Is ERP the Be-All and End-All Solution?

A number of small and mid-market executives are implementing new ERP systems in the hope they’ll solve just about everything in their supply chain: shipped-on-time, customer service, excess inventory, high costs. While ERP can improve processes and performance, its flaws can lead to disastrous results.

You see, there are three things that must be accurate for ERP to be successful – bills of materials (BOMs), inventory and forecasts, and in all three cases accuracy is almost impossible to achieve. Have you ever heard that “accurate forecasting” is an oxymoron?

Who Owns the Bills of Materials?

Of the three, BOMs have the greatest potential for accuracy, but only if someone in the organization owns the BOMs, they reflect how product is actually made and substitutions are handled properly. It takes a good BOM audit process to keep them from straying into inaccuracy.

Inventory

ERP needs to know what’s on hand to properly determine what to order, but many companies have inventory accuracy scores below 90%. A strong cycle counting system and inventory update processes and controls are required to keep things up to date and accurate.

Forecasts

Sadly, there isn’t much to be said about accurate forecasts. ERP needs them to plan replenishment, but because a forecast is merely an informed guess about the future, they’re only 80% accurate at best. Many supply chain experts have given up on forecasts entirely in favor of agility.

If you’re hoping ERP will solve your service, inventory management and supply chain problems, take a look at your BOMs, inventory and forecasts. If they’re not accurate, don’t expect ERP to be the be-all end-all solution.

© 2016 – Rick Pay – All Rights Reserved

Achieving the Impossible: Forecasting

The Great Alexander generates a sales forecast

Some say “accurate forecasting” is an oxymoron. How often have you heard, “We can’t develop a good plan because we can’t get an accurate forecast from sales!”

Many companies base their purchasing plans on forecasts, those always inaccurate, often sandbagged predictions of the future that the sales team occasionally generates so as not to put too much pressure on themselves to meet their budgets. Right out of the gate, purchasing and supply chain planning is a seemingly impossible task.

But wait, there really is a way to overcome that gargantuan obstacle! If supply chain can be extremely flexible and responsive with only high level indications of planned sales, it is possible to provide exceptional customer service with low inventory and maximum profit.

There are four things supply chain and purchasing must manage to achieve the impossible:

1) Supplier performance

2) Demand

3) Product portfolio

4) Inventory

In order to become highly flexible and provide world-class service, supply chain must make sure suppliers get the right material, at the right time, to the right place at the lowest possible cost. Next, supply chain must work with sales to manage demand. Toyota does this very successfully even though they have over a million possible permutations of their products. Third, the product portfolio must be managed to assure that products that actually sell are produced and kept in the warehouse. New product introduction and old product elimination must be handled deliberately. Finally, the inventory you do have must be accurate. You need to know what you have, where it is and its availability to be shipped.

By focusing on these four elements, supply chain and purchasing teams can overcome inaccurate forecasts and accelerate profit and growth.

© 2015 – Rick Pay – All rights reserved

Four Ways to Super-Charge Your Communication With Suppliers

Communication with suppliers is a vital element of forming a supplier partnership program, yet many (I would say most), companies don’t establish a solid foundation of communication. Here are four ways to super-charge your communication:

1.  Get together face-to-face. Phone calls and emails don’t establish the depth of relationship that you’ll need for your supplier partnerships to succeed. Face-to-face meetings to discuss expectations, status updates, changes to products, designs, materials, forecasts and other important issues are critical. Meetings should be on-site, alternating between the supplier’s location and yours, especially for your top ten suppliers. Going to the Gemba (point of work) can help clarify your perception of the supplier’s capabilities and help them understand exactly how their product is being used.

2. Organize a Supplier Day. Invite your top 20 – 25 suppliers to an all-day event where your sales leaders present company growth plans and forecasts, your CEO shares the company’s strategy, and the operations and supply chain people present expectations for the year. This gives suppliers a window into your company as well as the opportunity to network with other key suppliers and find opportunities for cooperation.

