Improve Performance – Create Resiliency – Lower Costs
Welcome to 2023!
With the onset of the pandemic in 2020 and subsequent havoc it created for many companies and the lingering impacts, there continues to be a need to get back to the basics of supply chain management.
Most of the pandemic issues were not your own doing, but your capabilities/processes/tools and ability to respond were in your control. Not having the processes/tools/strategies in place to manage the dramatic swings in supply and demand likely created excess costs, missed revenue opportunities, and now created excess inventory in many businesses.
While all businesses have different drivers and market dynamics, the 3 capabilities below can be implemented by everyone and I would argue are the key to managing not only your supply chain, but your overall business as well.
If you want to lower costs, be prepared to manage through pandemic situations, create supply chain resiliency, and improve overall performance, working to put these 3 core capabilities in place should be at the top of your 2023 Operational Objectives.
Supplier Management Program
Most small manufacturers and distributors struggle to put strong supplier management processes in place. Lack of procurement skillsets, processes and data are limiting factors.
Not all suppliers are created equally – so identifying your key strategic suppliers is a good place to start.
These suppliers usually are single sourced and likely contribute a large portion of your material costs. A second source may exist as a risk mitigation strategy.
Here are some areas to consider when implementing a more collaborative supplier management program.
Forecast – Are you providing a forecast to your key suppliers? How you support their ability to execute your requirements is key – how do they support their lower-level material purchases for your business if they are unaware of your needs.
Metrics – Are you measuring their delivery performance, quality, and benchmarking costs? There is nothing worse than an unpredictable supplier in any of these areas.
Business Reviews – Do you periodically conduct weekly/monthly/quarterly business reviews? Weekly/Monthly reviews can be used to communicate short-term demand and square away any performance issues. Use your quarterly review for broader business updates and a deeper dive into cost, quality, and delivery.
Bottom line – collaborating with key suppliers and providing them with information that will support their business and yours is a key best practice for creating supply resiliency.
Planning Process Development
Probably the most underrated process in your supply chain is the need to have periodic/consistent planning processes.
Sales and Operations Planning (Demand, Supply, Financial) – This process aligns your sales, operations, and finance teams to the same planned outcome. This is a must have for manufacturing businesses and a key to ensuring all functions are aligned to the same goals across the business.
Material requirements planning (MRP) – Allows you to plan your purchases and production based on key factors – BOM, part/production lead time etc. – time phased over a period– typically weeks.
Production Planning and Scheduling – Determines production schedules and plans key resources day to day and week to week.
Capacity Planning – Used to identify constraints in your manufacturing processes – allows for longer term investment requirements – and mitigates promising supply to customers when capacity is constrained.
Proactively planning your revenue, inventory investments, cash flow and financial results will allow your business to be more proactive vs reactive as business conditions change. Not to mention these processes also feed and inform your future business needs for your suppliers, production, financial resources, and investment needs.
I see so many companies with ad-hoc, unstructured planning processes, that lead to financial surprises, part shortages, inventory issues, missed revenue and excess inventory costs.
While these processes/capabilities can be challenging, the rewards of planning your business can mitigate many issues you will find yourself scrambling to address in the future.
Inventory Management Processes
The holy grail of supply chain management.
As someone who has managed and tracked inventory for various businesses for years, you will either have too much or not enough – that is the way it works – either way your ability to manage your inventory costs will largely depend on your inventory management capabilities and processes.
While there are other processes like supply/inventory planning that impact your inventory, I like to break this down into two categories for inventory management – How Much and How Accurate.
So many companies manage their inventory based on gut feel or using one factor – such as lead-time or transit time to determine how much inventory to carry for any product (FGI) or component. Basically it is a guess.
Here are the key factors to evaluate when determining how much inventory to carry:
- Product life cycle – Where a product is in its life cycle has a large impact on your inventory goals. New products tend to carry a higher level of inventory to support forecast variability and as it moves through to a more mature stage, inventory levels can moderate to actual demand requirements. Typically, you will start lowering your inventory requirements for products going end of life and have replacements on the way. You will remove safety stocks and may even update your MRP settings to block future purchases.
- Forecast Variability – Higher forecast variability = higher inventory if you want to keep a higher service level. This factor – how much forecast variability you want to cover is the single largest $ impact on inventory goals.
- Supplier Leadtime – Supplier leadtimes drive inventory and supplier delivery reliability also contribute to setting inventory goals. Longer lead-times can lead to larger inventory and vice versa.
- Network design – Distances between supply nodes and logistics strategy will also impact your inventory goals – boat/ocean shipments tend to create more in-transit inventory, while faster logistics options will reduce inventory requirements but likely drive-up freight costs.
Ah, most of my clients come to me with inventory variance issues. They just conducted their annual physical inventory and had unexpected and unplanned inventory write-offs. Very frustrating for the operations team as they were planning with bad on hand inventory information and equally frustrating for the finance/executive team to have unfavorable financial impact.
So, why can’t operations keep inventory accurate? Here are 5 areas to explore if you are having inventory accuracy issues.
- Bill of Material errors – The most common problem is that the actual material used in production is different than what is being depleted in the Bill of Materials. Do you have an audit process to ensure the BOM accurately reflects actual consumption in production?
- Receiving Process – It is not uncommon to have receiving issues – the bill of lading is inaccurate and what is physically received is less than the Bill of lading states. Missed receipts are another issue, although not common.
- No Cycle Count Program – Periodic (Weekly) counts of high volume/high dollar items can mitigate the year end surprises. A cycle count program is a best practice for manufacturers and distributors.
- Warehouse Management – Location management is not implemented – inventory is lost – not sure where inventory is located. This can happen in a variety of ways – but most of the time inventory is just put away in the wrong location – potentially causing overbuying and overall mismanagement.
- Transaction Management – Parts are received but never transacted via the PO – parts are used but Workorders are not closed or never opened. The ability to transact inventory as it physically is moving through your operation is a key process trait to be implemented. I see so many companies physically transforming materials in production with latent transactions. This compromises your planning system and your ability to manage your operations.
Focusing on these 3 core capabilities will enable best practices and core supply chain basics critical for any manufacturing company.
As always – Tight Lines