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Background
A high-growth Life Sciences business incurred over $5 million in unexpected supply chain costs over the past year. These surprise costs had an enormous impact on this otherwise highly profitable business.
Much of the costs were driven from inventory write-offs, but the business also received charges classified as ‘manufacturing variance’ from their plant on a regular basis.
The business initially was critical of their supply chain, as they got surprised with expenses from their plant nearly every month. But, was this really the fault of the manufacturing site?
Our Process
We Gathered Facts
We reviewed the entire planning cycle and identified answers to the following questions:
- How does the plant determine what inventory to build?
- Is there effective communication between the plant and the business?
- Does the business have a demand plan? How is this created?
We then analyzed detailed financial data:
- We reviewed long-term historical business growth
- We compared sales orders with the demand plan
- We compared the business demand plan with the plant supply plan
What We Learned
Disjointed Communication
The business team and the plant leadership communicated through ad hoc emails, resulting in confusion for both the business and the plant.
In one instance, the marketing team emailed the plant to expect 20% growth the upcoming year. The plant leadership responded by hiring a dozen workers to accommodate this expected demand.
These types of ad hoc communications often lacked factual basis and drove costly mistakes. Because there was no formal communication on either business growth or plant performance, the business and the plant blamed each other for these failures.
Overstated Sales
The sales team populated a sales pipeline with new wins, and this growth was reflected in the demand forecast. However, the majority of the wins replaced an existing product. The sales pipeline did not account for the cannibalization of the old products. Thus, the demand forecast was biased to overstate sales.
Lack of Formal Planning Process
There was not a holistic planning process. The business used the sales pipeline to build a simple demand forecast. There was no review cadence to align on both the demand plan for the business, and the corresponding supply plan at the plant.
Without a formal Supply and Operations Planning cycle, the business had no idea what their manufacturing plant was producing in any given month.
ERP Not Maintained; Overbuilding Supply
The manufacturing site used an outdated ERP that was admittedly not well maintained. To test the ERP deployment, we created our own ‘back of the napkin’ supply plan as a reasonableness test.
What we found was astonishing – The plant’s supply plan showed the plant would produce thousands of cases of a SKU for which there was already over 100 days of inventory. We then found the plant had routinely had to discard expired inventory for this same SKU.
The ERP had been configured with an incorrect unit of measure for one SKU. As a result, the plant constantly produced TWELVE TIMES the quantity needed for this SKU.
Our Recommendations
Build Communication Channels Between Plant and Business
The business can no longer give key guidance via ad hoc emails. The business needs to be a single point of contact who acts as the gatekeeper for key communications. Likewise, the plant needs a business liaison to listen to the business needs and provide feedback from plant leadership.
Establish Formal Planning Cycle
The business and its plant sorely need a planning rhythm that gives everyone insight into both business demand and products supplied. We uncovered several impactful issues that would have been quickly resolved with a plan cycle.
Client Outcome
The client still had a lot of excess inventory to work off and discard, and the plant needed to right-size its workforce to reflect a supply plan that met business needs. However, the plant began to produce the right product, so excess inventory dropped to marginal levels within a year.
Communication between the business and its manufacturing leaders improved dramatically, resulting in no more surprise expenses from the supply chain.
