You CAN Sell Out of an Empty Wagon

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“You can’t sell out of an empty wagon,” is a favorite saying among salespeople, meaning that you have to have inventory (usually lots of it) to quickly serve your customers. But it just isn’t true! In fact, if you have a successful Just In Time (JIT) supply chain management process, often the less inventory you have, the better you can service your customers. Here’s why:

  • Lower inventory leads to having the right inventory in the right place at the right time – true JIT inventory management.
  • Inventory buffers often lead to obsolete inventory.
  • High inventory levels jam up the warehouse and make it harder to quickly find and pick what you want for shipment.
  • Large amounts of inventory often lead to inaccurate records, so you don’t know what you have or what you need, resulting in stock outages.
  • Too much inventory requires more storage capacity, which raises the cost of holding inventory and reduces profit.

These are just a few of the ways excess inventory hurts profits and cash flow. By running a true JIT system, you can better serve your customers and yes, you CAN actually sell out of an empty wagon.

 

© 2019– Rick Pay – All Rights Reserved

A Great Question: Why?

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“Why” is a great question. Do you wonder why? The answer is simple: it puts things into context. It shows the future and sets the stage for people to understand the reason or purpose for their actions.

Take metrics for example. Many companies develop metrics because it seems like the right thing to do. They usually develop them by deciding how much – how much inventory, how much profit, how much overtime – but they rarely set them in the context of the ends they are trying to achieve.

First ask yourself “why?” It sets the reason for having metrics. What behaviors are you trying to change or encourage? What strategy are you trying to support?

Next time you are trying to improve almost anything, the first question to ask yourself is not “how much” but “why?”

© 2019 – Rick Pay – All Rights Reserved

Leadership Can Be Really Simple

I am currently working with a client to reduce materials costs, increase inventory turns and improve warehouse productivity. We started with warehouse organization and cleanup using a 5S technique from Lean. In the first couple of weeks we filled up an eight yard dumpster and organized and identified the parts that remained.

They are already seeing savings by not reordering parts they previously couldn’t find. They’ve also returned parts to suppliers for credit and re-deployed others to other warehouses where they could be used. All of this in just a few short weeks. The employees are thrilled with their neat, organized work place.

Setting Expectations

As part of the process they posted two signs around the facilities. One lists the 5Ss (sort, shine, set-in-order, standardize and sustain), and the other says “A Day’s Work In A Day,” which means people need to finish the day’s work before they go home. No one had ever told them that before.

Leadership can be simple. Sometimes all you have to do is tell people what is expected. Good employees can then take the reins and go.

© 2013 – Rick Pay – All Rights Reserved.

Variability and Importance as Factors in Forecasting

In a previous post I talked about the need to create a single unit of planning that could transcend the language barrier between Sales and Operations. Planning based on product families is one way of making this happen. I know of one company, a food products manufacturer, who plans according to product family (meat, cheese, or nuts, for example) because the same raw materials can be used in a number of products within each of those families. A wholesale distributor, on the other hand, needs to plan for each SKU and forecast accordingly.

 

 

 

 

 

 

 

 

 

 

 

If a product has low variability and is highly important, you’ll manage that with inventory, and the inventory has low exposure to obsolescence because you’re likely to sell it. High variability and high importance require you to use flexible production or flexible distribution – JIT types of approaches – because speed is important.

© 2012 – Rick Pay – All Rights Reserved

The Relationship Between Forecasts and MRP

The first place a forecast is used in Operations is in material requirements planning (MRP). For MRP to work, it requires a Bill of Materials, the forecast, and your inventory balances. The accuracy of these three elements is important, and because they aren’t perfect, it’s difficult to be successful with an MRP system. In an effort to make it work, we tend to build up inventory. Holding inventory isn’t free – it costs between 2 and 3% per month in most companies to hold inventory, which really adds up over a year.

Most companies I visit have between two and four inventory turns per year, which is very slow, but they’re stuck in this rut because they lack a forecast, their BOMs aren’t reliable, they can’t count on their suppliers, or a host of other reasons.

In operations planning we try to estimate capacity, labor, and materials for the year. We’d also like to have rolling forecasts for suppliers. But we’re working with estimates and guesses. So what can we do?

One of the first areas to address is the supply chain. The buyer or planner (who is usually in the materials department), in collaboration with others, uses the MRP to decide how much to buy and inform their suppliers. If they use a blanket PO, they base it on a number suggested by the MRP, which is inherently inaccurate.

In my next post I’ll show you how to create a forecast from ingredients you have on hand, including a dose of “professional gut feeling.”

