3D Printing in Wholesale Distribution?

3D printing is rapidly changing the manufacturing landscape. Companies are using it not only to speed up new product development by allowing engineers to print prototype parts on demand, but also for lower volume production. The technology is moving rapidly in both plastic and metal applications.

I wonder if 3D printing might be a disruptive technology for wholesale distribution as well. Perhaps it’s the ultimate in Just-In-Time fulfillment for distributors. They could have printers right in the warehouse and when they get an order for a lower volume part, just print and ship. Inventory would be low or perhaps at zero stocking levels. As part specifications change, distributors could update the program and not worry about obsolete parts.

Going one step further, what if wholesale distributors or manufacturers provided 3D printing as a service directly at the customer location. They could lease the machines, keep them programmed and maintained, and provide the raw materials as needed on a Vendor Managed Inventory basis. This reduces the inventory in the total supply chain, provides the shortest possible materials lead-time and is a win/win for customers and suppliers.

Developing a supply chain framework using 3D printing could transform your business model. Using disruptive thinking is key to accelerating profit and growth. Are you considering disruptive ideas?

© 2015 – Rick Pay – All Rights Reserved

Think Inside the Box To Reduce Costs

One of the areas where manufacturers and distributors can save untold levels of cost is packaging. One of my clients will save about a half-million dollars by reducing the size of its boxes by half. The current box was designed by their marketing department, and is much larger than necessary with costly photos and finishing.

This client has redesigned the box to still be very attractive, yet take up half the space. It will be packaged and mailed by the content supplier, so it doesn’t have to be received, put away, picked and shipped by my client. Because they can now put twice as many boxes on a pallet, shipping costs are much lower, and the boxes take up less room in the supplier’s warehouse. This simple change is saving about $500,000 per year.

What can we take away from this?

  1. When designing packaging, include representatives from marketing, purchasing, the warehouse and your suppliers.
  2. Smaller is better. Packaging can still be attractive and functional.
  3. Simplify the process – have suppliers do vendor-managed delivery if possible. The fewer times the product is touched, the cheaper it is.

For more on vendor managed inventory as a cost-saving approach, click here for a short video.

© 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

Vendor Managed Inventory – Great for the Supplier Too

In a recent blog post I reviewed the benefits of VMI* to the customer, but there are great benefits for the supplier as well.

  • Develop a close long-term relationship with the customer
  • Become well-established (or even irreplaceable) as a key supplier
  • Increase exposure to additional sales/service opportunities
  • Smooth the flow of materials and revenue

Overall, a well-designed VMI relationship has great value for both parties, which is the hallmark of a partnership.

*Vendor Managed Inventory (VMI) is a type of auto replenishment system in which the supplier has access to customer inventory information and is responsible for maintaining the inventory levels required by the customer.

© 2013 – Rick Pay – All Rights Reserved

Benefits of Vendor Managed Inventory

Vendor Managed Inventory (VMI) is a collaborative approach that has great value for both the customer and the supplier. With VMI, the supplier has access to customer inventory information and is responsible for maintaining required inventory levels. It can be applied to more than just parts, and is often used for printed materials, supplies, equipment repair and so on.

Benefits to the customer include:

  • Reduced total cost of ownership
  • Improved service levels (lower stock outs)
  • Improved inventory turns
  • Reduced floor space
  • Reduced efforts on the part of buyers for replenishment
  • Reduced obsolete inventory

VMI can improve profitability and use of assets. Consideration needs to be given to which suppliers can be relied on, which parts should be covered, and what access the supplier will be given. Good planning and management are critical for success, but the rewards can be great.

© 2013 – Rick Pay – All Rights Reserved

Is There Cash Hiding In Your Warehouse?

Avoiding obsolete inventory is key to minimizing inventory holding costs. Besides the cost of capital, obsolete inventory can represent the largest component in the cost of holding inventory and can run to as much as 3% per month. Is your company dragging its feet when it comes to getting rid of obsolete inventory?

More than Just Coins Between the Couch Cushions

A company that I know was developing a vendor managed inventory program. As part of the program, they identified a large amount of obsolete parts that happened to be made of valuable base metals. Because of the increasing commodity price of the metal, when they recycled the obsolete parts they received payment for the metal that was actually higher than the original cost of the parts. Getting rid of obsolete inventory sometimes has more advantages than you’d expect.

Eliminate the Root Cause

The root cause of obsolete inventory is uncertainty in both supply and demand, which causes buyers to purchase more than they need in order to avoid stock-outs.

To reduce uncertainly, companies can use three tools:

1) Sales and Operations Planning (S&OP)

2) Auto-replenishment systems such as vendor managed inventory

3) Strong discipline in new product introduction

Cleaning House

Your suppliers can be a valuable resource in helping to get rid of obsolete inventory. Suppliers often know other companies that may need the parts and will often buy obsolete inventory as part of the process of setting up vendor managed inventory.

There are a number of other ways to get rid of obsolete inventory including: redeployment, returning to suppliers, donating to community colleges, giving/selling to employees and recycling. How about some spring cleaning?

© Rick Pay 2013 – 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

Three Steps to Highest Procurement Value

Here are three steps that will move you toward the highest value in procurement:

1) Use your suppliers

Strive to use Vendor Managed Inventory (VMI), get suppliers involved in design and concurrent engineering, ask them for suggestions on cutting freight costs, or using different materials than what you’ve been purchasing.

Reducing the number of suppliers can improve your relationships with your most important suppliers and get you lower prices by increasing your purchase volume. You can often cut the number of suppliers by one third. Running a vendor year-to-date payments report will reveal who your biggest suppliers are, and using that list you can find your best opportunities for cost reduction.

2) Make sure that all elements of cost are owned by the purchasing department

Until you own all components of cost you can’t work to lower costs overall. This goes back to the example I used in a previous post of a company who logistics costs were managed by a department other than purchasing. This separation made it almost impossible to take a TCO approach.

3) Identify and manage your cost drivers

When you understand what your real components of cost are, you can move forward. Ask the CFO or controller what your total costs of materials are. He or she will likely be happy to tell you everything that goes into the materials cost line on the income statement. Then you can find out what the gross profit margin standards are for your industry and understand how you’re doing by comparison.

Edwards Deming, in his Fourteen Points, said, “End the practice of awarding business on the basis of the price tag. Instead, minimize total cost.”

© 2012 – Rick Pay – All rights reserved.

Elements of Procurement and Real Supplier Value

Since taking a total cost of ownership (TCO) approach makes so much sense, why aren’t more companies using it?

1-    The purchasing department doesn’t control all the elements of procurement. For example, many companies place responsibility for logistics somewhere other than the purchasing department, so part price and transportation costs aren’t being examined as elements of total cost. If the purchasing department’s success is rated only by how low a part price they can get, it’s impossible to take a TCO approach.

2-    Companies aren’t focused on the real value their suppliers can bring them.  Many companies don’t use vendor managed inventory. When suppliers come into your warehouse to stock parts, they have the chance to see what you do and make suggestions for how they can serve you better and save you money.

One client who uses VMI found out about brand new packaging technology from their supplier. The new packaging is cost-effective, environmentally friendly and protects their product well during shipping. The product arrives undamaged, customers are happy, their reputation is great, and revenue is going up and up. All this because they trusted a supplier to come in.

In my next post I’ll discuss how the cost accounting system can reinforce or undermine a TCO perspective on purchasing.

© 2012 – 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