LEAN SCM Part 3: LEAN Inventory and Replenishment Management for VUCA Challenges* )

LEAN SCM

Part 3: LEAN Inventory and Replenishment Management for VUCA Challenges*

Dr. Josef Packowski and Ernesto Knein

Camelot Management Consultants AG, Mannheim, Germany

Supply chain management (SCM) requirements in the

pharmaceu-tical sector have changed significantly in recent years. The new

buzzword in global supply chain management is adaptation to

increasing global complexity and volatility. Growing pressure from

financial markets and the difficulty of increasing operating margins

and working capital in this environment require efficient planning

and execution of global inventory and replenishment processes.

Companies are thus increasingly relying on LEAN SCM

–

harmo-nized production and replenishment planning along the entire

supply chain, closely managed by IT applications. LEAN SCM is

designed expressly to simplify existing planning processes and

improve synchronization and variability management of global

supply chains. A series of five articles provides further insights into

LEAN SCM, focusing on its key elements: LEAN SCM production

planning, LEAN SCM replenishment planning, organization and

performance management, and IT integration.

This article, the third in the series, provides an overview of global

inventory and replenishment planning based on the new end-to-end

LEAN SCM philosophy, emphasizing a paradigm change in

man-aging increasing variability and uncertainty along synchronized

supply chains. First, we explain why we must rethink current

inventory and replenishment planning concepts that are embedded in

ERP and APS systems. Second, we discuss how LEAN inventory

management with dynamic parameter adaption can buffer variability

and keep it out of operations in pharmaceutical supply chains.

Third, we highlight how LEAN replenishment planning connects to

such organizational concepts as constraint-based vendor-managed

inventory (VMI) and pull replenishment strategies. Finally, we explain

the link between replenishment planning and flexible,

capacity-con-strained production-campaign planning to synchronize supply chain

operations for greater agility and flexibility.

1 . T h e N e e d t o R e - t h i n k C u r r e n t P ra c t i c e s

Today’s pharma supply chain net-works feature an increasing number of contract manufacturers (CMOs)

and vastly differentiated product portfolios. Increased volatility and un-certainty in market conditions pose new challenges to planning and coor-dinating within these networks. For this the term„VUCA” has been coined – an acronym of the words „Volatil-ity”, „Uncertainty”, „Complexity” and „Ambiguity” – to precisely describe the rising challenges to global

manu-facturing organizations [1]. Increased use of personalized drugs, stricter reg-ulations, and higher service-level

re-quirements leave pharmaceutical

supply chains particularly vulnerable to rising variability and uncertainty in customer demand.

In an increasingly uncertain

world, continuing to struggle with the unrealistic prerequisite of high forecast data accuracy when plan-ning with Enterprise Resource Plan-ning (ERP) systems or Advanced Planning Systems (APS) and perpet-ually seeking better demand fore-casts is unwise. Moreover, even at their best these systems are unable to manage variability effectively, simply passing incoming demand variability along the entire supply chain. Variability is not buffered ac-tively, but passed on to production sites, which then need to reschedule operations and increase shifts on short notice, jeopardizing cost tar-gets, timely order completion, and customer service. Under current supply chain practices and the ERP or APS systems that support them, target and safety stock levels are used as fixed planning parameters with no buffering of variability, since they are never“touched” from a planning per-spective. In this way the traditional planning approaches represent a con-ceptual dead-end for solving today’s variability management problems.

To effectively address the chal-lenge of rising variability and its propagation along the supply chain, companies should adopt two-sided variability management by systemati-cally buffering variability in capac-ities as well as (planned) inventories. This can be achieved through dy-namic target stock-level setting in supply chain planning.

*)_{Part 1 and Part 2 see Pharm Ind 2014;76}

(1):69-73 and Pharm Ind 2014;76(2):190-194, respectively. Zur Verwendung mi t freun dlicher Genehmigu ng des Ve rlages /For use with permissi on of the publi sher

2 . L E A N I n v e n t o r y

Ma n a g e m e n t – Dynamic

Pa r a m e t e r A d a p t a t i o n t o A c t i v e l y B u f f e r

Va r i a b i l i ty

Demand variability manage-ment changes significantly under the LEAN SCM planning paradigm, which entails a two-sided approach that applies LEAN planning principles to both manufacturing capacities and inventories. [2] To be more precise, the safety stock ele-ments in all SKU-based inven-tories are now actively used in planning runs, as they have been designed for, to level

replenishment signals and

keep as much market noise as possi-ble out of manufacturing (see Fig. 1). The active use of safety buffers– particularly safety stocks to hedge

against variability – represents a major improvement in LEAN SCM Planning. In most companies this alone would be a paradigm change

in supply chain planning, because in traditional supply chain and tacti-cal production planning processes safety stocks are never touched in the planning horizon ahead of typical order lead times (see Fig. 2), even though they have been created to buffer variability. Consequently, high levels of“planned dead stock” remain in overall inventory profiles, which only increase further as variability in-creases. To overcome this conceptual dead end, LEAN SCM pursues a dis-ciplined approach to the dynamic adaptation of inventory target levels to changing conditions along the supply chain. This allows SCM to keep a key component of demand variability– demand peaks – out of manufacturing, smoothing capacity utilization and reducing time spent resolving production planning and scheduling problems. This might sound intuitive, but it represents a paradigm shift in today’s planning processes and systems. Some phar-maceutical companies, such as

As-traZeneca and Novartis Animal

Health, have already taken steps along this path to improve supply chain performance [3, 4].

