In this session, Prasad Saraph from Bayer Healthcare’s Biotech Pharmaceuticals Division provided a fascinating insight into the supply chain issues that Bayer faces in producing one of its key biotech pharmaceutical products.

Kogenate is a leading treatment for hemophilia-A, a genetically transmitted condition that prevents blood clotting and affects 400,000+ people worldwide.

Prasad began with some startling figures: 1,600 employees in 15 manufacturing plants work continuously throughout the year to produce just 250 grams of active ingredient, supporting over one billion USD of annual sales of Kogenate.

250g. $1bn. Wow.

Biotech pharmaceutical companies function in massively regulated environments. Add to that the technical complexity of the supply chain and manufacturing process and you can understand why companies like Bayer can leave nothing to chance.

All batches follow the same process flow but may use alternative facilities at each stage: Expression, fermentation, purification, bulk, fill, freeze dry, and packaging. Only one batch can be processed in a facility at a time (to avoid cross-contamination). In certain stages of the manufacturing process, employees must work in multi-layer suits, with highly advanced air filtering and evacuation processes and for no longer than four-hour shifts at a time.

Demand side cosntraints: Large demand fluctuations. The tender process which is increasingly being used by customers, and public authorities creates uncertainty (you’re either in or you’re out of a market, depending on whether you win or lose the tender). Customer emergencies (accidents, cuts) can cause huge demand increases compared to normal prescription levels. Inventory risks: Cold chain needs to be permanently maintained (product must be kept refrigerated 2-8°C) - suppliers must always maintain mandated inventory levels.

Supply side constraints: Complexity in the process, regulatory approval, equipment, facility, and formulation. Process uncertainty: varying quality cycle times based on deviations. Varying reject rates. Biotech products are made using live proteins. The compounds are not produced synthetically and therefore the whole process is less predictable.

Supply chain Planning is a continuous process, with endless cycles of data updates, assumption updates, scenario revisions.

Bayer has close ties with UC Berkeley and is highly involved with the Biotech Forum.

Key objectives: Produce sufficient but not excessive material, as soon as possible, but not too soon, while meeting all regional regulatory requirements on product, process equipment, facilities and raw materials.

Key considerations: Traceability, No back orders. Stock outages is not an option (= loss of life … and law suits).

Bayer uses CPLEX for MIP formulation because it can handle their large problem size. It’s a reliable and proven platform. They needed a platform that developers were familiar with.

Solution times: 30,000 boolean variables, 500,000 float variables, 100,000 contraints. 90% optimum solution reached in about 12 hours on a 1.8Ghz quad core dual processor 64 bit machine with 16Gb RAM.

Challenges: Data quality from ERP, planning engine user interface bugs, interpretation of PE outputs, keeping PE assumptions up to date, WIFM issues from key users and end users

Benefits: One version of the truth. Data fidelity, scenario management, mid-term planning decision support (what-if scenarios). Planners are no longer afraid of calls from regulatory bodies. They can react much more quickly and easily.

The future: Ability to analyze historical batch data to better improve planning forecasts.

In what I think was probably my favorite session of the day, Anna Ross from New Zealand’s Fonterra Cooperative Group Ltd. provided an excellent overview of her company’s operations and the many supply chain issues, challenges, and risks that Fonterra faces every day when competing in global markets.

True to the title of her presentation, Anna began with a quite extraordinary list of facts about her employer. Her first slide, and the subsequent statistics, made it quite clear that Fonterra is by no means a jack-of-all-trades kind of company. They are quite emphatically master of one trade: Dairy. Not only is Fonterra New Zealand’s largest company, they alone account for 20% of the country’s exports and 7% of New Zealand’s global GDP. They are responsible for over 1/3rd of all global dairy trade and are the world’s largest exporter.

Among the company’s suppliers are more than 4 million cows from 85 different New Zealand farms. Fonterra supplies over 5,000 customers and millions of consumers worldwide. Probably their most well-known brand is Anchor butter (which my mum’s been spreading on her toast since as long as I can remember, so it must be good stuff!)

I, for one, could not have imagined the insanely complex logistical issues that Fonterra must tackle every day to ensure that my mum can find her favorite brand of butter on the shelf at her local supermarket. Fortunately, Fonterra is an avid user of Logic Tools’ LogicNetPlus which has enabled them to capture and manage the complexity and risk inherent in their global operations.

