Improve performance by ‘doing something’.
Increase sales and/or profitability or reduce cost. This is the pressure that a new CEO or division manager can often be under; preferably to ‘do something’ that affects all three – and the pressure is increased if the business is not performing to expectations. But can ‘doing something’ lead to sub-optimal supply chain decisions?
A recent example is a business that operates a number of franchise based cafes and take-away food chains under various brands. The business has functioned as separate operations, each buying its own products and supplies, but the new CEO aims to have only one or two food services suppliers for the total group. The CEO states this is to “leverage the buying power of the group, condensing the range of products to economic run sizes”. He also notes that “franchisees could receive deliveries and invoices once per week rather than two or three times, minimising disruption and paperwork”.
But, to meet expectations of the Board, should only one approach to Procurement be pursued – are the challenges of having 140 SKUs across eight flavours of syrups the same as having eight regional suppliers of banana bread? Should fresh foods, packaged foods and non-food items be sourced and planned differently? The answer lies in the three product types
- fresh foods (classified as ‘short shelf-life’ products) are for quick sale and consumption
- packaged foods have ‘use by’ dates that provide a shelf life (classified as consumer packaged goods or CPG) and
- non-food items e.g. paper cups, napkins and cleaning products are classified as fast moving consumer goods or FMCG
In this case, consumers buy the short shelf-life products, but CPG products (syrups, spreads and jams) only complement the main product and FMCG items are just used.
The initial focus must be customer satisfaction. For a business with a number of brands, each needs to differentiate, based on the type of establishment. If reputation suffers, due to the products under each brand being viewed as very similar and potentially stale (deliveries of cakes expected to be once per week) then it will be a challenge to recover.
Instead, for short shelf-life products, the objective is to emphasise freshness and differentiation – daily deliveries of products that do not look like those in the outlets of competitors (which include the group’s brands). The Procurement objective is to source from suppliers which have that capability – make fresh and different products and respond to orders with short delivery times. This requires ‘assemble to order’ (ATO) type suppliers – so eight regional suppliers for banana bread could be acceptable.
Potential suppliers would need to provide products across the range for each brand; able to respond to the additional variability of promotion products and have the capability to develop and test new products. As they would have supply contracts with other customers, the product range could be large and production quantities of each SKU relatively small. The product variety and tight timelines means that prospective suppliers would need to demonstrate their flexibility and responsiveness in systems and processes to consistently deliver ‘in full and on time’ to each outlet in the region. And, of course, enable product traceability back through their supply chains, if a recall is required.
Structured ordering and production processes
To achieve flexibility and responsiveness, with potentially high variability, requires structured ordering and production processes. An approach is to produce the base items (in this case, sponges, fruit cake, banana cake) based on weekly forecasts by product type group from each customer outlet. The base products are made in volume from few materials stored in silos and tanks (or bags and drums for smaller manufacturers); then held as postponement inventory (even if only for a few hours). Assembly, finishing, packing and dispatch of consumer products are based on daily orders from a published product selection of different shapes, base combinations and toppings.
The possible permutations of products at the finished goods level are such that forecasts will always be very inaccurate. Forecasting is more predictable at a lower, base product level that is common across a variety of products.
These considerations require systems designed for CPG manufacture, which must support a make to stock (MTS) initial manufacturing process and assemble to order (ATO) finishing and packaging, with full traceability. Procurement professionals need to evaluate the capability of prospective suppliers, addressing areas such as:
- Forecasts and orders coming from many sources e.g. customer specific finished goods, base WIP requirements, inter-factory transfers and internal demand for development products. Ease of application use is required for customers and planning staff
- Supplier’s relationships with their suppliers concerning flexibility of order quantities and lead times of raw and packaging materials
- Vendor-managed inventory (VMI) for selected purchased materials
- Materials shelf life measurement and control
- Inventory locations and segregated zones i.e. peppermint requires a separate area; or differing temperature requirements
- Material process flows defined in Bills of Materials (BOM), including expected yields, by-products, co-products and waste
- Bulk materials handling and measurement using load cells, flow meters and data loggers (which could be part of an industrial internet of things (IIoT) network)
- Planning and execution must adapt rapidly to changing circumstances
- Planning for Constraints in the process e.g. line washouts and colour sequences
- Flexibility must increase closer to customers i.e. packaging machines purchased for their flexibility (quick changeover time) rather than output speed
- For flexibility in a process, rather than a few large holding tanks, use more small holding tanks for low volume batches processed in short runs
- Flexible workforce, based on the skill levels and training required to safely undertake the job roles
- ‘Back-flushing’ of finished product output back through the BOM to calculate planned materials and capacity usage
This discussion has illustrated that different approaches are required for the management of purchased items. Using a balance between availability and complexity, ‘short shelf-life’ items that are resold to customers and consumers should not be limited to those with ‘economic run sizes’. Instead, work with potential suppliers to identify the most effective operations that have the Agility to provide the range of products that consumers want to buy within that brand.