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Lean Value Chain: Demand Segmentation

A Packaging Supplier Synchronizes Operations and Order Fulfillment to Customer Demand

When a multibillion dollar packaging

When it came to implementing

the pull system, the process changes
were easy compared to the cultural
changes. The biggest challenge was


changing the organizations mindset.


manufacturer and distributor decided it

wanted to be the one-stop source for
packaging products in a highly competitive,
cost-critical market, it realized that it would
need to align 39 manufacturing and eight
distribution facilities across the United
States, Mexico, and Canada. The
immediate challenge in one business
segment: to reduce inventory levels and
improve forecast accuracy.
Starting the journey toward a lean value
chain, a thorough analysis of demand patterns accelerates adoption of a demand-based
replenishment system. Statistical forecasts
incorporate promotion and point-of-sale
data. SKU rationalization eliminates some
slow-moving, highly volatile products.
By using lean methodologies, the
company was able to use a pull system to
reduce inventory levels by $1 million for a
single product line while simultaneously
improving case-fill rates from 97.7 percent
to 98.5 percent. Shipping orders direct from
the factory further reduced inventory, related
carrying costs, and transportation costs.
Creating and following a standardized
process improved forecast accuracy from
around 55 percent to nearly 75 percent.

Moving Outside the Box

When it comes to matching production
with customer demand, the biggest
headaches are often self-inflicted. To meet
sales targets, marketing pushes end-ofquarter promotions, which trains customers
to wait for discounts and stockpile product.
High-volume order policies decrease order
frequency and further contribute to demand
volatility. Sales managers tweak or outright
ignore statistically-based forecasts. The
factory runs large batches to maximize
equipment utilization, then it has to shut
down production lines for weeks or even
months when sales fail to materialize.
The packaging supplier had all of these
problems and then some. Promotions
stimulated orders, creating the typical peaks
and valleys in volume, but it was impossible
to determine if these efforts were boosting
overall sales. Smaller customers were forced
to buy full-pallet quantities that would take
months for them to sell. Manufacturing was
forever playing catch-up because its
production schedule was based on the sales
forecast, a subjective and error-prone target
in any business. In some cases the
company received valuable point-of-sale
data from customers, but nobody was even
looking at it.
Looking at the metrics, forecast
accuracy hovered around 55 percent.
Inventory levels ranged from 23 to 85 days
of supply in a key business segment. But

despite having so much inventory, the

case-fill rate was only 97.7 percent. On top
of such poor performance, a series of
uncoordinated improvement initiatives and
the decrease in fill rates from previous
attempts to reduce inventory, had made the
workforce deeply skeptical that anything
could actually be improved.
To overcome such obstacles and get
things moving in the right direction, the
company engaged TBM Consulting Group,
which pulled together a cross-department
team who represented the value streamthe
flow of both materials and information
for a single product family spanning
multiple facilities. Fully supported by
executive management, the team was
comprised of people from the companys
forecasting and planning department,
production and inventory control, sales and
marketing, customer service, finance, and
information technology.
After observing existing processes to
identify potential opportunities for improvement, the team brainstormed and came up
with a number of possible solutions. They
plotted those ideas on an impact/difficulty
matrix. For each idea they estimated the
potential impact (high, medium, or low) and
the difficulty (high, medium, or low). From
that exercise the team identified three key
initiatives offering a high impact and a
low-to-medium difficulty level that would
deliver rapid improvement.

Pulling Everything Together

Understanding true demand is the key
starting point for creating a lean value chain.
Demand volatility will influence service-level
decisions and determine, for example, if a
product can be produced using a pull
system. Such a system relies on customer
orders to trigger production and material
replenishment. With acceptable service levels
(the lead time required to make and ship the
product to the customer), demand patterns
could also indicate that a particular
stock-keeping unit (SKU) should only be
produced on a made-to-order basis.
After performing a thorough demand
analysis, the team determined that a higher
percentage of products than previously
thought could effectively be managed by a
pull system. Almost 75 percent of products
were a good candidate for pull. The
remaining products consisted of highly
volatile items driven by seasonality or erratic
order patterns from smaller customers.
Starting with a single product line in a
single distribution facility, they began to use
the existing capability of their inventory
control system to send electronic
replenishment (kanban) signals back to the
factory. In addition to executive
management support, the organization was
able to implement changes quickly on the
strength of a clear project plan, adequate

