Category Archives: Inventory

Demand Control: Reduce, Reuse, Recycle, Redefinition and … Requisition Everything!

Part of good cost avoidance in Procurement is good demand management — reducing the consumption, and expenditure, on MRO, T&E, one-time buys for events, etc. We’ve covered the classic techniques in the past, which include:

Reduce: which can be accomplished by accurately predicting needs (and reducing waste) based on past use and current trends (and not maintaining volume levels on toner cartridges for a printer line being phased out)

Reuse: which can take the form of repurposing old equipment (as old developer workstations are probably just as powerful as the business user desktops used in the rest of the organization) or simply collecting unused/discarded collateral at an event and using it again next time

Recycle: where MRO inventory can be replenished by breaking down equipment (like workstations, production lines, etc.) that go out of service and harvesting still working parts that can be used in other equipment

Redefinition: where it’s not a need for more paper, but a need for second / bigger monitors so that people don’t need to print invoices / documents still submitted as (scans of) handwritten documents that can’t be OCR’d or that aren’t in a format the OCR recognizes or for tablets that allow executives to access their reports on the go

but a new type of demand management is popping up in the Procurement world, and it’s called:

Requisition Everything: where you have to literally submit a requisition to the procurement system so that all demand, and consumption, is tracked (and you can be visually guilted to control demand or utilization if you are consuming significantly more of a resource than your peer).

Now, this probably sounds very onerous to you and not worth it, but it all comes down to the implementation and user experience. At Coupa inspire, one company described an innovative method that they used to track and control demand on the factory floor (where workers would forget where they put their gloves, or realize they left them in the lunch room, and just go to the closest supply room or where workers would store extra tools or parts at their desks, just in case, leading to low stock signals and unnecessary ordering). They installed vending machines and when a worker needed something, they needed to go to the machine and punch in their id and slot number. Nothing was restricted (and no limits were placed), but every “requisition” was sent to the central Procurement system which not only updated MRO inventory but also tracked who used what, and allowed Procurement, and departments, to understand usage patterns better. This simple process reduced demand as it instilled the notion of cost consciousness and responsibility in the workers (who knew that their usage patterns could be analyzed and if they consumed considerably more than their peers, it would show), and didn’t really add any time or complexity to the process (as all the workers had to do was punch a few buttons) — especially since this process insured that the workers always knew where the stock was (which wouldn’t happen if it was moved around on the shelves).

Moreover, this technique is not limited to what fits in a vending machine — one could also use cheap RFID tags for larger items (of sufficient value) that would automatically be requisitioned when the tag left the store room (and be assigned to the right person using the employee record obtained from the entry control system when the person swipes their key card).

And, with micro-budgeting, it can be used to insure departments don’t go over their allotted new-hire budget unnoticed. New hire equipment can be kept in the secure storeroom, automatically tracked when retrieved, and automated re-orders made if stock gets too low. Plus, reusable equipment can be returned on employee departure, residual amortization amounts credited back to the micro-budget, and employees / departments who opt to use recycled equipment can be charged a deep discount against their micro-budget (and, more importantly, rewarded at annual recognition events as reuse stats can be tracked).

Now that almost everything can be automated, it might just be the time for Requisition Everything as the new method of employee-based demand management and cost control. Thoughts?

Organizational Sustentation 59: Warehouse Management

This warehouse frightens me … still
Has me tied up in knots …

Dave Matthews Band

And, as per our damnation post, if your warehouse doesn’t frighten you, obviously you haven’t taken a really good look at it. The warehouse is responsible for inventory, and inventory is very costly … even when it is well managed. Many studies of inventory (carrying) costs have estimated inventory costs to be 25% of the value of the average inventory level (or more). That’s huge!

But this is not the only reason the warehouse is a damnation. It is also a damnation because the warehouse controls:

  • product availability

    and can take their time unloading product, packing product, shipping product, etc.

  • the final quality check

    and if they get lax, and don’t independently test the spinach, your company could be blamed for the next salmonella outbreak that is actually the fault of your supplier

  • overhead costs

    inventory, operations, etc.

So what can you do? Let’s start with the obvious:

JiT (Just in Time) Inventory

The less excess inventory on hand, the less inventory carrying cost, the less inventory for the warehouse to lose or damage, and the less overhead cost to consider.

VMI (Vendor Managed Inventory)

Sometimes your vendor can manage inventory better than you can, and if their revenue is dependent on good management, they are very incented to manage it well.

But that’s just the start. You can also:

Get (a) Lean (assessment).

Identify the inefficiencies, and make sure something is done about them to keep efficiency up and overhead costs down. Make sure the organization is focused on lean transformation and continual process improvement.

Get external audits (on operations and inbound product).

Not only to keep the warehouse in check but to help them identify areas for improvement.

Get the Warehouse Training.

It’s not only Procurement that never has enough in the training budget, it’s the warehouse too. Management thinks that because it’s a manual job, it’s a low skill job and little training is required. Maybe, but considering that lean, six sigma, and kanban processes can greatly improve efficiency and minimize costs, it doesn’t hurt to make sure that the processes, and the labour implementing them, have all the knowledge they need to be as efficient and effective as possible.

Consumer Damnation 74: Demand Planning

Each group of customers are a damnation upon themselves, and they will get the attention they deserve, but demand planning to meet customer demand is its own damnation. Why is this?

Traditional demand planning models require historical data.

