Category Archives: Logistics

Inventory Management Softens Tough Times

With greater supply chain instability, driven mostly by the soaring price of oil, but exacerbated by the rush to outsource manufacturing, comes a growing need for leaner, meaner, inventory management, as pointed out in a recent Supply Chain Brain / Global Logistics & Supply Chain Strategies article that was taking another look at inventory planning and optimization.

The article points out that solid inventory management strategies are an important component of your overall risk mitigation plan, which hopefully you are working on considering a recent Aberdeen survey found that 99% of companies have experienced a supply chain disruption in the last year and that over half of suffered a financial loss because of it. To that end, the article highlighted a number of strategies that you should be exploring.

The first strategy it highlighted was the practice of inventory swaps between nominal competitors who help each other out in regions where supply suddenly becomes low or demand spikes unexpectedly. Most raw materials are used for multiple purposes in multiple industries, and it shouldn’t be too hard to identify companies that are not direct competitors that you can hammer out inventory swap agreements with.

The second strategy it recommends is my personal favorite, inventory optimization. However, it’s important to note that you need to do multi-echelon inventory optimization across your supply chain, as pointed out by this Supply Chain Digest article, because you need to see the big picture. Otherwise, you’ll overstock some locations, understock others, and lose out on real cost savings opportunities.

When you have multiple locations, you have to see the big picture and remember that you do not need as much safety inventory at a set of locations that are all in the same region as you might think you need. It’s often a better decision to risk having to ship inventory between warehouses than to risk an overstock that will result in obsolescence and a material loss in addition to the losses incurred by unnecessarily tying up too much working capital.

The third strategy, brought up in both articles, is better forecasting. The best inventory plan in the world is useless if the forecasts are way off. Be sure to pull in sales data regularly and revise your forecasts at least monthly to account for unexpected demand spikes, demand reductions, competitor new product introductions, seasonal demand shifts, and other unexpected variables that can require a forecast update to prevent unexpected losses from overstocks or understocks.

The fourth strategy is to consider network re-design. If you have too many warehouses, or too few, you could be losing money on the associated warehouse overhead or on extraneous transportation costs.

A fifth strategy, if you have excess inventory, is to donate it. As per this recent S&DC Exec article, “the benefits of donating excess inventory” are fourfold. It helps you reduce taxes (under section 170 (e)(3) of the U.S. Internal Revenue Code), it frees up warehouse space to store more inventory of products that are in higher demand, it avoids liquidation problems (that will appear down the road), and it can fulfill your company’s philanthropic goals while generating goodwill.

Just remember, inventory is cash. Too much, and you’re tying up too much of your precious working capital. Too little, and you’re losing the cash that results from sales. So get your inventory in order, and in addition to reducing your risk, you’ll probably save quite a bit of cash in the process. Like Home Depot, who estimates that better inventory management could save them 1.5 Billion a year. That’s a lot of bling.

Out in Front: Jon Miller, Strategic Sourceror

As per my last post, Bob Ferrari was first out of the gate with his initial contribution to the Seven Grand Challenges to Spend and Supply Management. Hot on his tail-pipe were Jon Miller of Gemba Panta Rei with his Seven Grand Challenges and the Strategic Sourceror of the Strategic Sourceror with his introductory post on the topic.

The Strategic Sourceror, who’s keeping his final list a secret for now, started off his post by noting that the shift has already left the harbor is the perfect metaphor for the globalization of a peak functioning supply chain. International supplier integration has gone from innovation to a competitive necessity in what seems like the blink of an eye in a global marketplace where overseas shipment costs are rising by as much as 170% and some carriers are slowing speed by 20% to conserve fuel. But the effect of petro-economics is only one component of the international sourcing equation. Other challenges are rising fast and furious, and, as noted by Strategic Sourceror, these include:

  • Currency
    Certain currencies, like the US Dollar, have been up-and-down faster than a yo-yo in the hands of a master.
  • Quality
    How many more PR disasters and deaths have to happen before people wake up as to how important this issue is?
  • Redress
    All you have to do is leave the state and the laws that your supplier are subject to might be different than the laws you are subject to. This only magnifies as you leave the country – and continent.
  • Trade Barriers
    It’s not even as simple as the import and export documentary requirements anymore … you have burgeoning denied party lists to deal with now.
  • Political Instability
    Political instability exists in numerous Asian and Euro-zone countries – not just in the Middle East and Venezuela.

Given these challenges, I’m anxious to see what the Strategic Sourceror’s seven grand challenges shape up to be!

