DriveYourSucce$$

Protect Finished, Semi-Finished & Raw Material Inventory in Contracts

Are you a manufacturer of custom-made designs? Do you manufacture these custom assemblies based on unique customer requirements? More importantly, do your existing supply contracts protect your finished, semi-finished and raw material inventory once these customers need to make change requests and revisions? If you’ve answered "no" to this last question, then you’ve likely decided to rework this inventory at your own expense. In this case, you’ve allowed your customer to continually make changes, changes they should pay for, but don’t because your contracts don’t protect your inventory. It’s time this change.

Blanket Orders and Kan Ban Contracts: Which Supply Agreement is Best?

Most of my customers make the common mistake of confusing blanket orders and Kan Ban contracts, with some referring to both as JIT (Just in Time) agreements. Unfortunately, it’s never that simple. Very few Kan Ban contracts are ever able to meet the strict delivery requirements of a JIT agreement. Granted, they are similar, but their differences must be understood in order to structure the supply agreement to meet each party’s unique needs. After all, there are buyers and suppliers who enter into these agreements and both must be cognizant of their appropriate roles, responsibilities and liabilities as they pertain to the inventory needed to make these orders work.

Sample Kan Ban Contract: Finished Inventory, Semi-Finished Inventory & Raw Materials Inventory

Today I decided to include a sample Kan Ban contract that specifies the liabilities for both a buyer and supplier as they pertain to the finished inventory, semi-finished inventory and raw material inventory within the agreement. These contractual agreements work when both parties clearly define these aforementioned liabilities and are willing to negotiate in good faith. However, it’s essential that these agreements are signed by both parties, as the amount of inventory needed to make these contracts work is quite substantial. Use properly, the Kan Ban agreement can help reduce the buyer’s inventory holding costs, while providing the supplier with consistent manufacturing volumes.

TOWS Analysis and Your Supply Chain: Lower Costs, Better Service!

Can a TOWS analysis help lower costs within your supply chain and be the catalyst to secure better service from your vendor base? When answering this question, think of how most companies apply a simplistic approach to reducing their supply chain costs. Think of how these companies rarely plan or come up with specific strategies. These are the enterprises that try to use fear and intimidation to threaten their suppliers with lost business. To these companies, their volumes are the only tool at their disposal and the biggest lever to bending suppliers to their will. Unfortunately, rarely does this approach work. However, a TOW analysis incentivizes companies to think outside the box by forcing them to consider more than just their volumes. So, how can a TOWS analysis help improve your supply chain?

Bill of Materials Essentials: Substructure & Subassembly Analysis

How important is it to properly manage your product's bill of materials? As a manufacturer, do you take the time to perform a substructure, or subassembly analysis in order to segregate your most common subcomponents and incorporate them in future designs? Do you understand the importance of isolating commonality at the part and raw material levels in order to reduce inventory skews, counts, costs and manufacturing cycle times? If you’ve answered "no" to each of these questions, then this is a definite must read. Identifying common subcomponents often holds the key to increased production throughput. So, what are the critical steps to performing a subassembly analysis?

Four Vendor Management Strategies to Reduce Costs in this Economy

One of the more valuable lessons emerging from this economy has to be the importance of maintaining strong vendor partnerships. Unfortunately, a large number of companies take an adversarial approach to vendor management. While some do make an effort to find a middle ground, the vast majority don’t. In fact, most rarely take the time to define how best to work with their vendor base. However, it’s those companies that excel in vendor management that are ultimately able to weather the storm and emerge stronger. Given today’s business climate, it just makes sense to adjust your company's approach to this new reality. So, what are the four strategies you should adopt with respect to how your company manages its vendor base?

Define Your Inventory Carrying Costs on Custom-Made Products

Does your company manufacture custom-made products and if so, have you taken the time to define your inventory carrying costs on these custom designs? Perhaps you're unaware of how the carrying costs on one-off designs might differ from say, standard product lines. Sales of conventional product lines typically dictate that a company manufacturers a product, holds it in inventory and then proceeds to go out and make sales. However, for custom-made assemblies, it’s entirely different as your company might not order raw materials or start production until an order is received. In addition, your company must adjust its manufacturing schedules when confronted with customer change requests. Ultimately, it's the customers who must sign-off on these modifications before the product moves to the next stage of production. Either way, these changes directly impact your company’s carrying costs of inventory on these custom-made products. The question is, by how much?