To start with, it takes about 5-6 weeks for Fonterra to ship its products to their main target markets. Add to that the fact that many of Fonterra’s products have a limited shelf life, and that month-by-month production volumes can vary considerably depending on the season. The company has 24 plants, 130 warehouses, and roughly 535 million different combinations of parameters affecting their supply chain network.

Fortunately, LogicNetPlus is able to handle this kind of complexity on a day-to-day basis without even flinching. It provides Fonterra with a holistic view of their supply chain, and also serves as a tool for long range strategic supply chain planning decisions. For example, Fonterra uses LogicNetPlus to plan new warehouse development projects (where should it be located? How big should it be? What mix of products should we store there?)

LogicNetPlus also helps Fonterra with optimal product mix decisions in their production plants, and helps them reduce the cost of third party storage and distribution centers. And if that weren’t enough, Fonterra has also integrated their supplier’s own supply chains into their model, further increasing the potential for global cost savings.

Food miles is a key concept for Fonterra. Food miles can be used as a measure of carbon effectiveness by measuring how long it takes for the product to arrive at the customer. One of Fonterra’s main markets is England, where around 41% of consumers are apparently purchasing products based on how carbon efficient they are, so Fonterra is keen to appear as green and lean as possible.

Geopolitical risks can also affect Fonterra’s supply or demand which can cause huge storage bottlenecks if delivery is disrupted to certain key markets.

Fonterra also faces climate-related risks. Several years of drought in New Zealand have pushed up prices and competitive pressures to the point where other companies are prepared to “poach” some of Fonterra’s farmers, therefore affecting their milk supply.

When thinking of risk, many people think of major catastrophes such as a warehouse catching fire, ships sinking, and so on. However, Anna explained that a lot of the risk they must deal with on a daily basis, is actually internal - and in particular IT-related risk.

Fonterra uses an e-documentation system to process exports (they export 95% of what they produce). Since they are looking to upgrade this system, they used LogicNetPlus to simulate different scenarios and determine whether their network could cope if for some reason the migration failed and they were without access to their e-documentation system. It turns out that their local storage and distribution network probably couldn’t cope, so they were able to take the necessary steps to mitigate the risk and keep costs to an absolute minimum if things did go wrong.

Food miles is just one component of the entire supply chain, though. Just because Anchor butter has to be shipped frozen all the way from New Zealand doesn’t necessarily mean that it is less carbon efficient than locally-produced brands. Many UK farmers, for example, house their cows indoors and therefore require heating and lighting. In New Zealand, cows roam free in fields - which, unsurprisingly, generates far less CO2.

Fonterra is piloting an RFID tracking system for their shipments and gets data direct from their shipping partners so that they can track precisely where their deliveries are at any moment in time.

New Zealand has a reputation as a green and pleasant land and the PR and image value of green logistics is a vital factor that explains Fonterra’s obsession with green logistics issues.

Fonterra’s global supply chain model, which manages over 535 million parameters, takes about 10 hours to run. For the sake of efficiency, Fonterra breaks down this global model into several smaller models. For example, they distinguish between ambient and temperature-controlled stock, and also by region. Their ambient stock model, for example, takes about 2 hours to run. Their China model takes 1 hour, and their US model takes about 40 minutes.

Some companies use LogicNetPlus as a one-time process optimization tool, but Fonterra uses it on an ongoing month-by-month basis. They have found it invaluable in managing their day-to-day business, as well as planning both their short and long term strategies for growth.

Thanks Anna for introducing me to the thrills and spills of global supply chain management!

In this session, Filippo Focacci, product marketing manager for ILOG’s Supply Chain Management (SCM) product line, presented ILOG Plant PowerOps (PPO) and how it was used to radically improve production planning and scheduling in Danone’s dairy manufacturing plants around the world.

PPO is ILOG’s new integrated planning and scheduling solution for the manufacturing process industry, specifically optimized for fast moving consumer goods (FMCG), pharmaceutical, and chemical processing applications.

The models generated by PPO provide management of tank operations, cleaning policies, shelf life and maturation times. They also provide decision support to help planners map the scheduling process and conduct what-if analyses to asses performance. PPO can also be integrated directly into existing IT infrastructure (ERP, etc.) and with the Logic Tools range of supply chain management solutions.

