Organisations need 𝐚𝐜𝐜𝐮𝐫𝐚𝐭𝐞 𝐟𝐨𝐫𝐞𝐜𝐚𝐬𝐭𝐬 to help with financial and budget planning, incentive management, procurement planning, warehouse sizing or production planning.
Consider the typical problems that Beverage Bottler will be facing:
- Seasonal demand peaks (summer and holidays) and seasonal production constraints (water limitations in summer) required production to be redistributed across plants and inventory to be built-up in preparation.
- Product specific shelf-life and product variability (type of sweetener) needed to be taken into consideration to ensure customers received consistent batches.
- Wet season required the creation of contingency plans to cope with flooded facilities, in particular redistribution of inventory or production capabilities and progressive restoration of full operational capacity, as well as the ability to recompute on a regular basis transportation plans (road closures).
In this article, we will present a general guide to some of the different production, inventory and transportation planning problems that can be solved with optimisation.
- Quarterly production and inventory organisation
- Annual production and inventory planning
- Multi-annual network growth projection
- Contingency planning
- Raw materials and suppliers plan
- Introduction of new products
- Expansion plan, network configuration change, mergers, acquisitions
Quarterly Production Organisation
The problem is the reorganisation of the 3-month term production, which is when you have the most reliable sales forecast information and the detail of the operation changes.
We must take into consideration:
- Production detail: lot size, tanks, setup time and cost, production rate, production recipes (syrup, packaging, label, multi-product presentations), maintenance lines, staff costs in normal / extra weekly time / holidays, direct and indirect production costs.
- Detail of the warehouses: current inventories and inventory rotation, warehouse entry / floor / exit capacity, storage and product maintenance costs, safety inventory.
- Transport details: enabled routes, transport times and frequencies, freight costs.
The plan allows to define:
- Changes in production and transportation due to stop lines or increase in hours worked on business days or holidays.
- Short-term inventory movements due to limited warehouse capacity or interruption of transport routes
- Quantities of raw materials according to needs (multi-flavoured SKUs whose sales are higher at the end of the year, mixtures of high-fructose corn syrup and cane sugar depending on the sweetening power of the latter).
The 3-month production plan is generally done on a detailed scale:
- 6-12 temporary periods of 1 – 2 weeks
- Important number of SKUs (500-1000)
- Detail of plant, inventory and transport.
- Availability of raw materials
Quarterly Inventory Organisation
Operations typically have a degree of uncertainty linked to the fluctuation of the input parameters of the models.
- Demand Variation
- Variation of compliance of plants and suppliers
- Variation of transport time
The purpose of inventory optimisation is to define how much inventory is needed for each SKU in each node of the network in order to ensure adequate service levels with the minimum inventory.
Typically, companies use a variable ABC hierarchy by location, based on sales volume to determine the number of floor days of a product.
The inventory optimisation allows adding other criteria that influence the quality of the service such as the forecast error, the default of the plants due to saturation or the variability of the transport times depending on the regions.
This allows a better use of the existing inventory thanks to a better adaptation of the inventory levels to the context of the region considered.
The recommendation to increase inventories in certain areas and reduce them in others, for a global improvement in the level of service.
Reorganisation of Production based on Seasonal Requirements
Seasonal demand peaks (summer and holidays) and seasonal production constraints (water limitations in summer) required production to be redistributed across plants, and inventory to be built-up in preparation.
Product specific shelf-life and product variability (type of sweetener) needed to be taken into consideration to ensure customers received consistent batches.
Wet season required the creation of contingency plans to cope with flooded facilities, in particular redistribution of inventory or production capabilities and progressive restoration of full operational capacity, as well as the ability to recompute on a regular basis transportation plans (road closures).
There are several dimensions in the decisions to make
- Temporary production movement: produce more than necessary in previous time periods to have the necessary inventory in the high season.
- Increase of plant capacity: add shifts locally to increase production capacity with different costs (weekdays, weekends / holidays).
- Support between plants: a plant with free capacity gives support to another plant, with implications for transport.
- Specialisation of plants: when making the previous modifications the production can be distributed in a way to maximise the size of the lots so that the plants are more efficient
Depending on the characteristics of the logistics chain, one or another type of production reorganisation may be more or less feasible:
- Life time: depending on the type of container (glass, PET or can), carbon dioxide is more or less conserved in the bottle. Products with shorter life can only move slightly towards the past. Rather, consider support options between plants or increased capacity.
- Transport cost: high transport costs make support options between plants or specialisation of plants by products unfeasible. Rather, consider increasing plant and production capacity in time periods prior to sale.
- Holding cost: very high storage costs make production options in temporary periods before sale impossible. Rather, consider other options. Storage restrictions: sometimes the capacity of the warehouses does not allow to store much product so it is not feasible to store in temporary periods prior to sale.
- Flexibility of work: the flexibility of plant capacity makes feasible options for temporary increase in plant capacity due to increased shifts, work on weekends or holidays.
The B Plant has an increase in production in June-August due to an increase in capacity (overtime).
Unable to cover all the necessary production of the blue product, the V Plant has to cover part of the production during the time periods from May to September.
The annual production plan in general is done on a medium scale:
- 12 temporary periods of 1 month
- Average number of SKUs / families (100-300)
- Sufficient details in the logistics chain
Introduction of New Products
A product is typically introduced into a limited number of plants and warehouses to limit the impact on the rest of the production, while determining whether the market response is positive.
In a second stage, the definitive production plan is determined with a progressive increase in the number of plants where the new SKU is produced.