The Bell Curve of Inventory Management: Finding the Middle Ground

Finding that middle ground between having too much inventory, and not enough, is never an easy endeavor. On one end of the spectrum are high inventory holding costs that accompany holding inventory without sales. On the other end are lost sales due to low inventory counts and levels. One involves high financing costs and the risks of inventory damage and obsolescence while the other involves losing sales and possibly customers, due to a lack of available inventory. One is a constant reminder of the company’s cost of capital and the other is a reminder of the costs of lost opportunities. Neither outcome is acceptable and finding that middle ground is paramount to success. So, what does it take to find that middle ground in inventory?

The Institute for Supply Management, ISM, Calls Upon Drive-Your-Success

I’ve contributed to several industry trade magazines for engineering, manufacturing, production planning as well as multiple publications covering purchasing and operations. I’ve written as a ghost writer for some enterprises, been used as a reference in others, sold content to companies and have also contributed to thousands of articles and white-papers. My work is spread out throughout the internet. However, for the most part and for a multitude of reasons, I’ve been unable to use my own name in these documents. However, a consulting company I've worked with recently forwarded my name to the Institute of Supply Management. In the recent issue of Inside Supply Management, the magazine publication for the Institute of Supply Management, I was asked to contribute to an article covering Dell’s “Push-Pull” supply chain management approaches. The article entitled “Finding the Push-Pull Balance” is available to download. Please note, this is Copyrighted to ISM - “Copyright Institute for Supply Management, October/November 2011” – Here is the article:Download Feature Push-Pull Oct-Nov2011[1]

Sample Customer Scorecard Excel Sheet: Grading Your Customer’s Value

What factors do you consider when it comes to grading your customer’s value to your business? Like most enterprises, does yours simply base this value on the amount that customer spends? Or, do you base it on other criteria, in addition to how much they spend? To help you answer these questions, I’ve decided to include a sample customer scorecard excel sheet that not only accounts for how much your customers spend, but also takes into consideration their payment habits, their contribution to your inventory turnover rates and their impact on your inventory and receivables financing costs.

The Inventory Conundrum: It’s Either Too Much or Not Enough!

One of the more contentious issues my customers face is the constant concern of having too much inventory or not enough. Why is this such a constant struggle and a going concern for today’s businesses? Well, it’s often because companies want to be able to capitalize on sales when they’re available but not have so much inventory that it eats away at their gross profit. While this explains the struggle companies face, it doesn’t necessarily explain why companies constantly find themselves in this mess. So, what’s at play here?

Inventory Management: Inventory Levels Are Low But Costs Are High, Why?

If I could name the single biggest mistake my customers make with respect to inventory management, it would have to be their assumption that low inventory levels mean low costs. Where they see low costs, I see a disaster waiting to happen. Where they see low costs, I see a company suddenly paying expedite fees to rush parts in to meet customer demand. Where they see low inventory costs, I see high per-unit freight costs on rush shipments of parts and materials. Where they see low inventory costs, I see material shortages and possible machine downtime in manufacturing. Where they see low costs, I see them covering the cost of freight to their customer’s location for being late. What they don’t see, I see all the time.

Commitment to Dell’s “Push-Pull” is Paramount to Success

If you’re going to run Dell’s “Push-Pull”, then you must commit your company's resources to making it a success. Dell’s strategy isn’t merely an inventory and supply chain approach, but also a doctrine that dictates how your company goes about manufacturing its products, and what your marketing & sales strategies must be focused on to secure consistent customer demand. While an argument can be made that the Push-Pull strategy bridges the gap between Min/Max and JIT, it would be wrong to assume that it’s only focused on how a company manages its inventory. To make this strategy truly successful requires you commit yourself to a multipronged approach and one that impacts your company's entire operations. So, what does it take to make Dell’s “Push-Pull” a success?

Supply Chain Management: Inventory Holding Costs in Dell’s Push-Pull

Dell’s Push-Pullallows manufacturers and integrators to pre-manufacture, or pre-assemble, the majority of a given assembly, wait and then complete the remaining portion in order to deliver a custom-made, finished product. Companies that run this inventory & supply chain strategy can shorten their product to market lead times and still deliver a customized product. However, the concern lies with the inventory holding costs in Dell’s Push-Pull. After all, a company must account for its costs to hold inventory before selling it. The longer it’s held, the higher the costs. So, how does one measure inventory holding costs using this supply chain approach?

Strategic Business Planning: Top 5 SWOT Analysis Applications

In my recent post entitled Strategic Business Planning: Use TOWS to Move SWOT to an Action Plan, I outlined how the TOWS analysis can turn the items under each SWOT heading into an actionable plan. The approach is to be succinct, to the point and not go overboard in assessing the four quadrants of the SWOT analysis; Strengths, Weaknesses, Opportunities & Threats. With this post I wanted to go over the top 5 applications for the SWOT analysis with respect to the content on this blog. Suffice it to say, this strategic business planning tool has multiple applications.

