Vendors – 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:

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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’

Water Chestnuts Only Come from China? Really?

October 10, 2014October 10, 2014 mcalisterts 0 Comment Case Studies, Expert Advice, Management Skills, Preparedness customer service, Expert Advice, Import, Preparedness, Raw Materials, Vendors

“There’s no harm in hoping for the best as long as you’re prepared for the worst.” Stephen King, Different Seasons

Although Mr. King is not known for his supply chain expertise, he could have written a thriller based on a situation that took place in our supply chain a number of years ago.

About a month after our company had launched a new product line using water chestnuts, we immediately saw signs of sales exceeding the forecast. After confirming this with Sales, I performed analysis on the raw material inventory to determine if we were at risk. It had already been a long day when my spreadsheet revealed that we would run out of water chestnuts in less than 6 weeks. I gave Procurement a quick call to let them know we would need to move up a shipment or two.

After a few minutes of discussion with Procurement, what I learned was a little shocking: the supplier was in China and they didn’t have any ‘safety stock’ in the US. This meant that there wasn’t any extra material readily available and we were likely to run out of material before the next shipment.

Unfortunately, it got worse. Digging further, we determined that the amount ordered and in-transit was not going to be enough to cover the rapidly rising requirements. We needed to ship incremental material quickly or we would jeopardize the product launch. This situation emphasized one of the unwritten rules of planning: If you are about to run out of a material, demand for the product will invariably increase.

My next question for Procurement was about an alternative supplier that could cover the potential shortage. After an uncomfortable pause on the phone, my contact said, “Water chestnuts are only sourced out of China, and because of our unique specifications, the supplier is the sole source of supply for the material we need for our product.” Really?

Rosemary Coates’ ‘The Risk of Failure.’ addresses rising supply chain risk due to materials being routinely sourced from far-reaching geographies. Speaking from experience, the risk is very real.

If we had to do it over again, we would certainly do things differently. It is the business team’s prerogative to ‘assemble’ the best product they can with the materials at their disposal. It can always be debated whether a unique material is ‘necessary’ to make a desirable product, but this discussion will focus on a proactive approach to managing long lead-time materials.

“Prepare for the unknown by studying how others in the past have coped with the unforeseeable and the unpredictable.” Gen. George S. Patton

There were a few days that felt like we were in the Battle of Bulge along with General Patton. In other circumstances it would be good news that sales of the product line were exceeding the forecast, but in this case, the supply chain was raising flags saying we may experience a shortage of water chestnuts (among other ingredients) making it difficult to produce some of the items. Putting it mildly, this is not what the business team wanted to hear.

Based on the trials and tribulations we experienced as we worked out the situation, here are three broad areas to consider when sourcing unique materials from distant geographies:

Carefully estimate the transit time and the time it takes to move items through Customs. What is the typical shipping time? Does it take 3 weeks or more to get across the ocean? How long does it take to get through Customs. Does your company have experience clearing materials through Customs. How long does it take to transport the material from the entry port to your location? Hiring an experienced import resource to manage the paperwork at the port and subsequent transactions can be very helpful. For this particular item, we allowed 6 weeks from the time the boat left the port in China until the material was in our facility ready for use.
Understand the vendor’s options if their primary source is depleted or the demand outpaces the rate of supply. Does the vendor have an alternative supplier or additional production capacity? If the demand for the material unexpectedly doubles or triples, can the vendor keep up? If not, what are the alternatives? Will a slightly different material work for short periods of time? Knowing the answers to these questions prior to being in a panic situation can be very helpful.
Develop a conservative inventory policy for high-risk materials. A conservative policy in this context means ‘extra’ inventory. Obviously it is necessary to be fiscally responsible, however the risk of suffering customer service issues (no product available) must be weighed against making sure 3-4 months of inventory is always available in a local warehouse. A key to making this plan work is requiring the vendor to have ‘safety stock’ readily available at all times. It is extremely important to ensure this agreement is being upheld and the inventory confirmed on a frequent basis. Having this stock locally available (in country) on short notice can greatly improve the chances for success of a product launch.

Perhaps you are wondering how our ‘thrilling’ situation worked out. We had to air-freight some of the material from China to the US. Suffice it to say this was very costly. From the beginning of the product launch, our customers were extremely excited to have the product on their shelves. The initial success of the product line led the business team to justify the expense.

After this incident, one of the activities that proved to be helpful was setting aside a day to conduct what we called ‘War Games’. The idea behind this activity was to get all of the key players (Sales, Marketing, Procurement, Planning, Quality, etc.) in one room for a day to go through all of the possible issues that could jeopardize the launch of a product. This brainstorming session would take place soon after Management decided to launch a new product and everyone had a chance to discuss possible upcoming challenges to the new business. All aspects are discussed, including competitive market challenges, distribution problems, supply chain concerns (such as the one discussed here) and any other concerns the team may uncover.

