Business Forecast – McAlister Tactical Strategies

What is in Season?

November 19, 2015November 19, 2015 Mike 0 Comment Business Forecast, Collaboration, Communication, Expert Advice, Uncategorized collaboration, communication, Competency, Experience, Expert Advice, inventory, Management, Operations, Vendors

In 1965, a folk-rock band, ‘The Byrds’, recorded their version of Pete Seeger’s song, ‘Turn, Turn, Turn’. The lyrics refer to there being a time for many activities and events, including a time to plant and a time to harvest. Although I’ve heard the song hundreds of times over the years, it had a new meaning for me when I became a supply chain manager.

Consumers want the freshest food possible, necessitating that manufacturers maintain the freshest inventory possible. This is especially true for fruits and vegetables used in processed or semi-processed foods. If these fruits and vegetables are grown in specific geographies, it can be very difficult to maintain a fresh inventory year round. Under these circumstances, purchasing the correct amount of these items is a challenge, and not having enough material to cover the requirements before the next harvest is an obvious problem. Conversely, purchasing too much material can be a problem if the shelf-life of perishable items expires before they can be utilized.

One of the biggest challenges of my career was managing the inventory of perishable materials. My colleagues and I developed a system for calculating the quantity of material to be purchased based on when new material needed to be contracted/purchased and the forecasted rate of the material’s consumption in the production of finished goods.

We determined that it worked best for the people in charge of procurement to frequently talk directly with operations people who have knowledge of the business and production planning. This not only guaranteed the freshest possible product for our customers, it reduced financial losses due to expired materials. It also minimized the need to make emergency purchases at a higher cost on the spot market to make up for shortfalls in the inventory. To facilitate these discussions, we developed a sophisticated spreadsheet tool to capture pertinent information.

Based on our experience, here are the recommended steps for developing an inventory management tool and using it to plan the best purchasing strategy for your business.

Establish the parameters for product availability

List all of the items to be purchased and then answer a few simple questions about everything on the list: What is the shelf life of the material? Where is the item grown? Is it available from sources outside of your country? Is it available in the opposite hemisphere, i.e., if you are located in the northern hemisphere, can the item be grown in the southern hemisphere and shipped economically to your location? Once this information is developed, the purchasing plan can be established.

Develop a consumption model

To predict the consumption of the material, a model will be required to show the projected inventory level of each item. This will require the production forecast by month, and the amount of material used in each finished good item to calculate the usage. Monthly consumption is the most convenient way to view the information. When developing the model, a ‘loss factor’ should be added to the formula to account for material wasted or damaged during storage and/or manufacturing. If the material is used in multiple finished good items, cumulative usage should be tracked and reported as a single number.

Develop the inventory model

Utilize the product availability parameters (step 1) and consumption model (step 2) to set up a tool that will show the inventory levels at the beginning or end of each month. The third variable in the inventory model should show the contracted quantities and when the material is available for usage.

Combining the inventory, consumption, and purchase quantity will generate a ‘strategic’ view of the available inventory over time. Understanding the strategic view of the inventory will indicate when to purchase the material again in the future.

Once the inventory model is working and actual inventories are updated each month, the inventory levels can be predicted for each time period. Management can then determine if there is a risk of running out of materials or conversely, predict if there will be excess material left over that will expire before it can be used. Examples of an annual purchase and semi-annual purchase inventory model are shown below:

Final Screen Shot 2015-11-30 at 2.05.09 PM

Review Inventory and Adjust Purchasing Strategy

The most important step of this process is for the appropriate parties to review the inventory positions on a monthly basis, even if the purchase date is several months away. For example, if sales are not going as planned, then a strategy can be developed to manage the potential issues of running out of material prematurely or having excess material that will expire and cannot be used. Ideally the Operations group will know how sales are trending and this intelligence can be brought to the attention of the Procurement group.

Establish Timetables for Making a Purchase Decision

The process works well when a timetable is developed for each item. In general, the process is to jointly review the inventory plan and forecast 3 months prior to when the material is available for purchase. The forecast should be verified with the Production Planning/Scheduling department two months prior to contracting the item. This gives Procurement enough time to develop the quantity requirements and negotiation strategy to be executed in the month prior to the delivery on the contract.

Some companies may have ERP/MRP systems that will generate similar information for a material, however, it is important to have a tool to facilitate the discussions between Procurement and Operations. These discussions need to take place with some frequency to ensure necessary adaptations to business plans.

It may take a few months to develop and launch this entire process, but once it is running and the monthly review of inventory is taking place between Procurement and Operations, the benefits are substantial. Having a sensitive and efficient process for updating the consumption model and the inventory model is key to success. Accurate and timely information will lead to better decisions and improved business results.

It is safe to say that the Byrds were not thinking about inventory position and consumption models when they recorded one of their most famous songs, but it’s easy to hear the wisdom in their chorus:

‘There is a season – turn, turn, turn

And a time to every purpose under heaven’

Are You Painting a Clear Picture?

