What Got You Here Won’t Get You There

FreeImages.com/Krzysztof Baranski

This famous saying and book title by Marshall Goldsmith, the consummate management coach, applies to many things in our business lives, not the least of which is supply chain management strategy. I recently received a survey from a marketing company seeking to find out how companies were addressing performance improvement and risk mitigation in their supply chains. As I reviewed the survey, two things jumped out.

  1. Most of the issues were internally focused.
  2. The ideas they proposed as “leading edge” had to do with information, communication, tracking, improving current processes, and collaboration; the same old, same old.

If companies want to move to the next level of performance in their supply chains, they need to think differently as they develop their strategies. Otherwise, they’re trying to out-perform their competitors by doing the same things better. To reach world class, top 10% performance, companies need to think differently. How can they partner (not just collaborate) to improve supply chain performance? How can they become more agile to allow quick, dramatic improvements to take place? How can they leverage speed in everything they do?

Companies don’t need to just think outside the box, they need to do away with the box. Trying to do the same things better won’t get you there. Using the power of partnerships and world class thinking will.

© 2018 – Rick Pay – All Rights Reserved

Risk Management – Putting Out the Fire Before It Even Starts

FreeImages.com/Nick Benjaminsz

As supply chains become more global and the focus increases on JIT to boost speed and profitability, risk management becomes a key topic for supply chain managers and CFOs. What are the right risk management issues to consider? Many companies develop strong capabilities to react once an incident occurs,  like putting the fire out if your house catches fire. But how do you minimize the damage before it occurs?

First, consider what contingent action you will take. These actions include things like having the proper insurance in place to help recover from the incident. Did you know you could actually insure the supplier’s facility? You can also get several types of business interruption insurance to help make up for the lost revenue you might experience from the risk event. Talk to your property and casualty insurer and specifically ask about both business interruption and marine insurance.

Second, consider preventive action. This is the best way to manage risk. Develop risk programs with your key suppliers before risk events occur. Also consider Design for Supply Chain Management (DSCM) to design out parts that represent significant supply chain risk. Regionalization of suppliers helps to reduce the risk of natural disasters. Sole sourcing parts while dual sourcing technologies maintains the effect of volume to reduce pricing while simultaneously reducing risk.

Managing risk in a global economy is a high priority for companies today. Managing both contingent and preventive responses is critical for success.

© 2018 – Rick Pay – All Rights Reserved

Another Asian Supply Chain Interruption

One of the world’s largest container shipping companies, Hanjin Shipping Co., has declared bankruptcy protection in the US. This creates significant potential disruption to supply chains to and from Asia.

One major problem is that many ships are now sitting off shore waiting to be unloaded. Dockworkers are properly concerned they won’t get paid to unload the ships, so ports such as Long Beach are sitting idle while goods languish in ships.

If this isn’t a reason to examine your supply chains to see if they are properly designed with attention to risk, I don’t know what is. One would think the west coast port slowdowns a couple of years ago would have stirred this pot, but many companies have not adjusted their supply chains to manage such risks and now their goods are waiting off shore. If companies have just in time inventory systems, they are in trouble.

In light of the potential disruptions to Asian supply chains caused by economic, political and natural disrupters, companies should examine their supply chain strategy to manage risk. This is not to say they should not source overseas, but they should reconsider options and network design to minimize risk, maximize return on investment, time to market, profitability and growth.

© 2016 – Rick Pay – All Rights Reserved

How Supplier Partner Programs Can Reduce Materials Cost Volatility

There are a number of ways to reduce materials costs or at least make them more predictable in volatile times. One method is supplier partner programs. Many companies try to cut materials costs by being “tough negotiators,” but in truth they could get lower prices by inviting their suppliers to be part of the team.

Inner Circle

In supplier partner programs, companies bring suppliers into the inner circle, including them in product design efforts, communicating with them continuously, and providing detailed sales/product forecasts. The supplier wins because they know they’re getting the lion’s share of the company’s business for the part or service they provide.


Partnerships start by rationalizing the supplier base; reducing the number of suppliers for a particular commodity to a few certified, developed and trusted suppliers. Purchase volume per supplier goes up, materials flow is smoothed and the total cost of ownership drops significantly. As if that isn’t enough, supply chain reliability goes up and risk goes down. A true win/win for everyone!

