Accelerating Inventory Turns/Accelerating Profit

Alaska Communications had a problem getting product to customers through their retail stores. Although inventory levels were high, the stores couldn’t seem to get the right product to the right place at the right time, and were having trouble filling orders for their customers in a timely manner. Inventory throughout the retail store network was over $6 million, materials costs were higher than desired, and inventory management in the central distribution warehouse was suffering. Multiple stores located throughout Alaska made the situation even more complex.

We worked together to implement a Kanban auto-replenishment system between the warehouse and the stores. The Kanban system was comprised of a two-bin arrangement at the stores that was replenished from the main warehouse. After calculating the Kanban size to be sure the stores had what they needed when they needed it, we moved the excess inventory back to the warehouse. This allowed the purchasing department to have a clearer view of product demand and velocity, allowing buyers to make better decisions. Another great example of accelerated profit and growth through improved inventory management.

• The stores’ fill rates shot up to 98% even with worldwide allocations of products causing some bumps in the road for the warehouse
• Overall inventories of wireless products were cut by over $3 million in just one year
• Customer service rates have remained in the high 90 percent range, and materials costs have plummeted.

© 2014 – Rick Pay – All Rights Reserved

An Unfortunate Downside of Process Improvement

Recently a client wanted to improve the reliability of inventory transfers from a central warehouse to several retail locations. The retail managers had claimed that sales were depressed because they didn’t have the items the customers wanted. Customers were frequently sent away empty-handed due to stock outs.

We developed a Kanban system, which is a process that automatically triggers replenishment when an item’s inventory level reaches a certain point. The system allowed for frequent inventory transfers with the dual benefits of improving availability and reducing inventory on hand. It worked exceptionally well…too well, in fact.

As it turned out, the reasons that sales were lower than projected in the stores had nothing to do with stock being unavailable. Lack of training, in some cases poor hiring practices, and lack of management oversight were the root causes of the problem. Unfortunately this was so clear after the system went in that the managers of a couple of stores loudly proclaimed that the system didn’t work, even when it could easily be shown that it did. They were hiding behind make-believe inventory shortages.

How do you prevent this from happening? First, be sure you have the right measures in place. Then understand the root cause of the problem. Then develop people and make sure you have the right ones on the bus. Develop a culture of accountability with ownership clearly established for the whole system. Great process does not automatically remove resistance to change.

Are your process improvement programs supported by all of your key people? Have you achieved true root cause?

© 2014 – Rick Pay – All Rights Reserved

Creating a Preferred Supplier List

Many companies have too many suppliers. Bridget McCrea interviewed me for a recent article for Digi-Key Corporation on how to develop a preferred supplier list. By following six steps, companies can have great supplier partners while maintaining a comparatively small list of those suppliers.

The six steps for developing a good list of suppliers are:

  1. Start the process in the design phase – get your engineers involved so they can help you select suppliers with the appropriate technical capabilities.
  2. Look beyond the bottom-line costs – focus on Total Cost of Ownership (TCO) including logistics, obsolescence and cost of quality.
  3. Award extra points to suppliers who are willing to partner – use your suppliers as experts to help improve quality and reduce costs.
  4. Open up to your suppliers – keep them in the loop as to your needs, and have conversations with them about what the market is doing.
  5. Look for innovative partners – use them to develop auto-replenishment systems such as Vendor Managed Inventory and Kanban.
  6. Review the list regularly but change slowly – hold them accountable, but don’t change unless you have to.

Using these six steps, companies can create a short list of key supplier partners to provide innovative solutions at a lower cost with reliable supply.

© 2013 – Rick Pay – All Rights Reserved

What Does Operations Discipline Look Like?

An often-overlooked way to improve processes is to take a walk through the plant and observe. In Lean this is referred to as going to the Gemba (point of work). Here is a “before” picture of what we found at one company:


The shelves aren’t labeled, there are things grouped together that are similar but not the same, and it looks a little bit like my garage. Workers are wasting time because they have to search for what they need instead of taking it off a clearly marked shelf.

Somewhere in here are latex gloves, which are a key supply item for this particular company. If they run out, they can’t make their product. When there is an uncertain supply of something so critical, workers begin to hide boxes of gloves to ensure that they’ll have them when they need them.