© 2011 – Rick Pay – All Rights Reserved

Be Proactive

If you want to be successful at just about anything, whether it be marketing, supplier management, cost reduction, revenue improvement, or innovation, it helps to know the situation and understand the details. Let’s take supplier management for example. For many companies, materials are the largest expense. Yet many materials professionals issue purchase orders to the low cost supplier and fail to follow up to see if the materials actually arrive. Supplier management is loose at best.

Know What You Want

There are three vital areas to knowing the situation and the details in supplier management. First, you have to know what you want. This involves clear specifications, expectations for performance in quality, delivery and cost, and knowing the supplier’s capability. Even knowing who the top suppliers are is a challenge for some companies.

As part of my supply chain evaluations, I analyze the supplier base using a descending year to date payments report. During the final presentation I ask executives who their top five suppliers are and you would be surprised how often they don’t know. That is knowing the details.

Measure It

Measuring supplier performance is the second key. For top suppliers, performance should be measured monthly on the metrics of delivery on time, quality, cost reduction and other subjective factors such as how easy it is to clear up invoice issues. I have often found that not only do companies not know how their suppliers are performing, but often the suppliers themselves don’t know either.

Sharing Information

This brings me to the third point which is communication. Internally, communication is comprised of clear specifications, clear expectations, and clear feedback. Externally, suppliers need to not only get their performance report, but quarterly review sessions should be held with top suppliers to review performance, new opportunities, cost and lead-time reduction activities, etc. In addition, annual supplier meetings should inform suppliers of planned new products and other opportunities for them to grow their business serving your company.

To improve supplier performance and relationships, know the situation and dig into the details. What you find may surprise you and save the company a lot of money.

© Rick Pay 2011 – All Rights Reserved

Vendor Managed Inventory – A Too Frequently Overlooked Tool

I have talked to many purchasing personnel who will not use Vendor Managed Inventory (VMI) as a tool for inventory management in their companies. They have typically had a bad experience with suppliers overfilling bins, allowing stock outs, or they simply don’t trust suppliers to do the right thing related to stocking programs.

VMI is the process of having suppliers come in to the company to review current stock levels and order inventory as needed, and can include the supplier actually replenishing the stocking location with needed materials. It is often referred to as a “bread man” system since it was originally patterned after how bread is stocked in grocery stores.

Many vendor stocking programs focus on “C” items (those with low volume or value), such as fasteners, packing materials, or production supplies. While those materials are great targets for VMI, this overlooks other materials that suppliers can successfully manage. Basically, anything that can easily be visually managed, has short replenishment lead times (typically a couple of days to a week) and has a local supplier presence can be managed through VMI.

The biggest issue that stands in the way is trust. In a successful VMI program, an internal resource works with suppliers to:

1) Clearly define how the program will work and what the performance expectations are,

2) Monitor performance to assure the expectations are met, and

3) Meet with suppliers frequently to adjust inventory levels to meet the company’s future needs.

In other words, communication and trust are cornerstones of success with VMI; in fact, they are the cornerstones of any supplier relationship. How can you work with suppliers you don’t trust? Why would you?

The benefits of VMI are several –

1)    Reduced inventory levels

2)    Reduced stock outs

3)    Reduced internal cost of ordering and managing inventory

A final benefit is having the supplier actually see what is going on in your operation so they can make additional suggestions to improve service and cut costs, which is a true win/win for both organizations.

Don’t overlook this opportunity to significantly improve materials management in your organization. With solid processes and attention, VMI can be a home run for your company.

© 2011 – Rick Pay – All Rights reserved

Blanket Purchase Orders – Supplier Relationships and a Fear of Commitment

Many companies tell me they don’t use Blanket Purchase Orders (BPOs) because they fear it creates a major commitment with the supplier. This doesn’t have to be the case.

A Blanket Purchase Order is usually set up to cover the purchase of one or more items from a supplier over a long period of time, usually one year. It specifies terms, conditions and price. BPOs often come into play when the supplier relationship is based on Kanban, Vendor Managed Inventory or other auto-replenishment systems where normal POs would be inadequate.

Why Are Buyers Reluctant?

The apparent stumbling block is that BPOs typically specify a total quantity for the entire purchasing period. Many buyers fear that the quantity is a firm commitment to purchase, and if business doesn’t go as planned, they will have to buy all of the remaining parts on the BPO. This is simply not true; as with most terms and conditions, it is negotiable.

Building a Relationship

BPOs are what I call relationship POs. One of the large benefits is that they forecast a quantity for the year so that the supplier can plan production or buying activities. This can significantly cut costs for the issuer of the BPO. In my experience, any commitment can be limited to the materials lead time for the supplier, usually 30 days or less.

Removing the Fear of Commitment

BPOs have many advantages including better pricing, lower transaction costs, fewer transactions to keep track of, and closer relationships between customer and supplier. Removing the pressure of an annual commitment makes it easier to reap these rewards.

© 2011 – Rick Pay – All Rights Reserved