I read a lot of books.    I typically have a few books “in the queue” but occasionally I’ll run out of reading material and have to wait for my next trip to the city to buy more.   When I travel, I’ll bring the book I’m currently reading and one or two more just in case I run out during the trip.  I’ll often re-read books I’ve enjoyed so I tend not to sell or give away books I’ve already read. As a result, my book shelves are stuffed way beyond their capacity.

So, when the Kindle came out a few years ago, I watched with interest.  There were still a few bugs to work out, so I waited.  The Kindle was also kind of expensive and…oh yeah…it wasn’t available to us cave-dwelling Canadians.  The Kindle 3 was announced in July.  It had some nice new features and a great price and was available north of the border, so I decided that I would treat myself for my birthday and ordered one on August 17th.

When I placed my order, Amazon couldn’t tell me when my new Kindle would ship.  Hmmm.   Yesterday, a couple of days into September, Amazon STILL couldn’t tell me when my Kindle will ship…not online anyway.  What’s going on?  Do they honestly not know when they can ship my product?  Is the date so bad that they are afraid I’ll go elsewhere?   Those among you that have been involved in supply chain, customer service or sales, know that the only thing worse than not shipping a product on the date a customer wants it is not being able to tell the customer when they can expect it.  

So what is the cause of the delay?  Bad Forecast?  Supply issues?  We just don’t know and likely won’t know until Amazon tells us (if they ever do). Regardless of the cause, what is stopping Amazon with providing me with a delivery date?  We all know that there are supply chain analytics available that can be used to identify an expected ship date.  Perhaps, being new to the brand owner /  manufacturing side of things, Amazon might not yet be aware of what is possible with good supply chain software.

Desperate for Amazon to tell me where the heck my Kindle is, I broke down and called customer service and finally got an answer that it should ship likely on September 10th.  Why that date wasn’t or couldn’t be provided online when I checked the status, I don’t know.

As someone who understands the complexity of the supply chain, I know that sometimes we can’t ship when a customer wants a product.  However, as a customer, I want to know when you CAN ship my product.  Amazon, you gotta give your customers any insight you can….and don’t make them work for it!

The WSJ article, From Snowmobiles to Cellphones, a Scramble for Parts, (paid subscription or preview sign-up may be required) further notes that companies have had to reconfigure offered products due to persistent supply shortages. It notes that shortages of transistors, capacitors and integrated circuits became pronounced in the first quarter, and persist in the second quarter. Telefon AB L.M. Ericsson indicated that shortages cost the company $400-$550 million in sales and delayed shipments, and Royal Phillips Electronics, Polaris Industries Inc. Motorola and Whirlpool are also mentioned as being impacted. Motorola CEO Sanjay Jha  summed it best noting that his company is scrambling in a “constrained environment.” Companies utilizing current hard-to-find components are seeking their own fixes which include offering customers different features or alternative components and/or technologies.

While it is obvious why Ericsson, Philips, and Motorola are affected by electronics component shortages, what is interesting is Bob’s inclusion of Polaris and Whirlpool in the list of companies. The original WSJ article clearly focuses on electronic parts shortages. Polaris makes snowmobiles and ATV’s. Whirlpool makes dishwashers, dryers, etc.  What does this have to do with electronic parts?  Well, a lot actually. I remember working on a project at Volkswagen in Germany in the late 1990’s shortly after they had just come out with the Golf Mark IV.  I don’t remember the exact details but the number of chips in the Golf had gone up from about 5 in the Mark III to about 50 in the Mark IV. Yet the demand that this represented for the chip manufacturer was still relatively low compared when compared to the demand from electronics companies such as Ericsson. The difference in the relationship with the more traditional Volkswagen suppliers, who made mechanical components for the Golf, was profound.  Whereas the chip demand represented a lot less than 10% for the chip manufacturer, often the demand from Volkswagen for the mechanical component suppliers represented well in excess of 30%-40%, sometimes in excess of 75% when factoring in aftermarket sales. Clearly Volkswagen had a great deal more leverage with the mechanical component suppliers.