Planning conservative raw material inventories can make a significant difference in ensuring product is available during the critical stages of a product launch. Turning Mr. King’s quote around, “Preparing for the worst will let us hope for the best.”

Photo credit: Depositphotos.com 53476899 thinglass

Can I Trust That Character?

September 10, 2014September 10, 2014 mcalisterts 0 Comment Expert Advice, Management Skills, Uncategorized Character, Competency, Covey, Trust, Vendors

Over the years I’ve had the honor of leading many groups of people who depended on my character to support them and help them become successful. In my world, I only considered myself successful if the people around me were successful. To make my organization successful, there had to be mutual trust and it was of paramount importance that everyone one around me trusted me as their leader.

In the professional environment, to gain the trust of our co-workers we must demonstrate our character. Our character will shine through in many ways, including but not limited to, how we speak to others, how we talk about people who are not in our presence, and how well we perform our jobs day in and day out. The way we conduct ourselves builds trust. The same is true for our business partners.

Trust has many facets, and one of my favorite books is, “The Speed of Trust: The One Thing that Changes Everything,” by Steven M.R. Covey. A great quote from this book is, “Trust is equal parts character and competence… You can look at any leadership failure, and it’s always a failure of one or the other.” More from Covey later.

In the supply chain world, I see a very strong connection between operational success and the level of trust in the vendors. In other words, if a vendor is trustworthy and reliable, product can be made on time and in full. When this happens, the business will make progress. Without trust, it’s a very tough road.

Consider this example of what happens when trust doesn’t exist between the company and its vendors: A manufacturing company makes a variety of Widgets containing anywhere from 10 to 15 parts in each widget. There is at least one vendor for each part, depending on the volume of parts needed for production. Since the assembly process is continuous from beginning to end for each variety of widget, all parts must be available at the beginning of the assembly process. If even one part is not available, the finished product cannot be assembled.

Most producers carry low inventories of raw materials, and deliveries of new raw materials are usually ‘just in time’. More than likely, if the vendor does not deliver the supply of parts on time, production will not occur. The repercussions of this scenario are always negative and costly… downtime, unplanned schedule changes, inventory imbalance, over-time, etc.

In my experience the best way to approach this situation is to find a reliable vendor with the technical resources to meet the demand, and an ‘organizational character’ you can trust. Perhaps this sounds a little far-fetched but things go well when both organizations truly embrace how they mutually benefit each other.

“Good teams are committed to the team mission and to each other personally. Good leaders inspire and build this commitment and trust.” Lee Ellis (Leading With Honor: Leadership Lessons from the Hanoi Hilton)

From my perspective there are ways to assess whether a new vendor will be trustworthy. Steven M.R. Covey, identifies four basic components of the trustworthy relationship: Integrity and Intent (Character) along with Capability and Results (Competency). Covey describes the process for building trust, and if the producer can answer yes to all of these questions, then the relationship will move forward quickly and efficiently. When evaluating your current vendors or considering a partnership with a new vendor, ask yourself the following questions proposed by Covey (paraphrased):

Does the vendor have Integrity? –Does the vendor do what they say they will do? Do they act with humility or do they ‘brag’ about their accomplishments? Do they show the courage necessary to do what needs to be done?

What is the vendor’s Intent? – Do they want to make one big sale, or do they want a long-term relationship? What is their agenda? Are they interested in what will make your company and your products better?

Does the vendor have the necessary Capabilities? – Do they have the talents, skills, and knowledge you will need to move forward? Does the vendor have the resources, intellectual capacity and capabilities needed to make a difference for your business?

Will the vendor get Results? – Do they consistently deliver the expected results? Will they continue to deliver in the future? Does the vendor take responsibility for their results or do they find reasons/excuses for their failures?

I have been in situations where a good vendor will answer all of the questions without hesitation and have data to back up their claims. I’ve also been involved with vendors who over-stated their capabilities… which is failure of both character and competency.

There is no simple way to get through the process of evaluating vendors. However, if time allows, the best way is to meet face-to-face with the technical representatives to ask the difficult questions and get a true understanding of their capabilities. When both parties can look each other in the eye, there is going to be a much stronger connection and subsequently, a higher level of trust.

When it comes down to it, we are all in business to be successful… you can measure success any way you like. Vendors are your partners or ‘team members’ in the enterprise and when they are successful, your business has a much better chance of being successful. If you can build a trusting relationship with ALL of your vendors you will be amazed at how much time you can then dedicate moving your business forward. Trusting those ‘characters’ will make all of the difference.

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