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DEMAND-DRIVEN

MANUFACTURING ADDS

AGILITY, PREDICTABILITY

AND EFFICIENCY TO

SUPPLY PLANS

IIn the consumer goods industry, anumber of powerful trends are puttingmanufacturing operations squarely atcenter stage. The days of CG compa-nies treating their manufacturing

processes as a “black box,” with ordersgoing into manufacturing at the beginningof the week and product emerging somehow, some way, at the end of the week, arerapidly coming to a close. Increasingly,consumer goods companies are seekingways to make their manufacturing moreagile, predictable and efficient in respond-ing to demand, as well as more transparentto their Supply Planners.

Among the forces shining a bright spot-light on manufacturing are:· Frequent, often rapid changes in con-sumer preferences and demand thatrequire faster manufacturing ramp-ups(and ramp-downs);

· The proliferation of product SKUs, bothin the absolute number of individual prod-ucts and in the variety of flavors, sizes andpackaging options;

· Increasing demands for localization, withdifferent products or product varietiesbeing produced for specific geographies orniche markets, creating a move away frommass production toward smaller batchsizes;

· The increasing costs, and risks, of hold-ing large volumes of inventory as a meansof dealing with rapid demand changes;

· A renewed focus on product quality andsafety spurred by recent recalls, which hasraised doubts about CG companies' abilityto outsource or offshore key manufactur-ing processes;

· Compliance with new regulations, requir-ing a greater in-house knowledge base of allaspects of manufacturing and production;and

· Increased focus on sustainable businesspractices, both to meet the demands ofecology-conscious consumers and to bringenergy costs under control.

Finally, the economic upheavals of the pasttwo years have put a new premium on com-panies that can deliver on their promiseswith minimum “drama” and uncertainty.The need for companies to get a better han-dle on their manufacturing has thusbecome both a dollars-and-cents issue anda brand image issue, according to Julie

2 | MARCH 2010

DEMAND-DRIVEN MANUFACTURING ADDS AGILITY, PREDICTABILITY AND EFFICIENCY TO SUPPLY PLANS

Consumer Products

Food, Beverage, Tobacco

STAY THE SAME DECREASE DON’T KNOWINCREASE

0 20 40 60 80 100

0 20 40 60 80 100

53% 37% 7%

40% 40% 20%

MARKET SEGMENT3%

Improved manufacturingasset reliability

Improving RONA/ROCE

Reducing Inventory

Improved product quality0 20 40 60 80 100

0 20 40 60 80 100

0 20 40 60 80 100

0 20 40 60 80 100

12% 10% 10%

10% 8% 4%

9% 8% 9%

9% 9%5%

Ability to profitably accommodateincreasing product mix

Lower prices

2ND CHOICE 3RD CHOICE1ST CHOICE

8% 5%

8% 5% 7%

4%

BUSINESS ISSUE

0 20 40 60 80 100

0 20 40 60 80 100

SOURCE: 2009 Tech Trends Study, CGT/AMR Research

CHANGE IN MANUFACTURING OPERATIONS SOFTWARE BUDGET FOR 2009

TOP 3 BUSINESS ISSUES FOR MANUFACTURING IT INVESTMENT

Fraser, Principal Industry Analyst at theconsulting firm Cambashi.

“It's about trust at the consumer level andalso at the level of retail, distributor and sup-plier partners,” says Fraser. “The key chal-lenge that companies across the supplychain are struggling with is volatility. Themore your company can provide visibilityinto your operations, and not do a lot of last-minute changes and firefighting, the moreyou're going to be a preferred partner.”

There are some strong indications that CGcompanies recognize the importance of theirmanufacturing operations. In the ConsumerGoods Technology 2009 Tech Trends Study,conducted in association with AMRResearch and published in October 2009,Lora Cecere wrote “One of the most strategicareas for IT spending for consumer productcompanies in 2010 is in improving manufac-turing operations.” Cecere, now a partnerwith the consulting firm Altimeter Group,added “With more than 53 percent of com-panies increasing spending in the food andbeverage industry, [IT spending on improv-ing manufacturing operations] tops the list.While spending in consumer products islower, it still ranks as the most strategicinvestment area.”

