Supply Chain Management in Process Industries PDF

1 Supply Chain Management in Process Industries Process industries represent a key driver of global value creation. Industry segments such as chemicals, pharmaceuticals, food and beverages, and consumer goods comprise more than 50% of industrial production in the United States and Europe. Their prod...

1 Supply Chain Management in Process Industries Process industries represent a key driver of global value creation. Industry segments such as chemicals, pharmaceuticals, food and beverages, and consumer goods comprise more than 50% of industrial production in the United States and Europe. Their products guarantee nutrition and health for the individual consumer and form the basis of virtually all products in our daily lives. However, a recent issue of Supply Chain Management Review clearly showed that companies in process industries are experiencing dramatic challenges in fulfilling their business targets and downward pressure on margins due to the unprecedented complexity and variability of today’s global economy (see Table 1.1). The need for visibility and optimization across all elements of a supply chain has never been greater. In the pharmaceutical industry, the rise of emerging markets and increasing price pressure are forcing companies to review established operating models. The dramatic shift in markets toward the so-called “pharmerging” countries adds to increasing pressure to redesign global value chains. Furthermore, the established pharmaceutical companies are threatened by patent expiry and generic competition, which could lead to sales losses of as much as 100 billion USD over a period of 2009–2015. The chemical sector faces similar dynamics on the market side: saturation in traditional markets and the shift to the rapidly growing and dynamic BRIC (Brazil, Russia, India, and China) and SMIT (South Korea, Mexico, Indonesia, and Turkey) countries. On the supply side, dramatic changes in feedstock sources might alter the rules of the game in the entire industry sector. The shale gas boom in the United States led to a huge decline in feedstock prices and energy costs in a very short time and is thus widely regarded as a potential “game changer” in chemicals and 3 4 LEAN Supply Chain Planning Table 1.1 Trends in Supply Chain Financial Ratios in Process Industries (Data Basis: Annual Reports (2000–2011)) Industry Chemical Consumer goods Food Pharmaceutical Average Changes in Financial Ratios Over the Period 2000–2011 Average Operating Margin Operating Margin (%) 0.09 0.16 0.15 0.24 –1 –2 –1 –4 SG&A Return On Revenue Per Margin (%) Assets (%) Employee (K$) 1 0 1 –1 2 2 –2 –6 16 29 29 46 energy-intensive industries, rapidly and substantially changing global investment patterns and global network footprints. Volatility has always been the key challenge for fast-moving consumer goods manufacturers. Today, however, many industry experts see many markets in this industry sector already in an era of hyper-competition, with product life cycles measured in a few months and sales promotions happening almost every day. Products are more and more tailored to the individual customer, adding a new level of complexity to supply chains, which therefore needs to be more effective and agile than ever before. The bottom-line result of these changes is intense pressure on supply chain management (SCM) across all process industries: Growth has been slowing, inventories have been climbing, and costs have been escalating, leading to negative trends in operating margins and other key supply chain measures, as summarized in Table 1.1. In the face of these changes and ongoing pressure from customers to deliver outstanding service, it would appear that only a reinvention of best practices along value chains will make it possible for companies of the process industries to meet the expectations of internal and external stakeholders as well as financial markets. The foundations for successfully orchestrating a global value chain are effective supply chain planning and reliable coordination of customer demand fulfillment. The performance of planning and coordination in SCM is directly impacting top-line results, costs, and capital. Yet we see reasonable and increasing doubt that the old recipes for supply chain success no longer suffice to keep up with the pace of change experienced in business reality today. Obviously, alternatives must be found to approach supply chain planning more effectively. In this book, we show that this Supply Chain Management in Process Industries 5 requires not merely minor modifications of business processes, but a change in the entire planning paradigm! 1.1 Supply Chain Management Must Master the VUCA World The acronym VUCA—volatility, uncertainty, complexity, and ambiguity—accurately describes the conditions under which companies and SCM operate in process industries today. It summarizes the key pressures felt today in SCM. The term VUCA originated in the military in the late 1990s, but was quickly adapted for use in business environments and now stands for strategies designed to cope with increasing volatility, unavoidable changes, and all manner of unpredictable issues that may arise—anything from a change in consumer taste to the onslaught of a recession. 1.1.1 Supply Chain Management Orchestrates Global Functions and Networks Supply chains in process industries encompass production facilities, distribution centers, and suppliers around the entire globe and connect those entities to global markets. SCM is tasked with integrating all organizational units along value chains and coordinating material, information, and financial flows to fulfill customer demand. The objective of SCM is to maximize customer satisfaction and ensure the most efficient use of required resources, including distribution capacity, inventory, and labor. SCM subsumes all activities related to the design, planning, execution, and monitoring of material procurement, production, and distribution activities along end-toend value chains, including managing the required information flow. From a functional point of view, all operations-related departments are involved and must collaborate: procurement, manufacturing, quality control and assurance, SCM, planning, customer service, warehousing, and logistics. As most companies are organized, these departments operate as separate functional units. Thus SCM, in its role as an enabler of end-to-end process interactions along the supply chain, needs to ensure that the required collaboration is achieved. Consequently, SCM requires harmonized and globally interlinked processes. This task also demands appropriate IT (information technology) solutions for advanced planning to ensure the necessary data management and the creation of global transparency. 6 LEAN Supply Chain Planning Business leaders today are well aware of the fundamental role of SCM in managing corporate value chains in a competitive environment and ensuring customer satisfaction at minimum cost and with minimum investment of working capital. However, the majority of supply chain improvement projects struggle to achieve their performance and pay-back targets. To bring these functions back on track, SCM must address the root causes of the VUCA world, which also means that new solutions must be found as the old ones have obviously failed to master volatility, uncertainty, complexity, and ambiguity effectively. 1.1.2 Key Pain Points in Supply Chain Organizations Today Given the market conditions we have described above, it is not surprising that rising concern about the VUCA world is reflected in what supply chain organizations today regard as their key pain points. According to a recent survey published in Supply Chain Management Review in 2013 (addressing the top 10 pain points as shown in Figure 1.1), supply chain leaders are becoming increasingly concerned over the growing lack of supply chain visibility, demand volatility, and supply chain complexity. These three key pain points are directly rooted in the VUCA world. The lack of visibility in today’s ever-widening supply networks is challenging many companies with a growing ambiguity within global planning organizations, substantially reducing the overall supply chain performance. The impact of weak visibility is further amplified by the strong demand ­volatility and growing supply chain complexity that are sensed by the majority of supply chain managers. Many supply chain managers thus fear a Top pain points 78% Lack of supply chain visibility 75% Demand volatility 70% Supply chain complexity Rising commodity prices 50% 45% Data quality issues Product proliferation 45% Talent shortage 38% Production reliability Compliance and legislation Globalization issues 33% 28% 25% Figure 1.1 Top 10 pain points according to supply chain managers. Supply Chain Management in Process Industries 7 growing loss of control and deteriorating performance in their global ­supply chain operations. In contrast, formerly key issues such as the impact of globalization or compliance with international regulations seem to have been resolved by most supply chain organizations as shown by the results of the survey. Today, it is indeed the VUCA world that is regarded as the most important challenge; consequently, its impact and the resulting pain points are on the top of most supply chain managers’ agendas today. 