© 2016 – Rick Pay – All Rights Reserved

Contingency Plans: Making the Most of Changing Circumstances

Every year for the past 35 years, Bend, Oregon has held the Pole Pedal Paddle Race comprised of downhill skiing, Nordic skiing, running, biking and kayaking. This year the lack of snow in the area meant that the Nordic races couldn’t be held and were replaced by a trail run. Teams that were ready for the change were more successful than those that counted on the Nordic leg for their overall success.

Many of the participants saw the change as “fun” and “kind of cool” (no pun intended). Triathletes in particular seemed to hold an edge in the new format. One radio station in Bend commented “there’s still the beer garden at the end,” a positive spin if ever there was one.

Businesses, too, need contingency plans, especially in their supply chains. Interruptions can occur for many reasons including weather, accidents, political events, social unrest, union conflicts (think of the west coast port slow downs) and many other events. Consider the risks you have and develop contingency plans to help mitigate those risks. You never know, the snow might not show up, but there’s always the beer garden!

© 2015 – 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



What Obsolete Inventory Can Do to Company Value

I recently attended a presentation on business transitions presented by Schwabe, Williamson & Wyatt in conjunction with GeffenMesher and Cascadia Capital, LLC. Hugh Campbell of Cascadia shared a story about a company that was going through the due diligence process for a company sale. The buyer found that the company had a significant amount of obsolete inventory. The buyer had a GAAP (generally accepted accounting principles) standard of one year for inventory, and required a restatement of the financial statements for the previous three years to adjust for the obsolete inventory.

The result was a significant decline in EBITDA (earnings), which reduced the company’s sale value by millions of dollars. Most companies’ sale value is calculated as EBITDA times a multiplier. For manufacturers, the multiplier is usually around five. So if a manufacturing company had to adjust earnings by $1 million in obsolete inventory, the sales value of the company would be reduced by $5 million.

Do you have a significant amount of inventory that‘s over one year old? Have you adjusted your financial reports to reflect that? Do you have processes in place to prevent obsolete inventory from accumulating? Are you thinking about selling your company, or transferring it to family or management in the next five years? It may be time to implement a program to prevent or reduce your exposure to a significant decline in company value.

© 2014 – Rick Pay – All Rights Reserved

Watch Out for the Mice

I was sitting in a restaurant toward the end of the business day recently talking to a CEO about his management team in operations. As we were wrapping up, I glanced across at the booth beside ours and there, under the table, was a mouse! He was a cute little thing, grey with a white belly, right out of a Disney movie. He seemed to be just looking around. I pointed him out to my guest, who exclaimed, “They must not have a vermin control program.” I just smiled and watched the mouse for a minute. He scurried over to the next booth.

As we walked out, I hailed the waitress. I motioned her to follow me and pointed out the mouse, now sitting in the middle of the lower section of the restaurant, still just looking around. The waitress let out a shriek and quickly headed away to get the manager. My guest and I left.

It was a good thing there weren’t very many people in the restaurant. Can you imagine the negative social network impact of that? Obviously management needs to tighten up their “vermin control” process and manage their risk. They should also monitor social networks for the next little while.

Are you ready for a risk event? Do you know what you would do if one occurred? Is your attention to detail such that you can prevent things like this from happening? What would you do if something like this happened in your business?

© 2014 – Rick Pay – All Rights Reserved

Six Ways to Respond to Supply Chain Risk

An attendee of the ISM international conference blogged a comprehensive review of supply chain risk management take-aways, including some points that I made in my presentation at the conference. He observes that supply chain risk management was one of the most popular topics at the conference, and comments, “What is driving such interest? Unfortunately, it’s real life experience.”

Check out his summary of six ways manufacturers can respond to supply chain risk. If you follow my blog and Executive Briefings, some of them will sound familiar.

© 2014 Rick Pay, All rights reserved.

How Real a Threat is Resource Scarcity?

The lack of critical raw materials is an important consideration in supply chain risk management. One argument says that when we run out of something we rely on, we innovate and discover a new substitute. In this article from the Supply Chain Management Review, the authors cite the transition from whale oil to kerosene as a fuel back in the mid-1800s.

While the article doesn’t offer any concrete answers, it takes a look at the thought-provoking area of resource scarcity as a supply chain risk management issue. These are important questions to ask as we refine our risk management plans.

© 2014 Rick Pay – All rights reserved.