DEFINING DEMAND-DRIVENMANUFACTURINGCG companies seeking to address their man-ufacturing challenges, or simply to gain abetter understanding of the strengths andweaknesses of their current operations, areturning to a Demand-Driven Manufacturingmodel. At its most basic, Demand-DrivenManufacturing (DDM) means having man-ufacturing operations that combine agilityand predictability, to the extent that whatev-er demand signals the company receives, themanufacturing operation will be able to fillorders quickly, at required quality levels, andin a profitable manner.

“The idea behind Demand-DrivenManufacturing is that a company's manu-facturing capacity is capable of respondingto fairly specific demand signals,” says AlisonSmith, Vice President of Strategic Planningat AspenTech. “However, it also means thatmanufacturing doesn't just respond once,but can move and shift based on changes inthat demand signal. Further, DDM meansmanufacturing can respond in such a waythat the company maintains the profit mar-gins on its products that had originally beenanticipated when it went through the origi-nal Sales & Operations Planning (S&OP)process.”

As a manufacturer, “you can be agile inresponding to demand, but it might putyour costs through the roof,” Smith adds.

MARCH 2010 | 3

“The key challenge that

companies across the

supply chain are struggling

with is volatility. The more

your company can provide

visibility into your operations,

and not do a lot of last-minute

changes and firefighting,

the more you're going to be

a preferred partner.”

—JULIE FRASER, PRINCIPAL INDUSTRYANALYST, CAMBASHI

DDM in Action

Operational Excellence in Manufacturing: Agility

CUSTOMERLeading household products manufacturer

“This solution does not replace our SAP R3 production planning implementation. The solution enhances the short-term planning process.”

—Systems Manager

SOLUTIONProvide within-the-day scheduling updates across multiple plant locations.

BENEFITS• Improve responsiveness to demand shifts and supply disruptions• 100% ROI from reduced: uOvertime uFinished goods inventory uPremium freight and outbound demurrage

For CG companies to survive and thrivetoday, “they must have both agility and prof-itability in their manufacturing processes.”

While DDM encompasses numerousprocesses, and its specific deployments willvary depending on the products being man-ufactured and the business models of thecompanies using it, its basic elementsinclude:

· Detailed visibility into production process-es, down to the level of the factory floor andeven to the level of individual productionlines, with real-time or near real-time visibili-ty into production data such as actual pro-duction yield, batch quality, equipment sta-tus, etc. In many cases, even greater granular-ity will provide the ability to monitor keyprocess parameters such as pressures, tem-peratures, feed speeds, viscosity, etc.

· Presentation of this data to operators,providing them with the real-time feed-back and guidance needed to keep theprocess in control.

· Aggregation of this data up to the facto-ry level, and further up to the enterpriselevel, providing the ability to create objec-tive measurement using a range of KeyPerformance Indicators (KPIs) such ascycle times, waste percentage per batch,and Overall Equipment Efficiency (OEE).

· Use of analytical tools to explain whyone line is operating less efficiently thananother, or what particular process ele-ment needs to be adjusted to raise quali-ty levels (e.g., batches being heated tooquickly or not being raised to a highenough temperature, insufficient timeallotted for intermediate tasks orprocesses).

Again, there are indications that CG com-panies recognize the importance andvalue of many elements of DDM.According to the CGT/AMR 2009 TechTrends Study, spending on the captureand usage of near real-time data to driveprocess improvement is second only tospending on quality technologies.

To truly be a demand-driven manufactur-er, however, companies must integratetheir production execution with theirsupply network. DDM solutions can, andshould, integrate with a CG company'sEnterprise Resource Planning (ERP) sys-tems, as well as with both its supply planning and plant scheduling systems.For companies that have already investedin Manufacturing Execution Systems(MES) and Enterprise ManufacturingIntelligence (EMI) solutions, moving to aDDM model can further leverage theseinvestments.

4 | MARCH 2010

DDM in Action

Operational Excellence in Manufacturing: Efficiency

CUSTOMERGlanbia

SOLUTIONProvide real-time view of current operating conditions with KPI reporting.