1.1.3 Why Leadership is Concerned about the Impact of Volatility As we all individually experience every day, the pace of change in the global business environment has been increasing dramatically over the past several years. Of all the factors responsible for the VUCA world, variability and volatility are challenging supply chain performance most. Volatility is everywhere and ever-increasing: on the demand side, we face major changes in global demographics, shorter life cycles, and more products, but simultaneously with relatively lower order volumes per product. On the supply side, there are major changes in global feedstock availability, supply disruptions, and price volatility. Characteristics that are unique to process industries only add to the challenge. Typically, production takes place in continuous processes or in significant batch sizes. As the manufacturing process is not based on small individual units, the corresponding manufacturing assets are considerably less flexible compared with those deployed in discrete manufacturing. Therefore, changeover effort and product sequencing are important factors in supply chain and production planning. By-products and even material waste may occur during the conversion of raw materials into final products. Production yield depends on process conditions as well as on campaign sizes and raw material quality. All those specific factors need to be taken into account by SCM when planning and coordinating operations across global manufacturing networks. The consequences of the lack of concepts, tools, and capabilities with which to manage volatility in SCM are severe. Looking at inventories in many chemical and pharmaceutical companies shows that some stock levels in the supply chain amount to as much as 60% of annual demand, and there are in many cases up to 20 weeks’ worth of finished goods stocks. Consequently, the amount of working capital tied up in those supply chains is by far beyond what management and financial shareholders expect. 8 LEAN Supply Chain Planning Number of drug shortages 200 180 160 140 120 100 80 60 40 20 0 2005 2006 2007 2008 2009 2010 Figure 1.2 The number of drug shortages in the United States is steadily increasing. But, more working capital tied in inventory and increasing operating costs are not the only consequences of weak response to volatility. In today’s fastpaced business environment in process industries, there is an increasing gap between supply lead times and customer expectations of order lead times. Even worse, product shortages might lead to lost sales and reduce long-term revenues. Moreover, stock-outs not only lead to additional costs, lost revenues, and customer dissatisfaction but also cost lives when, for example, dealing with life-saving drugs in the pharmaceutical industry. However, the growing number of drug shortages reported in the United States shows all too clearly that keeping the right stock availability is becoming a more challenging task in the industry (see Figure 1.2). The reported steady increase in drug shortages over the last 5 years can be regarded as one of the main issues resulting from insufficient volatility management. 1.2 Supply Chain Planning in the VUCA World Today Given the dynamics of the VUCA world, SCM is more demanding than ever in process industries. The increasing number of stock-out situations Supply Chain Management in Process Industries 9 and continuously rising inventory levels that many companies observe are just two indicators of the growing issues in supply chains that are involved in keeping track of those dynamics in the business environment. Supply chain planning is crucial for efficiently deploying resources and coordinating all activities along globally dispersed value chains; planning is thus the backbone of SCM. However, despite significant investments made in demand excellence programs or the introduction of the most sophisticated advanced planning techniques, supply chains struggle to manage volatility on both the demand and the supply side. One of the key reasons for this is that there are inherent flaws in the design of global planning approaches that prevent companies from achieving the targeted supply chain performance. 1.2.1 Planning and Control as the Backbone of Supply Chain Management The backbone of efficient SCM has always been effective planning. Without proper planning, a company risks sacrificing cost efficiency as well as losing customers due to poor service. When properly executed, supply chain planning ensures that all processes along the supply chain are smoothly orchestrated and that the company can match supply and demand on a daily basis. In this vein, supply chain planning ensures competitive inventory levels as well as low costs of goods sold by using a company’s resources and assets in the best possible way. To manage this task, supply chain planning ensures that all customer demands and market needs are taken into account when making replenishment, production, and supply decisions. By effectively balancing supply and demand, planning ensures cost-efficiency and high market responsiveness in line with business objectives and targeted customer service. In SCM, the planning task is typically hierarchically organized according to a range of time horizons to reduce planning complexity. In addition to long-term strategic planning that is conducted for the next 2–10 years in alignment with a company’s overall business strategy, tactical supply chain planning addresses mid-term planning needs for the next 4–36 months. Tactical planning is evaluated at an aggregated level and delivers the basis for sales & operations planning (S&OP). In addition, short-term planning is maintained at the SKU (stock-keeping unit) level, covering, for example, the next 0–12 weeks, which is the basis for fine scheduling of production and order fulfillment. 10 LEAN Supply Chain Planning At all these levels, planners must strike a delicate balance between overengineering their plans—including complex “black box” methodologies that few stakeholders understand and even fewer buy into—and over-simplified approaches that rely entirely on individual experience and vague rules of thumb. 1.2.1.1 Forecasting and Demand Planning Since a supply chain should ultimately be driven by customer demand, the planning starts with available and planned customer orders. Long lead times in production force every supply chain manager to consider demand forecasts. The process of forecasting future customer demand is crucial to various aspects of the supply chain—from next month’s production schedule to yearly reviewed supply plans with major contractors to market estimates for identifying capacity requirements in the coming years. The time horizon of forecast and demand plans must exceed the overall production lead time. The key challenge for demand planning is that longer planning horizons require a greater share of demand to be forecasted; and, typically, the longer the forecast horizon the lower the accuracy of the obtained forecasts. Companies typically differentiate between long-term forecasts that are inputs to strategic planning and operational forecasts that drive production planning and scheduling for the coming weeks and months. To estimate future demand, many companies employ statistical forecasting methods whose results are reviewed by the sales force and enriched by market intelligence. The final gross sales demand is then balanced against available inventories to derive the net replenishment demand for the production supply. 1.2.1.2 Supply Planning and Production Scheduling The goal of supply planning is ensuring customer satisfaction in terms of trustworthy order promising, delivery reliability, and responsiveness at the lowest possible cost. However, this means not only responding as quickly as possible to customer requests but also being flexible enough to manage customer request changes. From a financial perspective, supply planning has to minimize the associated purchasing, manufacturing, and distribution costs, including the “costs of change.” Sales forecasting and net replenishment demand at production sites define the required supply from a company’s own production facilities and Supply Chain Management in Process Industries 11 external parties such as suppliers or contract manufacturers. With respect to production and supply lead times, supply planning must first find the most efficient way to fulfill demand forecasts over the medium-term planning interval. Starting with replenishment and production planning for finished goods, supply chain planning ensures that the right amounts of upstream intermediate materials and capacities are available with regard to lead times, while avoiding excess inventories along the supply chain. In addition to coordinating material flows between sites, effective planning is not possible without identifying optimal production sequences and batch sizes. In process industries, long production processes and complex changeover operations imply that a significant amount of inventory as well as capacity (production costs) is directly determined by production sequences and the corresponding lot sizes. Effective scheduling ensures that optimal decisions are taken for each asset at the sites and globally coordinated schedules contribute to an agile and cost-effective supply chain. 