Material Availability: State of Affairs

Since the pandemic, it has been a constant battle to ensure material availability, let alone to proactively manage cost and service. Even the most proactive and successful clients have experienced brief shortages of key materials and extended lead-times. The rest have been plagued with these issues.

Material costs have been skyrocketing as inflationary pressures persist. We don’t need to look further than the impact of oil and gas prices. No matter the industry (food and beverage, building products, aerospace and defense, life sciences and healthcare), the increase in oil and gas prices has had an impact. Typically, oil and gas prices will relate to a material used in the manufacturing process somewhere in the end-to-end supply chain, if not in every link in the supply chain. And, of course, the price of oil and gas will directly impact the transportation costs in every supply chain. The same is true for labor cost and, unfortunately, a whole host of other inflationary impacts on materials.

During these inflationary times, every piece of material (or ingredient) is significant and will impact cost. Clients are experiencing escalating prices yet limited availability and extended lead times, negatively impacting service and margins. For example, a consumer products manufacturer experienced successive price increases with every purchase order for several months in a row. In a life sciences manufacturer, suppliers didn’t pass on successive price increases with each order; however, the price increased dramatically early on. It became a race to pass on price increases to keep up with changing conditions. Unfortunately, another industrial products client hadn’t kept up with price increases, and so when we helped them develop a customer and product profitability model, it became apparent that quick adjustments had to be made before customers refused to absorb the changes.

The Impact on Material Planning

Material planning becomes increasingly critical during these volatile times. Not only is production not possible without materials and components, but if schedules have to change or manufacturing runs cut short, the increased waste and reduced efficiencies have become increasingly costly. Certainly, if production runs behind and expedited transportation is required, not only will freight costs be higher due to rising fuel prices, but expedited freight charges will be staggering – if you can find someone to deliver it on an expedited timeline at all.

From the service viewpoint, it is quite clear that if you cannot produce to customer demand, your customer service will suffer. Although the most proactive clients have put a full-court press on managing OTIF (on-time-in-full) and jump through hoops on a daily basis to minimize impacts to the customer, the vast majority of companies have seen a negative impact on OTIF and lead times. The “average” companies have truly suffered. It is no longer good enough to be “average”.

Given the significant impacts, there should be an all hands on deck approach to upgrading material planning capabilities to best serve customers and minimize negative consequences on cost. It is a frustrating position to navigate on a daily basis, and so the best clients are also realizing that they must invest in these employees (provide support, training/ education, outside resources, etc.) to simply retain this critical talent.

Material Planning & Relevant Factors

Material planning (also known by many names including purchasing, buying, and production control depending on the company) focuses on how to ensure the “right” materials arrive at the “right” place (facility) at the “right” time. Frequently, material planning is also associated with MRP, material requirements planning from a process perspective.

Material planning should consider the following factors:

  • Order frequency – have you set up purchase contracts or commitments to receive on a daily, weekly, monthly, seasonally, or sporadic basis?
  • Order size – what minimum order size requirements have you set up in your supplier agreements? Is the order size by item, shipment, or blanket purchase order?
  • Supplier reliability – how predictable is your supplier’s performance? Will your receipts arrive +/- a day, week or month? Do you receive advance notice?
  • Supplier lead time – what is your standard lead time by supplier or commodity? How much notice do you receive for delays or shortages?
  • Transportation lead time – where is your supplier located, could they produce and ship from multiple facilities and what is the typical mode of transportation and associated lead times for each?
  • Service policies – what service policies have you negotiated in your supplier contracts? What has been their performance?
  • Supplier network flexibility and recovery capabilities – if your supplier has multiple plants and/or locations that could produce and store your material, have you discussed this possibility? Have you worked with your supplier to run appropriate trials to support flexibility?
  • Safety stocks – have you set up a safety stock agreement for critical materials and suppliers?
  • Forecasts and/or consumption information – are you sharing consumption and/or forecast information with suppliers so that are in the loop with changing demand patterns, expected opportunities and/or deviations from the norm?
  • ABC value – have you set up your items as A B or C based on volumes, value or another method to designate frequency and importance?
  • Storage constraints and warehousing costs
  • Inventory objectives

Material Planning Strategies

A material requirements plan should take the factors described above into account when building a plan. Typically, you’ll start with near-term work orders, and review longer term demand to determine your material plan based on what’s needed to support this master production schedule while considering your supplier agreements and associated service policies and your inventory objectives.

Depending on many factors including your manufacturing environment, supplier network, level of collaboration and agreements, your product and commodities mix, your tools (ERP and related technologies), and your objectives, there are multiple material replenishment strategies you could follow. Conceptually, consider the following options:

  • Reorder point / Kanban strategies – in essence, your suppliers replenish an agreed upon reorder quantity when as materials are consumed.
  • MRP strategies – in essence, you purchase based on the latest mix of work orders, sales orders, forecasts, and transfer orders as needed when reviewing your inventory and purchase orders in process.
  • DDMRP strategies – demand-driven material requirements planning (MRP) which is more sensitive to variations in demand and supply.
  • Supplier managed (also known as vendor managed inventory) – the supplier makes sure you have the appropriate inventory to support production requirements, managing within agreed upon service and inventory policies

There are tradeoffs, benefits and costs to each approach depending on your demand, supply, factors, and objectives. Frequently, we see a combination of approaches based on the supplier, commodity, relevance to the business, etc.

Incorporate Material Planning into a Monthly Review Cadence

Review your material plan summary information and related impacts as a part of your monthly SIOP/ S&OP process. Gather inputs from appropriate parties, compile and synthesize data, and design a monthly review of the material plans required to support the master production schedule and related customer requirements. This will impact inbound freight, storage requirements, and production capabilities to support customer orders, and it will be directly impacted with changes to production sourcing (production facility, reshore/ nearshore, offload), supply chain networks and stocking strategies.

Refer to our blog for many articles on planning, capacity and related systems. . Also, read more about these types of strategies in our eBooks, Thriving in 2022: Learning from Supply Chain Chaos and Future-Proofing Manufacturing & Supply Chain Post COVID-19. If you are interested in talking about what it would take to purse the replenishment planning and SIOP journey in your business, contact us.

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