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Article | October 31, 2002
Supply chain experts see change a comin'
In a future marked by price-sensitive consumers and fierce competition, companies will fail or flourish according to the efficiencies of their supply chains.
Strategic sourcing management supply-chain optimization software smart packaging vendor-managed inventory collaborative planning forecasting and replenishment RFID-enabled Web interface.
These are but a few of the concepts that are expected to alter the flow of packaging materials through the supply chain in the coming years. Strategic Sourcing Management (SSM) is what it’s all about as Julie Diehl and Jay Reddy pointed out in a recent white paper called “Strategic sourcing defines winners in the CPG [consumer packaged goods] industry.” Diehl is vice president of global strategic sourcing at Pennzoil-Quaker State; Reddy who recently managed a $450 million purchasing category at Pepsico is the founder and executive chairman of MindFlow Technologies (Plano TX) a provider of strategic sourcing software programs.
“The financials of all successful CPG companies reflect sourcing costs that are significantly lower than the competition” said Diehl and Reddy in their paper. “They have accomplished this without compromising product quality or consistency. They are able to do so because they have reinvented purchasing and have moved away from approaching it as a transactional procurement process. They now insist on strategic sourcing as a core competency.”
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According to Diehl and Reddy SSM requires a balance of cooperation and competition. They put it this way: “Balanced sourcing keeps individual suppliers constantly striving for innovation and efficiencies as they each continue to compete for a significant portion of the growing business.”
Consolidation of the supply base is a key plank in the SSM platform. A project completed by Pennzoil-Quaker State in December 2001 provides a good example of the kind of savings such consolidation can bring. After using MindFlow’s supply-chain optimization software called MindFlow Sourcing Suite to analyze plastic-bottle sourcing for all lubricants produced by Pennzoil-Quaker State the firm was able to go from six plastic bottle vendors to two. Such software is uniquely suited to finding the lowest-cost base of suppliers when multiple variables are involved. More traditional would be a spreadsheet approach but that’s limited because it’s inherently two-dimensional. With supply-chain optimization software a purchasing agent feeds in a host of variables—multiple suppliers multiple supplier plants multiple products multiple container sizes volume discounts multiple filling locations freight costs—all at the same time and then asks which approach will bring the best cost.
“The software was able to capture all the complexities of our plastic bottle supply chain—including bottle design changes lightweighting plant reorganizations—in one salient program that’s far more malleable than any spreadsheet or even some other software we looked at” says Dena Ladner senior manager of strategic sourcing at Pennzoil-Quaker State. “The program then provided a clear analysis for our review.”
The savings were impressive. “We achieved a 12 percent savings that was directly attributable to the MindFlow program’s functionality” says Ladner.
Impact on converters
The notion of “reinventing purchasing” as Diehl and Reddy put it will reshape the packaging supply chain of the future. Naturally it will affect packaging converters no less than the CPG companies they supply. The supply chain strategies now taking shape at VPK a leading Belgian manufacturer of paperboard and corrugated packaging incorporate many of the reinvented-purchasing concepts that will become increasingly common in the future.
“Our strategy is to move from being a commodity organization to a service organization” says Johan Vanhee chief supply chain officer and the man responsible for IT and logistics at VPK. “Not that we want to become a bank of course. But where a commodity paper goods organization thinks of little more than product and volume a service-oriented paper goods organization says: ‘Okay making product is my core competency but there are lots of services we provide that are important not only to me but also to my customers and my customers’ customers.’ And of all those services we provide finding value in and cutting costs from the supply chain will be the most important driver of our business in the coming 10 to 15 years.”
Why? Because the CPG companies that are VPK’s customers are being squeezed as never before by large store chains whose purchasing power is huge. These chains demand supply at the lowest possible cost and their penchant for cutting costs extends back through the supply chain all the way to converters such as VPK.
One cost-cutting concept the giant retailers are recommending is supply chain integration. That includes vendor-managed inventory and collaborative planning forecasting and replenishment. Both are recent additions to VPK’s supply chain strategy.
No more ‘orders’
“We don’t get ‘orders’ from our customers” says Vanhee. “They share with us their material requirement planning on a daily basis. We then calculate where stock levels should be on our side and on their side. We determine what to replenish when to replenish it and how much must be replenished.”
Vanhee says that about 40% of VPK’s volume in paperboard and corrugated board is now configured and managed in this way. What’s next? Implementation of AS//Packaging an industry-specific software solution from Germany’s Steeb an SAP system reseller; SAP and Steeb are represented in the United States by Unitinc (New York NY). Vanhee thinks this new supply chain solution holds great promise.
“In the corrugated board/paperboard business we need to create new product configurations every day” says Vanhee. “That makes speed a true competitive advantage. With AS//Packaging we’re in a good position to utilize our flexible production process from submitting quotes all the way through to invoicing. Steeb offers the only preconfigured SAP industry solution for packaging manufacturers.”
Among the CPG companies who are already benefiting from VPK’s supply chain initiatives is the Belgian division of drug maker Pharmacia. Located in the city of Puurs it ships product to 150 countries and is among the three largest Pharmacia plants in the world.
Pharmacia’s e-VMI program (vendor-managed inventory via an e-business solution) consolidates all corrugated purchases with VPK and links those purchases with its Enterprise Resource Plan (ERP). With no human intervention by Pharmacia’s procurement group the weekly supply of corrugated is identified ordered delivered and paid for. (See sidebar on p. 57 for a fuller description of e-VMI.)