Other industries, such as the white goods industry, will often design different washer or dryer models using virtually the same mechanical components, but use different chips to provide differentiation. Electronic components are everywhere. Delays in component deliveries affect many industries. The original WSJ article contains a graphic showing how the lead time for a common type of transistor has increased from 10 weeks in July 2009 to 20 weeks by February 2010.

Initially I set out to try to estimate the effect of electronic component shortages on G20 gross domestic product, but the more I looked into the data, the more it seems that electronic component shortages might already be “old” news. Clearly there is still a lot of caution in the industry and the effects are very real otherwise neither the WSJ nor Bob would have written about component shortages. It is also something we have been hearing from customers and prospects for the past 6-9 months. Yet some really good results over the past four quarters, such as those from Intel, seem to indicate that the situation may be easing. Since the financial results of semiconductor companies are a leading indicator of how other companies are investing in raw materials, it is encouraging to see the upward trend in both revenue and gross margin reported by Intel. But this blog is about component shortages. While Intel has shown better revenue numbers, the increase in the margin would still indicate a shortage situation. Looking at Intel’s inventory numbers indicates that these have been rising sharply too, especially finished goods.

The question is whether Intel is the proverbial “swallow that does not a summer make.” Looking at public semiconductor companies around the globe would indicate that the same is true throughout the industry. The figure below shows averaged financial results for all semiconductor companies.

This effect is most pronounced when considering the semiconductor companies in Asia, though a similar pattern is observed in North America, and less so in Europe.

Clearly it takes time for inventories to be built across the entire supply chain, but it is encouraging to see the level of inventories being built in the semiconductor industry. Notice that inventory levels far exceed the levels in early 2008.  In addition, the semiconductor industry is only one segment of the overall electronics industry. But, as I noted earlier, the semiconductor industry is a leading indicator because it is far up the supply chain.

What is your experience? Are you beginning to see an easing in the electronic component supply shortages?

Drivers include:

• SKU proliferation
• Demanding customers and high competition
• High product variety and customization
• Increase in total inventory and high obsolescence

Ideal candidates for postponement are products with:

• Short life cycles
• High variety / options to customers
• High value profile
• Standardized components and modular design

We too are seeing among our customers and prospects (particularly those in the high tech and electronics space) a growing interest and focus on postponement.  A great deal of agility and flexibility can be attained when a company can ship sub-assembly inventory and finish it locally.  But as these new supply chain management strategies evolve, so too does the complexity of the supply chain.  Advance supply chain strategies require the associated advance technology solutions to enable them, and that may limit the number of companies who can successfully apply the practice and harness its benefits.

Is postponement a growing topic in your company?

There is a comedian here in the US, Jeff Foxworthy, who is famous for his “You might be a redneck” jokes.  I am copying his format  – I hope I do not get any trouble related to comedian patent regulations or something like that!

“You might be expediting too much…”

• IF, you are amassing major points in your Air Frieght carriers “frequent flyer program”…
• IF, you constantly get emails from your Land/Sea carriers saying “We miss you, please come back”…
• IF, your key supplier ran out of bright orange “hot order” stickers to place on travelers and had to place a rush, expedited purchase order for more stickers…
• IF, even though your “Material Expediters” canceled their gym memberships but are actually in the best shape ever…
• IF, you use half of your white board to prioritize which late parts need to be expedited by keeping score of angry phone calls from production…
• IF, you use the other half of your white board to track supplier promise dates for late/shortage parts and you have run out of space…
• IF, you have not logged into your company’s MRP system for weeks because none of the dates are accurate… You might be expediting too much.

OK, these are obviously starting to get worse, so I am going to stop. Any more to add?  Join in!

Obsolete inventory was always one of my favorite supply chain topics.  Nothing starts the finger pointing faster than a reference to obsolete inventory.  The beauty of it is that everyone’s hands are dirty and thus everyone feels just in their accusations.