1.2.1.3 Supply and Demand Synchronization Limited availability of raw materials and capacity constraints may lead to shortfalls against requirements. If bottlenecks occur, the supply chain has to respond promptly to avoid stock outs. In collaboration with sales and production, the supply chain organization must resolve such demand and supply imbalances. Potential solutions to unresolved issues are escalated to S&OP meetings for final decision making. In most companies’ experience, the very first step of supply chain planning, forecasting, and demand planning is actually the Achilles heel of their entire supply chain. Although all commonly used approaches for supply and production planning require very reliable forecasts even at the product level, forecast accuracy remains unsatisfactory in virtually all supply chains. 1.2.2 The VUCA World Poses New Challenges to Supply Chain Planning The systems under which individual businesses and supply chains operate today are vast and complex—interconnected to the point of confusion and uncertainty. The stable and predictable times illustrated by the straight line in Figure 1.3 are history in today’s VUCA world for virtually all players in process industries. Simple linear root-cause analytics have obviously 12 LEAN Supply Chain Planning Manufacturer Customer Figure 1.3 The days of stable and predictable SCM are over. become less applicable. Therefore, it is necessary for supply chain managers to begin thinking in new ways and exploring new solutions. As there is no predictability or way to plan for every event that may arise, it becomes necessary to accept plans under uncertainty and conjoin with preparations to respond to any supply chain issue that may arise. Your company must now become aware of and learn how to operate in a VUCA environment. This requires, however, adopting a novel and innovative perspective, broader organizational understanding, new supply chain concepts, and more innovative skills and tools than those that are required in a more stable environment. To assess the new needs for planning and daily supply chain orchestration, it is necessary first to develop a better understanding of the major factors behind the new VUCA world. What makes planning today so different and the planner’s life so difficult? 1.2.2.1 Variability and Volatility Are on the Rise Variability in all forms is the natural antagonist of supply chain efficiency. As evidenced in a wide range of surveys, supply chain managers continue to rank variability as one of the top challenges to achieving their goals and objectives. But what is variability? Variability in SCM is anchored in the difference between a company’s market expectations and the actual customer requirements that need to be fulfilled every day. It has become axiomatic in recent years that the statistical spread between future demand expectations and actual customer orders is widening. As a consequence, supply chain managers have to anticipate, plan for, and react to a widening array of demand and supply scenarios (see Figure 1.4). Although the terms “variability” and “volatility” are often used interchangeably, one should be aware of the difference between them. Jay Forrester, business innovator and MIT scholar, introduced this distinction in the 1960s. He explained that a company must plan for variability through buffering in inventory and capacity and at the same time respond Supply Chain Management in Process Industries 13 Manufacturer Customer Figure 1.4 Variability and volatility are on the rise. to volatility through flexible processes and decisions in execution. To differentiate between variability and volatility, we can also use order lead time in execution: volatility applies within the time horizon of the customer order and variability applies to time horizons that precede the order lead time. SCM must therefore “plan for variability” across the entire planning horizon and prepare operations to “respond to volatility” as the plans are executed. This clear distinction between variability and volatility will be essential for understanding the fundamental concepts introduced later with the new supply chain planning paradigm. Variability implies introducing “the unexpected” and is therefore a natural antagonist to planning. Variability is not only increasing on the market and customer side due to the globalization of value chains. Furthermore, the physical distance involved in global sourcing concepts and bottlenecks in logistics make raw material supply more unreliable as well. This leads also to greater short-term volatility in intermediate and finished goods supplies. Increasing quality and regulatory requirements may lead to further yield variation, especially in the chemical industry. However, by far the biggest driver of variability and volatility is the ever-changing customer behavior. Today, customers request more customized products and higher service levels, despite their need for shorter lead times and decreasing order quantities. This makes detailed “planning for variability,” with demand forecasting at the product level, almost impossible. Instead, it is causing inferior operational performance and frustration for sales and supply chain organizations. 1.2.2.2 Uncertainty Keeps You Guessing Conditions in the supply chain world are changing so rapidly and in so many unexpected ways that it is often overwhelming the ability to cope and understand what’s going on. The accelerating rate of change in the business environment creates uncertainty, often also accompanied by a lack of clarity, which hinders management’s ability to conceptualize the threats and 14 LEAN Supply Chain Planning Manufacturer Customer Figure 1.5 Uncertainty keeps you guessing. challenges that supply chain organizations face. As uncertainty is increasing, companies need to find better ways to face and address it in SCM. Uncertainty leads, in turn, to missing trust. Every planner will start to “guesstimate” his or her own future demand, typically creating even more uncertainty for upstream supply chain operations (see Figure 1.5). To be prepared for what might come next, planners often use historical data, extrapolate them into the future, and then often add their own additional uncertainty on top before they pass their plans upstream to the next stage along the supply chain. This creates additional waves of uncertainty that are propagated through the value chain by interlinked planning systems. Additionally, when the supply chain environment is changing unpredictably, a company simply cannot rely on statistics to form the so-called adaptive expectation regarding customer demand. Even if we rely on historical information and extrapolating that into the future, the prediction will undoubtedly be inaccurate. Relying too heavily on historical data in environments characterized by fundamental uncertainty might lead to the wrong assumption that yesterday’s solution to a seemingly similar situation is appropriate today. What is needed here is a novel way of thinking. Being flexible in an uncertain environment is crucial. Detailed plans are great, but as they say in the military, the plan never survives first contact with the enemy. Fighting the plan and not adapting to a changed situation can get an organization into severe trouble. This might sound obvious or easy, but when planners believe they have a really good schedule, it is hard for them not to be wedded to it, especially when they have been involved in its creation. A good plan and surrounding planning process should incorporate flexibility and options for adaptation. 