End to End Supply Planning in the Chemical Industry
In my previous vlog, posted on LinkedIn, I shared the importance of demand planning and how I expect chemical customers will double-down on advanced forecasting capabilities to better understand their customers and be better positioned for market volatility. This is fundamental to creating an excellent customer experience. In this blog, I will highlight how end-end-end supply planning plays an equally important role in fulfilling this customer experience.
We have all experienced the woes of backordered shipments, delayed orders, and high prices this year as the fragility of supply chains all over the world have been exposed. During these frustrating experiences, the everyday consumer may not think about the chemical industry, but the reality is that 96 % of the world’s products are touched by chemistry, according to the American Chemistry Council. As a result of the interconnectedness of global value chains, the current market dynamics, and other shocks like intense weather & logistic congestion, supply planners in the chemical industry are experiencing intense disruption.
Despite this disruption, these supply planners face the same expectation you have when you place an order online. That is, their customers expect on-time, in-full, in-spec products. In the chemical industry, supply planning is complex. Many variables and moving parts must be considered across many processes including raw material supply, manufacturing, and distribution. When these processes work in harmony, supply chain planners significantly contribute to their company’s top and bottom line. With the alignment of SAP E2E capabilities and next practice business processes, supply planners can lead the charge to better serve their customers.
When we talk about supply planning in the chemical industry, there are many dimensions. It is not a singular process. One way to look at these dimensions is by time horizon. In an integrated business plan, we can consider strategic planning, tactical planning, operational planning, and execution. These dimensions span long term, to mid-term, to short-term, and ultimately to real-time planning & execution. Typically, when we are planning in a long-term horizon, data is more aggregated and in the short-term it is more granular & detailed. Within these horizons, there are many sub-processes and specific business requirements. Complex processes in the chemical industry require flexible capabilities to meet these business requirements, and most important, the integration of these processes to ensure harmonized data for more efficient and effective decision making. I will break down some of these supply planning processes below.
Starting at a tactical level, planners will need to generate an aggregated supply plan in the mid to long term horizon based on the consensus demand plan and inventory plan. These long-term supply planning processes are part of the S&OP process to balance supply with demand, determine if the unconstrained demand plan can be met, and evaluate various demand & supply scenarios. At this stage, we are typically looking at monthly volumes in the 4–24-month horizon, or in some cases, longer. It’s a critical first step in the world of supply planning. In asset intensive industries like Chemicals where there are often capacity constraints, S&OP processes can drive strategic decision making. For example, decisions around capital investments to increase capacity, toll manufacturer agreements, or re-balancing product mix based on business priorities.
Initially, chemical companies would likely look at an infinite supply plan that fulfills demand with no shortages so any gaps to meet consensus demand are flagged. At an S&OP level, the results will need to be analyzed and critical supply constraints identified. In SAP Integrated Business Planning for Supply Chain (SAP IBP), scenario planning is a key element in the reconciliation review which is then followed by the management business review. S&OP maturity as part of an Integrated Business Plan is a key focus for chemical customers and SAP IBP brings this process together on a common platform for collaboration to achieve an approved S&OP plan.
In the S&OP module of SAP IBP, the S&OP heuristic, can be leveraged to generate the supply plan and begin evaluating capacity requirements and how the unconstrained supply picture may necessitate added capacity or adjustment to strategic toll manufacturing plans. In case of infeasibilities, planners can carry out manual capacity leveling to solve potential supply issues. In this process, planners must consider total demand, including safety stock levels. With the SAP IBP Inventory Module, planners can leverage multi-echelon inventory targets as an input to the supply heuristic. The ability to effectively evaluate a rough-cut capacity plan is a critical step and with supply planning in SAP IBP, planners can be confident supply is balanced with demand while meeting inventory objectives. That is because in a complex chemical network, the algorithm considers the entire flow from finished product to raw material with multi-level BOMs and networks, locations, sources of supply, production sources, resources, lead times, lot sizes, and transportation lanes. In the context of S&OP, planners can formulate a master production plan for finished, semi-finished and procured materials across the network.
For many planning organizations, starting with heuristics, specifically unconstrained planning is a logical first step whether in a planning cycle or overall implementation project as it ensures the complete demand picture is considered. The reality is, however, that there are constraints and the more effectively we can plan these constraints, the higher opportunity of success we give our manufacturing and distribution facilities which directly impacts customers. Higher quality plans reduce churn from strategic planning to execution which has a positive impact on all operational teams, allowing them to focus on high value tasks. In addition, improving the quality of planning results enables organizations to reduce total supply chain costs.
This is an excellent opportunity to consider constrained supply planning in SAP IBP. You may consider the finite supply heuristic. This supply planning finite heuristic creates a finite demand and supply plan based on prioritized demand, considering certain supply and resource constraints. It provides a feasible solution with priorities derived from the costs of demand and sources of supply. For a more sophisticated level of planning, supply planners can leverage the supply optimizer to generate a cost-optimized production, distribution, and procurement plan for the entire supply chain network. There are two optimization modes, the first being profit maximization to determine feasibility based on total revenue vs. total cost and the second being delivery maximization to fulfill demand while minimizing cost and respecting hard constraints.