Higher Commissions for Prepaid Orders & Faster Turnover Rate Products

Most companies ignore the benefit of paying a higher commission to salespeople for securing prepaid orders and focusing on faster turnover rate products. These companies simply ignore their daily cost of money and its impact on the product’s gross profit. They fail to account for the company’s financing costs of inventory and the company's costs to finance receivables. For instance, if the product is retained for months on end, the salesperson still gets the same commission. Consequently, if a customer takes 30, 60 or even 90 days to pay an invoice, again the salesperson still gets the same commission. However, doesn’t it just make sense that the company’s sales team should be compensated for ensuring that inventory moves quickly and that customers pay faster? It most certainly does!

Strategic Planning: Reducing Inventory & Receivable Financing Costs

When it comes to strategic planning, few approaches are as important as reducing the company’s inventory & receivable financing costs. When a company looks at its financing costs of inventory, it is really concerned with its daily cost of money. Even after the product has been invoiced, the company will continue to cover this daily cost of money for everyday their receivable goes unpaid. This is why a number of companies only consider a sale finalized once the invoice has been paid. However, just how impactful are these financing costs? More importantly, how does a company reduce its inventory & receivable financing costs?

Should Your Company Define its Inventory Replenishment Time?

Have you taken the time to define your inventory replenishment time? Have you outlined the processes needed to ensure your inventory doesn’t encounter the high costs of inventory stock outs? Most companies rarely take the time to define their replenishment time. Instead, they try and dictate their terms of service with vendors by asking them to do everything possible to shorten their delivery times. Sometimes it involves making outrageous demands. Sometimes it involves purchasing from multiple vendors and yet in other cases, it involves purchasing a higher volume than needed. Unfortunately, purchasing too much is often just as costly as not buying enough. Therefore, defining your inventory replenishment times is essential to defining your overall turn times on finished goods. So, what are the steps involved in defining these replenishment times?

Small Business Inventory: Do You Know the Costs of Low Inventory?

Is it possible to simplify inventory costs into two categories? More importantly, when it comes to small business inventory, what are these two categories and which one is more costly? In order to answer these questions, think of your company’s cost to hold inventory without sales. In this case you’re likely thinking of your cost of money, the cost of inventory damage, obsolescence and the impact of ruined inventory. Holding inventory without sales is one of the cost drivers. The other includes the costs of losing sales because your company doesn’t have inventory, or has low inventory levels. Shocked to hear that losing sales is viewed by businesses as an inventory cost? Don’t be!

Use Stage-Gate Process to Choose an Inventory Management & Supply Chain Strategy

Using the Stage-Gate process to choose an inventory management & supply chain strategy is an excellent way to isolate costs and reduce waste. However, how would one use the Stage-Gate process and what would the first step be? Would it include focusing on what you’ve read works for other companies in other industries? Would it include reviewing inventory best practices and success stories from larger competitors? Or, should you focus on matching your inventory strategies to your business model, your market and your customers' order frequency? Well, as enticing as it may be to emulate another company’s success, going down this road won’t allow your company to pick the inventory strategy best suited to your situation. No, in this case, it's never that easy!

Protecting Vendor Interests in Consignment Inventory Agreements

Consignment inventory agreements are an excellent tool to grow your company's market share. They can help retain existing business or be used to pursue and close on new opportunities. However, as the vendor in these agreements, your company must be aware of both the pros and cons of consignment inventory. Granted, your company may see these agreements as essential to winning new business. Regardless, there are some aspects of consignment inventory that must be clearly defined between you and your customer. If not, your company risks losing gross profit on each and every sales transaction.

Using PERT Analysis to Estimate Vendor Delivery Times

A small business owner recently asked me if he could use the PERT analysis to estimate vendor delivery times. He had just finished reading the post Sample Sales Territory Forecasting Excel Sheet for Small Businesses and wondered if the same strategy used for small business sales forecasting could be applied to nail down a delivery date on incoming parts & raw materials. Obviously the owner didn’t have the luxury of an ERP system to track the variances in vendor lead times. I explained that the only time I had ever used PERT for this purpose was in tracking incoming parts & materials under certain projects. So, it is possible and I’ve decided to provide insight into how it could be done.