1.2.2.3 Complexity Becomes Overwhelming and Synchronization Challenging Growth strategies and global operations provide access to new customer groups and markets. However, the resulting trends toward global Supply Chain Management in Process Industries 15 manufacturing and distribution networks, outsourcing to best-cost countries, and the increasing number of toll manufacturers create significant complexity for supply chains. Given the additional trend toward product customization, most companies offer a broader product portfolio, but this often results in more individual customer orders and smaller order quantities. These changes together create significant turbulence in production schedules, asset and resource utilization, supply chain synchronization, and inventory management. Unfortunately, very few companies apply the analytical rigor needed to fully understand the tradeoffs between beneficial and wasteful complexity. As shown by a recent study from 2012 by Schey and Roesgen, complexity has become simply overwhelming for most companies (as illustrated in Figure 1.6). The greatest SCM challenge in working with all stakeholders in global networks is getting them coordinated and in sync, especially considering the increasing market pace with which companies must cope. Globally scattered material and information flows typically result in a complex strategic and tactical supply chain planning design. The increasing number of products and the shortening of product life cycles increase planning complexity still further. By way of analogy to an appropriate solution, consider the “complexity approach” of the African pygmy people when they hunt a large elephant. They jointly “slice the elephant” and carry it individually on their shoulders to their village. The key to making supply chain planning work is in this sense the common visibility (seeing the whole elephant), collaborative information sharing, and differentiated supply chain planning approaches (slicing the elephant) for the various market segments with their individualized customer needs. However, even with sophisticated planning solutions in place, the accumulation of lead times in globally operating value chains, with product replenishment lead times of 12 months or more, makes accurate demand forecasting virtually impossible. In this case, upstream production stages are operating as disconnected islands on the basis of gut feeling and past experience. Manufacturer Figure 1.6 Complexity becomes overwhelming. Customer 16 LEAN Supply Chain Planning 1.2.2.4 Ambiguity Leads to Confusion and Inefficiency The global span of value chains makes it more and more necessary that organizations work in a timely, interlinked way and that all supply chain planners from widely dispersed regions work collaboratively with their assets and processes aligned. In supply chain planning, ambiguity is the confusion arising from weakly harmonized processes, missing data, and poor definition of organizational interfaces (see Figure 1.7). For instance, although safety stocks play a fundamental role in any supply chain, there is so much unclarity and inconsistency regarding the definition and the right use of them. Ambiguity embodies the difficulty—and sometimes the seeming impossibility—in SCM of solving complex problems and making clear decisions. In many companies, the poor standardization of planning concepts and activities in combination with divergent functional priorities prevents SCM from delivering the targeted results. The underlying ambiguity has two significant causes: conflicts and inefficiency. First, the inability of leadership to provide clear direction and synchronize supply chain activities results in individual misreads, poor decisions, or even no decisions. Second, there is increasing frustration among supply chain planners who work hard, but with unclear and impermanent directions that do not add up to satisfying results or comprehensive success. Along with volatility, uncertainty, and complexity, it is ambiguity that ultimately prevents supply chain organizations from delivering the results that are demanded by internal and external stakeholders; consequently, supply chain costs, inventories, and service are not what they should (or could) be. But is traditional planning capable of solving these issues and mastering the challenges of the VUCA world? ? Manufacturer Customers Figure 1.7 Ambiguity leads to confusion. Supply Chain Management in Process Industries 17 1.2.3 Today’s Supply Chain Planning Approaches and Their Limitations Over the past three decades, global supply chain planning has become more and more demanding, with each decade bringing additional challenges, finally resulting in the challenges of today’s VUCA world. What was initially true, and remained mostly true even in the early 1990s, was that the planning task was largely a local one, such that the individual plant and asset could be planned separately considering solely the products dedicated to it. Today, however, production processes are globally connected, they process a myriad of distinct products, and they need to operate successfully under conditions of high demand and supply variability. The evolution of supply chain planning systems has always responded to emerging new challenges. Since the advent of computers and the Internet, the implementation of new business concepts for planning has been intertwined with the use of IT; in some cases, it was the availability of new technologies that led to major breakthroughs in planning and SCM. Three concepts—material requirement planning (MRP), enterprise resource planning (ERP), and advanced planning systems (APS)—resulted in major changes in planning approaches; below, we briefly outline how these three work and highlight why they struggle to deliver acceptable results when operating in a VUCA world. 1.2.3.1 From MRP to ERP In many companies, supply chain planning typically centers on the concept of MRP, which became popular in the 1960s as a solution for addressing a growing number of products and production steps. Based on demand for finished goods, MRP supports the calculation of required production volumes and precursor materials. As it grew in popularity, MRP also grew in scope, and evolved in the 1980s into manufacturing resource planning (MRP II), which combined MRP with master scheduling, rough-cut capacity planning, capacity requirements planning (CRP), and other functions. With the development of client/server IT architecture, it became feasible to integrate virtually all of a corporation’s business applications with a common database. This technological advancement led to the development of ERP, offering integration of internal and external information across an entire organization, and integrating all MRP/MRP II 18 LEAN Supply Chain Planning 1 Material requirement planning in ERP Requirement date Poor (based on forecast) forecast Demand Forecast 1 2 3 MRP Planned production Planning input with poor forecast quality 2 CRP Sequencing Execution A B C Time Capacity requirement planning ERP Capacity profile % Capacity overload Time 3 Sequencing in ERP Planned production Req. date of inputs A A Input material not available B B C Time Figure 1.8 ERP-based planning and its limitations. functionalities in one common platform; today, ERP systems form, at least in the execution of orders, the backbone of virtually all supply chain planning organizations. As shown in Figure 1.8, traditional supply chain and production planning using MRP II is based primarily on three successive steps: MRP, CRP, and the sequencing of orders; all of these steps are typically integrated into an ERP system. The ultimate starting point for planning is always the demand forecast, which triggers all subsequent steps and activities; it is therefore the quality and accuracy of forecast data that determines the value and outcome of supply chain planning—at least when common planning “recipes” are used. In the first step—material requirement planning—the required material quantities are calculated based on detailed product-level forecasts under consideration of current inventory levels and lot sizes. The result is a material requirement plan that covers expected demand. However, as capacity requirements are not considered in this step, the resulting production plan may lead to capacity overload. Therefore, in the second step—capacity requirement planning—the impact of the material requirement plan on available capacity is evaluated. If the available capacity is not sufficient, measures need to be taken to solve the identified capacity shortages. The production planner then tries to resolve capacity issues by, for example, adjusting shift models or postponing product delivery. In the third step, Supply Chain Management in Process Industries 19 the planner sequences the required production volumes into a production schedule with a defined production start and end date. Remaining gaps between demand and production capacity and related issues are resolved in S&OP meetings, after which the plan is finally adjusted and ready for execution by the production unit. 1.2.3.2 Advanced Planning Systems and Supply Chain Management At the end of the 1990s, in the face of globalized manufacturing and delivery processes, SCM as a corporate function rose to prominence. In parallel with the growing number of SCM departments and functions across companies, APS technology became an important cornerstone of most supply chain initiatives. The combination of SCM business concepts and APS as a technology platform provided companies with the means to enable globally integrated planning processes, encompassing multiple sites and countries. Modern APS solutions essentially stick to the same principles as MRP II, but are designed to cope with complex supply networks across plants and regions. They are capable of integrating all material flows of intermediates between production plants. In contrast to locally and site-oriented planning in ERP systems, APS provides additional functionalities for global visibility and planning. Equipped with modern in-memory database technology and enabling advanced mathematical optimization methods, APS promised to solve complex planning problems in global value chains. In contrast to previous ERP-based approaches, APS technology allows the planning and optimization of material and capacity volumes, including sequence scheduling, in one step. As shown in Figure 1.9, the determination of material and capacity requirements as well as production sequencing can be conducted simultaneously. This resolves a number of issues that arose for MRP II methodology within ERP systems. Infeasible supply chain plans can be avoided because shortages of material or capacity can be considered; the included sequencing capabilities with dynamic changeover time ensure a more realistic production model for process manufacturers, which in the end enables customer lead time expectations to be met more efficiently. Furthermore, APS technology provides important features such as the linking of all customer demand or stock-replenishment demand with the related multi-level production orders, a key enabler of global transparency. Finally, the used in-memory computing capabilities in APS systems offer integrated mathematical functionalities for automated optimization. 