White Paper

Best practice guide to supply chain management in the food manufacturing industry

Highlights

The ultimate goals of food manufacturers and distributors typically fall into three pillars: safety, efficiency and growth. While there are many different areas of a business that you can apply these three pillars to, none may be more important than supply chain management. Having a consistent and accurate supply chain has a positive effect on every part of a business and will help you to achieve your goals.

We’ve prepared this guide to outline the methods you can use to optimize your supply chain. In this guide you’ll learn how to:


Introduction

The goal of effective supply chain management is to allow all members of the supply chain to accomplish effective inventory management while achieving each partner’s customer service goals. This requires cooperation among all members of the supply chain, including partners, vendors and customers. In this guide we will explore how these members can benefit and achieve their maximum level of success through the sharing of information, and how this can be most easily done by leveraging technology.

Think about this: If a vendor sells a large quantity of product, it must mean that the vendor is increasing sales and profit. But this increase is only temporary; it does not necessarily mean an increase in long-term profitability. Large, infrequent orders do not maximize the use of a manufacturer’s machinery, manpower or material. Unneeded inventory, idle equipment and staffing changes can mean that money is left on the table.

Vendors, then, must focus on projecting the materials, equipment and labor needed to execute a long-term project cost-effectively. Accurate forecasting will work to bring larger, more consistent returns over time. But managing these processes can be complicated and ensuring supply chain cooperation cannot be successfully accomplished without the sharing of information. Below, we’ve divided the necessary information a successful company must share with its partners into three parts:

Let’s dig deeper into what this information really means to your business.


Demand forecasting best practices

It’s common practice to base forecasting or future customer demand on past sales or usage history, but situations change over time. Common examples of business changes include:

Compensating for these changes can often be done by connecting the supplier, vendor and customer links of the supply chain. A vendor can often better estimate how much of a product needs to be available when its customers share actual or projected sales, production schedules or other estimates of product usage. This process is known as collaborative planning, forecasting and replenishment (CPFR) or derived demand.

By leveraging technology, it’s easy for a supplier to automatically collect CPFR or derived forecasts by downloading information from their customers’ retail point of sales (POS) terminals or their manufacturing production schedules. But even if automated data collection is not practical, a vendor can still implement an effective CPFR system using the following steps:


Customers may often tend to overestimate their future needs of a product. To encourage them to give you the most accurate possible forecast, consider offering them a better discount based on the accuracy of their forecasts. After all, if they give you accurate forecasts, you should be able to stock less, while continuing to meet or exceed your customer’s expectations of product availability.

Relying simply on customer predictions can be nerve-wracking, though. Examining the five elements of accurate demand forecasting, in combination with specific customer forecasting, will undoubtedly mean better data and better predictions.

The five key elements of accurate demand forecasting are:


Following these steps, your “total forecast” will be the sum of collaborative forecasts from certain customers and the results of a formula that utilizes the five elements listed above. Calculating an accurate forecast may seem like a complicated process, but it doesn’t have to be. Start by monitoring the accuracy of your current forecasts by using the following formula:


The absolute value of (usage – forecast) ÷ The smaller of the forecast or actual usage


Then, examine those products with a high forecast error (greater than 50%-75%, for example). For each of these items ask:

If neither of these conditions is true, you need to look at the information and formula you are using to calculate the forecast and determine if there is a better way to predict future demand of the product. Be sure to share your forecasts with your suppliers. This will help them better predict how much product they need to product to fulfill your needs.

Anticipated Lead Times Best Practices

Accurate forecasts are an important element in achieving the goals of effective inventory and supply chain management. But you also have to be aware of the timing behind placing a replenishment order. Anticipated lead times represent the amount of time it will take you to replenish your inventory from the primary source of supply. Having an accurate forecast and knowing your anticipated lead time will allow you to calculate an order point (or minimum stock quantity) for each item.

