Recently, I heard a presentation from a Vice President of Supply Chain from an American supplier of steel products. This company buys scrap metal and then melts, rolls and processes steel. But, at its core, this company competes on service. The company provides a one-stop shop for steel coils across a large set of coil diameters, with value add processes – annealing, cleaning, coating & drawing – that are often not provided by other steel companies. Their goal is to lead in service while being cost competitive.
This American steel company began its journey toward making their supply chain a competitive weapon in 2010 when they implemented a new Integrated Business Planning (IBP) process. Since then, the company has improved its delivery performance from the low 60s to over 90 percent; their quoted lead times are now the shortest in the industry. They have saved millions of dollars in transportation ($8.9 million through less expediting) and warehousing (at least $5.4 million in excess storage avoided), reduced weeks of inventory by 12 percent (about a $20 million reduction in working capital), and improved throughput. Clearly, supply chain management is a competitive weapon for them.
Sales & Operations Planning is increasingly being called “Integrated Business Planning.” The core of both is the same, profitably balancing supply and demand over the coming weeks, months, and even years. In general, companies start by creating a consensus demand forecast, work to understand whether the company can meet that demand in a supply meeting, decide how demand will be balanced with supply, and present those demand-supply recommendations to an executive team who make the final decisions on which supply/demand scenarios will be executed.
IBP processes tend to be more inclusive, including a broader set of internal stakeholders. For example, in understanding whether they had the capacity to meet a demand forecast this steel producer included their transportation and warehouse planning groups to understand whether they would have sufficient logistics capacity. In many companies, logistics does not have a seat at the S&OP table.
This American manufacturer does not have an easy planning environment. They allow their customers to change both their initial request dates and order quantities. About 85 percent of the orders placed ship within a month. And they permit smaller order quantities, as small as 2 coils, than most of their competitors. This makes for demand complexities that most of their competitors don’t face.
On the supply side, the steel industry does not lend itself to manufacturing in small, quick batches which would make fulfilling quick turnaround orders much easier; they melt slab in large furnace size increments, but sell in much smaller quantities. They only roll a particular size of steel at most once a week, but they ship and process all sizes daily. Scheduling is complex, to meet the final grade requirements of a customer they may need to anneal, clean, coat draw the same item more than once. Finally, recipes and raw material requirements for grades of steel change as scrap metal prices change. This creates sourcing challenges.
Because of the complexities of forecasting demand with a high degree of accuracy, they need to carry excess capacity or use inventory as a buffer to meet demand in a timely manner. In the steel industry, inventory buffers – storing work in process inventory that can be turned into finished goods when orders are placed – is much less costly than investing in very expensive production machinery. The challenge is to understand what inventory is needed and what is excess. Knowing what inventory to plan for is a key component of their IBP process.
The company’s IBP process starts with an iterative process to come up with a consensus demand forecast consisting of known orders and a forecast. This demand forecast is the single source of information all departments use in their planning. The planning horizon includes the current year for demand/supply matching and the following year’s projected demand to help allocate capital for needed capacity. The IBP planning is done at an aggregate level (product families rather than down to the stock keeping level), but more detailed execution schedules do tie to the aggregate plans. These operational plans than become the basis of the financial forecasts.
Once the IBP process began, the steel company become much more focused on supply planning focused on their key constraint – melting the slab. In the past, they would try to keep all their work centers occupied. But the result was they would build finished products and a customer would change their order, leading to excess inventory or the need to remelt that inventory. Or they would build to a finished product forecast, the work centers would be busy, and new short turnaround orders would come in and the company would end up needing to do an expensive expedited shipment. Now they use a Theory of Constraints philosophy based on the idea that a low cost constraint should never lead to the underutilization of a high cost constraint; it is all right for manufacturing personnel that are not on the critical path to find non-production work to do, or even go home, rather than jeopardize the efficient operation of the key work center.
The other key part of their process are continuous improvement projects that are assigned during the executive IBP meetings. Many of these projects are focused on re-engineering business processes to reduce excess inventory or projects that make their processes more predictable. More predictable business processes have improved how the company manages supply and demand variation.
You can’t argue with their results. IBP has allowed the company to turn their supply chain into a competitive weapon.