20 LEAN Supply Chain Planning 1 2 3 Simultaneous planning in APS Requirement date Feasible plan for (based on forecast) poor forecasted req. Poor forecast Demand Forecast 1 MRP 2 3 CRP Planning input with poor forecast quality remains Sequencing Execution Capacity 1 Capacity 2 (bottleneck) Material 1 Production time Material 2 Delivery time Blocked capacity Available capacity Time Infeasible plan (separate planning) Feasible plan (simultaneous planning of material and capacity) Figure 1.9 APS-based planning and its limitations. However, one important issue has not been resolved by APS: dependency on sales forecasts. It should be noted here as well that APS requires highly accurate product-level forecasts for a planning horizon of up to several months. However, as forecast quality deteriorates substantially in the VUCA world, a lack of good quality inputs directly results in poor planning outcomes provided by any APS solution. 1.2.3.3 Drawbacks of Dependency on Forecasts and Ineffective Use of Inventories Although APS and its predecessors such as MRP and ERP delivered substantial benefits to many companies, they all have an Achilles heel: the strong dependency on accurate input for planning in the form of demand forecasts. If the input does not have the required quality, planning faces multifold issues regarding costs and service. And as the painful experiences of many companies show, forecast accuracy is often not sufficient. There are many possible reasons for that, from failing to integrate sales organizations into the planning process to the unpredictability of business in today’s VUCA world. Consequently, many companies still labor incessantly to improve forecast accuracy. However, although some improvements might be achieved from time to time, most such initiatives do not solve the fundamental problem as they will never result in a level of forecast accuracy that is required by either ERP or APS Supply Chain Management in Process Industries 21 solutions. Thus, we have to find a way to reduce the need for detailed forecasts in supply chain planning. In all planning systems today every forecasted demand signal on the tactical planning horizon is netted during planning runs against a fixedparameter inventory target, which includes a significant amount of safety stocks that is kept fixed as well. However, this substantial amount of stock is not really used by planning systems to balance the demand variations that occur so frequently. As a consequence, traditional planning systems actively plan for the so-called dead stock and have thus to be considered as a root cause of working capital levels that rise above market expectations. Overall, all these issues place a huge question mark behind traditional planning approaches in either ERP or APS systems. And, the bad news here is that such issues cannot be fixed by adjusting a few settings in planning systems or introducing an additional supply chain role in your organization. What we have is a fundamental problem that needs to be solved by taking a new direction in supply chain planning. 1.3 Why We Need a Paradigm Shift in Supply Chain Planning Now All the challenges companies face in SCM today and the resulting pressure on costs, inventories, and service have triggered an intense debate about how to back out of the dead end of today’s planning practices. In almost all companies, there are experts favoring either improving traditional planning approaches by investing in even more sophisticated systems and forecast improvement initiatives or going for lean approaches and extending them along the entire supply chain. One of the primary objectives of both lean and traditional supply chain planning is that of achieving a stable and reliable flow of material through the networks and a timely flow of information along the supply chain. More than ever, a decisive competitive advantage can be achieved by companies with a balanced flow from and to their customers. The better the balanced flow, the better the customer service level and the deployment of working capital. Manufacturing in process industries aims typically to achieve efficiency by producing output in large manufacturing campaigns through multiple batches. Large campaigns indeed promise at first glance to minimize 22 LEAN Supply Chain Planning production costs. However, large campaigns limit opportunities to introduce flow and come at the expense of higher inventories and lower responsiveness to customer demand; large campaigns can therefore also reduce the overall performance. Several formal disciplines, such as value stream mapping and S&OP, are designed to create balanced flows along the supply chain and to tie production to sales forecasts or customer demand. However, these approaches need to be extended to successfully address the increasing variability and volatility that all companies face in the VUCA world. The same generally holds true for both traditional planning and conventional lean approaches. To master the quest for balanced flows successfully, it is less promising to go for one of the two directions alone. Instead, a new planning paradigm is required that combines the best of both worlds. 1.3.1 Traditional Planning Approaches Fail to Deal with the VUCA World As we have seen in the preceding sections, traditional planning approaches and systems, either ERP- or APS-based, have two main limitations: first, their enormous dependency on forecasts and high forecast accuracy; and second, the ineffective use of inventory and capacity buffers when dealing with variability in supply chain planning. These planning system deficiencies result in three major root causes of poor supply chain performance: The planning loop trap The bullwhip effect One-sided variability management These three key issues of traditional planning are the main reasons for insufficient capabilities for managing supply chains in the VUCA world. A substantial number of cost and service issues in supply chains can be traced back to them. 1.3.1.1 The Planning Loop Trap: The Spiral to Inefficiency Traditional planning concepts pivot around the precondition of planning and producing in accordance with long term but detailed product forecasts, whose expected quality is generally far beyond the required accuracy. As a consequence, companies following these approaches quickly Supply Chain Management in Process Industries 23 Forecast Lead time Forecast error The longer the forecast horizon, the lower the forecast accuracy Accuracy Longer lead time 100% Planning loop trap Horizon Short-term re-scheduling and firefighting Poor asset utilization High safety stocks Poor customer service Figure 1.10 Many companies are caught in the planning loop trap. become trapped in the planning loop (see Figure 1.10). This phenomenon describes the vicious relationship between long lead times and the resulting need for far-reaching forecasting horizons, directly causing decreasing forecasting accuracy as planners must look far into the future and expand planning horizons. Especially in process industries, companies often face long lead times in manufacturing, and therefore have to plan and schedule for make-tostock (MTS) production. The long lead times, in turn, require that product forecasts guide planning. Naturally, as lead times increase, the accuracy of the product forecasts deteriorates. With more forecasting errors, the need for safety stock and excess capacity increases along the entire supply chain, and inventories swell. Forecasting errors also result in more rescheduling of orders. However, such short-term changes are little more than firefighting to adjust production schedules to actual demand, also implying that more rush orders need to be squeezed in. Overall, this reduces throughput on all assets due to sub-optimal manufacturing sequences and increased changeover times, thus resulting in reduced asset utilization. In other words, decreasing forecast accuracy ultimately increases production lead times due to reduced asset utilization and inefficient manufacturing sequences. In return, such 24 LEAN Supply Chain Planning