It’s not uncommon for chemical clients to ask about specific use cases for the Response and Supply module in SAP IBP, considering the ability to create a supply plan with the S&OP module. The finite heuristic and optimizer are offered with the SAP IBP Response & Supply license, therefore, licensing this module offers significant value to supply planners by extending the capabilities found in the S&OP module to create a more refined master production schedule as mentioned above. Also, the optimizer automates the constrained planning process that would otherwise take extra time for planners to manually constrain the supply plan. There are also many other capabilities that can be used to refine the supply plan. For example, with the supply optimizer we can model production wheels and with the 2111 release, the finite heuristic supports location product substitution. Additional capabilities of the Response and Supply Module are covered below as supply planners look to operationalize the plan.
As the time horizon is reduced to 1-12 months, the forecast becomes firm, orders are received, and supply plans must be operationalized, considering the latest demand and supply situation. In the chemical industry, planners must determine operational allocations for the market, manufacturing, and procurement. In SAP IBP, with a constrained forecast run, planners can create allocations and a supply plan based on prioritized or optimized forecasted demands and supply chain constraints. This results in an allocation plan, planned orders, purchase requisitions, and stock transfer requisitions. While the focus of this blog is on supply planning, it’s worth noting that planners have visibility to the latest demand signals through ML powered demand sensing capabilities. With SAP IBP, planners are equipped to perform mid-term supply planning from all distribution centers to manufacturing facilities, generating a master production schedule at a product-location level for finished, semi-finished (including by products, co products) and procured materials.
It goes without saying that a procurement plan is fundamental to the success of the supply plan. Chemical companies must manage key intermediate materials, limited suppliers on a global scale, contract manufacturers, and long lead times. These strategic raw materials can present significant risk or if managed well, offer a competitive advantage. Network collaboration is enabled with the SAP IBP Control Tower Module and SAP Ariba, allowing planners to share raw material demand and receive committed requirements to be considered in the constrained supply plan. Competing as an ecosystem in an industry business network, especially with suppliers, is critical to building supply chain resilience.
In the past year, sales and operations execution has been a popular term and for good reason. Supply chain organizations recognize that execution can be challenging and ultimately the value they create for their respective organizations comes down to executing plans, not creating plans. This is completely aligned with SAP’s strategy to synchronize planning and execution across different planning horizons and with all supply chain stakeholders & functions. Some examples of these capabilities critical to the chemical industry are below.
Transitioning to supply planning at the manufacturing level, supply chain planners are faced with a world of complexities to create a feasible production plan and schedule orders. The chemical industry is very experienced with Production Planning and Detailed Scheduling where customers are likely familiar with the term PP/DS as a part of SAP Advanced Planning and Optimization. The latest solution is known as SAP S/4HANA Manufacturing for Planning and Scheduling and as indicated in the name, it’s part of SAP S/4HANA, bringing this process close to the source of execution. Embedded in SAP S/4HANA, supply planners can leverage advanced planning and scheduling heuristics and optimization solvers while managing various production constraints. These capabilities, in addition to MRP and CRP in SAP S/4HANA, ensure E2E processes with out-of-the-box integration to SAP IBP. You can find the SAP IBP 2008 release highlight demonstrating the integration of the operational supply plan in SAP IBP and the detailed supply plan and schedule in SAP S/4HANA. Furthermore, supply chain organizations are pushing for more visibility and with the SAP IBP Control Tower, planners can contextually navigate between supply chain planning and production planning systems. The result of integrated processes synchronizes planning and execution, delivering insights and more importantly, the toolset to act.
SAP’s portfolio of supply chain solutions paves the way for chemical companies to achieve their vision and strategy of world-class supply chain planning by aligning people, processes, and systems from strategic planning to execution. As these capabilities stretch from long term planning to real-time execution, E2E processes are enabled for all supply chain functions. The integration of these processes ensures supply planners can absorb shocks, speed decision making, and operate in sync with a common view of the business and customers. And of course SAP is committed to continued development where product roadmaps can be viewed in the SAP Road Map Explorer.
Let’s have a conversation how E2E planning with SAP can take your supply chain organization to the next level. We encourage you to follow the SAP Integrated Business Planning Community Page and also the SAP for Chemicals Community Page to stay up the date with the latest information. We also encourage you to ask questions about this topic in the SAP Community using this Q&A tag link: https://answers.sap.com/questions/ask.html?primaryTagId=67838200100800006742
Thank you for these reflections Matt Reymann. Just a small question, what do you mean when you refer to creating a manually constrained plan via S&OP, could you give a small example please?
Time-series based Supply Heuristic provides planners with an infinite, unconstrained plan to help expose supply bottlenecks in the supply chain. Planners can then set up alerts or Excel views to find production decisions that result in over capacity situations and smooth out the plan manually by entering production overrides (Adj. Production Receipts).
TS Supply Optimizer plans in a finite, constrained fashion, therefore it provides the capacity leveled plan to avoid manual rework by planners. On the other hand, it can mask the true capacity shortages that may be important for planners to address in the long term S&OP cycles (e.g. capital investments to increase capacity, contracting tollers etc.)
Hope it helps,