Posts Tagged ‘Inventory’

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The current collapse in the US housing market and the ensuing financial crisis which lead to one of the worst recessions in the post War era, has prompted governments of all stripes to significantly increase spending. What the short and long term implications of these actions are not fully known at this time, but can be extrapolated based on past events and economic theory. How these unfolding events affect manufacturing and the supply chain will have a very significant impact on the future profitability all companies involved in this space.

What we can foresee happening is the massive amount of deficit spending by countries already financing government debt will place greater demand on the public and private debt markets. The implications for long term interest rates and inflation are not good. With so much demand chasing a finite amount of financing, long term rates are bound to begin rising. Add in the inflationary effects of ‘quantitative easing’ (governments printing money to flood the financial system), and the need to raise interest rates even further to hold inflation down becomes apparent.

What does this mean for the supply chain and its contribution to a company’s health and ability to grow earnings? As interest rates rise, the cost of borrowing will rise with it. This will have a direct impact on the carrying cost of inventory, which in turn will have a direct impact on a company’s bottom line, and its ability to compensate it employees and shareholders. In order to mitigate these negative consequences, companies will be forced to reduce their carrying costs dramatically, which means reducing the levels of inventory they will be able to carry. However, in an expanding economy stimulated by government intervention, demand will begin increasing, putting companies in danger of stock outs or lost sales.

Company management must therefore strive to reduce these risks as much as possible, and in order to do so, best of breed sales & operations planning (S&OP) tools will be essential. Due to the uneven recovery anticipated, correctly reacting to and meeting supply shortages and demand fluctuations will be critical to a company’s ability to satisfy the customer and generate profits. The ability for corporate planners to leverage all the data in the companies supply chain (not just a few ERP ‘silos’) and collaborate within the entire supply chain will directly affect the operations performance of all units of the business. Add to that the significantly greater cost of transportation and longer lead times inherent in an outsourced supply chain, and the ability to plan and execute to ever more restrictive inventory guidelines while maintaining order fulfillment goals becomes even more challenging.

A good S&OP solution should include four key features : 

1. Ease of combining disparate data sources into a single unified whole
2. The ability for multiple users located in different areas and parts of the supply chain to interact in a collaborative way
3. The ability to simulate and determine optimal scenarios in order to arrive at the best plan possible
4. The ability to execute on the plan once it is derived, and fine tune it to meet changing circumstances

These necessary S&OP systems cannot be implemented in a day, so the time to prepare for the coming increased supply chain turbulence is now, before your company is caught in a downward performance spiral it cannot get out of.

I saw a discussion posting on the Supply Chain Movement discussion group in Linked-in.  The discussion was around the fact that a company had difficulty getting accurate forecasts.  To compensate, they’ve been increasing their buffer inventories and were looking for metrics to monitor their inventory levels.  There were many suggestions around the best metrics to track and a couple suggestions for increasing forecast accuracy.  All great stuff.  I had a different approach that I thought I would discuss here.

As was pointed out by one of the commenters, there are strategies to improve forecast accuracy that should be explored. The problem is that no matter how much you try, the forecast is always going to be inaccurate to some degree. Traditionally, we would add buffer inventory to cover the demand fluctuations, but this is expensive. So how do you deal with forecast variability and reduce inventory costs? It comes down to your ability to respond when changes occur.

There are two factors to being able to improve responsiveness; 1) Reduce replenishment lead time - Use lean techniques to evaluate your value stream and reduce lead times. Most inventory levels are maintained to cover demand during lead time. Safety Stock formulas use variation during lead time as a key factor. Reduce your replenishment lead time and you can reduce inventory levels. 2) Reduce the lag between sensing a demand change and reacting to it. In other words, how long does it take before the event (a new order in excess of forecast for example) is recognized, the impact understood and an action plan is in place?

In many traditional systems, this can take days. This is time lost before the supply chain even knows about the change! Why so long? Traditional ERP systems perform planning in a batch process that can take hours to run. Often, this means MRP processing is run daily or sometimes weekly. This means that an order added first thing in the morning doesn’t get visibility beyond the top level assembly until after the next day. Then we still need to determine if we can accommodate the change and if not, what changes need to be made to the plan to make this happen. Traditional ERP tools are just not responsive enough.