Jon Miller decided to jump right in with his seven grand challenges, which, and this should come as no surprise given Gemba Panta Rei’s focus, had a distinctively lean orientation, with a smattering of green. Getting right to the point, Jon’s seven challenges were:

  • Putting Safety First
    It’s not just about price.
  • Getting Serious About Zeppelins
    Are they the 200 mph method of travel and transport of the future?
  • Waiting For It
    Do we really need new laptops and cell phones in 2-3 days from the day we make the decision?
  • Eating Fruits in Season
    Eat local when you can.
  • Paying to Waste
    Overpacking is costly as well as wasteful. Why do we do it?
  • Spacing Out
    Do we really need warehouses in space?
  • Beaming It Over
    The internet changes anything.

 

It’s quite an interesting list, and I highly recommend that you check out Jon’s post for the details, and rationale, behind his decisions.

Is Your Supply Chain Reversible?

The last few years have been very challenging for supply chains with the rapid rate of globalization, but I believe that the greatest challenges are yet to come. Specifically, I believe that the challenges of Centralized Purchasing, Low Cost Country Sourcing, and Risk and Disaster Management will look like child’s play compared to the supply chain challenges that you will face in the next five years.

When you consider the fact that the price of oil has skyrocketed over the past year, that skyrocketing demands in India and China have not only doubled and tripled the price of many raw materials but significantly restricted their supply as well, that the Euro has risen substantially while the US Dollar has fallen substantially, and that global food supplies are restricted and at a fifty year — if not a hundred year — low (thanks, in part, to the bio-fuel blunder), it should be fairly obvious that unprepared supply chains are in for a bit of a shock.

However, this is just the beginning of the changes that lie ahead. And companies that aren’t accurately predicting, and planning for, what comes next are going to be in for a bigger shock. Especially since the shift is already beginning. So far this shift has three main elements:

  • Global Shifting of Manufacturing Bases
    With respect to the European market, the US is now a Low Cost Country for Sourcing of sophisticated manufactured goods like construction or scientific research equipment.
  • Global Redistribution of Food Supply Chains
    With transportation costs skyrocketing, food distributors and supermarket chains are scrambling to source as close to the same marketplace as possible. For North America, this will mean more sourcing from South America than Africa or Asia whenever possible, as foreign producers are now no longer the lowest price.
  • Shifting Market Dynamics towards the Developing World
    In the next two decades, India is predicted to advance from the world’s 12th largest consumer market to the 5th while it’s middle class increases at least tenfold. In the same time, China will grow to the world’s third largest consumer market. Globally, the size of the middle class is expected to almost triple by 2030 — and where you buy your raw materials and components and products today is where you will need to sell them tomorrow.

In my view, this all points to one inescapable conclusion – that if you want to survive, your supply chain must be reversible. Raw materials, components, and products must be able to flow both ways and your supply chain needs to be capable of turning on a dime if supply becomes unavailable in one part of the world due to a natural disaster or inhospitable political or economic climate. An optimized inbound supply chain from China is useless if it now costs you more to bring a product to market than you can sell it for, and even more so if you can’t ship product that the emerging middle class in Asia wants from the US back to China, because that’s where a significant portion of your global revenues will be coming from in ten to twenty years, assuming you want to remain a global player.

So if you haven’t asked yourself this question yet, I think it’s time you should. And before you say I’m a crackpot, remember, I was among the first to not only predict that low cost country sourcing was going away and that best cost country sourcing was still not going to be good enough when I said the key to success was home cost country sourcing — and now that the US is a low cost country source for (Western) Europe, those manufacturers ready to take advantage of this situation are going to lead the turnaround in US manufacturing.

Giving Your “Ugly” Supply Chain a MakeOver

Is Your Supply Chain “Ugly”? asked a very important question – is your supply chain an “ugly baby” — which it is if your distribution is slow, if your products are unpopular due to quality issues, and, most importantly, if your warehouse and inventory management is in shambles. This is a very important question because a $100 million dollar company can lose $3 million to $6 million a year by the time storage costs, depreciation and disposition costs, and losses are factored in (because it can lose $1 million a year alone on an inaccuracy of just 5%!)

To that effect, as my last post pointed out, if your inventory is not in order, you need to get it in order — fast — because a warehouse in shambles could be your undoing in a down economy. But how do you get your inventory in order? Supply and Demand Chain Executive, who ran the article by Rene Jones of Total Logistics Solutions, Inc. that highlighted the problem, comes to the rescue with an article titled “Get Control of Your Inventory” by Sumit Chandra, Mirko Martich, Shalin Shah, and Kumar Venkataraman of A. T. Kearney who provide insight on getting to the root of the problems, and fixing them.

Inventory management is an enormously complex job these days. Some retailers have to track hundreds of thousands of stock keeping units (SKUs) from thousands of suppliers across hundreds or even thousands of stores and distribution centers. They must also differentiate the products based on consumer demand in local, regional, national and global markets while dealing with inefficient processes and inappropriate systems that only serve to complicate the process. And good inventory decisions must balance five key business drivers: consumer demand, lead time variability, pack mix, merchandising presentation requirements, and visibility.

