Ross Wpa BPsDemandInvPlanningCHEM

8/6/2019 Ross Wpa BPsDemandInvPlanningCHEM

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Best Practices in Demand and Inventory Planning for Chemical Companies

Executive Summary

In support of its present and future customers, CDC Software sponsored this white paperto help chemical manufacturers understand how supply chain functions such as demandand inventory planning can positively impact their overall operations and bottom line.


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Ross Enterprise | White Paper

IntroductionIts a classic scenario in chemical manufacturing strug-gling to coordinate the opinions of sales and marketing withmanufacturing and supply chain initiatives on what shouldbe produced, when it should be produced, and where itsneeded.

The lack of good supply chain coordination can lead tofrequent changes in production schedules, expeditedtransfers and shipments in distribution, excessive stock-outs,erratic levels of customer service, lack of visibility into futuredemand, and inventory in the wrong place and at the wrongtime.

For many chemical companies, these problems are notnew. In fact, their root cause typically revolves around afew basic issuesmainly, a lack of shared knowledge aboutthe supply chain planning function, inadequate decisionsupport systems, and unavailable or inconsistent data dueto lack of integration to the core business system.

Supply chain planning involves functions such as demandforecasting and planning, distribution inventory planning,and plant capacity planning and scheduling. The rightmix of strategy, education, and systems can have a veryhigh impact on a manufacturers overall operationsandultimately its bottom line.

Knowledge of the Supply Chain FunctionPart of the challenge many chemical companies face hasto do with a lack of knowledge regarding forecasting andplanning techniques. Often, key decision makers havelittle formal training in the areas of forecasting, inventoryplanning, production planning, distribution planning orscheduling theory and processes. Many are simply followingpast practices, which may be outdated, overly simplistic, andyield undesirable outcomes.

Yet knowledge of basic forecasting techniques, combinedwith an understanding of the forecasting process, isabsolutely essential in todays highly competitive environ-ment. A greater knowledge of forecasting techniques andthe systematic process of forecasting can improve forecastaccuracy and forecast credibility. This can result in bettercoordination between organizational units and greaterstability in the production plan.

Planners are often frustrated at the quality of the forecaststhey receive from their sales and marketing organizations.In many cases, they will override the forecast and use theirown judgment. While this can work better in individualcircumstances, it also means that marketing and planningare not working to a coordinated plan.

Forecasts at the item/location levels are often the least reli-able. Through the process of aggregation a more credibleforecast can be generated. So while item/location forecasts

may be unreliable, the aggregate forecast at the overallitem level is more stable. Aggregation from the item to thebrand level, across a wide range of items, tends to producea yet more reliable forecast. Through a method of proration,adjustments to the forecast made at the higher brand levelscan be prorated down to the item/location level.

This gives distribution a better expectation of shippingrequirements, while giving production a better demandnumber for planning and scheduling at the plant level.Production plans, based upon intermediate productforecasts, tend to become more stable through this methodof forecasting, since forecasts are more credible when builtover a longer time horizon.

With todays technology, this process can occur instanta-neously at the desktop, and the results can be easily sharedthroughout the network for use by multiple divisions withinthe organization.

A Deeper Knowledge of Inventory PolicyAnother key area in which planners and decision makersshould be more proficient is inventory policy. For example,there is often confusion about the relationship betweensafety stock, reorder point, reorder batch size and customerservice levels. Many chemical companies develop produc-tion plans around -days of supply or cover period. Somewill derive their figures by simply dividing annual demandby the number of forecast periodswithout taking intoaccount seasonality, trends, or the cost of production andcarrying costs.

Low-volume products generally should be produced lessoften with a longer cover period so that changeover costs(which are generally lower than carrying costs) are reduced.On the other hand, high-volume products should be pro-duced more frequently. The relationship of volume to coverperiod has an impact on safety stock and service levels. Theshorter the cover period, the more frequent the production;and with lower safety stock, service levels are higher. Theconverse is also true.

Knowledge of basic inventory policies, and how theyinterrelate, can benefit planners by deriving an inventoryreplenishment plan, which achieves stated customer servicelevels consistent with lower levels of inventory.

Planners should have enough supply chain managementunderstanding to know where to look, what questions toask and how to interpret the information they are receiving. They dont need to know all the underlying statisticaltechniques. But they do need an easy-to-use system thatcan perform the calculations quickly and generate credibleresults. The combination of an effective system, along withforecasting and planning know-how, can yield significantresults.


