Best practice planning for the dairy industry

Supply chain planning is always complex, but the dairy industry poses a unique set of challenges – a single input that produces a diverse range of outputs, short shelf lives for some products, ageing requirements of others, and effectively managing push and pull to name a few.

However, there is significant potential for bottom-line profit improvement for companies that successfully identify and address these challenges.

Planning for dairy processing is uniquely complex due to several factors:

• The nature of the milk supply and manufacturing process, which has a single input with multiple outputs
• To optimize value, the single input must be used in its entirety
• Market dynamics of commodity/pricing and exchange rate fluctuations
• Varying sales & profit outcomes from product mix options
• Effectively managing the dynamics of ‘push’ (constant supply) and ‘pull’(market demand)
• Short shelf life and ageing requirements

Traditional planning methodology

Over the last few decades, many companies have implemented or tried to implement, Sales and Operations Planning (S&OP) processes with the intent of resolving a number of planning issues and establishing a ‘balanced’ and optimal plan – from market to supply.

The reality is that S&OP is often not implemented as intended. Planning becomes departmentalized rather than holistic and fully integrated.

The reality of planning for dairy processors

There are several risks for dairy processors who use this style of departmentalized planning:

Risks in demand forecasting

• Sales will focus on producing a forecast that meets or exceeds sales budgets. There is a risk of having ‘bias’ distorting the forecast based on different KPI’s and/or sales staff’s experience and position.
• The forecast is difficult to correlate to factors such as production capacity, the optimal product mix, inventory build, and/or supply availability.
• In cases where promotions are used as part of the sales and forecasting process, promotions are generally applied with little consideration for the resulting projected stock on hand, processing capacity or profit impacts.

Risks in operational planning

• The sales forecast is then handed over to the production team where they try to understand what this plan means from a capacity and load perspective. They then work to understand the implications of the demand plan from a supply-side perspective – and do what they can to address these issues. However, the production team might not be looking at this until 1-2 weeks out from execution (or even making decisions ‘on the day’) which means that the lead time to address issues is often very short.
• Once the operations team has understood the status of the demand, they then need to balance this with the reality of the milk flow ‘coming at them’ – very often needing to go back to the sales team to recut demand.
• The sales team will then have to urgently address the imbalance with promotions, sub-optimal product decisions, and possibly even dumping products – all of which have a negative impact on profit.
• Capacity constraints, optimal batch sizes and changeovers all need addressing.

Risks in supply planning

• The sourcing team (through the farmer network) then need to try to execute the plan. Planning horizons and supply contracts need to be effectively managed, with seasonal, weather variables and farm productivity taken into account.
• Logistics needs to be effectively planned & executed
• Sales works to ‘pull’ product through to meet their demand, but in reality, supply ends up ‘pushing’ a volume into the supply chain – and planning/operations have to deal, on an ad-hoc basis, with the resulting process decisions, inventory surpluses and shortfalls.

The end result is a fragmented process, which is departmentalized, sub-optimized and reactive.

It is often more based on intuition than facts. It is prone to bias and does not effectively plan to maximize overall profit for the business.

Best practice planning for dairy processors

The key is to balance the milk supply with an optimal product mix, taking into account market and pricing fluctuations, processing constraints and optimal batch sizes / minimizing changeovers, while building inventory to meet demand – all the while maximizing profit.

Dairy processors can meet the unique complexities of the industry by successfully implementing a more mature planning approach that incorporates Integrated Business Planning (IBP) supported by Supply Chain Optimization.

Integrated business planning

Integrated business planning (IBP) improves the effectiveness of planning processes by aligning and synchronizing an organization across all functions, with the objective of improving financial performance. IBP represents a holistic model of the company’s supply chain that does a better job of linking strategic planning with operational planning and financial planning. IBP does not discard S&OP – it adds value from the perspective of working to better implement S&OP.