In my experience, the blaming usually began in purchasing and took the path of least resistance through the organization.  Ultimately, a member representing each implicated group,  purchasing, production scheduling, demand planning, product management, engineering, and sales, would get together in a room in order to determine what went wrong (i.e. who was really to blame) and hopefully to come up with a plan to use at least some of the inventory.

Rick Pay recently wrote an article on obsolete inventory “Consider This — Avoiding Obsolete Inventory”   He identifies the root cause of obsolete inventory as uncertainty in supply and demand and then goes on to identify three tools to help:
1) Sales and operations planning (S&OP)
2) Auto-replenishment systems
3) “Ramp-up/ramp-down” discipline

I would add to Rick’s root cause; I believe that it is our inability to respond to the inherent uncertainties in supply and demand that ultimately are to blame for obsolete inventory.  I agree that the tools and disciplines identified by Rick will definitely help reduce obsolete inventory as long as they are approached in a manner that allows for easy simulation and collaboration between different scenarios.

I was fortunate to be part of a successful S&OP implementation that positively impacted many aspects of my organization.  One of the noticeable side-effects was that the subject of obsolete inventory shifted from the blame game to a more civil collaboration.  In fact, with the right tools, potential obsolete inventory was identified ahead of time followed by agreed upon action plans

Obsolete inventory went down, but almost as important to the individuals involved was the fact that they agreed and understood the reasons for any obsolete inventory that was created on their watch.  The mystery had been solved.

Drop us a comment if you want to share your obsolete inventory story?   Let us know how you are winning the battle with obsolete inventory. 

In working with clients, I have never seen so much interest in supply allocation options,  demand prioritization and customer segmentation. Companies are realizing that the FIFO approach to customer demand isn’t good enough anymore.  However, you do find some companies that think that they need VERY complex rules. Supply chain doesn’t have to be complex to be effective.  In fact, I would argue that the opposite is true.

Companies all want to maximize revenue and minimize stock levels. I believe that global competition has also had a significant influence on the need for supply allocation options. If you can’t satisfy everyone on time, which customers are most important and what impact will not satisfying some customers have on your business?  Many companies have top tier customers that represent such a significant portion of their business that they always need to satisfy.  Other companies are rewarding their customers with the best forecast accuracy.

Supply is being allocated at either the finished good level or the material component level. If you are managing the finished goods side of the business, you may need a combination of automated supply allocation rules and also the option to manually allocate or create firm allocations to distribution centers or regions.

There is no one rule however for supply allocation. These are collaborative decisions that need to be supported by software but not decided by software.

What has been your experience with limited supply? How are you solving this today and do you need a better way? I would be really interested in hearing your comments.

Most ERP systems support expiry on some level, usually from a transactional point of view (what I will call simple expiry). Simple expiry allows the users to set expiry limits on a part by part basis, and the system will then calculate when a particular supply will expire. This is mainly used for 3 things in an ERP system:

• determining when a particular supply expires so it can be scrapped and/or replaced,
• allowing planning to determine in what order to use a supply in order to avoid scrap, and
• to enable inventory control and shipping to determine what supply can or cannot be used in production or order fulfillment.

The problem with this expiry model is that it does not realistically model actual expiry conditions in the supply chain, as actual expiry times can be consumed by  production and quality inspection lead times, perhaps through several levels in the supply chain. What this means is that supply that was projected to be available until a certain period in time will actually expire earlier, leaving an unanticipated gap in supply. This could lead to real shortages and dire consequences for customers if not recognized in time. 