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Long-Range Planning HorizonsSupply chain planning systems help companies tacklelong-term strategic issues, such as business forecasting and

global capacity, all the waydown to short-term tacticalissues such as day-to-dayscheduling. However, thelength of the planning horizondetermines the degree of flex-ibility and the methods used tomanage the plant.

The planning horizon for atypical business is a rollingtwelve-month period. This timehorizon is often considered ademand forecasting problem.Since the forecast is used todrive the budget, distribution,and production planning pro-

cesses, increasing the accuracyof the forecast is fundamentalto improving the stability of these plansi.e., distribution,inventory, productionand the

overall return on investment from corporate resources.

Therefore, implementing a good systematic forecastingprocess is the foundation of a sound supply chain planninginfrastructure. Benefits include a one-number forecast,greater stability of plans, less reactive decision making,improved morale, lower inventory levels, higher customerservice levels, increased throughput in manufacturing,greater confidence throughout the organization, and

reduced freight costs.

Medium-Term Planning HorizonsOnce a credible forecast is developed, planners can imme-diately plan distribution requirements, inventory levels,allocation of demand to plants (demand planning) andcapacity planning (at the plant level).

In order to develop a long-range Master ProductionSchedule (MPS), the planner must first establish inventorylevels for the finished products at each location. An inven-tory policy system provides essential help with this process.

The objective of an inventory policy system is to help theplanner establish safety stock levels, reorder points andreorder batch sizes over time, consistent with meeting atarget customer service level. The location of the inventoryis also considered during this process.

The inventory policy system builds upon the forecast andis the driver for distribution and production planning. Itformalizes the process of setting stock policy and allows theplanner to look at the tradeoffs between inventory invest-

Benefits of Advanced Planningand Scheduling Techniques:

Faster Planning and Re-Planning

Increased Stability of Plans

Reduced Overtime

Improved Labor Utilization

Reduced Changes in Daily Schedules

Improved Customer Service Levels

Improved Morale

Reduced Inventory Levels

Increased Plant Throughput

Fewer Changeovers Due to BetterSequencing

ment and service levels. Naturally, the aim is to meet thetarget customer service levels while holding the minimumlevel of inventory.

Enter Production Planning

Once inventory levels are set at each location, the plannercan then decide when and where (assuming multiple plantchoices) production should occur. This is the function of theProduction Planning system.

The Production Planning system covers months, weeks anddays as it resolves the trade-off between capacity, labor andinventory. By planning the inventory requirements over timein demand forecasting and inventory policy, the planner cansee the long- and short-term effect on plant capacity.

The planning model considers demand requirements, linecapacity and formulations required to meet the demandquantities and dates. Simulation capability tests differentscenarios and considers multiple solutions quickly.

Benefits of improved planning using advanced planningand scheduling (APS) techniques include faster planningand re-planning, increased stability of plans, reducedovertime, improved labor utilization, reduced changes indaily schedules, improved customer service levels, improvedmorale, greater confidence in the plans, reduced inventorylevels, increased plant throughput, and fewer changeoversdue to better sequencing.

In most production planning scenarios, the objective ismainly to resolve staffing, materials and capacity issues overweeks and months, rather than minute-by-minute or hour-by-hourwhich is traditionally the realm of scheduling. Atthis level of planning, planners can work with average run

rates and key resources, aiming at a good trade-off betweenthe quality of plans and the ease of maintenance of thesystem.

However, some modern APS tools, include sophisticatedfacilities for modeling production, even at the planningleveli.e., batching rules, alternative routing and recipes,changeover logic, sequencing rules, etc.to ensure theplans produced are both realistic and optimal.

Short-Term Planning Horizons

Production planning drives longer-range plans fromdemand forecasting. Shorter-range production plans mustalso resolve the replenishments of stock for the network of distribution centers, such as regional and local warehousesthat ship to customer locations. The system considers eachwarehouse when deciding what products will be stockedand how much to stock in each location. As describedabove, the inventory policy system will recommendoptimum stocking levels and reorder patterns.

