FMCG distributors are critical actors in the global supply chain. They manage a large variety of products and high levels of inventories and assets, and help ensure retailers deliver to their customers. To be profitable, we must control inventory costs, have effective facilities allocation, and have extremely well-organized logistics. Let’s look at how the insights from demand planning help us in our capacity planning, providing effective inventory management and order fulfillment.
What We Must Achieve In Capacity Planning
Facilities allocation: Deciding the required facilities, i.e. the space of any facility or zone needed to satisfy the anticipated flow of customer orders. It must support any projected higher inventory levels for each product.
Avoiding stockouts: Supplying warehouses to avoid stockouts with optimal frequency to ensure our products are available in our customers’ stores. Supplying these warehouses should take into account anticipated customer demand for each product, promotional campaigns, urgent orders and returns.
Performance of the order-to-cash process: Optimizing resources and reducing the order cycle time to satisfy the actual and future customer demand – in full, on time and without errors. Variables which must be monitored here are the product demand and the characteristics of the daily orders flow, either weekly or monthly.
Understand Demand Variables To Better Plan Capacity
The secret of capacity optimization for distributors is to know customer demand, seasonality, promotions, supply constraints, financial aspects (assets, cash etc.) and delivery regulation (e.g. OTIF), from a short-term horizon to a long-term horizon. This comes from the demand plan.
Inventory management requires planning for warehousing space, resources, manpower and logistics. For this, we need demand planning to know likely future sales.
How We Use Demand Planners For Better Inventory Management
FMCG products are characterized by a high demand variability: seasonality, promotions, new product demand inaccuracy, and urgent and specific orders. So, the order point method is recommended in this situation to manage transfer to the picking warehouse. It has three parameters: Safety Stock, Order Point and Maximum Quantity.
Demand planners give us the following to assist us with this:
- Products families based on demand volume and demand variability,
- The Demand plan which contains quantities of each products per month,
- Other information including shelving measures and zone spaces.
The maximum quantity is defined as the maximum storage capacity of the shelves satisfying the demand plan. In order to determine the maximum quantity more precisely, an optimal distribution of the products in the shelves can be determined, taking into account the relative ratios between the products (importance in terms of demand and volume of the box) and the maximum volume of the shelves. Linear programming can be a good way to resolve this problem, by using the Solver tool in MS Excel.
The order point policy aims at initiating replenishment as soon as an order point is reached (including the safety stock), with a quantity that cannot exceed a predefined maximum. ERP systems can simplify this policy and provide the following complementary functions:
- Real-time tracking of product volumes in their locations, based on the calculation of the updated inventory after each internal move.
- Alert notifications will be sent in case of reaching or exceeding a pre-set order point.
Scenario Planning For Order Cycle Process Optimization
In the order cycle process, orders can have significant waiting times during the picking operations. These long waiting times mean that operators will lose the opportunity to serve other customers (downtime) and often have to work overtime. In general, the problem is perceived as a lack of facilities and workers, which makes sense as managers have to control the costs associated with these. Therefore, managers should perform scenario planning in order to find the strategy that will optimize the order cycle time and overcome the problem of overtime while increasing logistics capacity.
Demand planners should know when customer orders are likely to come in for a certain period of time, and the demand we will experience for products in each zone in the warehouse. The what-if Analysis can use different performance levers: the inter-arrival time of customer orders, the waiting time for picking, and the number of resources.
Analytics can have a significant role in optimizing the process. The following information helps us translate the demand plan to a supply and capacity plan (as well order arrival policy): Picking Time in each zone of the warehouse, number of lines per order in each zone, and probability that Picking-List visits each zone.
Demand Planning Process Has A Great Impact On Capacity Optimization
As we see, the demand planning process has a great impact in optimizing capacity for FMCG distributors. Accurate demand forecasts and a deep knowledge of customers’ behaviors, and even demand forecasts at the zone level for the warehouse, are key factors in optimizing the supply side, along the with the support of an ERP system and analytics.