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
Communication with suppliers is a vital element of forming a supplier partnership program, yet many (I would say most), companies don’t establish a solid foundation of communication. Here are four ways to super-charge your communication:
1. Get together face-to-face. Phone calls and emails don’t establish the depth of relationship that you’ll need for your supplier partnerships to succeed. Face-to-face meetings to discuss expectations, status updates, changes to products, designs, materials, forecasts and other important issues are critical. Meetings should be on-site, alternating between the supplier’s location and yours, especially for your top ten suppliers. Going to the Gemba (point of work) can help clarify your perception of the supplier’s capabilities and help them understand exactly how their product is being used.
2. Organize a Supplier Day. Invite your top 20 – 25 suppliers to an all-day event where your sales leaders present company growth plans and forecasts, your CEO shares the company’s strategy, and the operations and supply chain people present expectations for the year. This gives suppliers a window into your company as well as the opportunity to network with other key suppliers and find opportunities for cooperation.
3. Connect executive sponsors in your organization to their counterparts at the supplier. Establishing these connections adds depth to the relationship, and also allows the executives to contact their counterpart for support in solving any problems that arise.
4. Set metrics to clarify expectations and provide feedback to the supplier on their performance.
All of these tools can help you super-charge your supplier partnerships and get the most out of these important relationships.
© 2018 – Rick Pay – All Rights Reserved
How do you respond when there is a sudden, unexpected shift in either your customer base or supplier base? Recently Prime Minister May of Great Britain experienced that in the election, when she unexpectedly lost her majority in Parliament. She called for an election confident that she would pick up seats for her majority, but instead, she lost the majority. Apparently the people were dissatisfied with the slow speed of change related to Brexit.
Do you control your business throttle to achieve the speed you want to keep your stakeholders happy? In The Executive Command Center, your dashboard of business performance, speed is the big dial. If you aren’t experiencing the wind blowing though your hair, be prepared for unexpected, poor results.
© 2017 – Rick Pay – All Rights Reserved.
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
The Great Alexander generates a sales forecast
Some say “accurate forecasting” is an oxymoron. How often have you heard, “We can’t develop a good plan because we can’t get an accurate forecast from sales!”
Many companies base their purchasing plans on forecasts, those always inaccurate, often sandbagged predictions of the future that the sales team occasionally generates so as not to put too much pressure on themselves to meet their budgets. Right out of the gate, purchasing and supply chain planning is a seemingly impossible task.
But wait, there really is a way to overcome that gargantuan obstacle! If supply chain can be extremely flexible and responsive with only high level indications of planned sales, it is possible to provide exceptional customer service with low inventory and maximum profit.
There are four things supply chain and purchasing must manage to achieve the impossible:
1) Supplier performance
3) Product portfolio
In order to become highly flexible and provide world-class service, supply chain must make sure suppliers get the right material, at the right time, to the right place at the lowest possible cost. Next, supply chain must work with sales to manage demand. Toyota does this very successfully even though they have over a million possible permutations of their products. Third, the product portfolio must be managed to assure that products that actually sell are produced and kept in the warehouse. New product introduction and old product elimination must be handled deliberately. Finally, the inventory you do have must be accurate. You need to know what you have, where it is and its availability to be shipped.
By focusing on these four elements, supply chain and purchasing teams can overcome inaccurate forecasts and accelerate profit and growth.
© 2015 – Rick Pay – All rights reserved
It’s common practice in retail for suppliers to buy advertising space on store shelves, giving the suppliers a chance to increase their revenue and the store’s. Wal-Mart is taking this practice to a new level. As reported in Bloomberg Business Week, Wal-Mart is planning to charge suppliers for storing their merchandize at Wal-Mart distribution centers. At the same time, Wal-Mart continues to stretch out payment terms. Not only does this depress supplier profit margins, but now payments will be delayed depressing supplier cash flow as well.
Wal-Mart says this will simplify things, put suppliers on the same footing and reduce costs. This change was a surprise to the over 10,000 suppliers in the supply chain. Wal-Mart is encouraging suppliers to offset the cash flow issues with loans, coincidentally from a Wal-Mart financing program. Wal-Mart claims the big benefit to the suppliers is increased sales. The problem is, given the double whammy of lower margins and depressed cash flow, suppliers would need a massive increase in volume to make up the difference.
Smaller suppliers in particular will be hurt, possibly beyond their ability to accept the change. Many banks will only allow receivables over 90 days in their credit lines, so suppliers that need those lines to finance operations will find less working capital available. In addition, their depressed margins may be a yellow (if not red) light on company performance. Large suppliers can push back, but smaller ones will be shown the door if they don’t acquiesce to Mal-Mart’s new demands.
Partnerships are based on trust and relationship. They represent a win-win for both parties, working together for the common good. Do Wal-Mart’s new policies sound like a partnership to you?
