It doesn’t take a crystal ball to predict the major issues beverage producers will face in 2008. If one were to sum them up in two words, the phrase might be “increased complexity.”

SKU proliferation, channel differentiation and burgeoning competition coming at all kinds of producers from new directions are among the chief factors which will continue to complicate the landscape for beverage producers.

Industry guru John Peter Koss describes what’s going on these days as not mere product proliferation, but an
“SKU explosion.”

“Over 1,000 new products enter the market every year. That trend is not going to go away. In fact, it will probably be magnified,” he says.

With marketing trends putting pressure on production, operationally many companies are pushing the envelope.
But, Koss points out a production line can only produce so much. “You can only change over so many times and can only build so much flexibility into your equipment, before you need to start adding more dedicated lines,” he says.

“Where a guy might have changed a line once or twice in a shift, he may be changing three, four or five times now. But you can’t run an efficient line, have economies of scale and be a low-cost producer if you’re going through so many changeovers.”

Recent developments in filling equipment and other systems are helping companies deal with the challenge.
“Equipment manufacturers have been trying, with some success, to design machinery that makes changeovers easier. They’ve built in multiple parts that can be electronically switched, so you don’t have to have a mechanic go in and start readjusting things. Someone at a console just inputs instructions and the automated system reconfigures the whole line,” Koss notes.

“But there are still limits to how fast you can go when you’re trying to be that flexible. As they add SKUs, and whole new categories of drinks to their lines, companies will need to take a hard look at what happens to their production line efficiency,” he cautions.

With the trend toward flexible manufacturing, Koss adds, beverage companies also should take a closer look at maintenance.

“In the production area, maintenance is becoming more and more important for several reasons: Production lines are being run more hours; flexible production lines are more complicated and therefore require more maintenance; and today’s highly complex filling systems and other equipment are much more expensive than older, simpler machinery, so if you don’t keep the equipment properly maintained, replacing it will be more costly than ever,” he points out.

What’s the Forecast?
Many successful companies in 2008 no doubt will attack the challenge of SKU proliferation and its impact on production efficiency by tweaking their forecasting systems to more accurately model and help them shape demand. Companies can then share that information with production through “expert” collaborative planning and scheduling systems that incorporate high degrees of intelligence and automation, to support better human decision-making.

“One of our customers, among the largest wine companies in the world, decreased their forecast error by about 50 percent using our demand planning system. What’s really important about that,” says Karin Bursa, vice president, marketing, for Logility, “is that there are some very long lead times associated with winemaking, so having both a long and short planning horizon is important to their business.

“Using our demand planning capabilities, they were able to look near-term, at the next 12 to 18 months, and also tie that into a long-term forecast going out four to five years,” Bursa continues. “Reducing their forecast error by 50 percent really gave the company a much better idea of what the market was going to look like, allowing them to fine-tune production and distribution, and reduce their finished goods inventory. Looking backwards from that, they were able to plan what they needed to do in their vineyards to produce to the forecasted demand several years out, enabling them to better grow their business.”

Another company, wine and spirits marketer Pernod Ricard, initially improved forecasting with Logility’s demand forecasting, inventory management and replenishment planning software, then saw an opportunity to increase productivity by integrating the vendor’s production scheduling system, says Bursa. “By building greater certainty for the production team, they were able to increase productivity out of their plants significantly in a short time, while reducing inventory by 15 percent. With an expensive product like spirits, that translates to a dramatic impact on profitability,” she points out.

Private label specialist Clement Pappas & Co. also foresees big benefits from its implementation of demand forecasting and production scheduling systems that extend beyond the functionalities available in its ERP system.
“We can take information from the demand planning system, export it to a spreadsheet and slice and dice it however we like. By taking various snapshots of the business, we can really see at a very granular level how items are trending, which will allow us to get a little closer to making to stock, rather than making to order, which is what kills you in this business,” observes Craig Ablin, vice president, supply chain.

What the system will then let the company do is really understand, as it looks at demand, where its constraints are. So the company can see, for example, if the warehouse team needs to pull forward a priority load.

“Before, our production planners could look out a week or two, but that’s not much help when you have seven new initiatives starting up and you have to figure out how to work each of those into the schedule. We’d get blown out of the water and end up needing to make product at another plant and transfer it with all the transportation and other operational costs that entails,” Ablin says.

Now, Ablin explains, production planners can look at any item or group of items over any time horizon and use that information to proactively schedule runs for utmost efficiency, including taking into account changeover times.

“We’ll use this capability to sequence the lines better, to give us better runs with better changeover efficiency. The system will help us minimize dramatic changeovers, for example, by helping us better fit together runs that might involve switching from organic to non-organic, kosher to non-kosher. It gives our production people the ability to look out over an extended horizon and say, ‘Here’s what you want and when you want it, now let me manage how to produce it for you in the most efficient way.’”

The ability to do sophisticated, automated demand forecasting and planning based on multiple demand signals will not be limited to larger companies.  

“We’re starting to see more of the smaller specialty drink manufacturers stepping up to purchase demand planning systems,” notes John Bermudez of Oracle. “They’re realizing that their little niches may not remain niches for long, with the big beverage companies also looking to get into specialties like vitamin waters or organic fruit drinks. So smaller companies are deciding they need to become a whole lot more precise to survive in this world.”

From Beverage World January 15, 2008