However, many inventory managers don’t have a clear understanding of what drives inventory levels, don’t have metric-based tools to track the key drivers, and don’t have anyone providing them with this information. Add to this the fact that there is a margin of error for each driver you try to account for, and that most companies don’t have a good forecasting process, and you can easily start to wonder how today’s supply chains can even function! The slightest error in a forecast can be very detrimental, resulting in too much inventory, which comes with unnecessary storage costs and disposition losses, or too little, which results in lost sales. So what can you do?

  • Better Forecasting
    Use good software that can take into account different demand patterns and distribution methods for various markets, as well as the seasonal, geographic and competitive position of each store. And focus on the process, and not just the software or final result. A tightly integrated S&OP process will produce better data, and better forecasting intervals, which will in turn produce better forecasts.
  • Lead Time Variability Reduction
    De-list suppliers with erratic lead times and distributors with low reliability. Track performance data against key metrics, provide regular feedback on performance and introduce supplier recognition programs.
  • Pack Mix Improvements
    When possible, optimize the pack mix size from the supplier. When not (due to complexity or cost), “break-pack” the item at local distribution centers to insure that only the needed level of inventory is shipped to a store.
  • Merchandising Presentation Management
    It might be case that extravagant visual presentations get a potential customer’s attention, but it’s also the case that such presentations can lead to excess inventory. Pack and presentation can increase inventory over a base level by 15% to 25% for an average retailer! In addition, specials on seasonal items can cause dramatic one-time boosts that can disrupt the normal inventory flow. The employment of advanced inventory flow-path techniques to determine cost and service-level tradeoffs can lead to significant savings.
  • Track Inventory Accurately
    Make sure that both outbound flows and inbound flows are carefully monitored by state-of-the-practice inventory management systems. If your system is not tracking and managing returns, you really don’t know how much inventory you have where, and whether or not it is resalable or able to be refurbished – both of which lower your overall inventory costs and losses.

Finally, make sure you have across-the-board visibility into what is where in your supply chain, and where the demands are.

Is Your Supply Chain “Ugly”?

A provocatively titled article in Supply & Demand Chain Executive that stated that “No One Wants to Hear They Have an ‘Ugly Baby'” recently caught my attention. Maybe it’s because, as the article points out, our economy is in trouble, your supply chain is crucial to your organization’s success or imminent failure, and, as the article deftly noted, your warehouse is about to make or break you! Or maybe it’s just because I liked the title. Either way, it was a good article.

It is a down-cycle, and that means, for those of you who aren’t innovating, and instead making the 10 Worst Innovation Mistakes that you can make during a recession, and who are unable to provide the customer what they want, when they want it, and at a price they can afford to pay, you may soon find yourselves out of business.

This means that if your supply chain is an “ugly baby”, that if your distribution is slow, that if your products are unpopular due to quality issues, and, most importantly, that if your warehouse is in shambles, you need to face facts, admit it, and do something about it.

How do you know if your distribution is slow? If it takes your competitor an average of 18 days to get product from Shanghai to their Chicago warehouse, and it takes you 27 days, your distribution is slow. If your closest competitor’s product sells out 3 days after it hits the shelves, and half of your product is still there 30 days later, your product is unpopular. And if received products take 2 days to be put away, if returns sit unattended for weeks, and if your personnel spend more time checking stock than they do processing it, your warehouse is in shambles.

When you consider that inventory can be as much as 20% of top-line sales, that many companies pay 20% to 35% of stock value to store inventory, and that certain types of products may decrease in value as much as 3% a month, it becomes easy to see that a $100 million company could be losing $3 million to $6 million a year with poor warehouse management that keeps too much stock on hand for too long by the time storage, depreciation, loss, and final disposition of remaining, unsalable, inventory is taken into account. (Heck, 5% inaccuracy on your inventory alone will cost you $1 million a year!)

Thus, if your warehouse is operating at anything less than 99% of optimal efficiency, you should do something about it sooner, rather than later, as the investments you make will quickly pay for themselves many times over in reduced inventory related costs. Not to mention the improvements it will generate in employee morale and customer satisfaction. As the author astutely points out, a warehouse laborer making $10 an hour can now spend as much as $100 a week for gas to travel to a job they likely hate. That’s one quarter of their take home income! If they’re not already looking for a job closer to home, unless your job is the best job in the world, they’re going to be very soon. In addition, every time a shipment is late, mixed up, or lost, your customers get a little more irate. They’ll only put up with so much, given all the other stresses they have to deal with in today’s economy, before they go elsewhere.

So if your supply chain’s ugly, admit it, and give it a makeover!