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.
Holding Inventory in Contracts
When you’re the customer in these types of agreements, reducing your inventory holding costs with contractual agreements provides your enterprise with a monthly savings of approximately 3%. This 3% pertains to your enterprise’s costs of holding inventory month to month. It’s no different for your customer base when you enter into a supply agreement as the supplier. Your customer isn’t only getting a better price, they’re also able to lower their own carrying costs. Inventory obsolescence and damage isn’t much of an issue when you hold product for them. Your customer’s financing costs also decrease when you retain product on your shelf for extended periods. To better understand those aforementioned carrying costs, please read Sample Inventory Costing Excel Sheet: Graph & Pie-Chart of Expenditures
You can access a sample blanket contract here and a sample kan ban contract here. Both are outlined in the above video
To read about Dell's Push-Pull and its unique supply chain and customer order fulfillment strategy, you can read the following post: Emulating Dell: Outlining a Small Manufacturer’s Push-Pull Strategies
If your supply contracts don’t protect your finished, semi-finished and raw material inventory, then any benefit to your company is easily lost if you hold the responsibility of reworking product through customer change requests. Therefore, understand that in addition to providing your customer with a better overall price, you are also saving them money on their carrying costs.
Protecting Your Inventory
The two most common agreements include blanket orders and Kan Ban contracts. While there are variations of these agreements from industry to industry, by and large, these are the two most prevalent types of supply contracts. Blanket orders often specify that a supplier holds finished inventory and releases an agreed upon shipment quality from month to month or from quarter to quarter. These types of agreements are ideally suited for cyclical and seasonal demand patters.
Kan Ban agreements are for those markets that have linear, constant demand where product must ship on a daily, weekly and or monthly basis. While blanket orders are more cyclical in nature, Kan Ban agreements are much more consistent in terms of their requirements for shipping finished product. However, where blanket orders merely require finished inventory, boxed and ready to ship, a Kan Ban agreement requires the supplier to specify finished, semi-finished & raw material inventory levels. This is needed in order to maintain the strict delivery requirements of these types of contracts.
Can an argument be made that protecting these inventory classes is more important when manufacturing custom-made assemblies? Absolutely! In fact, customer change requests don’t just impact what you have boxed, waiting to ship. They also impact your semi-finished inventory, as well as any and all work in process. Your contracts must protect your inventory and you must clearly define your inventory carrying costs on custom-made products .
Failure to do so means any profit you generate on releases are at risk once your company assumes responsibility for any and all future customer change requests. Your customer must cover these requests themselves and must be willing to accept the liability that comes with making so drastic a change to what you have in process.
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