For example, if you have a forecast of two items of product per day, and a lead time of seven days, you would need to place a new order when there are no less than 14 pieces left in inventory (i.e. 2 pieces/day x 7 days = 14 pieces). If you were to reorder the product when there are less than 14 pieces in stock, you could experience a stock out before the replenishment arrives. An accurate lead time is comprised of four elements:

As with the forecast, it is important to also analyze the accuracy of lead times. A best practice on lead time accuracy is to utilize a report that informs the appropriate buyer if the lead time associated with a stock receipt that just arrived is:

If any of these exceptional circumstances occur, the buyer should contact the vendor immediately to determine if lead times were caused by factors that will not reoccur, or if they are, in fact, representative of how long it will take to obtain the product in the future. This will help to ensure that you are able to place the next replenishment order at the correct time. Again, questioning your supply chain partners and sharing information benefits everyone. If a vendor’s lead times are continually inconsistent, it may be best to see if you can buy similar products from a different supplier. Reliable sources of supply are critical for long-term success.


Safety stock best practices

No matter how much effort you put into calculating an accurate prediction of future demand, it is still only an estimate. There is always a chance that you will sell more than you forecast. And there is always a possibility that you will experience a delay in receiving a replenishment shipment. For this reason, it is a good idea to keep a “safety stock” of additional inventory, especially for items that are critical to your customers or to your operations. Calculating the most accurate forecast possible and maintaining anticipated lead times that truly reflect how long it will take to obtain materials will allow you to keep less safety stock while still being able to deliver superior service to your customers.

One of the best ways to determine appropriate safety stock quantities is to base the calculation on the average deviation or difference between the forecast and actual usage, as well as the average deviation between the anticipated and actual lead times. As a rule, you will need to maintain more safety stock for items with unpredictable usage and lead times, and less safety stock for products with more consistent ones. Lowering your safety stock quantities will reduce your overall inventory investment, resulting in increased profitability and success.

Lowering your safety stock quantities will reduce your overall inventory investment, resulting in increased profitability and success.


Order cycles

The formula used to calculate the order point for an item is:


(Demand/day x anticipated lead time) + safety stock


But it’s not as simple as ordering a product when its net available quantity falls to order below the order point. Why? Because often vendors will have a target order requirement. This target requirement often means terms or discounts that allow you to profitably sell or use the vendor’s products. Without this target order requirement, you could be left purchasing products for full price.

Target order requirement is often expressed as:

The order cycle is the amount of time necessary for your company to sell or use enough of the vendor’s products to meet the target order requirement. When you place an order with a vendor you must not only order those products that are at or below the order point, but you must also include items that will fall below the order point before you can place the next target order with the vendor. For example, if a vendor has a 30 day vendor cycle and you are placing an order with the vendor today, you must include any product that has less than a 30 day supply above the order point. You are being forced to order those products for which net available quantity is above the order point before you really need to. It is easy to see how lengthy order cycles (which result from large target order requirements) will increase your inventory. Long order cycles will also increase your inventory in another way, too. If you can only meet a vendor’s target requirement every 30 days, you must order at least a 30 day supply of each item you obtain from that vendor. After all, buying a one to two week supply of an item every 30 days will not result in great customer service.

If you do experience extended order cycles, work with your suppliers to see if you can receive smaller shipments more often. Perhaps some of your vendors don’t realize that filling occasional large customer orders does not maximize the use of their machinery, manpower and material. Machinery that remains idle for long periods of time, large inventories of raw materials and finished goods and personnel that are not totally productive increase any supplier’s costs.

Summary

The ultimate goal of most food processors is to maximize long-term profitability. But this does not have to be accomplished at the expense of your vendors and customers. By following the best practices for demand forecasts, anticipated lead times, safety stock quantities and harnessing technology, you will be able to form a strong supply chain that maximizes everyone’s profitability. After all, obtaining and sharing information is usually mush less expensive than maintaining unneeded inventory.

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