Supply Chains for management of intermediate products

Roger OakdenGlobal Logistics, Logistics Management, Logistics Planning, Procurement, Supply Chains & Supply Networks

Agile supply chains

An intermediate product.

In commercial supply chains, supply chains can take different forms in response to the needs of particular markets. It is a role of logisticians to evaluate the supply chains and structure them to best meet the needs of their markets.

The previous blog discussed the situation of a franchise based fresh food services business and the need for different inventory policies across the three types of product used. These are:

  1. fresh food items (classified as ‘short shelf-life’ products); these are for quick sale and consumption by consumers
  2. packaged food items that have a ‘use by’ date, to identify the shelf life (classified as ‘consumer packaged goods’ or CPG) and
  3. non-food items e.g. paper cups, napkins and cleaning products, classified as ‘fast moving consumer goods’ or FMCG

In this situation, the view of the downstream supply chain by a manufacturer is:

  • Customer’s customer – the retail franchise chains
  • Customer – the food services company which supplies the retail outlets
  • Supplier – manufacturers of items required by the retail franchise chains

The discussion in this blog concerns the suppliers of intermediate products – although they are finished products at the manufacturer, they are viewed as intermediate products downstream in the supply chains. They are ‘necessary but not critical’, therefore can be substituted with no reduction in customer satisfaction.

Intermediate items in fresh foods services complement fresh food items – these are CPG products (syrups, spreads and jams etc.). Some items will be classified as ‘cool-chain’, requiring refrigeration during production and distribution, plus storage at the food services customer and at the customer’s customer (the franchisee).

In the previous blog, it was stated that  across the franchise businesses, there were currently 140 SKUs for eight flavours of syrups. This was due to each business having its own approach to identifying its purchased item needs and is likely to be replicated across other intermediate products. Here is an opportunity for a centralised purchased item rationalisation effort, identifying standard containers for ‘behind the counter’ and ‘front of house’ items.

The items are expected by franchisees to be available as required. Only sufficient inventory will be held at each franchisee between weekly deliveries by the food services supplier. At the food services supplier, inventory is likely be held to satisfy weekly deliveries to all their customers’ outlets, but any shorfalls are expected to be quickly satisfied. Demand on the supplier (manufacturer) is therefore likely to be ‘lumpy’ and unpredictable.

A comment recently received from a reader has similar concerns, but with reference to discreet products – the manufacturer of metal cans. The situation for the downstream supply chain of this business was reported (together with some assumptions) as:

Customer’s customer – orders the final product of filled cans (by full truckload (FTL), less than truckload (LTT), pallet or cartons)

  • demand is not well managed
  • order the final product when needed, therefore the demand pattern is ‘lumpy’ and unpredictable, which statistically is not a normal distribution. The traditional inventory techniques of safety stock calculation, based on normal demand distribution, is insufficient

Customer – manufacturers of food, beverages, paint, oil etc.

  • Customers prefer that inventory of empty cans is kept at the supplier
  • Require deliveries of empty cans based on sales forecasts and orders for finished goods (FG) products from their customers

Supplier – can manufacturer

  • Customers call up deliveries of cans as required against a period contract
  • Short delivery lead times expected
  • At the ‘bright can’ (semi-finished) or postponement stage, the number of SKUs is governed by the range of can sizes
  • Many possible SKUs at the finished product stage
  • The finishing stage of printing cans to customer order can be a bottleneck in the process (if cans are labelled, it is typically done at the customer site after the filling stage)
  • Few materials (steel and aluminium) and production processes
  • Majority of production time and handling is to the semi-finished level

Operations at a supplier of intermediate products

In any business relationships where customers will hold low (or nil) inventories and quick delivery of items is expected, being an Agile manufacturer is a necessity for a viable business. However, this requires a supply chain strategy which emphasises ‘effectiveness’ over ‘efficiency’; that is, being responsive to customers’ requirements. This requires an approach across the business, addressing inventory levels, equipment types, planning systems and people.