3. Connect executive sponsors in your organization to their counterparts at the supplier. Establishing these connections adds depth to the relationship, and also allows the executives to contact their counterpart for support in solving any problems that arise.

4. Set metrics to clarify expectations and provide feedback to the supplier on their performance.

All of these tools can help you super-charge your supplier partnerships and get the most out of these important relationships.

© 2014 – Rick Pay – All Rights Reserved

Tell Them What You Need

I recently sat in on a conversation between two people from Sales and two people from Supply Chain Management trying to determine why the company had run out of parts that were needed to satisfy demand. Sales claimed they had submitted a forecast that should have covered the demand. During the conversation, the salespeople mentioned how they had gone into the system before they submitted the forecast to see how many parts the company had, and noticed that most were already allocated. So they submitted an adjusted forecast to allow for the allocated product. In effect, while trying to help, they effectively mislead the Supply Chain team as to what the real demand was. This is unfortunately a common occurrence and can stem from either trying to help, or from not trusting the Supply Chain team to do their job.

When Sales submits a forecast, it should reflect what is needed to satisfy demand for the period, without regard to the current status of inventory. Supply Chain should then determine what they need to either buy, reallocate or transfer to cover the demand. Trying to do the other person’s job for them often results in confusion and poor service levels. Sales should forecast what they need.

© 2013 – Rick Pay – All Rights Reserved

Get in Touch

It never fails: when my business slows down, I look at my schedule and see that I haven’t kept up my habit of meeting with people – either referral sources or potential clients. My calendar shows that, for me, failing to keep in touch with people results in lower performance.

It’s the same with supplier partnerships. Communication is the foundation of partnerships and regular communication is vital for success. Supply chain personnel need to get in touch with suppliers for more than just placing orders.

How about improving performance by…

  • Sharing forecasts and plans
  • Discussing production issues
  • Asking what’s new in the supplier’s world (a great way to learn about new technology and better product options)

The same can be said about customers. Don’t fall into the trap of only talking to customers when they place an order. Be in touch. Ask what’s going on. Is business up or down? Are there any new opportunities to be of service to them?

Frequent communication (face-to-face is best) can accelerate your business’s growth and profitability. Look at your schedule – do you need to get in touch?

© 2013 – Rick Pay – All Rights Reserved

 

Supplier Partnerships – No Fuss, No Muss

An attorney once told me that you don’t really need a contract unless you plan to sue someone. That doesn’t sound like the basis for a good relationship to me.

In my prior life as VP, Operations for a rapidly growing manufacturer, we had an active supplier partner program with between 150 and 200 suppliers. We had a contract with only one supplier, and that was because their bank required it to help back up their line of credit. For the rest of our suppliers, we had terms and conditions on the purchase order as well as what we called a purchase accord.

Setting Expectations

The purchase accord was simply an agreement between the two of us (I suppose you could call it a contract) that spelled out our mutual expectations. We told the supplier that we would provide them with forecasts and purchase orders and how much of the forecast we would commit to. The supplier told us that they would ship to us in the quantities we requested with a specified lead-time. We also agreed on payment terms and quality and conformance standards. The document was typically two pages long.

Partnership-Oriented

When we first started talking to a new supplier and presented the purchase accord idea, their reactions were a combination of surprise and delight. Taking this approach was unusual for the suppliers and many often said they wished their other customers were as partnership-oriented as we were

Partnerships start with a foundation of trust and communication. Accountability for performance certainly needs to be maintained, but with close communication, issues can typically be resolved long before any legal action would need to take place. Starting on the right foot goes a long way in that direction. No fuss, No muss.

© 2013 – Rick Pay – All Rights Reserved

Plugging the Sales Leak

As an example of what happens as a result of improved operations strategy, I’d like to share the following case study. To download a printable version and read other case studies, please visit my website.

Situation:

A middle market distributor of construction supplies and materials used centralized  purchasing to support their  network of branches. The branches regularly ran out of stock, causing losses of 10 to 20% of total sales. In addition to solving the stock shortage problem, company management wanted to improve customer service, revenue, inventory turns, profitability, and cash flow.

