Many companies start Continuous Improvement initiatives with 5S, workplace organization. This reduces clutter in offices, warehouses and manufacturing floors and creates quick, visible improvements to jump start employee engagement in the process.

Another way to jump start the effort is through simplification. For example, companies can reduce the number of suppliers, the number of SKUs (stock keeping units, or part numbers) and even the number of approvals required to do just about anything in the organization.

When I first started in my prior position as VP, Operations at a rapidly growing manufacturer, I had to approve all purchase orders for manufacturing materials over a certain dollar amount. One day as I sat there signing a pile of POs, I asked myself, am I not going to sign any of these? Will I shut down production because I won’t sign a PO? Is there a better way to control the flow of materials than inserting myself as a roadblock?

From that point forward, I never signed another PO for production materials. The rule was, if the PO is within the plan, issue it. Make sure there are processes, reports and measures in place to be sure we aren’t building inventory or buying parts we don’t need, but otherwise, let it flow.

Even reducing authorizations helps increase flow, and cut costs and lost time. To start continuous improvement, simplify in every facet of operations and supply chain. That way you can begin to accelerate profits and growth.

© 2017 – Rick Pay – All Rights Reserved

Rick’s Materials Management Manifesto

At my first meeting with many companies, they’re often stressed by trying to deliver 3% to 5% per year cost reductions to their customers. They frequently have inventory turns of four or less, which consumes cash and erodes profitability.

Companies really can achieve dramatic improvement with profit numbers in the 20% of sales range and inventory turns over 12. Rick’s Materials Management Manifesto will challenge your thinking and put you on a path to world-class performance. Click here for an expanded description of all eight points.


  1. You can sell out of an empty wagon
  2. Don’t waste your buyer on buying
  3. RFQs increase costs
  4. Annual cost reductions of 3% to 5% are peanuts
  5. Unplug your MRP – it’s likely an ineffective buying tool
  6. Too many suppliers spoil the soup
  7. Manage products throughout their life cycle
  8. Consigned inventory can destroy supplier relationships


Supplier partnerships, process discipline and striving to improve flow though Just-In-Time inventory management can provide exponential improvements in profit and cash flow. Use Rick’s Materials Management Manifesto to guide your thinking and achieve world-class performance.


© 2017 – Rick Pay – All Rights Reserved

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.


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.


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

The Two Deciding Factors for Successful Change Management

Recently two of my clients were working on very similar issues. Each wanted to improve inventory turns, cut materials costs and boost warehouse productivity. One client (we’ll call them Client A) made breathtakingly fast progress, while the other (Client B) limped along.

What was the X factor that rendered one company so successful while the other barely made progress? Actually, there are two factors…

Get Engaged

Client A’s top management was engaged in the process. They monitored progress, made minor directional changes and developed a dashboard for the leadership team to measure results. Even though the project sponsor was out of town a lot, he stayed in close touch and provided the resources to move things forward.

Client B was less fortunate. While the top leader met with the team to launch the project, he essentially disappeared after that meeting. Internal resource issues slowed things down, there were no mid-course corrections, and no data was forthcoming to measure results.

The Right People

The middle management of Client A is committed to the project and is driving it relentlessly forward. These managers see that successful change will make their jobs easier and more fulfilling, and that they’ll be the innovators in their region of the United States.

Client B’s managers see the project as an interruption.

To successfully drive change in an organization, the two deciding factors are 1) engaged leadership, and 2) the right people on the team. These two things combined can lead to breakthrough results in record time.

© 2013 – Rick Pay – All Rights Reserved

Show Me the Money

Companies can typically save at least 5% on materials costs within six months by using a descending supplier year-to-date payments report from accounts payable. Here is an example of one company’s report and the opportunities for consolidation and savings:

This particular company had 375 suppliers on their list, which is small. I have a client who has 1700 suppliers on their list, which is a bad sign. When the supplier base is formulated correctly, the top three to seven suppliers will comprise 50% of spending. In this case, the top supplier is 37%, and the top three suppliers combined account for 54%, which is good consolidation. They are probably getting large volume discounts and saving on freight costs.

The Next Opportunity 

80% of this company’s spending is with the top 10 suppliers. While this looks good overall, the fact that we see sealants appearing so many times on the list shows that there is opportunity for further consolidation and potential savings. We don’t want to sole-source the sealants because that would increase risk in the case of supplier disruption, but rather there should be two suppliers for that category. I call this dual-sourcing the technology and sole-sourcing the part.

© 2013 Rick Pay – All rights reserved.