What is needed is a response management tool. A response management tool provides visibility to the entire supply chain, models and emulates the ERP logic in each ERP system in the supply chain, allows the creation of simulation scenarios to try different response approaches, provides collaboration capabilities to bring those that can contribute together quickly, provides reporting tools including comparative scorecards that allow you to evaluate the impact of a change and the effectiveness of your solution. Finally, once the decision is made, a response management tool allows you to communicate the changes throughout your supply chain so that all are in alignment.

Reducing your replenishment lead time and improving your ability to sense and respond to changes in demand can result in the ability to absorb some amount of forecast error while lowering inventory levels.

For most of us, we’re experiencing unprecedented economic challenges. The implications to the supply chain management profession are profound. We’ve gathered some of the industry’s brightest minds to discuss these challenges and seek innovative solutions. We hope you enjoy the Kinaxis Supply Chain Expert Series as we challenge these experts on these issues.

Dave Blanchard
Editorial Director/Associate Publisher
Material Handling Management
Logistics Today

David Blanchard is the editorial director of Penton Media’s Supply Chain Group, which includes
Material Handling Management and Logistics Today. He previously served as editor-in-chief of IndustryWeek. He is also the author of Supply Chain Management Best Practices (John Wiley & Sons, 2007), with a second edition forthcoming in 2010.

Kinaxis: We are experiencing a rapid and perhaps long-lasting downturn in the economy.  What lessons can be learned from the downturn that can be applied to supply chain management in the short term and in the long term?

Dave: All business is cyclical, although based on some of the more hysterical reporting from the mainstream media, you would think we’ve never seen a downturn before. In the course of writing my book, Supply Chain Management Best Practices, I discovered that top-performing supply chains consistently do things differently than everybody else. They relentlessly attack their inventory problems, they commit resources to improving customer service, and they partner with their key supply chain partners to ensure they’ve got the best transactional data at all times.

Supply chain success requires commitment at the highest levels of a company. “Short-term supply chain management” is something of a misnomer since the whole idea of SCM involves the integration of processes and activities within your company and outside the four walls to your customers and suppliers. But when things aren’t going well, short-term reactive thinking tends to trump long-term proactive planning. For instance, a recent front page article in the Wall Street Journal points out that electronic component manufacturers probably overreacted when the downturn hit and cut inventories too close to the bone; as a result, they cost themselves sales by not being able to adequately respond to the demands of the marketplace. While nobody wants to be stuck with inventory that doesn’t move and has to be warehoused, cutting production and workforce simply for the sake of cutting is a bad idea, too. Hence, it all comes back to having as clear and accurate a picture of the total supply chain as possible.

Kinaxis: What specific supply chain initiatives can be applied in the short term that will have greatest effect on a company’s financial performance and sustainability?

Dave: Again, the goal of supply chain management isn’t necessarily focused on short-term quick-fixes, but that said, there are plenty of problem areas that you can address by taking a supply chain approach to them, rather than the more typical silo approach.

Supply chain people are always talking about the Perfect Order, getting the right product in the right quantity from the right source delivered to the right destination in the right condition at the right time at the right cost. So any company looking for some of that short-term “low-hanging fruit” can start by addressing whichever area of their supply chain is the least perfect.

Whenever one of these “rights” isn’t met, somebody in your supply chain is going to bill you for the discrepancy. Customers today are very, very picky. They don’t want a truck to pull into the dock five hours early, and they certainly don’t want it there five hours late. They’ll give you a window of opportunity, but if you don’t hit it just right, you’re going to pay more. Similarly, you’re going to pay more if you don’t deliver the right amount of widgets to your customer, and you’re going to pay more if some of those widgets are damaged in transit. So achieving the Perfect Order translates into “don’t spend a dime more than you have to, but make sure you do everything right”

Focus on where the most money is spent or where the most network disruptions occur. Inventory optimization seems to be where a lot of companies are focusing their attention, and rightly so since it can pay off both short- and long-term: carrying less inventory when the economy is down, and turning more inventory when the economy is up. In either situation, the ideal is to carry the “right amount” of inventory.

Kinaxis: Outsourcing has been widely adopted in the developed world over the past two decades. Will the trend of using off-shore contract manufacturing continue, or will near-shoring and even local sourcing become more dominant?

Dave: I’m sure U.S. companies would love to hear that near-shoring is the coming trend, but there are only isolated pockets of activity to suggest that might be the case. The reality is, manufacturers are going to continue seeking out the least expensive alternatives to produce their goods. If your competitor can make their widgets cheaper overseas and then sell them for a dollar less here in the United States – even after factoring in the transportation costs and the longer supply chain cycle – then unless you can find a competitively-priced domestic source, chances are you’ll be off-shoring some of your production, too. If the economy was more robust right now, the near-shoring trend might be more popular given all the negative reaction to tainted products overseas.