Inventory management, in which a dynamic inventory target-setting process supports active variability management, is a key conceptual lever for LEAN SCM. Since safety Arzneimittelwesen

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A U T H O R

Dr. Josef Packowski

is co-founder and Managing Partner of the Camelot Consulting Group, an international organization of leading specialists focused on value chain man-agement in core industries comprising chemical, pharmaceutical, and consumer goods manufac-turers. He received his doctoral degree in business and information technology from Saarland Uni-versity, and in addition to his professional work he is today a lecturer on advanced planning systems and supply chain management at the University of Mannheim, one of the leading business schools in Germany. He is a respected industry consultant with over 25 years of experience, and a visionary leader in operations management and strategy in process industries. During this time he has worked for several of Camelot’s most prominent clients and global industry leaders such as Astellas, Astra-Zeneca, Bayer, BASF, DSM, Henkel, Lyondell Basell, Merck, Novartis, Roche, Sabic, and others.

A U T H O R

Ernesto Knein

is a consultant and LEAN SCM expert at Camelot Management Consultants. He received his diploma in business administration from the University of Cologne (Germany), focusing on supply chain management and controlling. He has several years of international consulting and industry experience with a focus on supply chain management and process re-design for clients in process and discrete industries. In addition to his consulting work he has been a regular guest lecturer at the University of Cologne for supply chain management.

Fi g u re 1

Market demand variability is managed on two sides (all graphics courtesy of Camelot Management Consultants AG).

Zur V erwendung mit freundlicher Genehmigung des V erlages /F or use with permission of the publisher

inventory allocation and optimization. Significant benefits can be realized by jointly optimizing inventories along the entire supply chain, ac-counting for dependencies between stages and optimizing inventory allo-cation (see Fig. 3). Several recent projects conducted at Top 10 phar-maceutical companies indicate that multi-stage inventory planning ap-proaches can typically generate 15– 25 % inventory reductions while si-multaneously preserving or even in-creasing service levels.

3 . L E A N R e p l e n i s h m e n t

P l a n n i n g– Differentiation

o f P u s h / P u l l Mo d e s a n d VM I / C M I O rg a n i z a t i o n s

Predicting the future has always been a challenge. Under current demand-management practices in pharma-ceutical companies, most companies perpetually seek to predict future de-mand but continually fail to do so with sufficient accuracy. In today’s VUCA world forecasting accuracy is more difficult to achieve than ever and growth in tender business and smaller order sizes will further re-duce accuracy. Nevertheless, all plan-ning activities today are based on inaccurate sales forecast input, result-ing in even less accurate plannresult-ing outputs. This dominant planning ap-proach is known as“push-mode” – producing based on inaccurately forecasted demand.

Searching for new ways to ap-proach planning and forecasting is therefore on many supply chain planners’ agendas. So how can com-panies cope with this forecasting di-lemma? We suggest the following guide to SCM: “Accept uncertainty and eliminate the need for certainty

in operations”, as a Senior Director Supply Chain at Eli Lilly so fittingly postulated. [5] This means, in the first place, no longer using forecasts to trigger manufacturing orders – in-stead responding to real consumption, implicating pull replenishment. In“pull mode”, replenishment is triggered by real customer demand, not by doubt-ful forecasts. In other words, produc-tion processes are initiated in re-sponse to actual customer orders, not in uncertain anticipation of those orders. Again, this is a shift in mind-set: make what you sell, don’t sell what you made! Yet, to adopt “pull

mode” effectively you must prepare your strategic supply chain footprint and pre-configure your tactical capac-ity and inventory buffers for increased supply chain agility and velocity.

Directly linked to demand-driven pull replenishment and end-to-end supply chain synchronization – bal-ancing capacity (OEE, utilization) and inventory (service level, working capital) objectives– is organizational alignment of inventory ownership and replenishment responsibility. To enable end-to-end supply chain opti-mization for leveled flow and greater supply flexibility in today’s VUCA en-Safety stocks in the fulfillment and the tactical planning time horizon.