BENEFITS• Improved (OEE) asset efficiency and performance• Increased production yields: uReduced waste and losses uIncreasing process output• Reduced operating costs: uImproved quality “right first time” uReduced energy and utilities costs

“As a manufacturer, you

can be agile in responding

to demand, but it might

put your costs through the

roof. For CG companies to

survive and thrive today,

they must have both agility

and profitability in their

manufacturing processes.”

—ALISON SMITH, VICE PRESIDENT OFSTRATEGIC PLANNING, ASPENTECH


IMPROVED MANUFACTURING TIED TOBETTER BUSINESS PERFORMANCEMoving to a DDM model and thus improv-ing the efficiency and agility of manufac-turing operations can have a positiveimpact for many types of businesses.According to the February 2010 reporttitled “Correlating Plant Performance toBusiness Performance,” produced by theManufacturing Enterprise SolutionsAssociation (MESA) International andCambashi, while many manufacturers havestruggled during the economic troubles ofthe past few years, some actually improvedagainst business metrics. Those that didimprove financially were more likely tohave improved their plant operations andIT metrics, showing a clear correlationbetween plant performance and businessperformance.

More specifically for the CG industry,respondent companies fitting the CG manu-facturing model were in a group that hadmade dramatic improvements against the“upside production flexibility” metric. Thismetric comes into play if a company experi-ences a demand spike, measuring “how longit takes you to ramp up your productionprocess for that particular SKU to meet amuch higher demand level than you hadoriginally forecast,” explains Cambashi'sFraser, the study's author. This metric is “agood indicator that a company is starting todrive their demand-driven capabilities intotheir production plant,” she adds, notingthat the study found that 70 percent of thecompanies in this group had improved thismetric by over 10 percent on average in thepast three years. “That's a very high number,and one that I found quite eye-opening,” shenotes.

DDM ADDRESSES TOUGH CGCHALLENGESMany conditions in the CG industry make ita particular “sweet spot” for the use of DDM

MARCH 2010 | 5

KEY PERFORMANCE INDICATORS:

WHAT TO WATCHWhile the individual requirementsof each consumer goods companywill determine its specific mix ofmanufacturing Key PerformanceIndicators (KPIs), they can be divid-ed into four general groups, accord-ing to Sean Duclaux, Senior Directorof Product Management for PlantOperations at AspenTech:

1) TIME-BASED KPIsOn a macro level, these measure thetime it takes a manufacturing facilityto complete an order or a batch.However, for real insight into this KPIcategory, the measurements must bebroken down to the level of processparts—for example, the time neededto take a line down, clean it, and setit up for another run. Time neededbetween individual processes (e.g.,for heating or cooling) also needs tobe factored in.

2) QUANTITY-BASED KPIsThese can include not only a facto-ry's ability to meet a specific orderquantity, such as when 1,000 unitsof a product are needed ondemand, but also the waste per-centage—a factor that often means1,025 units need to be produced inorder to end up with 1,000 finishedproducts. Measurements of plannedwaste percentages versus the actualwaste that is produced is an impor-tant KPI, according to Duclaux, whoadds “there are also organizational

quantities in operational areas andwork sequences, such as turning,mixing and hardening; companiesshould be asking if they can takeout some of those steps. In addi-tion, the more employee workinggroups there are in a particularprocess, the greater the complexity,so companies need to ask if theycan simplify those in any way.”

3) QUALITY KPIsAgain, these will vary greatlydepending on the product beingmanufactured, but variance meas-urements (how far off each batch isfrom the “perfect order” or “gold-en batch”) are crucial to under-standing, and comparing, the capa-bilities of each line and factory—aswell as pinpointing where improve-ments need to take place.

