Don’t Waste Your Buyers On Buying

A buyer’s primary job is to buy, right? Many companies require that buyers or purchasers simply execute purchase orders; assemble, issue and score RFQs; and negotiate deals with suppliers. That is all low value work!

In most cases, the focus and yield from those activities is getting parts on time so as not to shut down production or miss order shipments, and to try to get materials as cheaply as possible to reduce materials costs. Often companies find that at best, those activities might reduce costs 2 to 5% per year, but in many cases, commodity prices drive materials costs, so even that level of performance is hard to achieve. Not only that, but the best suppliers often don’t respond to RFQs, so quality and performance may be substandard as well.

So what is the best use of buyers? Turn them into Supplier Business Managers, to develop relationships with suppliers that can yield from 5% to 20% reductions in cost! An SBM’s key responsibilities are:

  • Rationalize the supplier base to focus on the few key/best suppliers
  • Develop and execute the supplier partnership program
  • Minimize inventory through use of auto-replenishment systems
  • Provide supplier performance feedback
  • Conduct supplier visits to review performance, capabilities and opportunities for outsourcing
  • Provide forecasts of future demand
  • Monitor commodity cost changes leading to adjusted agreements

These responsibilities can lead to much broader cost reductions than just cheaper materials costs. The overall supplier relationship can provide savings in many categories leading to 5 to 20% annual reductions and much lower inventory levels, freeing up cash.

How do you use your buyers? Can they be a major profit producer for your company? If you would like to explore how to make that transition, contact me.

 

© 2017 – Rick Pay – All Rights Reserved

Reduce Complexity To Reduce Costs

Many executives ask me how to reduce costs more than the 3% – 5% often required annually by customers. Through many client engagements I’ve found that companies  can reduce costs exponentially by reducing complexity. Companies of all types complexify the simple by allowing numbers of parts, suppliers, employees and so on to increase over time without considering what that does to costs.

There are several things you can do to simplify processes and reduce costs:

  • Reduce the number of parts you carry – on an annual basis, eliminate those items that represent the least amount of sales in your portfolio. By developing a report on SKU movement, you can sort by number of units sold and see those SKUs that have low or no part movement. Eliminate the bottom 20% and you will reduce transactions in purchasing and accounting, warehouse space, cost of holding inventory, and obsolete inventory.
  • Reduce the number of suppliers you buy from – if you buy a particular part from more than two suppliers, not only are you increasing costs, but you’re also introducing variation in quality which can result in even larger costs. Properly reducing the number of suppliers per part does not increase risk as some supply chain professionals think. Conducting an annual supplier rationalization exercise provides opportunities to reduce costs and receive higher volume discounts, all of which can dramatically improve your materials costs as a percent of sales.
  • Improve product management through Ramp-down – this is the process of managing the backside of the product life-cycle curve. By managing older products and eliminating them in favor of newer products, not only do you keep your product assortment fresh, but you reduce the cost of obsolete inventory, reduce warehouse space taken by slow moving items and reduce inventory, thus freeing up cash.

Reducing complexity can have many benefits, not the least of which is dramatic improvement in profit and freeing up cash. Studies are easy to conduct which will show if you have overly complex processes and how to simplify to accelerate profit and growth.

© 2016 – Rick Pay – All Rights Reserved

Managing Volatile Demand (and Increasing Profit)

One of the big issues in inventory management is volatility: the variation in demand for a part or product. But volatile demand is more than just variable demand. It includes rapid and unpredictable demand, the worst kind. Most purchasing departments respond to volatility by bringing in more inventory to buffer the fluctuations. This not only consumes cash, it hurts profitability and increases risk.

There are three ways to manage volatile demand. The first is by partnering with customers to improve predictability through more accurate forecasts, smoother value chains and auto replenishment systems such as Kanban.

The second is to review the revenue flow from volatile items to see if the profit they generate is worth the risk and cash flow they bring. Simply put: if they don’t produce value, eliminate them.

The third is to manage demand the way Toyota and other companies do. Determine what’s available to the market place, decide how to allocate it, and that is what you ship. Demand management is actually a very effective means to manage volatility and improve profitability. The potential lost sales from underestimating demand is usually outweighed by the profit increase that demand management generates.

Are you managing demand effectively? Do you have excess inventory because of efforts to guard against volatility? Contact me to discuss volatility solutions for your business.

© 2015 – Rick Pay – All Rights Reserved

 

 

Accelerating Inventory Turns/Accelerating Profit

Situation:
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.

Solution:
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.

Results:
• 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

New Video Interview on Supplier Partnerships

As part of my participation as a speaker at the Institute of Supply Management International Conference back in May, I did a short video interview on what supplier partnerships really are, and what their true potential is. The interview is up now on the Supply Chain Brain website, which does require you to create an account, but if you choose to do so, please have a look – the video is listed under the All Videos category.

© 2014 Rick Pay – All rights reserved.

Getting the Highest Value in Purchasing

A video I made back in 2012 on the five stages of purchasing management continues to be the most-watched of my YouTube videos. It’s about the continuum of value in purchasing management and what the most effective companies are doing.

You’ll see Total Cost of Ownership there in the middle of the line, but over on the right are more sophisticated approaches like supplier partnerships, demand management, and design for supply chain management (DSCM). Where is your company on this continuum?
© 2014 Rick Pay, All rights reserved.

 

Inventory Management vs. Inventory Control

Inventory management and inventory control are both vital to improved performance in manufacturing, wholesale distribution and retail operations. Unfortunately many companies confuse the two, resulting in excess inventory and higher operations costs.

Inventory management is the process of making sure the right materials are in the right place at the right time at the lowest possible cost. Good inventory management leads to high levels of customer service, high inventory turns, good use of assets and increased profitability.

Inventory control is the process of knowing how much inventory you have and where it is. Good control results in smoother operations and improved purchasing productivity because knowing what you have (and where it is) saves time from ordering materials you don’t need to order, and from running around looking for parts.

Without good inventory control, inventory management becomes very difficult. Without good inventory management, customer service and profitability suffer. Both are vital to breakthrough operations performance.

© 2013 – Rick Pay – All Rights Reserved

Innovation Provides Future Growth Opportunities

A recent article in Industry Week suggests that innovation will play a key role in growth for manufacturing companies. According to an Industry Week poll, 44% of executives say they plan to increase their investment in innovation while continuing to focus on cost management and efficiency in operations.

Many of the new innovations involve partnering with both customers and suppliers for customized product development and improved designs. This not only reduces product costs but also accelerates speed to market.

In a recent blog post I cover the elements of advanced purchasing methods that encourage innovation. For additional information on innovative manufacturing and supply chain methods,  contact me or visit my web site at www.rpaycompany.com.

© 2012 – 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