extended production lead times require even longer forecasting horizons, further decreasing forecasting accuracy. And now, planners are trapped in the planning loop and the same cycle recurs. Lower forecasting accuracy further increases product lead times and the planning loop trap expands further—driving up costs, increasing delays, and creating inefficiencies. This spiral into decreasing performance and inefficiency depends strongly on the forecasting accuracy level, which drops as planning horizons are extended. The increasing variability and volatility of today’s VUCA world only amplify this negative trend. In addition, the overall production lead time is increasing with the growing number of products on typical production lines. Increasing product complexity is thus aggravating the planning loop trap. 1.3.1.2 The Bullwhip Effect: Amplifying Variability along the Value Chain Your company and its SCM staff might recognize this situation. Despite very stable customer demand for one of your company’s “A” products, your manufacturing department may be telling you that production for the very same products constantly swings, seemingly more and more widely. For sure, your company is not alone. The phenomenon behind this situation is called the bullwhip effect and it jeopardizes performance along many supply chains. The bullwhip effect describes the amplification of demand variability along the supply chain. Even if the end-customer demand is quite stable, upstream demand often fluctuates widely (see Figure 1.11). It is very important to recognize that the bullwhip effect causes substantial supply chain costs. Greater variability means higher inventories, lower utilization, and less efficient manufacturing, all of which increase working capital and costs of goods sold. However, the bullwhip effect is not inevitable. In many supply chains, much of the variability is not given, but self-made. Anyway, do not blame your company’s SCM organization. Today most companies have only limited transparency along their global supply chains, which prevents supply chain planners from effective planning. In addition, their planning activities rely on mostly unreliable demand forecasts, which make effective planning virtually impossible. Owing to such limited global transparency, every plant or distribution center finds itself optimizing its operations in isolation. Every supply point Supply Chain Management in Process Industries 25 Demand variability amplification Demand Quantity Demand Quantity Time Production Customer demand Quantity Time Production Time Customers Figure 1.11 The bullwhip effect describes the phenomenon of demand variability amplification. along the value chain is batching demand input to a locally cost-optimized lot size. However, with isolated lot sizing at every value chain step, variability is amplified systematically upstream along the supply chain. No one should be surprised that planners often overreact to demand signals given the poor accuracy of the forecasts they receive every day. It seems only logical that they inflate replenishment and production quantities in order to be on the safe side. However, this missing trust in demand forecasts, albeit often well justified, creates considerable nervousness and costly variability along a supply chain. If supply chain planning is not capable of handling this variability, but instead amplifies it internally due to ineffective decision making, substantial issues with service and total costs arise. 1.3.1.3 One-Sided Variability Management: Increasing Inventories and Supply Chain Nervousness Traditional supply chain planning is based primarily on the logic of the MRP run. In this planning approach, estimated demand and planned production are balanced in light of current inventory levels. Based on these levels, an inventory projection is calculated. As soon as minimum inventory levels—the safety stocks—are reached, the MRP logic will lead to the planning of further production runs to stay above the minimum levels 26 LEAN Supply Chain Planning and create stock to meet anticipated further demand. The safety stock levels are not touched in this logic. Because they omit consideration of safety stocks in tactical supply planning, MRP-based planning runs fail to include safety stocks when calculating available stock for all inventory plans. In contrast, the systems trigger replenishment orders immediately once the safety stock levels are reached or even expected to be reached. Such a response to expected demand is in this situation especially dangerous. Although we all know that forecasts are typically highly unreliable, even long-term forecasts— those with the greatest inaccuracy—are used by MRP systems to plan orders and avoid touching the safety stocks. As a consequence, even a single peak in demand forecasts will cause a substantial amount of replanning and rescheduling activities. As shown in the middle part of Figure 1.12, with one-sided variability management, capacity utilization directly follows demand. Inventories, in contrast, are not used actively in planning as a means of dampening variability. Instead, all variability must be buffered by asset capacity, causing much of the nervousness observed in today’s supply chains. As a direct consequence of not touching safety stocks, all the market variability and forecast uncertainty are passed one-to-one to production planning and manufacturing capacities through planned stock replenishment signals. Consequently, the capacity side has to manage all the variability—one-sided only—through perpetual replanning and frequent rescheduling activities. Market demand is only buffered by capacity, amplifying variability Market demand variability Market demand variability Inventory is not used to managed on one side… buffer market variability, leading to dead stocks Inventory Time Manufacturing assets managed with traditional planning Capacity utilization Demand Inventory stockkeeping units (SKU) Figure 1.12 One-sided variability management leads to ineffective use of assets and inventories. Supply Chain Management in Process Industries 27 Even worse, this also implies that planning runs are creating stock replenishment orders with the same one-to-one quantity oscillation as seen in the forecasted (market) demand with all the forecast inaccuracy included. In tactical planning, demand peaks are thus not absorbed through inventory due to the fixed-maintained inventory targets, nor are they dampened through the active use of safety stocks—although dampening variability is the intended purpose of safety stock. Instead, dead stocks accumulate and weaken the working capital position of the whole company. When demand begins drifting in the VUCA world, it is really a case of two worlds colliding as the traditional MRP planning mode has not foreseen a mechanism for smoothing the increased demand volatility. Similar to the bullwhip effect—and aggravated by it—demand variability is propagated one-to-one from one production stage to the other. Failing to execute variability control by actively using inventory prevents companies from dampening variability and forces supply chains to manage all the variability on the capacity side. At the operational level, this requires constant production planning adjustments and creates an awkward situation for manufacturing units and raw material suppliers. Perpetual replanning and rescheduling cause excessive effort on the part of planners, but typically result in unsatisfactory results due to the inherent design flaws in traditional planning modes. Although this challenge is well known to supply chain practitioners, it is hard to change this practice when using traditional planning systems and the accompanying supply chain planning processes that were established in the past. 1.3.2 Common Lean Approaches are Insufficient for Global Supply Chain Synchronization To overcome the shortcomings of traditional supply chain planning, companies seek alternative planning approaches. In recent years, lean concepts such as value stream mapping or kanban have become popular across a range of industries as potential alternatives to traditional planning and coordination in operations. Originating in the automotive industry, lean concepts have inspired considerable effort to adapt them to the specific requirements of process industries. At the shop floor level, lean approaches have surely helped to improve flow and establish more demand-centric operations. 28 LEAN Supply Chain Planning When extending the lean approach along the entire supply chain, however, many companies find that lean practices tend to over-simplify global supply chain planning. Because lean concepts do not involve integration with corporate planning systems or planning across multiple plants and assets, these concepts appear insufficient for improving flow at the supply chain level and for supporting global supply chain synchronization. 