Warehouse replenishment is based upon the frequency andvolume of shipments from the plant to the warehouse. Thisfunction is typically performed by a distribution require-


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ments planning system. Distribution requirements planningsystems plan the transportation frequency among thenetwork of distribution centers, while considering the plantcapacity established in the production planning system. Byvarying the frequency and capacity of transportation, theavailable to promiseat the outletcan be simulated.

Distribution requirements planning systems help reducetransportation costs; improve customer service levels;reduce stock-outs at distribution locations; improve com-munication between sales, distribution and production;increase stability of plans; boost confidence and morale;and ensure the right product is at the right place at the righttime.

Short-term changes in demand are always a reality, but thecombination of better forecasting with a formal process of warehouse replenishment leads to fewer disruptions, lesscontention and lower overall costs.

Integrating with ERP Systems

High quality planning is simply not possible if the inventorydata is inaccurate or out of dateor if the formulationinformation is incomplete. The forecasting system requiresaccurate sales history. The distribution requirementsplanning system requires accurate inventory balances. The capacity planning system requires meaningful plantcapacity and product structure (recipe) information. Suchdata is generally available in most of the better ERP systemsavailable today.

Supply chain planning systems are available in various formsof delivery: stand-alone, an APS server connected to the ERPhost machine via a network and hosted solutions (softwareservice). The supply chain planning system receives informa-

tion updates from the ERP system periodically (weekly, daily,etc.).

Planning and scheduling issues are resolved throughsystematic processes that involve simulation and modeling.Planning is generally done periodically, according to thetask at hand. Therefore, forecasts may be updated weeklyor monthly, the production plan may be updated weekly ordaily and the finite schedule may be run at the end of a shiftor a day.

The supply chain planning system needs to be refreshedwith new status information. This might include dynamicdata such as on-hand inventory of finished goods, interme-diates (WIP) and raw materials; updated demand (forecastand orders); expected purchase receipt timing; and planneddowntime.

In addition to the dynamic data, the planning system mustbe updated periodically with static information, such asnew products recipes/formulae and operations, new plant

resources with their operating characteristics, and newwarehouses or new transportation options.

Because the ERP system will be integrated at several datapoints, careful consideration must be taken to ensure alldata is up to date and accurate. Interfaces become verycomplex if the underlying ERP system is highly custom-

ized and/or spread over multiple servers and databases. Therefore, the best results are usually achieved throughan integrated ERP system that covers all the underlyingbusiness functions.

Better Control Over the PlanningFunctionIn order to make sound tactical and strategic decisionsthat impact profitability, decision makers must have bettercontrol over the planning function. Its precisely in the areaof forward decision-making where companies can have themost impact on improving business results.

To achieve these benefits, however, manufacturers mustfirst invest in supply chain planning education, systems andpractices that deliver visibility into the future and thereforeempower decision makers.

When one considers the fact that improvements in forecast-ing can reduce forecast error by 15%and a system canhelp increase plant output by 10% while reducing inventorylevels by 20%its easier to see why this is such a criticalarea for business success in todays highly competitivechemical industry.


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For more information or a complete list of our worldwide offices, please visit www.pivotal.com.

Copyright CDC Software 2007. All rights reserved. The CDC Software logo and Ross Enterprise logo are registered trademarks and/or trademarks of CDC Software.

About CDC Software

CDC Software, The Customer-Driven Company, is a provider of enterprise software applications designed tohelp organizations deliver a superior customer experience while increasing efficiencies and profitability. CDCSoftwares product suite includes CDC Factory (manufacturing operations management); Ross ERP (enterpriseresource planning) and SCM (supply chain management); IMI warehouse management and order management;Pivotal CRM and Saratoga CRM (customer relationship management); Respond (customer complaint andfeedback management); c3 60 CRM add-on products, industry solutions, and development tools for the

Microsoft Dynamics CRM platform; Platinum HRM (human resources); and business analytics solutions. Theseindustry-specific solutions are used by more than 6,000 customers worldwide within the manufacturing,financial services, health care, home building, real estate, and wholesale and retail distribution industries. Thecompany completes its offerings with a full continuum of services that span the lifecycle of technology andsoftware applications, including implementation, project consulting, outsourced business services, applicationmanagement, and offshore development. CDC Software is the enterprise software unit of CDC Corporation andis ranked number 12 on the Manufacturing Business Technology 007 Global 1 00 List of Enterprise and SupplyChain Management Application vendors. For more information, please visit www.CDCsoftware.com.

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