Improving the customer-perceived value of supply with just-in-time production of specialty chemicals

Abstract

In many consumer markets lead-time is no longer the outcome of a process of planning, producing and delivery. Many companies have gained competitive advantage through shortening the lead-time. In achieving this, next to the introduction of more flexibility in their own operations, companies are looking for more flexible suppliers. Traditionally uncertainty in supply was mitigated through high inventories. Next to the costs involved in keeping these inventories, they also delay the demand information and thereby create volatility, called the bullwhip effect. That is why various industries have put efforts in lowering the inventories and increasing flexibility. Introducing flexibility in production is rather controversial in the chemicals industry. Economies of scale and low margins nurture the emphasis on plant utilization. This drives ever lower margins, hence an even higher emphasis on plant utilization. The 24-hour operation leaves no flexibility to respond to a changing demand or to compensate for downtime. The company that initiated this research and offered the facilities to perform a desk study and provided the data to build a simulation model is active in the chemicals industry. During the recession of 2008 the company was confronted with a decrease in demand. In 2010 a quick recovery of the market was experienced, accompanied with several assets failing this caused large disruptions in the supply to customers. The reliability of supply was perceived too low at the commercial interface. This made the company look for ways to improve the customer-perceived value of supply. In this report a strategic audit is proposed. The objective of this audit is to align the company’s competitive strategy and operations strategy. The competitive strategy considers the market the company is active in and its value proposition to its customers. In this research this was done though the Industry Trends Analysis and the Customer Value Analysis. The market view was applied, which starts at the market and ends in recommendations for the operations. This audit structured the answering of the following research question: How can chemicals companies delivering to intermediate markets, improve the customer-perceived value of the supply in a cost-effective way? Increasing volatility in the demand on consumer markets makes that requirements of the industries downstream of the chemicals industry include the responsiveness to this volatile demand. As a consequence this also influences the customer-perceived value of the manufacturer’s supply. The commoditization in the downstream markets increases the need for agile operations and make that customers focus more on service-aspects like lead-times. Through a structured survey customers were asked to indicate the importance of, and performances on, supply chain related aspects. These aspects were based on the four guiding principles for supply chain managers: responsiveness, reliability, resilience and relationships and the three of the four elements of customer value: quality, service and timing (cost was excluded to prevent strategic answers). Besides a confirmation of some characteristics of the industry like the low importance of customized solutions and the high emphasis on quality the survey also resulted in new insights. The results especially represent the CASE customers, a segment in which the company wants to grow and where customers on average are smaller and deliver to industries where just-in-time practices are more common. In contrast with Flexibles customers these customers value responsiveness more than reliability. Reliability was valued high and performances where rated high. For responsiveness the importance was indicated to be high, while the performances where rated amongst the lowest. The challenge for the company will be to become less dependent on forecasts and increase the agility of operations while sustaining the current level of reliability. As part of the strategic audit, the competency gap was specified by defining key performance indicators that the company should improve. The objective of the system should be to limit the lead-times, achieve a high order fulfilment rate and keep appropriate inventory levels. The company currently applies a hybrid form of make-to-order (MTO) and make-to-stock (MTS) operations regime. The regime is based on forecasts that are facilitated by the monthly repeated S&OP process. The focus is in the first place on optimizing production, which leads to varying availability of products and a long planning horizon. The delay in information between the complex production chain and demand management makes that inventory levels vary a lot and consequentially order fulfilment is compromised. It is advised to implement the just-in-time (JIT) regime. This regime has the prospect of shorter lead-times, more stable inventory levels which lead to less variation in product availability and thereby increases order fulfilment. The only downside is that this compromises the production capacity used on short term as this is adaptive to the demand, which is counter intuitive regarding the current KPI’s which focus on the occupancy of assets. The prospect is that production capacity is only used for producing the right products at the right time and higher sales margins due to more stable operations. The production processes and assets were successfully represented in a simulation model, which delivered valuable insights for the industry. The chemicals industry is characterized by a bill of materials that decomposes a few raw materials into many finished products. This makes that the chemicals industry has one of the most complex production chains. In this thesis an object oriented representation of the system was proposed. The relations between objects describe the bill of materials, thereby enabling the simulation of the complex production chain. Experiments based on the sales of 2010 and disruptions based on historical data from 2005 to 2011 excluding the force-majeure situations showed that the JIT regime is successful in fulfilling the orders with short lead times and low inventory levels. It is important to note that the sales represent a managed demand. Due to the inflexible capacity this managed demand is considered an important requirement for the system to work. Next to an improved order fulfilment, the model showed that JIT allows lower inventory levels. Finally JIT makes the impact of disruptions more predictable, which enables the company to develop calculated responses to these situations.