Although Pharmacia’s initial thrust with e-VMI was for corrugated the firm has since expanded its use to labels inserts and folding cartons. Once again a single vendor is responsible for each—except for folding cartons whose structural complexities made two vendors more appropriate. The bottom line is that 80% of the packaging materials purchase orders issued by Pharmacia Puurs flow through e-VMI. According to Gino Vansteenbergen manager of procurement and traffic at Pharmacia’s Puurs facility it’s all about visibility and collaboration.
“It’s important that the supplier understand that it’s not just a transfer of purchase order responsibility from packager to supplier” says Vansteenbergen. “In fact it’s an optimization of the supply chain that gives the supplier full visibility into this plant’s requirements for the next 13 weeks. There are clear advantages to the supplier. For example suppose he sees a peak in our material requirements that’s 10 weeks out. He can begin producing those materials in weeks seven eight and nine to help level things out.”
Vansteenbergen says the benefits gained in corrugated sourcing alone include reductions of 70% in inventory and 10% in cost of material. Lead time he adds went from 15 days to three. But these benefits are not the key advantage that this new supply chain strategy brings.
“These measures permit a huge reduction in inventory carrying costs throughout the entire supply chain from VPK to Pharmacia to the retailers Pharmacia sells to” says Vansteenbergen. “In today’s business environment that’s a huge benefit.”
RFID: coming to a supply chain near you
Few areas of the supply chain landscape have been explored as energetically or with as much CPG-company input as RFID or radio-frequency identification. At the center of these explorations is the work being done at the Massachusett’s Institute of Technology’s Auto-ID Center where the electronic product code (ePC) is the key.
The Auto-ID Center envisions a world where computers will be able to identify any object anywhere instantly because that object has an ePC that is uniquely its own. To accomplish that vision the Center is designing the infrastructure and developing the standards for a universal open network for identifying individual products and tracking them as they flow through the global supply chain.
Bud Babcock manager of logistics packaging and product identification at Procter & Gamble describes the use of the ePC this way.
“If you think for a moment about what might happen in five to 10 years what we might begin to see instead of a bar code on a consumer package is an embedded electronic chip. This electronic product code will identify not only that a package is a 40-ounce box of Tide. It will also identify which box of Tide it is out of all the millions that have been made.
“The supply chain impacts are potentially enormous” he continues. “We think we could cut half of our inventory out of the supply chain if such technologies were implemented. At the retailer’s dock inventory could be updated instantly and automatically as soon as the pallet passes through the chip-reading antennae. No stopping counting double-checking. If you back up further in the supply chain it seems logical to me to think we’ll get to a point where as our raw materials suppliers ship materials to us the same system would be in place. As a shipment of corrugated boxes comes in there would be chips in the boxes to tell us what we’re receiving. And we’d know our inventory in real time any time. Once we receive goods the invoicing system could also be triggered so that payments can be made on time.”
The Internet could come into play too.
“Built into much of this RFID technology is a tremendous Web interface capability throughout the supply chain” says Babcock. “For example someone at a warehouse could interface the signal from a package’s chip with a Web site to learn about special handling conditions required by that package’s contents.”
Peering into Unilever operations
Simon Ellis supply chain futurist at Unilever is equally enthusiastic about the kind of RFID-enabled collaborative supply chain initiatives that the future holds.
“We’ve definitely begun to give our suppliers more visibility into our operations” says Ellis. “How else can they execute the kind of vendor-managed inventory programs we’ve been leaning toward the past few years? Why not let them see our drawdown of their material in our manufacturing sites so they can anticipate when they need to replenish as opposed to waiting until they get an order from us?”
Could all of this unfold over an RFID-enabled ERP system?
“It could yes” says Ellis. “We think one of the more appealing applications of RFID is with inbound materials. For example if we receive cases of folding cartons and there’s an RFID chip on the pallet as the pallet passes the antenna at our dock it could trigger an invoice. The invoice could trigger payment. And then as that pallet moves into our packaging area and its cases of cartons are consumed another signal could go out this time telling the carton converter that we need more cartons.”
How soon will the Auto-ID Center’s vision for RFID become a reality? All bets are off until the cost of the smart chip comes down. Currently such chips are probably in the range of 40¢ each. Considering that electronic article surveillance tags which are now produced in the millions still cost about 3¢ each it’s obviously going to be awhile before 40¢ RFID tags see widespread application in the packaging materials supply chain. But Ellis and others told Packaging World they are convinced that eventually it will happen. And when it does it won’t just link a converter to its CPG company customers.
“We think that in five or 10 years we’ll be able to spread this notion of visibility across the entire supply chain” says Ellis. “So that what happens to our products at the retail store will become increasingly transparent not just to us but to our suppliers packaging suppliers included.”
Such an evolution in the supply chain will help CPG companies make to order rather than make to inventory. In that environment says Ellis “The elapsed time between a consumer’s removal of a product from a store shelf and the need to produce a replacement for it will be measured in two or three weeks instead of twelve. In that scenario it definitely benefits a carton supplier to know that a carton of our product left a retailer’s shelf at 10 a.m. on Tuesday.”
Regardless of whether Ellis’s vision of a transparent and RFID-enabled supply chain comes to fruition in five years ten years or not at all there seems little doubt that supply chain excellence will be a key business driver for the foreseeable future. As VPK’s Vanhee puts it: “We all have the same machines we all use the same paper and we all go after the same customers. The one who is best able to manage the supply chain in the future has a clear competitive advantage.”
For the full text of Diehl and Reddy's white paper see: packworld.com/go/w038
For more on MIT's Auto-ID Center see: packworld.com/go/w042
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