January 16, 2015January 16, 2015 mcalisterts 0 Comment Business Forecast, Case Studies, Expert Advice, Uncategorized crisis management, customer service, Expert Advice, inventory, supplychain

Woman standing in the gallery

As my department worked through a crisis several years back, I discovered that the information we needed was not available in a format that would help us resolve the issues. Due to the nature of the crisis, and the need to communicate information inside the company and to our customers, I found a way to assemble a large amount of data into a single, concise communication that made sense to everyone, not just supply chain people.

“Every now and then one paints a picture that seems to have opened a door and serves as a stepping stone to other things.” ― Pablo Picasso

I have a feeling that Picasso wasn’t thinking about customer service when he said this, but I like his sentiment. If painting ‘pictures’ can serve as stepping-stones, then they can help us move on to bigger and better things.

I was the Supply Chain manager when a production issue necessitated a massive recall for half of the existing inventory in my category. The production network was running at 100% capacity when the problem occurred so we all knew it would take time to recover. The million dollar question (literally) was how long would the situation affect our customers? A few weeks? Several months? As you might imagine, our customers were not going to accept an answer of ‘we aren’t sure when you will get your product.’ I asked my planner for a report that would show the weekly inventory position for every item for the next 13 weeks, and I was told the planning system was not able to generate such a comprehensive view.

Since a problem of this size was new for me, I asked my compatriots for examples of how to manage such a major problem. Unfortunately, I was only greeted with kind words of support. It turned out that nobody on the staff had dealt with a problem this large before and no template was available.

It was clear that we needed to develop a method for communicating the status of the inventory, and here are the steps my team and I took to ‘paint a picture’ that would generate useful information for Management and ultimately our customers.

Determine what information is available from the planning system, and how to download it into a spreadsheet.

Weekly production plans were available in the supply planning system, however a complete view of the inventory position was not available in a single report. This was a quirk of the system, and getting individual items to aggregate into a single report was something I.T. was not willing to tackle, regardless of the circumstances.
We found that the individual item information could be downloaded from the planning system, however, this report included raw data showing the current inventory and planned production quantities along with other pieces of extraneous data. Using an ‘intermediate’ spreadsheet, we extracted and formatted the information needed for the next step.

Once the data is in a spreadsheet, determine how to format the information to accurately tell the story

Within our company, most people understood the inventory position in terms of ‘days of coverage’. For the purposes of communication, we needed to put several of the items on a single page, to see the overall effect of the production plan. The most accurate way to calculate the inventory coverage was to develop a formula that used 1) the inventory available at the beginning of the week, 2) the production plan, and 3) the demand forecast, in order to calculate the theoretical days of coverage in the inventory each week going forward.
Once the formulae were set up to calculate days of supply for the next 13 weeks, we determined it would be helpful to color-code the information to generate a way to identify issues more easily. This is where the ‘stop-light’ formatting for each cell was used; with green being considered ‘good’ inventory levels, yellow considered ‘risky’ or potentially problematic, and red being ‘bad’ or definite customer service problems. We also used blue to indicate if the inventory was above target.

Develop a view that provides information for driving decision-making.

Once the data was verified and the color-coding applied, we assembled a view to show the ‘days of supply’ for all items for the upcoming 13 weeks. It indicated that it would take over two months for the inventory to completely recover. (The chart below is a simulation of the initial inventory positions we discovered. It does not use the actual data.)
With the inventory projection view finally in place, we could discuss various production options, such as delaying the production of less popular (slower moving) items, and risking some case fill issues, while producing larger volumes of the more popular items. A few scenarios were presented to management for their review and decisions were made regarding the information to be shared with customers. Now we could show our customers when they could expect the product back on their shelves.

Prior to developing this methodology, we were making educated guesses about the timing of the recovery. For the most part, these guesses were inaccurate, frustrating management and our customers alike. Having much more accurate and comprehensive days of supply information available was extremely helpful to the Sales team and our customers. Armed with this information customers could find ways to work around the gaps on their shelves.

At the end of the day, a clear picture of bad news was better than not knowing when customer service would recover. With a chart like the one above, we were able to have meaningful and honest discussions with our customers. Sharing accurate information, even if it is not good news, is the key to building trust between organizations.

Picasso was certainly correct about a picture serving as a stepping-stone. We found a way to move forward with our customers once we generated a clear picture of the situation.

Photo credit: depositphotos.com image:26852525 by: semisatch

Is There an App for Supply Chains?

October 31, 2014October 31, 2014 mcalisterts 0 Comment Business Forecast, Expert Advice, Management Skills Business Review, Capacity Review, Operations, Performance Metrics

Tablet PC and Smart Phone with navigation system

When in unfamiliar territory in this day and age, we automatically reach for our smart devices to map out directions to our destination. We conduct a search for the place we want to go, tap the map icon and head off in the right direction. Mapping out directions for a supply chain is not so simple.