A dairy manufacturing plant requires an extremely complex manufacturing process that includes tank management, flow control and scheduled cleaning activities. The Danone project was designed to address three major business challenges:

• Meeting demand
• Manufacturing efficiency
• Quality

The solution provided integrated planning and scheduling for both intermediary and finished products and modeled all the plant’s key manufacturing and plant floor constraints. Integrated planning and scheduling means that planning decisions made at the same time as decisions about operational capacity. This is the only way to determine trade off between planning decisions and operating efficiency, that is to say between supply chain and manufacturing goals.

ILOG worked with Danone to create custom KPIs to enable them to track performance of the system and simulate various scenarios.

These KPIs allowed Danone to compare optimized plans generated by PPO with previous manual processes created by their experienced planning team. These comparisons revealed areas of the manufacturing process that could be considerbaly optimized. For example, manual planners would build in too margin in certain processes to mitigate risk, but this margin would often be far greater than was strictly necessary for operational efficiency.

PPO’s production smoothing tools help companies like Danone move towards lean manufacturing processes by reducing variability in the manufacturing process.

Danone identified the following key benefits of the PPO solution:

• Information Systems: Full SAP integration, modeling of both finished and semi-finished products with a repeatable core model that could be used as a template for other plants.
• User: Very high user acceptance, easy to learn and use.
• Organization: Manufacturing and supply chain use the same tool and planning is now a daily activity rather than the previous week-long process.
• Process: Improved operational efficiency, optimized service levels and inventory corridor. Ability to deliver executable plans for finished products and white mass as well as cleaning and changeovers.

The first Danone plant to adopt the PPO solution was in Mexico. Danone has since implemented similar solutions in Russia, Argentina, and now Brazil. These are all markets with 20-30% market growth potential per year, bringing Danone very high return on their investment. The largest gains to made with PPO are in markets that have high growth and capacity constraints, where improvements in plant throughput are essential to meeting growing customer demand.

Major synergies are possible between PPO and Logic Tools or other supply chain management applications, such as SAP or Oracle. So while the Danone story certainly represents a breakthrough in production planning and scheduling, so much more is possible.

In this session, Andrew Reese hosted a discussion with Rob Wehrman from 3M, Anna Ross from Fonterra and Derek Nelson and David Simchi-Levi from ILOG. The session explored strategies for handling complex supply chain networks and touched on challenges like green logistics, risk management and rising transportation costs.

The session provided real insight into the complexity inherent in manufacturing and shipping on a global scale. Below are a few snippets from the discussion…

Fonterra: We use local offices (”mini-Fonterras”) around the world staffed with people with local knowledge to reduce the complexity of managing our global supply chain.

3M: Our biggest issue is data availability. Global infrastructures are expensive to manage and hard to standardize. You probably wouldn’t think of Post It Notes as complex, for example, but with over 300 colors (including at least 15 different shades of yellow!) to manufacture and deliver to markets worldwide, the humble Post It note is perhaps more complex than you might think!

Fonterra: We involve people in the modeling of the supply chain and explain to them how the data is processed. People are less likely to trust a new kid on the block who comes in with a fancy new solution that changes the way they’ve been managing their warehouse inventory for the last 20 years. Involving employees in the process helps everyone learn more about the product and fosters employee buy-in for improving these processes.

3M: Reducing complexity should not be an objective in itself, though. It’s likely that you can actually make more money by making your supply chain more complex. At the same time, there’s a certain amount of chaos built into the system. If left unchecked, a supply chain will always tend towards complexity because of the push towards local solutions that optimize local processes but fail to take into account the bigger picture.

Fonterra: We thrive on complexity. Staying on top of that supply chain is invigorating. If your supply chain isn’t complex, then you probably don’t have a very good supply chain or a competitive business model. Tools like those from ILOG are making the challenge of managing that increasing complexity easier and easier, so don’t be afraid of complexity. If you have the right tools to manage that complexity, you stand to generate considerable competitive advantage.

3M: Another import issue to take into account is the skill sets of your staff. Very few projects fail because of technical issues. People in your team who are able to identify the real problems behind your supply chain inefficiencies are invaluable. They need to be able to interpret your SCM data intelligently and use the system to identify appropriate adjustments. If your system reveals inefficiencies in shipping semi-finished goods between two different plants, it might suggest investing 60 million dollars or more to consolidate the production into a single plant to improve efficiency. However, if the underlying problem is in fact a simple issue of insufficient stock level management in one of the plants, you could save yourself a whole lot of money by digging a little deeper into the problem. Your staff need to be able to identify those failure modes and go beyond the surface data to investigate ways to improve the system in the most intelligent way.