When we reorganized this supply room we implemented a Kanban system, which uses a visual indicator to show when the item needs to be replenished. You never run out when this system is used correctly.


After setting this up, we asked the workers to please bring back the boxes of the gloves that they had stashed away, and suddenly we had a truckload of latex gloves. Think of the money that was literally lying around the production floor in latex gloves, not to mention the space that was being taken up. Having supplies readily available on clearly marked shelves saved time and improved labor productivity. This particular process improvement took only two days to set up, including communicating with suppliers.

This was easy to fix, but the larger story is that a messy supply area is more than just a mess – it’s an indication of a lack of operations discipline. There’s probably more going on in this company than meets the eye.

© 2013 Rick Pay – All rights reserved.

For Strong Supplier Partnerships, Define Outcomes, Not Methodology

When companies are developing requirements for their suppliers, they often define in great detail how the supplier will deliver the materials and products and how they will offer support. Companies often stipulate that suppliers carry a certain level of inventory to provide a high service level. For instance, many companies require the supplier to hold 30 days of stock on hand.

You Pay for What You Require

At first glance this might seem to make sense, but the reality is that when you specify how  suppliers are to do their job, they will charge you for what you require them to do. Those costs will either be built in to the part price or added as a service charge or surcharge. When I was VP Operations for a manufacturer, one of our sister companies used consigned inventory and required 30 days stocking levels at the supplier. The supplier charged them a five percent surcharge for doing so.

Tell Suppliers What You Want, Not How to Provide It

In a true supplier partnership the customer defines outcomes, not methodology. For instance, if you want just in time delivery, say so. If you want to use Kanban, say so. If you want 99.8% perfect order execution, say so. Specify the outcome, not the method. This allows the supplier to use whatever means they need to meet your requirements. The process is theirs, not yours. They won’t add a surcharge, the service will be better and the total cost of materials will be lower.

©2013 – Rick Pay – All Rights Reserved

Shining a Lean Light on Purchasing

Recently a client asked how purchasing activities change in a Lean environment. In both manufacturing and distribution, Lean or Toyota Production System (TPS) implementation affects material flow from suppliers to production. The focus on waste reduction can translate to lower materials cost.

Here are three ways that purchasing methods and activities look different in a Lean light:

Speed Without Waste

First, materials flow to the lines tends to be more “Just-In-Time.” Smaller, more frequent batches drive Purchasing to use blanket purchase orders with frequent, usually daily, releases. To prevent stock-outs while keeping inventory (one of the seven wastes of TPS) low, many companies use auto-replenishment systems such as Kanban and Vendor Managed Inventory (VMI).

Creative Cost-Cutting

Second, materials cost reduction takes on greater importance. Working with suppliers to improve quality, involving suppliers in design for cost reduction, and changing the way suppliers package and ship will all require increased attention from buyers.

Don’t be Shy

Third, the level of communication with suppliers increases dramatically in Lean purchasing. In order to eliminate waste and cut costs, buyers need to refine their supplier selection processes. In addition, openly sharing forecasts, product development plans and market activity changes the nature and frequency of supplier communications. Lean purchasers can’t be shy with their suppliers.

Lean presents new challenges to every part of your operations, including purchasing. Ultimately, the payoff is worth the effort.

© 2012 – Rick Pay – All Rights Reserved

Last-minute Customization: The Theory of Postponement for Highly Variable Items

If a product has high variability and low importance you can manage it with inventory, but using Kanban or VMI to allow for a quick response to a spike in demand. For these items you could build subassemblies or stock them in adherence with the theory of postponement.

The Trouble with High Variability

The theory of postponement was developed at Hewlett Packard in Vancouver, Washington and simply means that you finish the customization of the product at the last possible moment. When HP was shipping printers to Europe each printer was the same, but required a user manual in a specific language and a power plug that met regional standards. HP would build printers for France and others for Germany, ship them off, and find that they always shipped the wrong number. The product was highly important for the company but highly variable.

Last-minute Customization

HP learned to customize the product at the last moment by shipping printers without user manuals or power cords. The manuals and cords were added at a facility in Europe, so HP could cut inventory – and the costs associated with holding it – while increasing customer service levels. Engineers or designers can come up with solutions to make manufacturing flexible, enabling you to work around high variability.

© 2012 – 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