whitepaper

best practices in demand

& Inventory Planning
For Chemical Companies

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WHITEPAPER

Best Practices in Demand and Inventory Planning

about
In support of its present and future customers, Aptean sponsored this
white paper to help chemical manufacturers understand how supply
chain functions such as demand and inventory planning can positively
impact their overall operations and bottom line.

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WHITEPAPER

Best Practices in Demand and Inventory Planning

Introduction

Its a classic scenario in chemical manufacturing struggling

to coordinate the opinions of sales and marketing with
manufacturing and supply chain initiatives on what should be
produced, when it should be produced, and where its needed.
The lack of good supply chain coordination can lead to
frequent changes in production schedules, expedited transfers
and shipments in distribution, excessive stock-outs, erratic
levels of customer service, lack of visibility into future demand,
and inventory in the wrong place and at the wrong time.
For many chemical companies, these problems are not new.
In fact, their root cause typically revolves around a few basic
issuesmainly, a lack of shared knowledge about the supply
chain planning function, inadequate decision support systems,
and unavailable or inconsistent data due to lack of integration
to the core business system.
Supply chain planning involves functions such as demand
forecasting and planning, distribution inventory planning,
and plant capacity planning and scheduling. The right mix of
strategy, education, and systems can have a very high impact
on a manufacturers overall operationsand ultimately its
bottom line.

Knowledge of the
Supply Chain Function

Part of the challenge many chemical companies face has

to do with a lack of knowledge regarding forecasting and
planning techniques. Often, key decision makers have little
formal training in the areas of forecasting, inventory planning,
production planning, distribution planning or scheduling
theory and processes. Many are simply following past
practices, which may be outdated, overly simplistic, and yield
undesirable outcomes.
Yet knowledge of basic forecasting techniques, combined
with an understanding of the forecasting process, is absolutely
essential in todays highly competitive environment. A greater
knowledge of forecasting techniques and the systematic
process of forecasting can improve forecast accuracy and
forecast credibility. This can result in better coordination

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between organizational units and greater stability in the

production plan.
Planners are often frustrated at the quality of the forecasts
they receive from their sales and marketing organizations.
In many cases, they will override the forecast and use their
own judgment. While this can work better in individual
circumstances, it also means that marketing and planning are
not working to a coordinated plan.
Forecasts at the item/location levels are often the least reliable.
Through the process of aggregation a more credible forecast
can be generated. So while item/location forecasts may be
unreliable, the aggregate forecast at the overall item level is
more stable. Aggregation from the item to the brand level,
across a wide range of items, tends to produce a yet more
reliable forecast. Through a method of proration, adjustments
to the forecast made at the higher brand levels can be
prorated down to the item/location level.
This gives distribution a better expectation of shipping
requirements, while giving production a better demand
number for planning and scheduling at the plant level.
Production plans, based upon intermediate product forecasts,
tend to become more stable through this method of
forecasting, since forecasts are more credible when built over
a longer time horizon.
With todays technology, this process can occur
instantaneously at the desktop, and the results can be easily
shared throughout the network for use by multiple divisions
within the organization.

A Deeper Knowledge of
Inventory Policy

Another key area in which planners and decision makers

should be more proficient is inventory policy. For example,
there is often confusion about the relationship between safety
stock, reorder point, reorder batch size and customer service
levels. Many chemical companies develop production plans
around -days of supply or cover period. Some will derive
their figures by simply dividing annual demand by the number
of forecast periodswithout taking into account seasonality,

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Best Practices in Demand and Inventory Planning

Benefits of Advanced Planning and Scheduling

Techniques:

Faster Planning and Re-Planning

Reduced Changes in Daily Schedules

Increased Stability of Plans

Reduced Overtime
Improved Labor Utilization

Improved Customer Service Levels

Improved Morale
Reduced Inventory Levels
Increased Plant Throughput
Fewer Changeovers Due to Better Sequencing

trends, or the cost of production and carrying costs.

