Procurement – From a Planning & Inventory Optimization Perspective

The foremost expectation for any supply chain is to work in tandem with the market realities at the minimum cost possible, so that right goods reach the right place at the right time. In the discussion below, we will touch upon some of these aspects of these expectations, while trying to also build upon recent paradigms which have taken the world of supply chain by a storm in the last decade.

WYFIWYG (What You Feed Is What You Get)

The quality of feed of information to a supply chain echelon makes it or breaks it. In a separate context though, the former U.S. President, Ronal Regan frequently had observed – “Trust, but Verify”. Unfortunately in the world of Supply Chain, ‘verifying’ is more often a post-mortem job of what went as per expectations, and what didn’t. Hence this world has been working on a workaround – which goes by the name of “Sales Forecasts”. However, in the uncertain environment of businesses, and intense market activities by all forces, such forecasts usually have a wide degree of variation from the reality. Hence supply chain functions, especially Procurement need to be wary of using such inputs blindly. Rather, the updated version of the above adage could be “Trust, but Triangulate” (using available information with other relevant sources)

Too much emphasis on “Sales Forecasts” could prove risky. However, by considering those for a rough-cut planning perspective could do the job, since any challenges on capacity over/underutilization can be flagged off, and scenarios may be discussed

Buffer it up, but not that much!

The best of working in such scenarios could be designing optimum and dynamic buffers of inventories at strategic locations, which should be in line with the variabilities of consumption and supply and should correspond to the general volume of the SKU in question.

The buffers should

  • take into cognizance the recent trends of consumptions
  • keep a forward-looking eye on any onset/decline of expected seasonality etc
  • any planned interventions should be considered, only when there is significant confidence on the expected impact
  • be actively managed, questioned, subjected to feedback and tight control, and linked to KPIs

Strategic calls of ordering e.g. high/low coverage due to price anticipations/Minimum Order Quantities (MOQs) should be considered once the inventory norms basis the above considerations have been adequately considered. The lever then remains is the scheduling aspect, which should be carefully be inserted into the contract clauses, so that there is no ambiguity left over the same

Singing in the rhythm:

“The rhythm is like the spine of the piece. If you change that, then the body that forms around it is changed as well” – Peter Gabriel

A frequent, consistent rhythm of order flow, supply visibility and corresponding analysis of over/under inventory is a must, as it defines how the supply chain responds to change events.

Some recommended parameters of this PERIODICITY are:

Frequency – should be as high as possible – a synchronized information flow at a daily level of consumption at all relevant nodes is desirable. Expenditure in collecting this daily data may not be high. Most companies have this data residing somewhere in their system. The key lies in linking this data to the ERP in a seamless manner without any manual effort. If done properly, the net effort and total costs should actually come down over time

Timelines for action – Decision making shouldn’t be so late, that there is a delay in reacting to the demand signal, nor should be so frequent, that MOQs don’t get made, or upstream nodes get too much noise from the downstream ones. A bi-weekly frequency works out practically fine in this scenario for many companies, but with improvement in internal agility, a DAILY PLANNING & REVIEW should be the Holy Grail. MOQ should not be an issue since the first requirement of a small quantity should trigger the MOQ order. Chaos can be avoided by smoothening the demand signal over the usual consumer purchase cycle pattern.

Plan horizon – should be long enough to foresee any capacity constraint challenges for the peak consumptions, and should have a subtle indication at least for any major periods of non-utilizations of resources

Visibility and understanding of lead times – The various lead times of Procurement and further levels of the supply chain need to be kept in mind at all the times. Having visibility of the back-end materials on order and in stock helps gain confidence in supplies

Service level agreements – have a realistic, yet stretch target for the team, which is clearly aligned with the customer expectations. High inventory is like bad cholesterol – it silently kills you from within and clogs the arteries which bring in money (oxygen). But being underweight has its own ramifications, and nobody wants a sudden shock due to (stock) starvation. Hence a balance of the two is paramount, which needs to be articulated on paper.

Standard deviations are your friends

The late Prime Minister of United Kingdom, Sir Winston Churchill once remarked in the House of Commons, “Those who fail to learn from history are condemned to repeat it”. Truly, with the amount of data now getting available, it is obvious that supply chain teams, especially ones dealing with Procurement, need to study the patterns which have led to past incidents. Some pointers here would help:

Déjà vu, anybody?

Patterns lead to behaviours, even at organization levels. It helps to analyse the instances when there were sudden spikes in downstream consumptions. Something would have led to one another. Where was the first domino tile when it fell down, and how did the forest fire spread? Was there a way it could have been contained earlier? Cause-and Impact analysis comes quite handy here

Who moved my cheese?

Things go wrong, but before they do, there are certain signals which remain hidden in plain sight. In case of say, incoming material rejections, we can try probing into

  • Quality trends near the time of the incident.
  • Were the specifications of the parameters during incoming material checks changed recently?
  • Was there a change in the processes at the vendor’s end?
  • Was there a new vendor? Or a new vendor’s vendor?

Numeralize and Monetize

How can subjectivity in the information be translated to measurable data and then converted to a net profit/loss projection?

  • Can a performance matrix of material suppliers be developed?
  • Can the understanding of financial health of the vendor be useful in deciding the future course of action?

Capitalize on each incident which is different from the usual to gain insight on what could have gone behind the scenes. Rewards and Risks can be treated further accordingly.

Mr Murphy was, is, and will remain so…

Let’s be frank – Supply chain will continue facing unknown and sudden pressures. Breakdowns in factories will happen, sudden orders will come overnight, transport strikes will happen, and costs of key components will zoom up on due to a politician’s statement sitting 20,000 miles away. However, some of these crumbs of GSPs (Good Supply Practices), when comprehensively and whole-heartedly implemented, should help avoid fraction of the heart-ache at least. Mr Murphy with his doomed law of “Whatever has to happen, will happen” will prevail. The only difference is, that the outcome can be managed to a reasonably good extent as well, provided the focus from the team and management is there.