Sample Pareto Excel Sheet for Tracking Causes of High Freight Costs

Pareto charts are excellent tools for depicting the consequences and outcomes of ill-advised strategies or existing business processes. This sample Pareto excel sheet for tracking causes of high freight costs is meant to isolate the biggest cost drivers of your company's freight. The per-unit freight cost of incoming shipments of raw materials, and outgoing shipments of finished parts, is an extremely important part of your company’s overall inventory holding costs. Tracking why these costs are high allows your company to pinpoint those areas that need to be addressed.

Reducing Your Inventory Holding Costs with Contractual Agreements

In my recent post entitled “Production Throughput: Inventory Holding Costs & Lost Time due to Material Shortages”, I touched on how a company could reduce its inventory holding costs with contractual agreements. Today I thought I would expand on how these agreements allow companies to reduce the costs of retaining inventory for extended periods. The focus must be on understanding your company’s monthly carrying costs of inventory and then dividing these costs with your vendor through either a blanket order or large volume contract. So, can a company effectively reduce its holding costs with the right agreement?

Maintaining Safety Stock Leads to Customer Service Excellence

How does your company define customer service excellence? More importantly, do you understand how your safety stock plays a role in ensuring your company meets your customers’ expected ship dates? Properly managing safety stock means your company is actively reducing the impacts of stock outs and their negative impact on sales. In fact, stock outs increase a company’s inventory holding costs because they lead to lost sales. In this case, properly managing your safety stock ensures you’re not only excelling in customer service, but that you’re ultimately improving customer retention.

Five Inventory Holding Costs That Impact Your Bottom Line

You need inventory to capture opportunistic sales but can’t quite come to terms with your inventory holding costs. It’s why most companies have a love hate relationship with their inventory and all strive to reduce their costs to hold inventory for extended periods. It’s a constant reminder of the company’s cost of money and extremely expensive to support. However, when it comes to these costs, it’s important to remember that every dollar saved goes directly to your company’s bottom line. Consequently, every dollar wasted has the exact opposite effect. Given the high cost of holding inventory, what are the most prevalent holding costs? More importantly, what are the five inventory holding costs that are impacting your bottom line?

Production Throughput: Inventory Holding Costs & Lost Time due to Material Shortages

Are you aware that your inventory holding costs include those instances where you must rush parts in because of a lack of available inventory? More importantly, do you track the incidences of lost time on the production floor due to material shortages? It’s amazing to think that manufacturers encounter lost time because of a lack of inventory, but they do. In today’s business environment, manufacturers everywhere are trying to reduce their inventory holding costs and for some companies, that means limiting the amount of inventory they hold. While running a tight inventory may seem like a good way to reduce costs, in reality, it does nothing more than increase holding costs and in the worst instances, increases lost time in manufacturing. 

Determining Safety Stock & its Impact on Inventory Holding Costs

When it comes to retaining safety stock, a number of companies are concerned about its impact on their inventory holding costs. Unfortunately, some companies believe retaining emergency stock is simply too expensive and doesn’t justify holding inventory to capture opportunistic sales. However, is having safety stock really about capturing opportunistic sales or more about ensuring the company meets its obligations, better services its customer base and protect its market share? Well, the fact is, money tied up in inventory isn’t easy to accept and it can be expensive. However, having that safety stock is an essential part of your company’s success. The key is in determining your safety stock levels and their impact on your company's inventory holding costs.

Using Inventory Holding Costs to Determine Restocking Fees on Returns

What role does your company’s inventory holding costs play in your restocking fees on product returns? Do you track your product’s average number of days held before its sold - its turnover rate - and then use your holding costs to determine your company’s fee for accepting a customer return? Perhaps you’ve not yet taken the time to define your company’s restocking fees, or are unsure of what criteria should be used. Well, while there are varying opinions on how to implement fees for returning product, I’m going to put forth the argument that restocking fees must be based on your company’s costs to hold inventory and ultimately, must provide some way to recoup those costs.

Emulating Dell: Outlining a Small Manufacturer’s Push-Pull Strategies

In my recent post entitled, Explaining Push-Pull Supply Chain Strategies for Small Enterprises , I outlined how Dell’s approach to supply chain management differs from Just in Time, or JIT. I made an argument that Dell’s strategy is ideally suited to small and medium sized enterprises because it matches their customers’ cyclical and seasonal demand patterns. However, I didn’t provide any insight into how companies can define their “Push” strategies relative to their “Pull” strategies. To clarify both of these aspects of Dell’s approach, we’ll review each in detail and provide insight into how small manufacturers can use a multipronged approach to ensuring their “Push-Pull” strategy is successful.