Network Optimization for contract manufacturer-controlled production case study


Courtesy of LLamasoft, Inc.

The leading joss sticks manufacturer in India is challenged by a highly volatile demand due to the nature and typical use of joss sticks (also known as incense sticks or ‘agarbattis’). This leads to frequent changes in production planning and distribution scheduling. As production is managed by contract manufacturers, any change in planning and scheduling has a high impact on the contract manufacturer framework, and leads to sub-optimal network utilization. The company needed to identify a cost-efficient fixed supply chain network which would be adaptive to market volatility, considering direct and indirect cost implications and inherent constraints of the existing value chain.

The solution has helped the company design a supply chain framework with end-to-end network cost visibility. The optimization considered all of the cost elements of supply, production and logistics coupled with inherent value chain constraints, credit rules and the complex tax structure in India. The solution also incorporated complexities related to supplier capacity constraints, procurement contracts, multi-BOM scenario, production activity wise capacity constraints, product mix constraints, inventory policies, truckload constraints, serviceability factors and transportation policies. The optimization model was built using LLamasoft Supply Chain Guru, which enabled incorporation of all aforesaid data elements and constraints.

The solution provided a framework which helped the company reduce its network complexity and reduce costs. Measurable benefits include:

  • Production mix with 85 percent firm and 15 percent flexible based on market exceptions
  • Firm distribution network to the tune of 90 percent and 10 percent flexible network with two supply options to answer changing market dynamics without violating constraints present
  • Increase of direct delivery to regional warehouses from 29 percent to 50 percent
  • Twenty-five percent reduction in outbound transportation cost
  • Overall cost savings of 2.5 percent
  • Defined pre-build inventory strategy: Recommended inventory turns increased from six to 10

Soft benefits include:

  • Reduction in month-on-month production and procurement requirement deviations
  • Reduction in inventory write-off of the raw material at manufacturing premises
  • Less variation in production planning led to more visibility of dispatch planning from manufacturing premises
  • More visibility to the business for negotiating contracts with contract manufacturers and logistics providers
  • More visibility of space required at manufacturing premises for raw material and finished goods
  • Better production adherence in relation to the demand plan

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