Several years ago I was involved in a situation where the senior business team decided to reallocate advertising and promotional dollars from my team’s brand to another brand in an attempt to increase earnings. Those of us at Headquarters knew this maneuver signaled a significant reduction in the amount of product needed over the next few months.

Since the resulting change was a ‘system-driven’ exercise, it was a few weeks before the new production forecast was available and published. By that time the new plan was in the system, my team had moved on to other battles and the impact of the funding strategy change was a distant memory. A month later I got a call from the Plant manager who was directly affected by this change. It was not a pleasant call… and rightly so. His staffing was based on the ‘old’ forecast and now he had to lay off people that he had hired recently.

Using colorful language not suitable for publication, he let me know that I made a big mistake. We called these discussions ‘leadership moments’. I vowed from that day forward to keep the plant and the rest of the supply chain ‘in the loop’ when it came to changes in the business strategy. To do this, I needed a mechanism to clearly communicate the impact of changing business conditions to the rest of the supply chain. In today’s lingo, I needed an ‘App’ to point supply chain operations in the right direction.

Efforts and courage are not enough without purpose and direction. John F. Kennedy

There was never any doubt the plant would do whatever it took to achieve the production targets we established months before. Unfortunately making product based on an outdated production plan, was not what the business needed. As a result of my ‘leadership moment’, we developed a very effective way to communicate the state of the business, along with specific information to the supply chain by using a process called the ‘Operational Review’.

Most organizations have a way to show Management their production capacity plan, however multi-colored charts are only part of the story. A good operational review process has several elements that will encourage greater understanding between the business team at Headquarters, and the supply chain.

Here are the basic elements of the Operational Review:

1. Production Capacity Review

Periodically updated visual depictions (charts or graphs) of each manufacturing line showing the production capacity and the volume currently planned for the line: These charts will identify production capacity concerns in the near future and whether there is capacity to grow the business.
Updated charts showing inventory projections that take into account sales forecasts: These charts are usually expressed in a ‘days of supply’ format. The purpose of these charts is to give an indication of current and potential customer service concerns.

2. Performance Metrics Review

Updated summaries of the inventory value (working capital) versus targets: These summaries will show how well the production plan is performing against the forecast. For example, higher than expected inventory value may indicate the sales forecast is not meeting expectations. However, if lower than expected sales are not the root cause of the increased inventory, then further investigation will be needed to find the source of the issue.
Information regarding customer service: Customer Service problems should be discussed to determine how and when they would be resolved. For example, if customers say they are running short on product, yet the overall inventory is above the agreed target levels, then the supply chain will need to determine what is creating this imbalance, and report back to the business team.
Production performance metrics presented by the plant showing the actual production results versus the production schedule: This is sometimes called ‘output reliability’ or ‘schedule reliability’.

3. Discussion of Events Impacting the Business

The Sales Forecast and Promotional Sales calendar is shared with the plant: This information will help the plant determine the amount of resources needed to meet the expected demand.
Future projects, such as packaging or graphics changes should be discussed well in advance: This discussion will help with production planning and minimize material write-offs.
Plans for future innovation projects, such as line extensions and new products should be discussed with the plant as soon as possible: Innovation projects should result in incremental business, and the plant will need to plan for the additional resources.

A key consideration when establishing the Operational Review process is deciding who is to be involved in the discussion. One of the purposes of the Review is to provide purpose and direction to the troops in the field. It was my experience that the person at Headquarters who has responsibility for providing the tactical direction to the plant is a key member of the Headquarters team, and the Production team, and is in the best position to be the facilitator of the discussion.

The majority of the information at the meeting will be intended for the Plant Manager and their production staff. However, the plant staff will also be asked to provide information for the review. A very important function of the meeting is for Headquarters and Production to gain a mutual understanding of the current and future challenges the business faces. It may be helpful to include other support functions on the team, such as Procurement and Quality.

Another factor to consider is the frequency of the meetings. We found that a monthly meeting was appropriate, however this could vary depending on the industry. Having pertinent and timely information to share is important, and most companies utilize a monthly business cycle.

Sometimes the path you’re on is not as important as the direction you’re heading. Kevin Smith

It was always my experience that when Management at the plant was well informed regarding the direction of the company, the trickle-down effect of this knowledge was always positive, even if the news was not always good. When plant management, supervision, and the line workers had a clear understanding of the direction of their business, they were more likely to make good business decisions. In the bigger picture, everyone wants to feel that they are contributing to the success of their company, and not coincidentally, their own success.

A steady and honest flow of information between Headquarters and Production regarding the direction of the business is always a good thing. Implementing an Operational Review process is an ‘app’ that can ensure everyone is going in the right direction.

Photo credit: Depositphotos.com 33866531 monicaodo