Supplier performance problems are often linked to sustainability issues, weather-related calamities or lack of sufficient oversight over work conditions as in the recent tragedies in Bangladeshi factories. But more often the mundane issues such as on-time delivery, quality and overall responsiveness have a large impact on supply chain cost and performance. These problems are often manifested in excess inventory and expedited shipments.
In our recent webinar with Pepsico Worldwide Flavours (PWF), we show how asking the right questions and keeping an open mind to the root causes of inventory and drivers of supply chain costs can uncover unexpected results. In PWF’s case, one of these results was that the major cause of excess raw material inventory in the plants was supplier lead time variability. How did we figure this out?
PWF recently went through a reorganization that led to a reassessment of inventory in the manufacturing plants. With a multi-tier network of three plants, four Distribution Centers (DCs) in the US serving both the US and Canadian markets, 450 finished goods and 1781 components and raw materials, this was not something that could be done easily. Management realized that this complex multi-level supply chain network could not be fully optimized using single-echelon optimization methods.
Therefore the company chose to work with OPS Rules and deploy an end to end inventory optimization process. The initial part of the process was to create a validated model of PWF’s network. The next step and most creative part was to plan the various scenarios that will uncover the most information about the drivers of inventory in the PWF supply chain.
Our first discovery was that most of the excess inventory was in raw materials at the plants. This led to devising several scenarios to see what was driving the raw material inventory. These included:
- improving demand forecast
- eliminating some packaging options to reduce complexity
- changing the frequency and size of production batches
- analyzing the impact of lead times.
We examined what would happen if we changed supplier lead times for the raw material by either reducing or increasing it. It turned out that this had a relatively minor impact on the amount of inventory held in the plant.
Then we looked at another factor that is often neglected by inventory planners, lead time variability. What we discovered was that reducing lead time variability even a little had a significant impact on supply chain costs.
This implies that one of the best ways for PWF to reduce inventory at the plants is to work with suppliers to improve their performance by focusing on improving “on time delivery”. This was an unexpected insight, as management typically expects other factors to be more important. To view the entire webinar see below.