“Outsourcing” and “off-shoring” aren’t really the same thing, though. The idea of using a third-party to perform key logistics tasks, such as transportation and warehousing, is part-and-parcel of the 3PL movement, and that trend will continue to become more dominant. The reason for that is simple: There are some jobs that you’d rather not do yourself, such as maintaining a private fleet of trucks, so if you can outsource that activity to a third-party specialist, you can concentrate instead on your core competency. So 3PLs are here to stay.

Anybody that knows me can tell you two things about me right away. One is that I travel a lot and the other is that I love cars. All you have to do is look at my garage, and even my cubicle, and you can see the interest. I have pictures of vehicles everywhere that I’d like to own.

On a recent vacation with my wife, I experienced what can only be described as a ‘missed opportunity’ that I could directly relate to inventory management. More specifically, excess inventory.

We had flown to Las Vegas where we had planned on spending a couple of days, followed by six days of driving throughout Arizona and California. Being a car lover, I had arranged for a rented convertible but, given six days and two people, one with enough room for luggage.

When I went to pick up the car, I was offered an upgrade to a Corvette convertible. You can’t describe the look on my face as I realized that this was a wonderful opportunity and, at the same time, one that I had to turn down. You see, two backpacks, one duffle bag, and one largish suitcase just won’t fit in to the trunk of a Vette.

There really wasn’t any need to discuss the situation until I began to evaluate our ‘inventory position’. Unfortunately, I had left the packing to the ‘Manager’ and didn’t have any visibility in to the ‘on-hand’ articles.

Had I have had the foresight, and visibility, I may have questioned the need for six pairs of shoes when we were only planning for 8 days ‘production’. I may have questioned the ‘carrying cost’ of a hair dryer when there is generally one supplied at each stop. In hindsight, I may have even suggested staff reductions but, we were too close to an anniversary.

Ultimately, I had to take responsibility for not keeping a close eye on our inventory position and subsequently missing an opportunity.  I should have had the foresight to put tools in to place so that I could review our on-hands and possible make recommendations. I did not manage well initially and ultimately paid a price.  Next time, something is staying home…….

For anyone that knows me or has spoken with me will know that I am not a native of Canada. I have been in Canada for around 30 years so consider myself well naturalized.

To the surprise of many, not all Canadians are either Lumberjacks or Hockey players.  But I am sure most Canadians at some time in their lives have wanted to be one or the other.  Not being a player of sports, I recently fell into the Lumberjack category. So last winter on one of my trips to my local hardware store I found a great starter chainsaw on sale (red tag, not plaid).  I could not wait for the weather to get warmer so I could try out my new found hobby.

A few weeks later it was time and all my impatience was finally subdued. I had a great time cutting and clearing chunks of wood from the bottom acre of our lot. After a couple of hours though I noticed that the saw chain had become blunt.  So, that was it for the day until I could get the saw chain sharpened.

I talked to many experts in the area as to where I could get the sharpening done and had a list of people to contact, but all through my conversations was advice that I should have two chains - one in use and one spare. Great idea, so another chain was now on my shopping list.

So back to the hardware store I went, armed with the manufacturer’s saw chain number and model number of the saw.  I knew I would need this from my experience in the supply chain (forgive the pun) world as suppliers can’t do much without the correct SKU.

I met a lovely lady at the service window who told me she would have to contact the manufacturer as they did not have stock of the chainsaw. She took my phone number and said she would call me when she had some answers.  Oops. I am thinking this may not be such a good experience. Anyway, later that day the phone rang and Kathy informed me that the chainsaw I had purchased at such a wonderful cut price was obsolete.  Double oops.  She continued to tell me that the manufacturer did say they may have some excess inventory of the saw chain and would look into it. She promised to call me again when she had further information.

I had not had time to digest what she had told me - was this the end of my new found hobby? The phone once again rang and it was Kathy.  She told me that the manufacturer was going to send me a new saw chain free of charge for the inconvenience. I did not really understand at the time why but I did think about one thing.

This particular manufacturer in a very short period of time had reviewed the model and part numbers and, although they had realized they were obsolete, was able to quickly find out that they had excess inventory of the saw chains and was willing to send me one.  What wonderful news for me.  More to the point was that the individual at the manufacturer obviously knew the difference between obsolete and excess: obsolete being “never to be used again” and excess being “supply that I have no demand for.”

