demand originated growing losses also in the productivity of the confectioning department.

Balanced production despite stochastic demand

The analysis and structuring of the assortment of items (ABC-XYZ analysis) provided a sensible approach towards an improvement. By means of restructuring the inventories, important improvements without major changes in the inventory could be achieved. I.e. the inventory level of fast movers with a relatively regular consumption behaviour was slightly increased, while reducing inventory in other item categories. By changing the ranges of the inventories per item category, market fluctuations can now be softened for production.

Production planning can now work with a higher accuracy. Orthomol is put in a position to forecast the production over two weeks and even to fix its production programme for one week. However, only approx. 80% of all capacities available in production and confectioning are considered and approx. 20% are free for so-called exotic orders and unexpected demands. If there are no extra demands at one stage, the capacity is filled with "normal" orders. Thanks to the reduction of the operative stress and an improved planning security in the planning horizon, strong capacity fluctuations can be reduced and the capacity resources decisively improved. The result is a strongly improved productivity, with the market still being satisfied without loss and without major finished goods stocks.

In order to correctly assess the present situation of the supply chain, the following aspects have been examined, among others:

• analysis of the market demand and the sales forecast based on it, its forecasting methods and the accuracy of the forecasts;
• structuring of the whole assortment of items, from raw materials to finished goods (ABC-XYZ analysis), analysis of the inventory development, stock ranges and their consumption behaviour in the course of time;
• analysis of the productivity in the departments of dispatch, confectioning and production in the course of time;
• determination of the capacity utilization threshold of the manufacturing departments;
• analysis of the production planning, its planning parameters, factors influencing production planning and planning quality;
• revision of the supply reliability and flexibility of the suppliers.

Defining the employment risk³ and elaborating potentials

The first point of contact of growing market stochastics is, of course, the sales forecast. The analysis of the market and the assessment of the sales forecast accuracy form the point of departure for all further considerations. The continual increase of the variants required by the market leads to an increase in the inventories, if no countermeasures are adopted, because the accuracy of sales forecasts diminishes for longer periods ahead; in addition, the large number of product variants causes a fluctuation of the sales in the product mix.

Detail analyses of the sales forecast at Orthomol showed a similar tendency. Although the sales forecast was quite accurate over the whole assortment of items, the forecast for individual items was not optimal. By adopting and implementing the most different measures, the sales forecasting process provides an optimal forecast quality for every individual item on a market that is growing more and more difficult. Among others, the following measures were agreed upon:

• classification of the assortment of items and revision / readjustment of the most appropriate forecast methods per item category;
• establishment of stricter tracking signals of the sales forecast system;
• introduction of a regular forecast meeting including production and purchase departments before implementing the forecast results;
• optimization of the forecast process for marketing campaigns in view of necessary lead time;
• development and introduction of check lists for product managers to assist in their planning.

Changes in dispatch

The dispatch department was in a position to meet any market demand using its own capacities. The flexibility was not sufficient, however, to answer daily market fluctuations in customer demand by short-term adjustments of the employment situation (fig. 2). This implied that sometimes too many employees were required to guarantee practically a "100% " service level. For this reason, there was a discussion about increasing the work in store in the dispatch department. This could be achieved by postponing the dispatch of the goods to the next but one day at the latest. With an increased work in store, the resource planning and, as a consequence, the basic employment could be improved. However, these changes would influence directly the delivery dates. Following the maxim "The market demands, we follow!" the changes were not realized. A so-called "knocking-off shift on call" combined with a basic employment is now applied to soften peaks in a more flexible way.

Fig. 2: number of workers and number of dispatched packets per worker and day in the course of time

Changes in confectioning

At present, there are checks realized in the confectioning department to see whether reducing the internal basic employment and intensifying the cooperation with external suppliers would lead to positive economic results. The main criterion for the decision is the price cap, which is determined by the (additional) cost for self-manufacturing and is compared to the acquisition price of the supplier. The costs due to external supply of the service result from the costs originated by external supply or savings thanks to external supply and their comparison to the new price cap for self-manufacturing. The costs of self-manufacturing, however, are influenced strongly by the employment situation and the possibility to adjust capacities to changing employment situations. Thanks to the new production planning situation, the costs of the internal confectioning could be considerably reduced.

Summary

The Orthomol example shows that the general tendency towards more flexibility in an economic situation growing more and more difficult has to be judged individually in every company and every department. It is extremely important to meet the desires and requirements of the customers and the market with a value chain that is as lean as possible. These are the requirements that dominate every other consideration. On the way to this ideal, the power of benefits and innovation of the company must form the basis of every decision to be adopted. The most important feature is not the productivity of the individual department but the long-term overall productivity of the value chain. This often means that the "optimal operating range" has to be found within the trade-off between inventory cost and flexibility cost.