1.3.2.1 The Promise of Lean Principles in Supply Chains Becoming lean is widely regarded as a promising approach to SCM that makes it possible to achieve a steady flow of goods, driven only by what customers really want—a true pull-driven supply chain. Using lean principles, the automotive and discrete manufacturing industries have found major success in establishing stable material and information flows. Less surprisingly, many companies in process industries today are also on a quest for improved flow. Now more than ever, industry leaders are convinced that a decisive competitive advantage can be achieved for supply chains with a high degree of flow through all stages and to customers. Moreover, observations of process industries confirm this belief: supply chains with stable flows indeed exhibit better service levels, higher asset utilization, and lower inventories. But would traditional planning practitioners deny the benefits of flow? As we hear all the time, certainly not! Every planner knows that material and products that flow reliably are the easiest to plan for and manage. As lean advocates, all users of traditional planning concepts agree that reliable flow indeed improves supply chain performance and simplifies daily planning tasks. However, are traditional planning systems such as MRP capable of establishing demand-driven flow along the entire supply chain? When considering all the planning issues supply chain managers face today, it must be admitted that they are not. Strong dependency on (accurate) forecasts prevents ERP and APS systems from pulling products based on customer demand and establishing stable and reliable material flows. 1.3.2.2 Cyclic Scheduling: Lean Scheduling for Process Manufacturers Many companies have benefited from applying lean manufacturing, enjoying lower inventories, reduced variability, and high acceptance on the part of the people who actually work with lean principles and tools. However, Supply Chain Management in Process Industries 29 practitioners in process industries also face significant limitations when attempting to implement lean tools such as kanban or heijunka beyond the shop-floor level. Traditional lean principles and tools are deeply rooted in the automotive industry, which does not operate under the manufacturing constraints that are present in process industries. Especially when it comes to planning and scheduling, lean concepts thus often struggle in these industries. In process industries, the manufacturing restrictions are much more manifold and complex, demanding intensive supply chain and operations planning activities. Planning must address a variety of industry-specific supply and manufacturing restrictions: long supply lead times, variable product yields, and sequence-dependent changeover times, to mention just a few. Minimum campaign sizes need to be taken into account due to technical or economical restrictions. Furthermore, production sequences determine the efficiency of changeover operations and the amount of waste in production. Thus, an optimal sequence for production—for example, from bright-to-dark colors, or low-to-high additive concentrations—must be defined and maintained. In recent years, the product wheel has evolved as a lean approach for achieving leveled production, smooth production flows, and reduced cycle times in light of relevant manufacturing restrictions and challenges inherent to process industries. To maximize equipment utilization and labor productivity—two major competitive advantages in process industries— product wheels aim to accomplish the dual objectives of production leveling and multi-product scheduling to an optimum practical extent. They combine these two objectives with a third advantage: the optimization of multi-product schedules. Changeover time, costs, and difficulty depend on the sequence in which products are manufactured; the optimization of the production sequence is thus a critical feature for process industries. As shown in Figure 1.13, a product wheel is a visual metaphor for a structured, regularly repeating sequence of all products to be made on a Production schedule A B C D E Time Figure 1.13 The idea behind product wheels. D E A C B Cycle time 30 LEAN Supply Chain Planning certain asset or piece of equipment; it is designed to manufacture products in a cyclic sequence in short cycle times without sacrificing customer service. In this way, product wheels constitute an effective way to bring lean planning and scheduling principles into process industries. They combine the simplicity and flow thinking of the lean approach with the requirements that are characteristic of process industries. The length of every spoke of a product wheel represents the production quantity of a certain product, so the spokes need to be arranged according to the optimal production sequence. The length of each spoke—the production quantity within one cycle—is based on the demand takt rate, that is, demand averaged over some period. When using product wheels, production will be triggered only if it is a product’s turn, ensuring stable manufacturing flow and minimizing (work-in-process) inventories. In this way, product wheels are an important measure for establishing pull principles in the highly constrained process industry environment. Product wheels can be employed in both make-to-order (MTO) and MTS environments. In fact, MTO and MTS products can be scheduled on the same wheel. Still, can we resolve all planning challenges in the VUCA world by adopting product wheels in process industries? The first implementations of product wheels were expected to produce every product in every cycle of the wheel. As industry experts such as Peter L. King recognize, this limits their application to stable product portfolios on locally planned assets. Although some extensions of product wheels have been discussed in the past, all standard product wheels presented so far struggle to manage short-term volatility and fail to ensure global synchronization along supply chains. This is the reason why we introduce Rhythm Wheels in this book as approach to overcome such limitations of standard product wheels. 1.3.2.3 Limitations of the “Product Wheel” Approach for Managing End-to-End Supply Chains When it comes to supply chain planning and execution, lean advocates are often accused of being antitechnology. Of course, it is reasonable to avoid using IT in applications in which it is wasteful, confusing, or not reflective of reality. Unfortunately, this has been true for quite some time with regard to traditional planning approaches such as MRP or APS systems. Consequently, most product wheels that have been introduced into industry practice are locally managed and are mostly applied manually or with simple Excel-based solutions outside existing corporate information Supply Chain Management in Process Industries 31 systems. Lacking support by corporate planning systems combined with a lack of tailored business concepts has, however, had a very undesirable consequence: today, the application of standard product wheels is limited to rather stable and fast-moving product portfolios. They cannot be used for slow-moving or highly volatile products. However, as value chain networks in process industries encompass several manufacturing steps that are distributed across plants around the globe, end-to-end supply chain synchronization is crucial to ensuring efficiency. When attempting to apply the standard product wheel to separate but interlinked plants at the same time, three major shortcomings have been identified by many practitioners: The rigid design of standard product wheels limits their application to fast-moving and stable product portfolios. However, when operating in a VUCA world with an increasing share of volatile products, this constitutes a major limitation. As standard wheels do not incorporate concepts for mitigating short-term volatility or adjusting to changing conditions, they quickly lose effectiveness when exposed to highly dynamic business changes. If product wheels are locally designed and maintained without integration with corporate planning systems, the designs and techniques typically in use tend to differ significantly across sites or even across manufacturing lines of the very same plant. Lacking well-governed standards runs the risk that product wheels may be locally optimized, but leads to sub-optimal solutions for the entire supply chain. Without proper global synchronization, companies face the risk of increasing cycle times, tying up more working capital, and prolonging customer response times. The proliferation and sustainability of product wheel implementations have been negatively impacted by the lack of appropriate planning and execution technology. Site-specific product wheels do not foresee real-time sharing of detailed information as an ERP or APS system would do. However, low demand visibility and planned production and inventory levels along the supply chain reduce the flexibility needed to react to changes and make global synchronization virtually impossible. Consequently, well-intentioned lean initiatives based on product wheels—the most suitable approach for lean planning and scheduling 32 LEAN Supply Chain Planning introduced to process industries so far—very often lack process standardization and global visibility in corporate planning systems, hindering global synchronization along supply chains. 