4) SUSTAINABILITY/GREEN KPIsOperating with as little harm to theenvironment as possible is not justgood for a company's image andgood for the planet; these initiativescan have a real dollars-and-centsimpact. More efficient manufactur-ing reduces the amount of waste (of both raw materials and unusablefinished products) that must be dis-posed of, and minimizing energyconsumption can reduce a key opera-tional cost—one that can vary greatlydepending on factors outside thecompany's control. l

BUSINESS MOVERS OTHERS

SYSTEMS UPTIME 47% 21%

TOTAL ROLLED THROUGHPUT YIELD 43% 26%

ON-TIME DELIVERY TO COMMIT 41% 16%

OVERALL EQUIPMENT EFFECTIVENESS 35% 33%

ENERGY CONSUPTION PER UNIT OF PRODUCTION 33% 2%

solutions. “CG companies have a strongneed for consistent quality, but at the sametime consumers are fickle, so the demandside of the equation can change very quick-ly,” says Sean Duclaux, Senior Director,Product Management for Plant Operationsat AspenTech. “A domestic CG companymight be dealing with demand for its prod-ucts going through the roof in Asia, and beasking themselves 'How do I change tomeet this demand as quickly as possible?'Does the company continue to make theproduct in the U.S., incurring the timedelays and costs associated with shipping,or is the company agile enough to switchthe manufacturing to China?”

DDM can also help CG companies dealmore cost-effectively with precipitous dropsin demand. By interacting with plant sched-uling systems, S&OP systems, and raw mate-rials suppliers, a DDM solution can help acompany either find other customers for itsproduct, or switch manufacturing plans tomake different products from the same rawmaterials. “For example, if a CG food andbeverage company bought tomatoes andthen discovered that its customer didn'twant to make tomato soup, the companywould want to look for a market for otherproducts,” says Sharon Ward, SeniorDirector of Supply Chain ProductManagement for AspenTech. “Would thecompany get the best margin by selling themas whole tomatoes? For tomato paste? Or asan ingredient in a more complex food item?”

Ward adds that DDM solutions “give com-panies the ability to react immediately tocustomer demand—either with Capable-to-Promise information, or to notify customerswhen there's going to be an issue with theirexpected order.” Excel-based systems or ERPsolutions might indicate that a manufactur-ing problem is slowing down production,“but finding out who is directly affected is a monumental task,” says Ward. “TheAspenTech solution can tell you that itaffects this customer and this specific order.Even if you have to deliver bad news, you cansay exactly what will get to the customer andwhat won't.”

Such specificity helps CG companiesachieve a key benefit of DDM solutions: touse their production facilities as a means tomore effectively achieve business goals.“We can help our CG customers optimizetheir production in order to maximize fortheir particular metrics,” says Ward. A com-pany might want to maximize service toone customer or a group of customers;maximize its profit margins; or reduce itsinventory levels of a certain product. “If a

6 | MARCH 2010

NOTE: “Business Movers” are respondents who report improving business performance either dramati-cally or broadly on average over the past three years. These companies either improved EBITDA or NetOperating Profit by 10% or made more than a 1% improvement in 10 or more of the 14 business met-rics included in the survey. “Others” includes companies that may have made some improvements thatwere less dramatic. So as an example, nearly half (47%) of Business Movers reported a 10% or greaterimprovement in the “systems uptime” metric, while only 21% of Others reported that level of improve-ment. The Others may have made systems uptime improvements, but they were not as dramatic as thosemade by the Business Movers.

RESPONDENTS REPORTING 10% OR MORE ANNUAL IMPROVEMENT IN OPERATIONS METRICS

Source: “Correlat ing Plant Performance to Business Performance” © 2010 MESAInternat ional & Cambashi Inc.


MARCH 2010 | 7

company wanted to do any of those things,our solution could come up with the opti-mum product mix and production plan toachieve these goals,” says Ward.

REDUCING RELIANCE ON INVENTORYTO DEAL WITH DEMAND SHIFTSThe improved manufacturing agility pro-vided by DDM solutions can address otherpersistent and difficult CG industry chal-lenges. “Historically, the way companieshave dealt with fast changes in demand isto shift their inventory around,” saysCambashi's Fraser. “But if companies canmake their products closer to the actualtime when they will be shipped, deliveredand consumed, they have the opportunityto actually make those shifts in the produc-tion facility itself, rather than in a finishedgoods warehouse or a shipping line.”