resources, and a consensus among managers

about the process improvements being
made. Still, the transition wasnt without
pain. Getting to the new stocking levels
meant that manufacturing had to shut down
several production lines for three weeks to
bleed off the extra inventory, which created
negativealbeit temporary and
anticipatedaccounting variances. To
further smooth out demand, the company
changed its policies to allow customers to
order in less-than-pallet quantities.
When it came to implementing the pull
system, the process changes were easy
compared to the cultural changes. The
biggest challenge was changing the
organizations mindsetespecially in
marketingabout the amount of inventory
needed to maintain acceptable customer
service levels (fill rates). With production
driven by actual signals from the customer,
manufacturing managers also had to learn
to think differently about the sales forecast.
Going forward, it would be used to plan
capacity and resources, but not for
actual scheduling.
In the end, even though there was less
inventory in the supply chain, fill rates
improved from around 97.7 percent to more
than 98.5 percent. Not having to ramp
resources up and down reduced labor costs
by several hundred thousand dollars in a

Managing Times | Q1.08

High-Variability SKUs

Low-Variability SKUs

Bumpy Ride: Even for this low variability product, the alignment of orders
and shipments could be improved further by smoothing the large swings in the
January-February and September-December timeframes.

single factory. The company anticipates that

direct shipments to customers from the
plant, rather than through a distribution
centera change enabled by the transition
to pullwill save several hundred thousand
dollars more in transportation costs.
Strength in Numbers
The second key initiative recommended
by the team was to establish a standard
forecasting process. Here they benefited from
the example set by another area of the company, which used a more statistical method
to predict customer demand that yielded
much higher accuracy rates. In the business
targeted for improvement, the account managers participated in the forecasting process.
Each of them added their own spin to the
numbers, which further reduced accuracy.
In addition to implementing a
statistically-based forecasting method, they
began to factor point-of-sale data and
upcoming trade promotions into their
calculations. A designated business owner
for the demand-planning process initiated a
new monthly forecasting meeting. Sales and
marketing managers began bringing their
promotion schedules to that meeting to help
other areas of the business plan capacity. The
team developed an 18-month, rolling forecast with weekly projections for the coming
three months, and monthly expectations


Out of Sync: As illustrated by this month-to-month overlay, orders and shipments

for this highly promoted product fail to align with the sales forecast, which is
completely out of sync with production. Low production rates in January ramp up
rapidly in February and March. The line is shut down completely in April and May
when orders fail to materialize.

after that. As a result, forecasting accuracy

improved from around 55 percent to
upwards of 75 percent.
On the distribution side, the
organization had always struggled to allocate
inventory between five regions throughout
the United States. Each unplanned transfer
from one region to another to satisfy local
demand represented a forecasting failure. As
part of the revamped forecasting process, the
demand-planning team stopped making an
overall projection that was then divvied up
on a percentage basis by region. Instead,
they started at the regional level, factoring in
point-of-sale data for each product as well as
anticipated promotions, and rolled that up
to the national level. This produced a much
more accurate demand forecast by region
that will save a projected $500,000 in
annual intersite transportation costs.
The third recommendation of the
assessment team focused on 225 highly
volatile SKUs (out of 570 total). Dictated by
large lot sizes, it made no sense to build and
stock so much inventory for these products,
which sat in storage for 75 days on average.
The team determined that 45 of these
low-volume, highly variable products could
be eliminated or substituted with higher
volume SKUs. Producing the remainder on
a make-to-order basis could further improve
material flow and smooth out production.

This supplier of foodservice packaging

has begun to break free from its traditional
supply chain structure. Customer demand
drives replenishment, pulling product from
the distribution centers and factories.
Manufacturing is no longer churning out
highly volatile product in large batches.
Forecasts arent based exclusively on
historical data and salespeoples hunches.
Inventories are on the decline, fewer items
are out of stock, and less obsolete inventory
is sitting around in the distribution centers.
Developing a lean value chain means
addressing four key links: demand
management, order fulfillment, business
planning and scheduling, and supply
management. Now that the company has a
more accurate sales forecast, the next step is
sharing that information with its supply
base. More collaborative relationships with
suppliers will further reduce inventory levels
and smooth the product flow throughout
the value chain.