1.3.3 How to Back Out of the Dead End of Today’s Planning The lessons learned from observing today’s approach to supply chain planning in process industries are clear: both traditional planning and common lean approaches, even when adapted to the requirements of process industry manufacturing, fail to a considerable degree when addressing increasing VUCA challenges. Thus, we believe that it is time to back out of the dead end in global supply chain planning—or avoid it altogether—by taking the best of traditional and lean planning and tailor it to the new realities in process industries. This is what we call LEAN Supply Chain Management. 1.3.3.1 Both Common Lean Approaches and Traditional Planning Fail Supply chain planning has to find answers to the growing VUCA challenges in the business world. Without the capability of managing those factors, costs and inventories will surely continue to rise and service issues as well as shortages will occur even more frequently. As we have seen, when it comes to planning and execution, both common lean approaches and traditional planning suffer from serious limitations when it comes to solving the VUCA challenges. Traditional planning is subject to several vulnerabilities when addressing uncertainty and volatility; in particular, three root causes of weak performance can be identified that are mutually amplifying: The planning loop trap increases forecast errors. The bullwhip effect increases volatility and variability due to overreaction to forecast errors and too little consideration of actual costumer demand. The traditional planning approach in ERP and APS systems transfers all the volatility—with no smoothing—to production planning. On the other hand, even product wheels, the most sophisticated lean concept for process industries, fail, as do other conventional lean planning approaches, to manage complexity: Supply Chain Management in Process Industries 33 Product wheels, albeit tailored to process industries, struggle to manage high-mix and highly volatile product portfolios and to cope with business dynamics. The lack of system support and standardization prevents lean planning from providing visibility beyond local manufacturing sites into global SCM. Common lean concepts fail to achieve global supply chain synchronization. Insofar as both traditional and conventional lean concepts struggle in the VUCA world, the key question for SCM today is how to go forward. The verdict is clear: neither traditional planning nor conventional lean concepts alone can solve the current challenges. Traditional planning suffers from its over-complexity and insufficient capability for managing volatility and variability, while over-simplified lean approaches help to solve some local issues but fail to coordinate and synchronize global value chains. 1.3.3.2 Resolving the Traditional Planning versus Lean Conflict In the face of all the above-mentioned planning issues in the VUCA world, many companies are experiencing intense deliberations while trying to determine the right way forward. The typical conflict between traditional versus lean planning goes something like this: many lean initiatives attempt to abandon traditional supply chain planning, which uses ERP or APS systems. Why? In the eyes of lean advocates, they are inappropriate, transaction-intensive, and nonvalue-added when compared with what lean planning and execution tries to accomplish. In the eyes of the most lean facilitators and advocates, ERP and APS are just overcomplicated and wasteful dinosaurs that prevent companies from establishing demanddriven supply chains. This, however, often causes tremendous friction between supply chain planners and the lean advocates who are pushing to eliminate formal planning systems. Supply chain planners see every day that they need to be able to see the total demand picture and develop global corporate capabilities for inventory and capacity planning, since otherwise blind spots will exist in the planning process, resulting in shortages, firefighting, and even excessive inventory positions. Although many planners favor lean principles, they regard the simple pull approach of lean planning as a gross 34 LEAN Supply Chain Planning oversimplification of the complex planning and scheduling scenarios that are the norm in today’s VUCA environment. To achieve a true step change in supply chain performance and bring greater agility and resilience into SCM, we believe that it is counterproductive to choose between lean or traditional planning as though they are mutually exclusive. Both approaches are burdened by serious limitations when dealing with the VUCA world, so we should think more about taking the best of both worlds. 1.3.3.3 Prepare for the VUCA World by Opting for LEAN SCM To back out of, or avoid altogether, the dead end of today’s supply chain planning practices and regain lost performance by establishing flow and demand-driven supply chains to withstand the turbulence of the VUCA world, we have invented LEAN Supply Chain Management—LEAN SCM—a planning paradigm that brings formerly disconnected planning approaches together and tailors them to the specific requirements of process industries. As highlighted in Figure 1.14, LEAN SCM is, first and foremost, designed to eliminate the root causes of poor supply chain performance that result from today’s VUCA challenges. In particular, it eliminates the strong dependency on accurate forecasts that is the Achilles heel of any Challenges of supply chain planning in a VUCA world Poor customer service due to planning loop trap High inventories and limited capacity utilization due to one-sided variability management Weak supply chain synchronization due to bullwhip effect How to solve these challenges Do even more detailed planning and try to further improve forecast accuracy Use a different planning approach Myth of forecasting LEAN SCM Figure 1.14 LEAN SCM provides a new planning paradigm. Supply Chain Management in Process Industries 35 MRP-based planning approach. Through LEAN SCM, your company can also rid itself of the antiquated and complex rules governing demand and supply order generation in traditional supply chain planning, rules that lead to unrealistic schedules and constitute a huge problem for flow. Also, LEAN SCM avoids reliance on concepts with little or no connectivity at the plant, enterprise, or supply chain level of conventional lean planning, which is a reason for poor global supply chain synchronization. We thus introduce an innovative Rhythm Wheel approach with formalized variability control mechanisms that extend standard product wheels to highmix and volatile product portfolios and enable the synchronization of Rhythm Wheels along the global value chain. In the face of the VUCA challenges, there are now two ways to conduct SCM: first, SCM can accept the drawbacks of the traditional planning and conventional lean practices as they exist today in organization, processes, and planning systems. But all too often this results in high inventories, poor asset utilization, and service issues—all of them jeopardizing topline margins. Or, second, SCM can challenge and fundamentally change how your company approaches supply chain planning and global coordination. From our point of view and in the context of this book, we show you how to take the second way by going for LEAN SCM. Chapter Summary Virtually all industry leaders in process industries emphasize that mastering the VUCA world and its impacts is the top SCM priority. Strong pressure on inventories, service, and top-line margins urgently demand a rapid but sustainable solution. Especially the management of volatility and variability is a key challenge for supply chain planning, the backbone of any supply chain. Traditional planning systems such as MRP and APS struggle in this effort due to their strong dependency on unrealistically high levels of forecast accuracy, trapping them in the planning loop and subjecting them to the infamous bullwhip effect. Furthermore, these traditional planning approaches lack efficiency due to their one-sided approach to variability management, which causes ineffective use of both capacity and inventory. However, conventional lean approaches, such as kanban and heijunka, often considered as viable alternatives to traditional planning, are also 36 LEAN Supply Chain Planning unable to overcome the challenges of the VUCA world. These approaches provide some advantages when it comes to variability management, but they fail to establish end-to-end synchronization along supply chains—a prerequisite for successfully managing the global value chain networking in process industries. To help your company back out of or avoid a dead end in supply chain planning, we propose in this book a new way: LEAN SCM. We combine elements of both lean and traditional SCM to develop a holistic concept that adapts planning to the VUCA world while meeting all specific requirements of process industries. Along these lines, we guide you through a paradigm change that will enable your company to achieve a step change in supply chain performance.