I obviously do not know if his decision was supported by an enterprise application, but it was nice to see a manufacturer that to me was keeping the customer satisfied by using an obsolete product to further the customer’s confidence and now loyalty. The whole success is in being able to identify “obsolete from excess” inventory.

As a foot note the make of the chainsaw was ‘Yard Man’ by MTD.  MTD uses Kinaxis RapidResponse at some of their divisions but I am not sure at the time of this writing if the division that  supplied me with the saw chain uses RapidResponse.  But it does tell me one thing - this company has customer satisfaction as one of their motivators.

The white paper “Inventory management: inventory rationalization and right sizing strategies” points to the desperation of the current economic conditions , the critical role of supply chain management, and the undeniable need for the proper supply chain tool for monitoring, modeling, planning and alerting. As stated in the paper, many companies have lost the battle for profitability and have devolved into a survival mode.  i.e. the US auto industry.

Bad times will always highlight the poor decisions of the past. Unfortunately, too often the current economic conditions, good or bad, become the excuse for not making the right decision in the present. In good times, management can become complacent with the security that they are doing good. For those times, people need to be reminded of two clichés:

• The number one enemy of “best” is “good
• Better to dig a well before you are thirsty

There are many clichés that could be applied for bad times also. An expression that a mentor of mine told me in my younger days was, ‘If you can make dollars for pennies, it is not the right time to save your pennies.’  In bad times an understandable temptation is to avoid all expenditures. Instead care must be taken. Even more so in bad times the supply chain/inventory issues become like an anchor around the neck. The key is not to grow inventory in these times. The careful investment in supply chain processes and technology can lift the anchor, and bring the dollars for pennies.

The bottom line is that it is always the wrong time not to have the right tools and processes, especially for supply chain management. In the paper, Kerry Zuber goes through the many supply chain risk points and variables. He covers supply chain interruptions, both routine and catastrophic; demand volatility; buffer stock and buffer stock positioning; product life cycle; market and competitive positions; lead-time; waste elimination; lean manufacturing; just in time inventory, etc.  All of the different elements within the supply chain must be wisely balanced and integrated with appropriate practices applied to the proper conditions.

With the business environment in an extreme state of flux the supply chain tools and processes must be adaptive to the ever changing business needs.  Yesterday’s answers no longer apply to tomorrow’s questions.  In these depressed economic times, the companies that will survive and thrive will be those who invest wisely in, and pay acute attention to, their supply chain processes and tools  Short term cost cutting or avoidance measures can threaten the long term viability of a company.  Companies must be careful to understand the opportunity to use supply chain management as not only a means for survival, but a competitive weapon.

The North American Indians commonly communicated via smoke signal. Each tribe had their own signaling system and understanding. A signaler started a fire on an elevation typically using damp grass, which would cause a column of smoke to rise. The grass would be taken off as it dried and another bundle would be placed on the fire. Reputedly the location of the smoke along the incline conveyed a meaning. If it came from half way up the hill, this would signify all was well, but from the top of the hill it would signify danger.

Native Americans on a painting by Frederic Remington

In our supply chains today (although we don’t use Smoke) we do use visual signals to identify demand\stock outs, in Lean Manufacturing and Just In Time Inventory Systems these signals have come in many ways; the flashing of a light, the reaching of a mark on a bin, an empty inbox on your desk, and countless other methods. More commonly today thanks to the creation of automated alerts and the world wide web, it is within seconds that a supplier can be notified of a new demand requirement. Not only that but sophisticated systems check stock and availability and also automatically respond with the expected delivery date of a demand request.  It’s a far cry to think that manufacturing systems are based on smoke signals but never the less one of the most important things in the supply chain world today is the speed at which these age old visual signals can be sent, addressed and resolved to meet or exceed the one thing we all like to hear …….”Customer Satisfaction.”  Keep the home fires burning as the fuel of our fire is still merely a signal. Don’t forget it is not as easy as lighting a fire but the supply chain today needs to be linked with the use of today’s technology and the most important resource our people. Many tools are available which allow quick response to changes but the people are still the key.