Reducing Materials Cost Volatility – Escalators

There are a number of ways to reduce materials costs or at least make them more predictable in volatile times. One of those is the use of escalator clauses in customer and supplier contracts.

Escalator clauses indicate that you and your customer/supplier agree that prices should change under certain conditions. When market conditions are volatile and you use longer-term contracts, commodity price changes can put you or your customer/supplier in a risky position. Worst case, they may lose significant amounts of money because of post-agreement price fluctuations. Note that escalator clauses work both ways, moving up and down based on a mutually agreed-upon benchmark such as Consumer Price Index, Chicago Mercantile Exchange or various industry benchmarks.

Escalator clauses are common in business-supply contracts, labor agreements, utility pricing and even leases. Over the last couple of years I’ve seen escalator clauses for fuel prices. I also know of several companies that use escalator clauses for steel and for molding resin (due to petroleum price volatility).

The essence of escalator clauses is that they work both ways, protecting the margins for both parties whether prices go up or down. Many companies think their customers won’t accept escalator clauses, but as long as they work both ways, they are in both parties’ best interest.

© 2012 – Rick Pay – All Rights Reserved

To Radically Reduce Materials Costs, Seek First to Understand

Many companies try to cut materials costs by simply buying better. That is a nice way to say that they try to negotiate lower prices, often beating up their suppliers in the process. In many cases, they change suppliers or expand their supplier base over time in an attempt to get better prices. Unfortunately, both of these practices introduce additional costs.

More Than Just Part Price

To reduce materials costs, the first place to start is by reviewing the components of cost. A close look at the materials section of the income statement reveals all of the items that get booked as materials costs. The cost of materials is much more than just part price. It includes freight, customs, scrap, yield, cost of holding inventory, quality, accuracy/inventory adjustments, tooling, and obsolescence. Often, in addition to the part price itself, obsolescence and inventory adjustments can be very large and usually present themselves as an ugly surprise at year-end.

Looking beyond part price to see all the elements of cost can reveal great opportunities. Those who seek first to understand those elements will find fertile ground for cost reduction.

© 2012 – Rick Pay – All Rights Reserved

Where to Apply Lean

Many companies begin their Lean journey by targeting labor productivity improvement and cost reduction. One of my clients found that labor was 9% of sales while materials was 45%. If this client reduces labor costs by 10%, they add only one point to their bottom line. A 10% reduction in materials, however, adds 4.5 points to the bottom line. With further analysis, they found that if they reduced overhead by the same amount, they’d see the same 4.5% benefit. In this case, my client will get more bang for their buck by applying Lean to materials and overhead.

As you develop a plan for your own Lean initiative (or other process improvement effort), it’s smart to remember that your business model includes labor, materials and overhead, and the greatest opportunity to increase the bottom line isn’t necessarily always by reducing labor costs. As you target your Lean initiatives, look for initial targets that have the highest return on investment.

© 2011 – Rick Pay – 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

Total Cost of Ownership: A Closer Look at Part Cost in the Decision to Go Off-shore

Total Cost of Ownership is a model that breaks the part cost into three major segments: pre-transaction, transaction, and post-transaction costs. Today I’d like to take a closer look at pre-transaction costs with a particular focus on China as a supplier. In a recent survey of 750 Supply Chain Managers worldwide, 37% cited China as their leading source of manufactured parts and materials outside their home country.

Pre-transaction costs

This includes engineering and design, materials requirements, supplier sourcing, visiting your suppliers before you start buying from them, and continuing to visit at least twice a year. Many companies calculate the cost at $3000-5000 for a week in China including airfare, lost time, hotels, food, etc.


Tooling in Asia tends to be extremely inexpensive, for example plastic injection molds can be one-tenth the cost compared to the US. The good news is that most injection molders are getting their tools built in Asia and then bringing them back to the US to run, so they can manage the whole process for you. The trick is in making sure the supplier is good so if there’s a problem you can get it fixed onshore.


Contracting can be very difficult. When I went to China I was fortunate to have an attorney who was both a judge in China and held a JD from an American university. We asked him to translate all our contracts into Chinese, and then translate them back. We discovered that there are sometimes no equivalents for technical terms, so our challenge was to come up with words that were descriptive and accurate in both languages. Things can literally get lost in translation.

Additional Considerations

Plans for adapting various systems, from computers to monetary systems and social structures like holidays – everything shuts down for Chinese New Year, and Europe closes up shop during August – are also part of your pre-transaction costs.

In my next post I’ll address the transaction itself and post-transaction costs.

© Rick Pay, 2011 – All rights reserved