The traditional inventory calculation for each SKU consists of:

Cycle inventory. Inventory at the mid-point through the replenishment cycle (half the order quantity). Reducing cycle inventory requires the reduction of lead times, change-over times between products and removing bottlenecks in the production and delivery process.

Fluctuation inventory. Inventory held in excess of the cycle inventory to overcome Uncertainty associated with unplanned events. This inventory is called either safety stock, reserve stock or buffer stock. It is affected by variances in demand, supply and lead times. Fluctuation inventory can be reduced through

  • process improvements at the ‘decoupling point’ – the interface point between operational push and customer pull and
  • identifying opportunities for postponement of adding value to items – hold inventory upstream at lower value, but able to quickly finish items to customer requirements

To reduce inventory requires equipment that emphasises quick responsiveness to customer orders rather than high throughput and efficiency. Therefore use many lower speed but quick changeover wrapping and packing machines. This can result in periods where some machines are idle, which accountants find difficult to reconcile with their ‘efficiency’ mindset.

In process industries, have many small tanks and hoppers to hold short-run quantities of materials. Filling lines are designed for quick changeover of both size and product. For example, at one client, hoists were located alongside product filling lines, so that mechanics could work offline to exchange parts on filling units. At the end of a short production run, quick release valves were actuated and the filling unit swung off the line, to be quickly replaced by a ‘ready to go’ unit.

Similarly, to reduce batch quantities in discrete products businesses, the emphasis must be on ‘single minute exchange of dies’ (SMED) as the maximum time to change-over from one type of cutting/milling/drilling operation to another. The emphasis on reduced batch sizes and responsiveness also incorporates principles of Lean production, such as:

  • Create flows, without interruptions, detours, repeat sequences (backflows), waiting and scrap
  • Make only what is pulled by the customer
  • Remove layers of waste

The ultimate measure of flexibility and responsiveness is that the warehouse consists of trailers being filled to customer requirements, directly off the packing/finishing area – that is, no physical warehouse required.

Planning inventory and production is at two levels:

  1. Inventory kept at the postponement stage (if able to assemble to order (ATO))
  2. Quick response at the final assembly/finishing stage
    1. Planning against bottlenecks in the process e.g. line washouts and colour sequences
    2. Delivery and quantity requirements planning and execution schedule via finite capacity planning
    3. Planning process able adapt rapidly to changing demands

An earlier blog provides an example of planning system requirements for ‘mix and stir’ businesses within ‘make to order’ and ‘assemble to order’ process businesses.

If the production and delivery process is flexible and responsive, then the workforce structure must be similar. Journal and magazine articles seem to assume that Agile organisations must have a minimum casual staff of about 20 percent to be effective (one large eCommerce distribution business uses 100 percent casuals operations workforce).

While casual employment is one approach to flexibility, another is to hire for the skill levels (and training) required to safely undertake many job roles. Having many staff members who are multi-skilled provides an inbuilt flexibility. Also, review the employment criteria for flexibility; examples are:

  • Employment contracts that requires annual hours worked (with overtime paid after reaching the annual hours), but with flexible weekly hours and a fixed salary.
  • Permanent part time
  • Three people organising their own roster to work two jobs

This approach emphasises that for an Agile business, responsiveness is required across the organisation. It requires a different supply chain strategy which recognises that static inventory policies such as ‘weeks of cover or supply’ and minimum run lengths are not applicable, as they are not responsive to changes in supply chain variability, service level targets or costs.

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About the Author

Roger Oakden

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With my background as a practitioner, consultant and educator, I am uniquely qualified to provide practical learning in supply chains and logistics. I have co-authored a book on these subjects, published by McGraw-Hill. As the program Manager at RMIT University in Melbourne, Australia, I developed and presented the largest supply chain post-graduate program in the Asia Pacific region, with centres in Melbourne, Singapore and Hong Kong. Read More...