Reading Kerry Zuber’s white paper, “Inventory management: inventory rationalization and right sizing strategies“, I was struck by the increase in complexity of inventory management in an outsourced environment.  It’s a little like coordinating the neighborhood barbeque rather than planning your own dinner party.   While a dinner party can certainly be a lot of work, I’ve always found it less risky to personally invite my guests, do my menu planning and food shopping, and prepare the meal itself.  “Demand planning” is easier, as I’m talking directly with the people involved, and I know they’ll let me know as soon as they can if their plans change.  There still may be some short notice guest additions, or some people may have food allergies, bigger than usual appetites, etc.  But it’s not so difficult to plan for this level of variation.  I  can buy some extra ingredients, or even prepare an extra main course, as I have visibility of how  I might use this “safety stock” in the future in my own kitchen.  And I know what’s in my fridge and can usually come up with some alternate dishes for those surprise vegetarians in the group.

But consider the neighborhood barbeque where people are a little more casual about communicating their intent to attend (who do they tell?), and  responsibility for food provision is dispersed.  Food supply is riskier when, say, Chris and Anne have a family emergency and are called away, and Dave and Lynne bring along their young daughter Katie’s T-ball team to celebrate an unexpected victory.  Is there enough of the right food?  Do you feed steaks to these young girls when hot dogs were planned for the kids?  And, by the way, volume and food mix  aren’t the only problems, as no-show Chris and Anne were the sole providers of both the buns for the hotdogs and the chips to scoop up Marg’s special home-made salsa–a very real “supply disruption”.   There’s a looming disaster here.  A combination of the inventory planning strategies that Kerry alludes to may apply:  extra hot dogs ready for cooking, extra steaks (perhaps still frozen at the contributing families’ homes) available for further prep if needed, multiple providers of low cost hotdogs and buns.  But most critical of all is the overall coordination to ensure that inventory management at each level of the neighborhood supply chain is considered so no one goes hungry.

As the sun neared the horizon, the wind was still blowing almost 25 mph and I thought I could get at least one more wind surfing run into the middle of the Laguna Madre from the South Padre Island shore.   I was at approximately 1.5 miles off the beach when the boom suddenly snapped and I was violently thrown into the 30 mph path of my own board.    Fortunately the razor sharp fin missed me, but not the bulk of the board and I now carry some new bruises.   Recovering from the crash, I glanced at the distant beach and realized I was in for a very difficult time getting back to shore.    The good news was that in the Laguna Madre, the average depth of the water is less than 4 feet and you can literally stand in the water regardless of the distance from the beach.      So as I trudged through the water dragging the windsurfer, I had plenty of time to contemplate the current economic situation in South Padre Island.   

The friend that had convinced me to join him on this holiday had commented on how badly the area had been hit by the plunging exchange rate between the Mexican Peso and the American dollar.   Typically, over the week preceding Easter Sunday, the hotels along the beach in South Padre are filled to capacity with Mexican Nationals who choose to spend the holiday north of the border.    In years past, the volume of tourists is so far above the average that the stores shelves are emptied early in the week of such staples as bread, and water, and my friend lamented over the difficulties this often presented.    I naturally commented on the crazy fact that a known and predictable event still results in empty store shelves.   Why wouldn’t stores stock up for the event and take better advantage of this revenue generating opportunity?      A little more investigation revealed that the stores do make a moderate attempt to stock up, but apparently never to the degree warranted.  

This year seemed to catch everybody by surprise.   When the Peso plummeted, so did the hotel reservations and naturally the consequence was a glut of supplies at not only the grocers, but at the tourist stores as well.   “Special” sales were being advertised everywhere to deal with the excess inventory and revenue shortfall.   I naturally wondered how much of the excess inventory was avoidable.   The Peso began falling weeks before the Easter Week and a quick check of the reservation bookings at several of the larger hotels would have revealed the pending tourist shortage problem.   Had the business been tapped into these early warning systems perhaps they have could have avoided some of the cash flow problems that the excess inventory obviously introduced (hence the special sales). 

Take a lesson from the stores in South Padre Island and question whether your company has the tools to monitor and alert users to business conditions that could harm your business.   Early warning systems will often make the difference between the ability to profitably respond or at least minimize the cost or consequences.

The latest edition of the IndustryWeek Manufacturing Business Challenge is out.  It is entitled “Poor inventory management angers customers and suppliers.”  The challenge profiles a manufacturer trying to implement lean manufacturing processes but struggling to get their inventory levels right.  Too much inventory has cost implications that negatively impact operations performance and too little inventory undermines customer service and puts revenue and market share at risk.

Solutions are proposed by Kinaxis and Nari Viswanathan, vice president and principal analyst, Aberdeen Group.