© 2015 – Rick Pay – All Rights Reserved
Boeing is facing an unprecedented ramp up of production for its 737 Max aircraft. According to an article in the Wall Street Journal (August 21, 2015 p. B1 – Boeing Scrambles to Get Key Part), Boeing has the opportunity to go from less than one aircraft per month to over 50 by 2020, the fastest ever increase in jetliner production.
But there’s a problem. It seems the supplier of a key engine part may not be able to respond to that level of growth. While Boeing is confident in its own processes and their ability to ramp up, one part in their supply chain could hold them back. This is the essence of Benjamin Franklin’s proverb, “for want of a nail the shoe was lost.” Many companies fall into the trap of certifying suppliers at current demand levels without exploring their capability to ramp-up rapidly in response to new market demand.
Being ready to ramp-up and ramp-down can prevent excess inventory and lost sales. Is your supply chain ready for a fast ramp-up? Can your suppliers (who have performed well in the past) respond to a significant change in demand?
© – 2015 – Rick Pay – All Rights Reserved
If you’re not developing partnerships with suppliers, you could be leaving money on the table…a lot of money. A recent article in Industry Week cited a survey of 435 top automotive suppliers, which found that the Big 3 (Ford, GM, FCA) and Nissan had weak supplier relations, costing them over $2 billion in sales in 2014. Those relationships were based on pressure to cut costs using adversarial approaches. Suppliers feared retaliation if they didn’t comply.
The survey suggested that the fault lay with the buyers. Top management wanted to improve relationships, but they couldn’t because GM, for example, has over 600 buyers. Give me a break. Doesn’t management control or influence the people who work for them, and isn’t management driving the effort to cut costs? While they may not be directly ordering their buyers to beat up suppliers, corporate culture and short- to mid-term focus on meeting Wall Street expectations are driving the buyers’ behavior.
Toyota and Honda, on the other hand, had good supplier relationships and achieved many of their cost targets through “respect for the individual,” a basic tenet of the Toyota Production System.
Supplier partnerships are based on trust, respect and the goal of reducing the total cost of ownership, which goes well beyond part price. I know of one manufacturer that wanted to be their supplier’s most profitable account, while the supplier gave the company world class pricing. The company achieved 23% profit before tax and inventory turns north of 17 due to profitable partnerships.
© 2015 – Rick Pay – All Rights Reserved
Paying suppliers faster can actually increase profitability and strengthen your supplier partnerships. Most accountants will tell you to slow your payments to suppliers, thus building accounts payable and allowing your suppliers to finance your inventory. It’s a basic cash flow principle. But this practice has several downsides.
First, your suppliers will figure out how to charge you interest on your debt to them, especially if it’s more than 30 days old. They may not charge direct interest, but you better believe it’s buried in the price somewhere.
Some companies really stretch out their supplier payments. One large company pays in over 100 days. For their small suppliers, this creates a terrible cash crunch and can even threaten their existence. Remember, most banks won’t lend on accounts receivable that is over 90 days old.
Take Advantage of Discounts
Second, using very short payment terms is a strong lever in negotiating early pay discounts. I know a company that got a large cash infusion and took advantage of the one time opportunity by offering to make their payments (which were usually around 45 to 60 days) within 10 days if the suppliers offered an early pay discount. Most did, and the discounts ranged from 2% to 3% and more. For middle market companies, this can represent hundreds of thousands of dollars in added profitability.
You can finance this by reducing your inventory and collecting your receivables on time; you don’t need to go to the bank or investors the find the money. Those two actions also produce even more profit, and soon the value of your company begins to really move up.
© 2014 – Rick Pay – All Rights Reserved
Many companies are trying to reduce their inventory to free up cash or create additional space for production or new products. Often, companies believe they need additional floor space or new technology in order to optimize storage and inventory processing. What I have found over my career (both in warehouse and manufacturing management) and working with clients in manufacturing and distribution is that you can uncover as much as 25% to 40% additional space simply by getting rid of clutter!
Clutter comes in three forms – first there is actual clutter: things you store that you don’t really need. This step is like cleaning out the garage and getting rid of old equipment, old computers, boxes of records, etc. One client found two barbeques buried under clutter that they had bought for an employee picnic, but forgot they had. Another had a couple of vintage cars parked in the middle of their warehouse.
Second, there is old inventory. Many companies hold on to old inventory because they might be able to sell it sometime. They claim it really isn’t obsolete, so they hang on to it. I call that “GSM” – glacially slow moving inventory. Since the cost of holding inventory is typically north of 2% per month, there is a cost to sitting on it. Get rid of it.
Third, consolidate suppliers. Having multiple suppliers often means having multiple parts that do the same thing. The more part numbers, the more space is required to store it. By getting rid of suppliers (supplier rationalization), you’ll reduce part numbers, probably lower your materials costs and release space for other needs.
Clutter comes in many forms. Do you have clutter in your warehouse or manufacturing facility? Can you see it? Do you know how to get rid of it?
© 2014 – Rick Pay – All Rights Reserved