To be precise, they require a fair amount of historical sales or usage data in order to be accurate. And sometimes a lot of sales data. But with new product introductions coming fast and furious every day, there are so many categories without a decent amount, if any, historical sales data that it’s hard to make good predictions. Now, one can always use the most similar product, or the product the new product is expected to replace, but this weakens the model and the confidence in the result.

Traditional demand planning models require market predictability.

To be more precise, they expect that the market will not substantially change. That the needs will stay the same. The utilization or replacement curves will stay about the same. That a competitor won’t substantially increase or decrease their market share overnight. That a revolutionary new product won’t be released that causes a huge market shift.

Traditional demand planning models require market foresight.

In addition to requiring historical data and market predictability, traditional demand planning requires market foresight. Knowledge of potential competitor product introductions that could change the market demand. Knowledge of innovations that will begin demand shifts. Knowledge of general market conditions that could delay replacements or result in reduced demand due to cash availability.

Demand Planning requires knowledge of the expected price point.

Most products are services, especially in the end consumer market, are very price dependent. People will pay more if they perceive more value, which could be better quality, more functionality, or owning an iconic brand, but if they don’t perceive more value in your product which is priced higher than a competitor’s product, don’t think for a minute, even if they bought from you last time, they won’t shift. And price prediction is difficult if it is dependent on production cost, which can be variable if transportation can involve unpredictable fuel surcharges, raw material prices can skyrocket due to insufficient supply as a result of a disaster, and labour prices are dependent on contingent labour to meet demands at peak periods.

In other words, sometimes demand prediction models fall flat, and demand projections come from a place that can only be seen by a proctologist with a flashlight, so how do you effectively plan for those as a Procurement Professional? You don’t. It’s damnation.

Organizational Damnation 59: Warehouse Management

This warehouse frightens me.
Has me tied up in knots …
   Dave Matthews Band

And if your warehouse doesn’t frighten you, obviously you haven’t taken a good look at it.

The warehouse is responsible for inventory, and inventory is very costly even when it’s well managed. Some studies of inventory (carrying) costs have estimated inventory costs to be 25% of the value of the average inventory level. Having your inventory cost you up to 25% of its value is a damnation in itself! That’s why many organizations have been migrating to JiT (Just in Time) inventory strategies. But this brings its own problems — and is another source of warehouse damnation (but we’ll get to that).

If an organization aggressively pursues a JiT inventory strategy, even a slight delay can result in a stockout which can result in production line downtime if the product was needed internally or a loss of sales if the product was for sale and needed on the shelf.

Now, besides costing a small fortune, why is the warehouse a damnation?

They control product availability.

If they take their time unloading product, temporarily misplace product, damage product, miscount product, or store it in the least efficient location, the product won’t be available when you need it.

They are the final product quality check.

If they don’t carefully check deliveries for apparent damage, don’t return defective units (and accidentally restock them), and don’t perform any quality checks they are supposed to perform on delivery, defective (or tainted) product can get in the system, get shipped to customers, and give you a black eye.

They control product delivery.

If they take their time loading product, or get behind in orders, customers won’t get their product on time and you will be blamed even if the order arrived on time.

They have a huge impact on inventory cost.

You can move to JiT and optimize inventory levels, but inventory cost is the overhead costs and the depreciation costs, and the overhead costs are the space utilized, the manpower employed, and the operational overhead. If poor planning requires 50% more manpower, on average, than is needed, that bumps up cost. If poor organization means each product retrieval or shipment takes 50% longer than it should (because the warehouse is not lean), that bumps up cost. If poor operational policies or systems means that it is heated 24 hours a day, even though only staffed 10 hours, that bumps up cost. Warehouse controls all of this, not Procurement.

Even a warehouse staff with the best of intentions can cause Procurement the worst of nightmares. It’s yet another organizational damnation that you need to deal with on a daily basis.

Procurement Trend #26: Increased Accuracy in Demand Planning

Twenty-three lacklustre, backwater, trends from yester-year still remain, so let’s get back to it. The sooner we get through these, the sooner we get back to modern times.

So why do so many historians keep pegging increased accuracy as a future trend, and helping poor LOLCat regress to past lives? There are a number of reasons, but among the top three today are:

    • Hyper-competitive markets make demand planning difficult
      because a one week’s difference in release date due to an unexpected delay can result in a competitor beating you to market and siphoning off a significant portion of your expected market share for the product
  • lack of long-term data in short lifecycle product categories makes trending hard
    which makes it even harder to predict not only when a product instance is going to reach end of useful (sales) life but when the next iteration is going to bomb because the product has reached end of life and needs to be retired
  • most tools are still using outdated inventory models
    because the initial versions were created twenty, thirty, and even forty years ago and it’s just not possible to force fit new, complex, innovative inventory costing and projection models into them

So what do you do?

Hyper-Competitive Markets

As per above, Procurement not only needs to identify suppliers who can add value at little or no incremental cost but needs to identify suppliers who can help it get an edge in these markets. It needs to move to JIT (Just in Time) production and distribution to the extent possible, track product and consumer trends carefully, and adapt as needed.

Lack of Long-Term Data in Short Lifecycle Product Categories

It needs to collect as much market data as it can from analyst and trade bureaus to identify global trends, and analyze all of the data it has on past and current products to predict life-cycle trends that are in-line with current market conditions.

Outdated Inventory & Forecasting Models

It needs to update its inventory management and demand planning tools ASAP to not only plan with more data, more resolution, and more options, but support forecasting under different conditions.