Supply chain optimization

It is not enough to just visualize any shortages and understand capacity constraints. To drive profitability in a complex, constraint-based supply chain, companies need support to make the best decisions from a profit perspective. True supply chain optimization (which is based on mathematical optimization) gives an integrated, single view of the supply chain in action, from forecast demand through processing and capacity planning, to milk supply. It will enable consideration of all business rules and constraints, and identify the single most profitable plan to meet market demand, solving complex challenges like:

• When you can’t meet all demand, Supply Chain Optimization will let you know what demand should be dropped to maximize profit.
• How to balance load over time whilst considering demand, cost, expiry date, supply etc. to optimize profit.
• Identify the optimal product mix in a supply-constrained situation considering demand, capacity, sell price, cost, expiry date etc.
• Identify the optimal (i.e. most profitable) distribution plan considering production, demand, distribution network and costs.
• How to best utilize resources considering load, capacity, cost of resources, cost of holding stock, expiry date etc. Knowing that you don’t have enough capacity is not enough.
• Supply Chain Optimization will give you the optimal safety-stock and inventory holdings considering all the components that will impact cost.

The key benefit of true Supply Chain Optimization is that it is based on mathematical modelling and optimization. Without it, some planning tools may be able to test different scenarios and create some visibility, but they will never be able to deliver a plan that maximizes profit.

Benefits for the dairy industry

Well-executed IBP that is enabled by effective SCO will deliver the best results for the unique demands of the dairy industry.

Here is an outline of how it would look:

Best-practice demand forecasting

Sales will focus on producing a forecast that meets or exceeds profit/sales budget. In this first cut plan, promotions should be used very sparsely, since promotions should primarily be used to maximize profit (instead of the common situation where promotions are used to purely drive sales without understanding the actual profit impacts).

In the perfect scenario, the forecast is fully integrated with the complete supply chain including operations and the supply of milk. So when the first cut of the forecast is completed, the sales team will test this forecast against the constraints of the entire supply chain. In this scenario, all the business rules and constraints are defined in the model.

So by validating the first cut plan, sales will be able to:

• Validate the ability to deliver the plan in full. If it’s not possible, they can start to understand what demand would be missed – because this is now made visible.
• Understand the impact on capacity vs load. Are there any capacity issues in delivering this plan?
• Understand the supply requirements – the possibility of utilizing the minimum and maximum supply, i.e. can the plan be met from a supply point of view?
• Understand the projected stock on hand (surplus due to an unbalanced demand and stock build implications).
• Assess the optimal product mix (most effectively balancing supply and demand).
• Assess the bottom line end-to-end profitability of the plan.

This first assessment will tell the team if they are able to fulfil the proposed sales demand and if they are meeting the sales and profit targets. If not, then the sales team may look at revising the forecast using promotions or finding new short-term channels to drive sales and improve profit (‘balance the milk supply’).  If capacity or supply are an issue, then operations could start investigating and planning for these issues.

Best-practice operational planning

If the first cut is not delivering the required result and the issues are on the operational side, then operations will look at ways of adjusting and balancing the workload over time. In an ideal scenario, all the possible options for capacity adjustments would be built into the supply chain model and will be automatically addressed. This could be:

• The use of overtime
• The use of additional shifts
• Optimal use of resources
• Optimal batch sizing to maximize productivity whilst minimizing changeovers
• Minimum plan utilization in kg

If not, then the operational team would look at amending and adjusting these constraints. Once this is done, the model is tested again against the defined demand and the subsequent profit impacts.

Best practice supply planning

If milk supply is a constraint to meeting set sales and profit targets, then the sourcing team can action this. In a perfect world, all the contracts with prices can be defined, so when testing the model these contracts are considered.  If the target is not met, the sourcing team may need to review their contracts and as well as alternate procurement options.

This could be the result of a loss of milk supply or variations in weather and productivity. In this scenario, the change of the sourcing parameters will be updated in the model. Once it is in place, the model will be tested once again using the defined demand, and alternate scenarios can be tested for their business impact and profitability – for example, scenario testing alternate core milk volumes, or alternate product mix solutions.

The holistic, integrated planning approach

The key point of this article is that in the IBP scenario, everyone operates off one model, one set of data, with one ultimate goal – maximizing profits.  The model is holistic and sales, processing, sourcing and finance are fully integrated. Any changes will be considered from all aspects of the supply chain.

Being able to address issues in a timely fashion enables supply chain teams to operate efficiently and strategically instead of constantly firefighting.

With this approach, fire sales will be reduced or even eliminated, misguided short-term decisions will be avoided, promotions will only be used to improve the bottom line, and you will clearly be able to understand where there are surpluses and shortages.

IBP will enable you to ‘plan to maximize profit’ – not simply meet sales or volume parameters – finding the right mix of push and pull whilst optimizing product combinations.

Learn more about Optimity’s solutions for the dairy industry.