It’s been six (6) years, six (6) months, and six (6) days since SI published it’s first post. Religiously speaking, I believe that means SI should be evil today. As a blog, this presents SI with a bit of a conundrum. How can a blog be evil? A few years ago, SI would not have been able to answer this, but today, thanks to Twitter, it can. A blog can be evil by publishing its entire post to Twitter, and forcing you to read it in 140 character increments. Quite evil in fact. So, if you want to read the rest of today’s post, and find out two things that will tank your Supply Management Organization in 2013 if you’re not ready, you’ll have to follow @sourcingdoctor on Twitter! ha, hA, HA, HA, HA!
Monthly Archives: December 2012
I Got Your Mail. And I Don’t Even Need A Side-Channel Attack.
How? I just used your password. As recently reported by CNN.com, SplashData just released its “Worst Passwords” list compiled from common passwords posted by hackers. I can’t believe how stupid the top 25 are. It’s insane. I don’t even need a brute-force dictionary to have a good chance of breaking into a random account if this is what still passes for a password these days! If you have one of these, you might want to consider changing it. But if you’re going to use a dictionary word, at least mis-spell it, or it won’t be much harder for a hacker with a brute-force dictionary-based script and a bit of patience.
1. password
2, 123456
3. 12345678
4. abc123
5. qwerty
6. monkey
7. letmein
8. dragon
9. 111111
10. baseball
11. iloveyou
12. trustno1
13. 1234567
14. sunshine
15. master
16. 123123
17. welcome
18. shadow
19. ashley
20. football
21. jesus
22. michael
23. ninja
24. mustang
25. password1
Can We Make EOQ Relevant Again?
This summer, Supply & Demand Executive published an article on how to make EOQ relevant again. Going through the recent archives, it got my attention because it is simultaneously a metric that should have never lost relevance and a metric that loses relevance when too much emphasis is placed on JIT or avoiding stock-outs (at all costs).
EOQ, short for Economic Order Quantity, is an old-school metric whose function is to identify the optimum order size that has the lowest cost. Defined as the square root(2UA/IC), where:
- U is the (annual) usage,
- A is the acquisition cost per order,
- I is the inventory carrying rate, and
- C is the cost per item
if demand is relatively constant, or at least known and predictable, the item is purchased in lots or batches, and the order preparation and inventory carrying costs are constant and known, then the formula tells you how much to order (and, as a result, how often to order) to minimize your overall order cost.
But, as the article points out, even assuming you can mesh this with your JIT production schedule (timing the orders so that you don’t carry too much inventory but still keep production running smoothly), these are not all of the costs associated with an order. Other costs include:
- purchase order processing cost (which should be included in acquisition cost)
- a true ICC rate (and not the holding cost computed as the extra cost of money invested in stock) that takes into account opportunity costs (which should be included in I)
- taxes paid on inventory (which can be substantial and why many auto dealers, for example, have year end clear-outs) (which should also be included in I)
- stock quantity shrinkage loss due to handling, pilferage, and theft (which should also be included in I)
- stock risk losses due to product obsolescence, deterioration or shelf life expiration (which should be factored into C)
Thus, in order to use EOQ, you need to first insure that all of these costs can be accounted for. Then, as per the article, you need to insure that:
- the product(s) are offered at a single price,
- demand is predictable,
- prices will not change (significantly) during the time the order is in stock,
- stock will not exceed the shelf-life,
- a single order can be placed, and
- freight is included in the purchase price, or can be factored in.
In this situation, if the additional costs identified above are factored in, EOQ is still very relevant and should be used. However, if multiple assumptions are violated, EOQ may not be appropriate, and, more specifically, if demand is slow, or very unpredictable, then JIT is the preferred method.
And, furthermore, if you
- establish minimum quantities to reflect minimum purchase volumes,
- set a maximum ceiling stock for difficult, bulky, or large items, and
- base adjustments on multiples of packaged lots
then you may find that EOQ is still right for you.
Can Beer Build a Better Business?
And now that I’ve got your attention, yes SI is serious!
As per a recent article over on Inside Supply Management (ISM) on Brewing a Better Future, Heineken plans to Improve, Empower, and Make an Impact! As part of its three-part strategic initiative, Heineken plans to increase partnerships, source local, and, most importantly, reduce CO2 emissions and water consumption.
With respect to CO2 emissions and water consumption, Heineken plans to:
- reduce emissions by 40% in its breweries,
- reduce and track emissions throughout the value chain,
- implement the concept of a CO2 neutral brewery in at least three sites (by 2015), and
- reduce water usage by 20%.
That’s one heck of a sustainability initiative, especially for a brewery where water consumption can be as much as 8 cubic meters per cubic meter of beer produced and where CO2 production can be as much as 10 kg per hecto-liter. If it succeeds, the improvements will be very significant, with over a liter of water being saved per liter of beer (as consumption will be reduced from 5.1 to 3.7) and kgs of CO2 emissions disappearing per hecto-liter (as output will decrease from 10.4 kg/hl in 2008 to 6.4 kg/hl in 2020).
If Heineken succeeds, the innovations that it will introduce could revolutionize not only the brewing industry, but the food and beverage industry as a whole. Let’s all hope that they manage to brew a better business (without sacrificing the quality of the beer, of course).
To Get The Most Out Of Supplier Reports, Read Between the Lines
SIG recently ran a good article on Getting the Most out of Supplier Reports (that now appears to be hidden behind a registration/membership wall in their newly redesigned site) that made some good points. Many suppliers are just beginning their reporting journey, and don’t always know what is important or what the customer really wants. Plus, and this is even more important, if a supplier is really doing poor in one area, it may not want you to know, especially if renewal time is coming up.
So how do you get the most out of the reports?
First, go beyond the facts. As the article notes, the reports should include quantitative and qualitative information. Have the supplier go beyond just spend, on time delivery, and other hard metrics and include customer service ratings, quality reviews, and overall compliance levels. The supplier might be hitting the cost targets, delivery times, or resolution times, but your internal stakeholders, the customers, might be extremely unhappy with the supplier.
Then, and this is SI’s advice, pick a couple of metrics that are poor and a couple of metrics that are good and dig, dig, dig. For example, let’s say on time delivery is poor. Find out why. When the supplier says that the production rate is 80% of predicted throughput, don’t just say to speed up, dig. Is it labor issues? Is the supplier short-handed? Is it mechanical issues? Does key equipment keep breaking down? Is it supply? Is a second tier supplier repeatedly late? Don’t stop until you find the root cause and make sure it gets appropriately addressed. Then choose a good metric. For example, let’s say the supplier hit the savings target. Why? Every cost has components, and where a supplier is concerned, there will be supply costs, labour costs, and overhead costs. Make sure you understand which costs were reduced and to what degree. There might still be gold in the veins. For example, let’s say that supply costs dropped 10%. If market costs dropped 12%, then the supplier might not have done anything! If the supplier was supposed to reduce supply costs and overhead costs, and leaves one cost untouched, the supplier can still do better.
But don’t stop there. As the article indicates, make sure you have the supplier compare its performance serving you to its average performance serving other customers. This will help you identify metrics that you need to monitor for improvement.
And audit. (But not too often.) This will allow you to maintain control and give you more insight into the supplier’s performance. (However, if done too often, will be too time-consuming, instill angst in the supplier, and not produce any results if no issues are found.)
Doing this will allow you to read between the lines and extract true value from your supplier reports.