Low-volume products generally should be produced less often
with a longer cover period so that changeover costs (which
are generally lower than carrying costs) are reduced. On the
other hand, high-volume products should be produced more
frequently. The relationship of volume to cover period has
an impact on safety stock and service levels. The shorter the
cover period, the more frequent the production; and with
lower safety stock, service levels are higher. The converse is
also true.
Knowledge of basic inventory policies, and how they
interrelate, can benefit planners by deriving an inventory
replenishment plan, which achieves stated customer service
levels consistent with lower levels of inventory.
Planners should have enough supply chain management
understanding to know where to look, what questions to ask
and how to interpret the information they are receiving. They
dont need to know all the underlying statistical techniques.
But they do need an easy-to-use system that can perform
the calculations quickly and generate credible results. The
combination of an effective system, along with forecasting
and planning know-how, can yield significant results.

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Long-Range Planning
Horizons

Supply chain planning systems help companies tackle longterm strategic issues, such as business forecasting and global
capacity, all the way down to short-term tactical issues
such as day-to-day scheduling. However, the length of the
planning horizon determines the degree of flexibility and the
methods used to manage the plant.
The planning horizon for a typical business is a rolling twelvemonth period. This time horizon is often considered a
demand forecasting problem. Since the forecast is used
to drive the budget, distribution, and production planning
processes, increasing the accuracy of the forecast is
fundamental to improving the stability of these plansi.e.,
distribution, inventory, productionand the overall return on
investment from corporate resources.
Therefore, implementing a good systematic forecasting
process is the foundation of a sound supply chain planning
infrastructure. Benefits include a one-number forecast,
greater stability of plans, less reactive decision making,
improved morale, lower inventory levels, higher customer
service levels, increased throughput in manufacturing, greater
confidence throughout the organization, and reduced freight
costs.

Medium-Term Planning
Horizons

Once a credible forecast is developed, planners can

immediately plan distribution requirements, inventory levels,
allocation of demand to plants (demand planning) and
capacity planning (at the plant level).
In order to develop a long-range Master Production Schedule
(MPS), the planner must first establish inventory levels for the
finished products at each location. An inventory policy system
provides essential help with this process.
The objective of an inventory policy system is to help the
planner establish safety stock levels, reorder points and
reorder batch sizes over time, consistent with meeting a

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Best Practices in Demand and Inventory Planning

target customer service level. The location of the inventory is

also considered during this process.
The inventory policy system builds upon the forecast and
is the driver for distribution and production planning. It
formalizes the process of setting stock policy and allows
the planner to look at the tradeoffs between inventory
investment and service levels. Naturally, the aim is to meet
the target customer service levels while holding the minimum
level of inventory.

Enter Production
Planning

Once inventory levels are set at each location, the planner

can then decide when and where (assuming multiple plant
choices) production should occur. This is the function of the
Production Planning system.
The Production Planning system covers months, weeks and
days as it resolves the trade-off between capacity, labor and
inventory. By planning the inventory requirements over time in
demand forecasting and inventory policy, the planner can see
the long- and short-term effect on plant capacity.
The planning model considers demand requirements, line
capacity and formulations required to meet the demand
quantities and dates. Simulation capability tests different
scenarios and considers multiple solutions quickly.
Benefits of improved planning using advanced planning
and scheduling (APS) techniques include faster planning
and re-planning, increased stability of plans, reduced
overtime, improved labor utilization, reduced changes in
daily schedules, improved customer service levels, improved
morale, greater confidence in the plans, reduced inventory
levels, increased plant throughput, and fewer changeovers
due to better sequencing.
In most production planning scenarios, the objective is mainly
to resolve staffing, materials and capacity issues over weeks
and months, rather than minute-by-minute or hourby-hour
which is traditionally the realm of scheduling. At this level of

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planning, planners can work with average run rates and key
resources, aiming at a good trade-off between the quality of
plans and the ease of maintenance of the system.
However, some modern APS tools, include sophisticated
facilities for modeling production, even at the planning
leveli.e., batching rules, alternative routing and recipes,
changeover logic, sequencing rules, etc.to ensure the plans
produced are both realistic and optimal.