The ability to produce products “ondemand” rather than relying on safetystock or last-minute shipping adjustmentscreates a ripple effect of benefits. “If youhave sudden demand changes that requirecomplex cross-shipping among distribu-tion centers and local warehouses, there arecertainly transportation costs involved inhandling demand fluctuation out in thedistribution network,” says Fraser. “Inaddition, depending on your businessmodel, these parts of the network are oftenowned by someone else, such as a distribu-tor or retailer, so there are hard cost savingsif you can avoid that.”

Inventory savings will account for a largeportion of the benefits of DDM-style man-ufacturing, according to Fraser. “In someconsumer goods segments products haveexpiration dates, so there's not just the costof carrying the inventory but in some casesof writing off expired goods,” she says. “Inother cases where you've produced excessgoods, you'll often need to do promotionsto liquidate them or sell them through.”

These hard dollar costs can be accompa-nied by less obvious drawbacks. “Therecan be a loss of trust among a company'spartners if the CG company ships itemsthat those customers can't unload in atimely manner,” she notes. “Leaving cus-tomers with inventory on their booksthat they don't want or need hurts a com-pany’s negotiating power, which meansthey can end up not getting as good a dealin the future—for prime shelf space in aretail store or the best prices from a dis-tributor.”

CONCLUSIONBy providing CG companies with a clearerunderstanding of what their manufacturingoperations can and can’t do, Demand-Driven Manufacturing provides a wide rangeof benefits. The alternative—viewing manu-

"We can help our CG

customers optimize their

production in order to

maximize for their particular

metrics, such as maximizing

service to one customer

or a group of customers;

maximizing profit margins;

or reducing inventory levels

of a certain product."

—SHARON WARD, SENIOR DIRECTOROF SUPPLY CHAIN PRODUCTMANAGEMENT, ASPENTECH

DDM in Action

Efficient Supply Chain

CUSTOMERFP Corporation

SOLUTIONForecast, plan and schedule production in conjunction with distribution operations.

BENEFITS (May 2003 through December 2009):• $65.6 million reduction in third-party warehouse costs (approx. $6.1 million annually)• $81.4 million reduction in inter-warehouse transportation costs (approx. $13.6 million annually)• $14.4 million reduction in inventory assets• 70%+ reduction in peak demand product run out

DDM in Action

Operational Excellence in Manufacturing:Predictable and Efficient Execution

CUSTOMERDSM

SOLUTIONProvide operators with real-time information and guidance: “Ideal” process profiles overlaid on “actual” process profiles with alerts, alarms and recommended actions provided.

BENEFITS• Increase daily output by 3-15%• Improve production consistency• 5-20% faster product launches and transitions

facturing as a mysterious, unknowable“black box”—is becoming an increasinglydangerous path.

“There has been an inherent assumptionthat when a CG company tells its manufac-turing operation to make something, it willget made,” says AspenTech's Alison Smith.“The factories themselves have traditionallydone whatever they need to do to satisfythose demand signals. The 'black box' goesthrough a lot of pain and strain to be as pre-dictable as it needs to be to satisfy the busi-ness plan. People generally don't thinkabout this, but if you don't have an agilemanufacturing response, and if your manu-facturing costs get driven up, you will erodethe financial performance of your business.”

For Cambashi's Julie Fraser, the benefits ofDDM come down to “being able torespond effectively, and cost-effectively, toshifts in the market. It has everything to dowith lowering your cost of doing business,which means that your products are stillaffordable and you're making a profit in avery competitive market. This is really anew frontier, one in which consumer goodscompanies will really have to fine-tunetheir capabilities.” n


About Aspen TechnologyAspenTech is a leading supplier of software that optimizes process manufacturing. With AspenTech's integrated solutions, process manufacturers can implement best practices for optimizing their engineering, manufacturing, and supply chain operations. As a result,AspenTech customers are better able to increase capacity, improve margins, reduce costs, and become more energy efficient. To see how the world’s leading process manufacturers rely on AspenTech to achieve their operational excellence goals, visit www.aspentech.com orcontact us at [email protected]

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A CONSUMER GOODS TECHNOLOGY WHITE PAPER