Fi g u re 3

Multi-stage inventory optimization considers all inventories along the supply chain simultaneously. Zur Verwendung mi t freun dlicher Genehmigu ng des Ve rlages /For use with permissi on of the publi sher

vironment, companies often consoli-date ownership and global responsi-bility, shifting from local Customer Managed Inventory (CMI) through local sales organizations to regional or even global Vendor Managed Inven-tory (VMI) through a global supply chain organization. Most pharmaceu-tical companies have already shifted into VMI-replenishment mode after having established global supply chain visibility. Now, however, after reducing overall inventory levels, they face the next process requirement: balancing and synchronizing uncon-strained VMI-replenishment demand with“leaned”, “consolidated”, or even “virtualized” supply-capacity con-straints. 4 . L E A N R e p l e n i s h m e n t S y n c h r o n i z a t i o n– Linking R e p l e n i s h m e n t D e m a n d w i t h F l e x i b l e P r o d u c t i o n C a m p a i g n P l a n n i n g

Successful SCM requires effective

synchronization of demand and

supply. Depending on the underlying replenishment mode (push/pull) and organizational responsibility (VMI/ CMI), supply chain processes differ significantly. Typically, in SCM, re-plenishment signals from a distribu-tion center (DC) are passed on to

manufacturing in certain time

“buckets”, usually months or weeks. Local operations then have to sched-ule production in some way to more or less meet replenishment demand within the given time buckets. At the DC, however, there is no real visibility into which products are going to ar-rive at what times until a short-term delivery note is posted.

Under LEAN SCM, this approach is changed fundamentally, since it follows a capacity-constrained VMI concept with pull replenishment. Un-restricted replenishment demand is now managed through predefined campaign planning at the production site (see first and second points in Fig. 4). From the network perspec-tive, production dates are now known due to the“sequenced capac-ity view”, which is far more accurate

than planning from the classic

bucket perspective.

Local operations at the produc-tion site in turn need flexible cam-paign planning, linking replenish-ment signals with the right campaign size and sequence. The Rhythm Wheel concept accounts for exactly this market variability by enabling

flexible campaign building [6].

Rhythm Wheels schedule campaigns in optimized sequences and adjust campaign sizes dynamically in re-sponse to unrestricted demand sig-nals (please refer to the previous ar-ticle in this series,“LEAN SCM Pro-duction Planning”, to learn more about the Rhythm Wheel concept). This procedure leverages the full benefits of flexibility within the VMI concept, since it gives local opera-tions the freedom to optimize and adjust schedules while maintaining full transparency for global planning. The dynamic production cam-paigns are then mirrored from the “local site view” to the “sequenced capacity view” in supply network planning. The resulting replenish-Arzneimittelwesen

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Fi g u re 4

Linking replenishment demand with flexible production campaign planning.

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the DC is explicitly allowed, since their levels have been designed to actively buffer variability.

5 . B e n e f i t s o f L E A N I n v e n t o r y M a n a g e m e n t a n d R e p l e n i s h m e n t P l a n n i n g

Leaders of the pharma industry have already experienced sustainable per-formance improvements along their supply chains by means of LEAN in-ventory management and replenish-ment planning:

. Dynamic safety stock-setting re-duces blocked stock in planning and overall inventories along the supply chain; the potential benefit is in the range of 30–40 %.

The next article in this series on LEAN SCM,“Organization and Performance Management”, explains the setup that is best suited to successfully running LEAN SCM; the article following that one focuses on IT tools that facilitate LEAN inventory management and re-plenishment planning.

Part 4 will be published in one of the upcoming issues of“pharmind“.

R E F E R E N C E S

[1] Packowski J. LEAN Supply Chain Plan-ning: The New Supply Chain Management Paradigm for Process Industries to Master Today's VUCA World. New York: CRC Press; 2013.

[2] http://www.leansupplychainplanning.com

Optimize the Value to Customers. A pre-sentation held at the LogiPharma 2010, Boston, MA, USA.

[6] Packowski J, Knein E, Streuber P. Ein in-novativer Lean Ansatz zur Produktions-planung und -steuerung– Das Multi-Echelon Rhythm Wheel Konzept am Beispiel einer pharmazeutischen Supply Chain. In: Schönberger R, Elber R, editors. Dimensionen der Logistik Funktionen, Institutionen und Handlungsebenen. Wiesbaden, Germany: Gabler Verlag; 2010. p. 101–115.

Correspondence: Dr. Josef Packowski

Camelot Management Consultants AG Theodor-Heuss-Anlage 12

68165 Mannheim (Germany) e-mail: [email protected]

Chefredaktion: Claudius Arndt. Sekretariat: Gudrun Geppert. Verlag: ECV · Editio Cantor Verlag für Medizin und Naturwissenschaften GmbH, Baendelstockweg 20, 88326 Aulendorf (Germany). Tel.: +49 (0) 75 25 94 00, Fax: +49 (0) 75 25 94 01 80. e-mail: [email protected]. http://www.ecv.de. Herstellung: Rombach Druck- und Verlagshaus GmbH & Co. KG / Holzmann Druck GmbH & Co. KG. Alle Rechte vorbehalten.

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