Fonterra: We have a mix of older, more experienced supply chain planners and younger graduates with more up to date operations research and supply chain theor. The challenge is getting these two groups to work together effectively. We need to stay aware of new techniques, but also temper the enthusiasm of the younger generation with the reality of what is possible.

David Simchi-Levi: 10-15 years ago, supply chain management systems were designed for leading experts. These days they are aimed at business level users. It’s like purchasing a car. You don’t need to be an experienced mechanic to purchase a car these days. You’re concerned about issues of usability and practicality for your needs, but you don’t want to have to get under the hood with your oil can and wrench every time you want to go for a drive.

Fonterra: Green logistics is a huge issue for Fonterra. Every project we embark upon must include a carbon emissions impact study or it doesn’t get funded. Find out more in my session later today.

3M: One of our corporate values is to minimize our impact on the environment. We’ve not yet implemented carbon footprint evaluation into our supply chain, but we are following progress in this area carefully.

David Reese: To sum up, complexity is increasing. It’s unavoidable. Deal with it. When handled effectively, complexity can bring you significant competitive advantage. Think global when optimizing your supply chain activities. Technology itself can create unnecessary complexity if not managed correctly. Ensure you involve cross-functional and interdisciplinary teams in your SCM decisions.

Martin Brotschul, senior manager, Supply Chain Strategy Practice, Accenture

In this talk, Martin focussed on the impact of climate change on supply chain business models.

Customers are stepping up to environmental responsibility and demanding sustainability from the supply chain that produces the goods they use. The push has come from Europe but the US is catching up. Many companies are interested in instituting change before legislation is imposed upon them. Companies are also beginning to see how moves towards sustainability can have a significant impact on brand value.

For a typical consumer good, only 12% of the carbon footprint comes from storage and distribution. However emphasis is in this area as this section of the supply chain is highly visible - it’s the truck you see at the end of your street or a towering storage facility.

As the price of oil rises, this will be passed on to consumer goods. Other options include reducing distribution network or looking at new fuels such as biofuels. Trucks can switch to the electric model.

Companies that are already beginning to look into some of these approaches include M&S, Sainsbury’s, Innocent Drinks, Green & Blacks, Walkers and Hewlett-Packard. From the list it’s evident that early advances are being made in Europe. However, US companies are beginning to become more active -the most visible example being Wal-Mart.

What does the future hold?

As well as reducing carbon emissions, manufacturers will have to look further into the external social costs of the goods they produce. One example is battery manufacturers offering ways to dispose of dead cells.

David Simchi-Levi, MIT professor and co-founder of LogicTools, a division of ILOG

In this talk, David concentrated on the major trade-off facing supply chain operators - that between increasing plant capacity without increasing risk.

Redundancy

It’s difficult to build a forecast to build in risk. One way is to go through scenario (what-if) analysis. The problem here is that it can be difficult to predict every possible scenario and to determine which scenario will best fit your situation.

David suggests another approach - one borrowed from the financial sector - of working out the lowest cost portfolio and working in some redundancy to cover risk. The example used looks at the structure of the total cost function as you change the number of distribution centers. The graph looks something like a narrow-bottomed frying pan. The main point is that in a number of different scenarios, total cost does not change dramatically. Therefore you can pick the scenario with the maximum redundancy at this lower cost level. There may be a slight increase in total cost as a result of this, but risk is reduced substantially.

Network planning

Why is concentrating on the distribution network important?

• Consumers are demanding this more and more
• Europe now offers financial incentives for companies that cut carbon emissions
• High carbon emissions means low SC efficiency
• Future legislation is expected in US more in line with those in Europe

By applying network modeling, you can design a distribution network that satisfies customer demand yet minimizes carbon emissions. The key is to find the right trade-off between cost, service and carbon emissions.

Risk pooling

Inventory is can be stockpiled at different points in the supply chain for risk pooling. Overall the supply chain will be more efficient and maintain forecast accuracy.

In closing, David signaled the significant increase in the level of risk over the last few years. This is where supply chain planning can provide real value.

Dialog 08 is now fully underway - we’ve already seen Jerome Boyer talking about Agile Business Rules Development and Pierre Berlandier covering Rule Governance (thanks to James Taylor for the coverage).

Just to recap, these are the tracks that will be running over the next couple of days:

• Business Rule Management Systems (BRMS)
• Optimization
• Visualization
• Supply Chain Management (SCM)
• Financial Services Industry (FSI)

Dialog attendees: feel free to use this post for comments on the tracks in general and anything around the event.