What simple expiry does not do is allow expiry to be driven by dependent components in the BoM, which I will call complex expiry. In this model, component parts (perhaps several levels down in the BoM), drive the expiry date of the parent part. A true expiry planning system must be able to account for the lost expiry time as the driving expiry component is processed and tested up through multiple levels in the BoM. As well, when supplies are allocated to demands, the originating demand’s expiry requirements (minimum shelf life, or how long the product must last before expiring once it has been shipped) must be known when planning supply, otherwise a mismatch between the demands requirements and the supply’s ability to meet them can occur. Another issue to consider is safety stock being held at multiple levels in the supply chain, as by its very definition, safety stock can exist in inventory for extended periods of time, further consuming expiry time.

In order to get a true supply/demand picture when planning or simulating in the supply chain, actual or planned supplies must be matched to their allocated demands. This can only truly be done in a CTP (Capable to Promise), bottom up analysis of the true available dates of the components, and how they affect the parent’s availability. In other words, you cannot properly fulfill demand for expiring product unless you have a true picture of when your supply will be available, and when it actually expires.

A simple expiry model can be made to accommodate certain aspects of this planning model (by manually or programmatically accounting for lead times etc. in each level of the BoM in the expiry data), but without the ability to account for actual variations in the supply plan through a CTP analysis, the picture will always be incomplete.

In summary, in order to get a realistic view of your supply chain under expiry, a complex expiry model is required (and a planning tool which supports this). In order to get a true picture of scrap, gaps in coverage, safety stock requirements, batch production timing, and the financial implications associated with each, the ability to support the complex expiry model is a requirement in any planning tool.

We are delighted to be sponsoring an upcoming webinar that will explore key issues for the global Pharmaceutical Industry and discuss the impact of these trends on supply chain development, response and go forward strategy.

Part 1: Pharma 2020 – Maintaining competitiveness and operational advantage in a rapidly changing environment
Tuesday May 25th 2010,  11:00am ET
Live Webinar

Speakers:

• Hans Engels, CEO, DSM Pharmaceuticals Inc.
• Thomas Panzer, Vice President Global Supply Chain, Bayer Biotech
• Nari Viswanathan, Vice President, Aberdeen Group

Key topics will include:

• Is the era of blockbuster new products over, and has the balance shifted to a new paradigm of competition on process and efficiency?
• Optimization of inventory and manufacturing capacity across multi-tiered global pharmaceutical operations
• Driving working capital efficiencies
• Enhancing supply chain agility and flexibility to integrate and align supply and demand

Registration is complementary.

1. The driver behind the cycle count was financial reconciliation.   The key was ensuring that the inventory values tallied to what was on the books in aggregate.  So, if part A was down a bit and part B was up a bit, overall, things balanced!
2. There was no follow up to identify the root cause of the discrepancy.   And no changes put in place to prevent similar issues from happening again. In fact, the inventory clerks would simply adjust the inventory balance to reflect the correct values.

So… what’s wrong with this approach?  It’s all about the money, right? Right. It IS all about the money.  However, how much money can you make if you can’t make the parts you want to sell?  How much money can you make if your profits are all eaten by the added expense of expediting?     An incorrect inventory quantity on a component that costs a fraction of a cent can prevent a multi-million dollar unit from shipping on time.    Take a word of advice.  Get the finance guys out of the stockroom and change the focus to true inventory accuracy.    A cycle count needs to ensure that the right quantity of  the right part is in the right location.  The interesting thing about focusing on inventory accuracy is that the financial accuracy will improve automatically.  It’s win win!

The other problem with this company’s approach was that people were not following up to determine the cause of the cycle count discrepancies.   In a former life I used to support our inventory control staff as they tried to figure out why their values weren’t tallying.  In many cases, the cause of the error turned out to be systemic in nature;  Backflushing errors, BOM errors, incorrect allocations, etc.  Fixing these prevented the same problem the next time this part was made.  In some industries (electronics, pharmaceuticals. etc) , where parts could have black market value, establishing root cause is critical to ensuring that pilfering is caught and dealt with quickly.

So what are some best practices for cycle counting?  Jeff Rose at Tomkins Associates put together a very informative guide to implementing cycle counting which outlines the goals, benefits and steps to implementing a world class cycle counting program.  In my opinion this is a must read for anyone who manages inventory.