With an average of 1 new product launched each month, an effective process is needed to:
- Evaluate different production location scenarios and minimise the disruption of operations.
- Evaluate the economic and operational impact of the product launch on a limited number of plants and warehouses.
- Evaluate changes in productivity when moving to a multi-plant production.
Annual Planning of Raw Materials
The raw materials plan in general is made after the annual production plan.
It covers the supply of critical inputs necessary for production.
The problem is to plan the quantity to ask each raw material supplier:
- Selection of suppliers based on their supply capacity, costs and distance to the plants.
- Evolution of the supply plan based on the evolution of production.
- Reverse logistics chain and re-supply needs in raw materials based on returns (returnable containers).
Annual Inventory Planning
The problem is to manage the evolution of inventories annually.
The variation of production by time period implies a variation of the volumes in the warehouse.
Inventory divided into pre-build, in-transit, cycle and safety stock.
The inventory presents an increase in several items for the high season:
- Moving Inventory
- Cycle Inventory
- Security Inventory
- Extra Inventory
In addition, the production plan determined that the production jump could not be covered between February and March in a single time period, so inventory must be added in the warehouse to reduce the variation in volume.
Annual inventory planning allows you to manage inventories with high-level concepts to prepare the correct execution of the company’s strategy.
Increase of the service level from 97% to 99% for high-turnover products in high season and measuring the impact on the logistics chain both in reducing sales losses and in volumes in the logistics chain.
Inventory preparation for a probable increase in volumes due to promotions on certain products.
Impact on inventories of a change in flows, for example distribution of all low-rotation products from a given warehouse and specialisation of the other warehouses in high-rotation products.
Multi Annual Network Growth Projection
The problem is to prepare a multi-year growth plan.
The action plan depends on multiple factors such as the increase in consumption by type of beverage, search for new markets, development of new product lines, increased transport costs due to increased oil costs or legislative changes (overtime, footprint carbon, etc.).
There may also be strategic decisions of the company such as mergers with competitors or acquisitions of complementary products of the current portfolio (waters, beers, snacks).
Possible actions are
- Opening, increment, transfers or closing of plants / lines.
- Change in plant profile, multi-product vs. specialist.
- Change in the organisation of wineries (cross-docking)
- Opening, capacity increase or closure of warehouses
The multi-annual growth plan is resolved on a 5-year scale
- 20 temporary periods of 3 months
- SKU families only (20-30)
- Details on possible strategic actions (openings / closures), investments, closing costs, etc.
Specialisation vs. Flexibility
When the expansion plan is being considered, it may involve opening new plants or production lines and this requires defining the profile of plants, referring to the number of lines, products / families that must be manufactured in each production node.
A high flexibility plant has several lines and the possibility of developing all SKUs or a large number of them.
This usually implies greater number of enlistments, lower packaging rate, lower capacity and a higher operating cost.
A plant with less flexibility restricts the number of products / families.
Normally in production runs the lots are larger.
By having less enlistments, they are more efficient, allow greater packaging volume and a lower production cost.
Availability and ease of transport play an important role in this definition.
For example, if the flow between plants allows to compensate the load, this can reduce the cost of transport and favour specialist plants.
Likewise, a greater number of plants normally implies greater proximity to customers and this entails a lower cost of secondary transport, which is usually the most important within the distribution costs, so this should also be incorporated into the analysis.
The balance of demand by regions / products also affects this definition.
If it is similar between regions, the vehicles will be able to have return trip easily, but if not, the return will be empty increasing the costs of transportation and primary distribution.
The inventory and storage capacity policy can also restrict plant configuration.
It is clear that the greatest saving item is achieved, if the production benefits are obtained and these must compensate for the transport and inventory expenses that are usually increased.
Information & Data Requirements
The models are very dependent on the availability and quality of the data.
We will need to define how to obtain reliable data for the following items
- Fixed and variable costs, rates, capacity and production compliance.
- Costs, levels and capacity of warehouses.
- Inventory policies and storage restrictions.
- Routes, costs, freight origin destination, times and transportation compliance.
- Demand and fluctuation, sale price.
Some are necessary for the inventory issue with Inventory Management Optimiser (which considers the uncertainty of the logistics chain).
The others for the planning of production and flows that operate on the network.
Plants & Production
- Description of plants and lines (flexibility of products made there).
- Fixed costs per plant and line (as defined by the cost structure).
- Variable cost of production. (eg USD / HL), by product / family, production line or packaging.
- Production rate (eg HL / Hr)
- Hours / shifts scheduled and available per week / month.
- Costs of opening / closing, operating lines or plants (depending on the type of problem)
- General BOM and simplified by SKU / product family.
- Policies / restrictions, general operation or product allocation.
- Maintenance, scheduled and unscheduled.
- Production compliance
Warehouses & Inventory
- Description and classification of warehouses (Plant, CD, primary, secondary, cross-docking, etc.).
- Fixed and variable costs (as discriminated against)
- Storage capacity (pallets, boxes, HL or depending on the unit they manage)
- Inventory policy if applicable (min / max stock, per product)
- Work schedules / shifts.
- Other restrictions and conditions.
- Current routes
- Types of vehicles traveling and capacity (TON, pallets, etc)
- Cost or freight per trip / route, current and potential.
- Travel time per route.
- Delivery Restrictions
- Delivery time fulfilment
Clients / Demand
- Delivery areas, cities, municipalities or delivery warehouses.
- Demand (biweekly / monthly / yearly) for “customer” by product or family
- Average sale price (net value after channel discount) by product or family
- Average fluctuation