Short-Term Planning
Horizons

Production planning drives longer-range plans from demand

forecasting. Shorter-range production plans must also resolve
the replenishments of stock for the network of distribution
centers, such as regional and local warehouses that ship to
customer locations. The system considers each warehouse
when deciding what products will be stocked and how much
to stock in each location. As described above, the inventory
policy system will recommend optimum stocking levels and
reorder patterns.
Warehouse replenishment is based upon the frequency and
volume of shipments from the plant to the warehouse. This
function is typically performed by a distribution require ments
planning system. Distribution requirements planning systems
plan the transportation frequency among the network of
distribution centers, while considering the plant capacity
established in the production planning system. By varying
the frequency and capacity of transportation, the available to
promiseat the outletcan be simulated.
Distribution requirements planning systems help reduce
transportation costs; improve customer service levels; reduce
stock-outs at distribution locations; improve communication
between sales, distribution and production; increase stability
of plans; boost confidence and morale; and ensure the right
product is at the right place at the right time.
Short-term changes in demand are always a reality, but the
combination of better forecasting with a formal process of
warehouse replenishment leads to fewer disruptions, less
contention and lower overall costs.

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Best Practices in Demand and Inventory Planning

Integrating with ERP

Systems

High quality planning is simply not possible if the inventory

data is inaccurate or out of dateor if the formulation
information is incomplete. The forecasting system requires
accurate sales history. The distribution requirements planning
system requires accurate inventory balances. The capacity
planning system requires meaningful plant capacity and
product structure (recipe) information. Such data is generally
available in most of the better ERP systems available today.
Supply chain planning systems are available in various
forms of delivery: stand-alone, an APS server connected to
the ERP host machine via a network and hosted solutions
(software service). The supply chain planning system receives
information updates from the ERP system periodically (weekly,
daily, etc.).
Planning and scheduling issues are resolved through
systematic processes that involve simulation and modeling.
Planning is generally done periodically, according to the task
at hand. Therefore, forecasts may be updated weekly or
monthly, the production plan may be updated weekly or daily
and the finite schedule may be run at the end of a shift or a
day.
The supply chain planning system needs to be refreshed with
new status information. This might include dynamic data such
as on-hand inventory of finished goods, intermediates (WIP)
and raw materials; updated demand (forecast and orders);
expected purchase receipt timing; and planned downtime.

new products recipes/formulae and operations, new plant

resources with their operating characteristics, and new
warehouses or new transportation options.
Because the ERP system will be integrated at several data
points, careful consideration must be taken to ensure all data
is up to date and accurate. Interfaces become very complex if
the underlying ERP system is highly customized and/or spread
over multiple servers and databases. Therefore, the best
results are usually achieved through an integrated ERP system
that covers all the underlying business functions.

Better Control Over

the Planning Function

In order to make sound tactical and strategic decisions that

impact profitability, decision makers must have better control
over the planning function. Its precisely in the area of forward
decision-making where companies can have the most impact
on improving business results.
To achieve these benefits, however, manufacturers must
first invest in supply chain planning education, systems and
practices that deliver visibility into the future and therefore
empower decision makers.
When one considers the fact that improvements in
forecasting can reduce forecast error by 15%and a system
can help increase plant output by 10% while reducing
inventory levels by 20%its easier to see why this is such a
critical area for business success in todays highly competitive
chemical industry.

In addition to the dynamic data, the planning system must

be updated periodically with static information, such as

More than 9,000 customers around the world rely on us to give them a competitive edge. By
providing innovative, industry-driven enterprise application software, Aptean helps businesses
to satisfy their customers, operate most efficiently, and stay at the forefront of their industry.
For more information, visit: www.aptean.com

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