Do you have inventory horror stories you want to share?  Inventory practices and processes put in place for all the wrong reasons?  Share them with us so we all can learn!

What is interesting is an article in Business Week discussing how Deere & Co is struggling to satisfy customer demand because of their adoption of Lean.  While undoubtedly, as stated in the Business Week article, there has been a big emphasis on Lean adoption in Deere which has led to large reductions in inventories, I think there is more that can be drawn from the story. The question is whether you can get too Lean?

Source: AGCO Corp. http://www.AGCOcorp.com

Before I start though, here are some caveats:  I am not a Lean practitioner, I am not a financial analyst, and I do not know the strategies of the companies I will discuss below.  But I am a farm boy, and had a Massey Ferguson, one of the AGCO brands.  I spent many happy hours ploughing fields and reaping crops on “big red”.  I learned to drive the tractor when I was 5 and had to pull down on the steering wheel because I wasn’t heavy enough to push the clutch down.  Going to the tractor dealer was infinitely more interesting than going to the car dealership or toy store.  However, I digress.  As a child I experienced the side of the buyer, and as an adult I have been inside more than one of the Ag equipment manufacturers as a consultant, so I know a little of their operations too.

As the Business Week article states, this is a highly seasonable business.  One thing that has changed dramatically since my father bought tractors is that they are now highly configurable with all sorts of options that include air conditioning and GPS.  Combining seasonality with configurability is a toxic mix for getting Lean wrong.  A central tenet of Lean is “level loading” which is all about keeping a regular cadence in production.  This is fine when you can predict the demand very well, but outside of these tight boundaries, it is really easy to get into trouble either in terms of missing customer shipments (as is the case at Deere), or in terms of not making best use of capacity. From the numbers, it appears that Deere has focused on reducing inventories without implementing an adequate postponement plan to reduce the order-to-delivery cycle.  Let’s go and look at the numbers.

The data in the table above is based upon the 2009 financial results.  (You can do the same analysis using our free benchmarking service.) From this, we can see that Deere & Co has by far the lowest days of inventory (DOI).  However, look at their cash-to-cash (C2C) and days of sales outstanding (DSO).  Their DSO is 7 times more than that of AGCO, which is best-in-class.  What I suspect is that the Deere DSO represents a lot of inventory sitting on dealer floors for which Deere has extended long payments terms to the dealers.  I don’t know this for a fact, but from what I know of the relationships between OEM’s and dealers in the Ag Equipment industry, I suspect this is the case. 

More interesting from an operational perspective, is to analyze Deere’s inventories, especially in comparison with those of AGCO.  We see that Deere has roughly double the finished goods (FG) inventory of AGCO and roughly half the raw material (RM) inventory of AGCO.  The work-in-progress (WIP) inventories are roughly the same, though in real terms, AGCO’s are 33% lower.  The conclusion I come to is that Deere makes FG and stuffs the channel.  If the FG values don’t convince you, what about the DSO?  It would appear that AGCO has worked out how to forecast dependent demand – components and sub-assemblies – so they buy a bunch of stuff and then do late stage assembly to meet market demand.  I come to this conclusion because they have the highest RM yet the lowest WIP and FG.  Compare that to Deere which is organized the other way around with more FG and relatively little WIP and RM.  My conclusion is that AGCO is the company that has truly embraced Lean.  Simply reducing inventories without a good postponement strategy is a recipe for poor performance. Where we see the real benefit to the AGCO investors in the return on invested capital (ROIC). Clearly there is a lot that Deere is doing that is correct.  Of the big Ag Equipment companies they have the highest margin values, all the way from gross margin through to net margin.  So I hope they get this right. 

Let me repeat at this point that none of my analysis is based upon deep knowledge of how these companies operate.  I could be wildly wrong, but I don’t think I am.  What do the Lean experts out there think?