Solutions:

We launched a comprehensive change management effort including better sales forecasting, use of a distribution center, and improved materials management throughout the interstate network of branches. Specific product ramp-up and ramp-down methodologies for new products helped establish proper inventory levels.

A new team-oriented structure established clearly defined roles, responsibilities and accountabilities throughout the purchasing and operations areas and allowed for partnerships between the branches and central offices.

Results:

The company is meeting or exceeded their goals, and things are still improving. They accomplished the following:

  • Increased revenue by 5 to 10%
  • Improved inventory turns from 2.8 to 10
  • Improved gross profit margin by 10%
  • Reduced obsolete inventory by 75%

© Rick Pay, 2011-2012. All Rights Reserved.

Shipped on Time and Other Measures

If you’re going to measure one thing in an organization, it’s shipped on time. If you can’t ship on time you won’t have any customers and then nothing else matters. Measuring shipped on time by orders, not line items, makes a big difference. An incomplete order – even if it’s on time – doesn’t make customers happy.

Tracking inventory turns is another important aspect to measure. Inventory absorbs money, takes up storage space, requires people to move it, accrues interest that you pay to the bank, and in many cases eventually goes obsolete and becomes an expense. Gross profit margin is another important measure, because it reveals improvement (or lack of improvement).

Key measures are not only a way to show people how they’re doing, but they have the power to change behavior and establish accountability. One of my clients had a 24% shipped on time rate when they came to me a few months ago. This week it’s in the mid-80s. They also cut their backorders partly by tracking them and posting the numbers every day. In the past at this company, the sales department saw operations as an adversary. Now the sales manager is applauding operations and saying, “Now we’d better get out there and sell.” Keeping sales in the critical path is what allows the business to flourish and revenue to grow, and forecasting and planning is the front end of it.

© 2012 – Rick Pay – All Rights Reserved

The Power of Scoreboards: Key Performance Measures That Get Results

Key performance measures serve to increase accountability and should include a scoreboard to make the results visible. When I do evaluations for companies, one of my favorite questions to ask is, “At the end of the day, how do you know you did a good job?” The most common answer by far is, “I didn’t get in trouble.” Clarifying expectations for employees is essential to getting them out of this “Avoid getting in trouble” mindset. When a clear plan for the day is in place, employees know if they met their goals or not.

Scoreboards

One client saw output skyrocket after putting up scoreboards in the work area showing the goal for the day and updated actual results every two hours. Quality stayed high as well. At my previous company, I used to post the sales forecast and the actual revenue by salesperson in the sales department. We took the salesperson whose actual revenue most closely matched their forecast out to lunch, and we started getting reasonably accurate forecasts.

In my next post I’ll talk about tracking shipped on time and inventory turns.

© 2012 – Rick Pay – All Rights Reserved

Communication as an Element of Forecasting

I can’t overemphasize the importance of communication with Sales. When I was VP of Operations at a manufacturing company my production managers did the planning, and I required them to meet with their sales manager every Monday morning to convey the past week’s results and to update the forecast for the coming week and month. Sales managers know if a major retailer is planning a sale, or if they’re about to get a really big customer. Communication with Sales offers Operations a glimpse into the future.

Likewise, Sales needs to know what Operations is doing. Are machines breaking down? Are there labor problems? Currently I have a client with 180 positions, 30 of which are open because they can’t find qualified workers. That has a tremendous impact on output, so communication is key.

Communication doesn’t end at the front door – we also need to communicate with the supplier base. At my former company the buyers visited our top 10 suppliers twice a year, and those 10 suppliers visited us twice a year, so we came face to face once each quarter. A client of mine, who has one buyer, keeps running out of inventory and the buyer refuses to talk to the suppliers, even on the phone. How can this buyer possibly know what’s happening or what’s coming down the pike?

© 2012 – Rick Pay – All Rights Reserved