Pressure from Competition
Over three years a Rohm and Haas team used operations research and other techniques to align its Polymers and Resins Unit, now reorganized into Performance Polymers – around well-defined business policies, segregating products into make-to-stock and make-to-order supply channels, prioritizing customers, and shifting non-strategic customers to distributors. The changes saved millions of dollars, increased productive capacity, and made Polymers and Resins a smoother-operating unit.
In the mid-1990s, the company's customers faced increasing pricing pressure from retailers like Wal-Mart and Home Depot, with increased competition from chemical giants BASF and Dow Chemical. Company officials felt they must reduce costs, pointing to weaknesses on a large product line, where plants were scheduling orders and delivery dates on a case-by-case basis, causing high inventory costs and stress to staff.
In 1995 Rohm and Haas began improvement of business operations in Polymers and Resins, or P and R. P and R, Rohm and Haas' largest unit, accounted for 51 percent of corporate sales and earnings in the $4 billion company. The unit's biggest product line was polymer emulsions, the main ingredient in water-based paint.
Make-to-Stock and Make-to-Order
P and R staff had long assumed that customer-demand patterns were unpredictable. Since the unit had short lead times for most products, P and R stored many products in bulk so it could fill customer orders from inventory. With over 800 products and no formal demand forecasting, plant schedulers often revised the manufacturing plan, sometimes several times a day.
The redesign began with analysis of the customer base. The team was able to identify different tiers of customers, with the most important one comprising only 2% of all customers but representing 59% of volume and 55% of gross profits. Given this information, Rohm and Haas interviewed top customers to identify what services they valued most. The company transferred customer service for low-volume customers to distributors and concentrated on the top tier.
The team also developed an operations research model to analyze historical demand variability. They were able to identify two product categories: those that sold in high volume but with low demand variability; and, at the opposite pole, products with low volume but high variability.
The needs of the first, high volume category, the team realized, were predictable, thus allowing development of a streamlined process. In fact, the team came to realize that the predictive nature of the first group's product demand had been masked by the confusion created by the second, larger group.
With these insights, the team formulated a new manufacturing strategy. They proposed devoting certain Rohm and Haas plants to high volume, low variability products and storing those products in bulk, available for customer shipment within 2 days. Under this make-to-stock strategy, these plants would manufacture to plan, with customer orders filled from inventory.
For the second group of products, the team proposed longer lead times from customers, allowing manufacturing to plan production with stability. Delivery time for this group was 7 days. P and R required these customers to buy entire production batches, making order quantity about equal to batch size. P and R would not store these products in bulk, thus eliminating its considerable investment in inventory.
Cumulatively, the performance improvements gave P and R a substantial competitive advantage.
"Producing credible production schedules has been an unqualified success, despite the early doubts of planners and schedulers," writes Steven J. Rauscher, Vice President and Supply Chain Director, Performance Polymers, Rohm and Haas, in an addendum to the study.
"In 1997, plants operated in a reactive mode with frequent schedule changes, with no visibility into production requirements beyond the next couple of batches or shifts. Today, the world is much different. On Thursdays, at [Polymers and Resins] plants across the region, the production plan for the next week is created and respected. As a result, we have cut several million pounds of raw material inventory."
The division's on-time delivery of bulk orders is steadily over 95%, he says. The company has realized logistics and freight savings as well.
"People are saying that life in the P and R production world is better," he writes. "Being able to plan makes work more satisfying. We are making more product than [before,] but it feels as if we are not as busy."
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