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In Part 1 of this column, we examined the concept of just-in-time inventory management amid major supply-chain disruptions such as the COVID-19 pandemic and the devasting effects of last year’s Winter Storm Uri. Catch up with it to get the full context.
After reviewing and reflecting on Part 1, it occurred to me that some readers may think it mostly pertained to manufacturers and suppliers and a bit less directly to wholesale distributors. Of course, wholesalers have been impacted by supplier shortages, too, so Part 2 is slanted more toward wholesale distributors.
My review led to another frequently asked question: In hindsight, what could the industry have done to help avoid or limit supply chain issues?
My answer is in the form of four key points:
So, let’s drill down:
Stress-Test Your Supplier
Objectively, segment your suppliers by risk level:
Obvious high risk — your total spend and the supplier performance impacts are high.
Low risk — low total spend and low financial impact of performance.
Hidden risk — total spend may be low, but the financial impact of disruption is high.
Further, what mitigation policies, based on these supply chain vulnerabilities, should you put in place when the supply chain comes under stress?
Is single-sourcing really working for you now? Are there options? Should you be considering those options, such as diversifying your product sources?
Share Real-Time Product Demand Data
Sharing real-time demand data and advance orders gives suppliers at least a chance to plan their raw material in advance. It also aligns their operational requirements with respect to their labor and equipment — not find out about it when an order gets plopped on someone’s desk.
I know well, from past experience, that when you talk about sharing data, it is often anathema to even mention it — in any context. Quite often, I’ll hear, “Well, it’s not for us.” I’ve long wondered, is this a matter of “east vs. west” culture, short-term thinking, or a simple unwillingness to provide transparency, perhaps related to what is believed to be confidential information?
In some B2C or B2B arenas, wholesale distributors are amply rewarded (meaning compensated in dollars) for providing real-time demand data (point-of-sale) to their suppliers. Their industry organizations and marketing and buying groups foster this exchange of data — and sometimes even facilitate the exchange.
However, doesn’t it have to do with building close relationships with our suppliers, treating them as partners, and believing that their success is our success? Now, those are nice words and, yes, we may say we do that, but, today, it is primarily focused on new products, price, order minimums, discounts and rebates.
I think we’ve forgotten the potential benefits of collaborative improvement in things such as data sharing — data-driven transparency approaches. Under traditional regimes, this often meant little or no information was shared with upstream stages in the supply chain (meaning your suppliers) that could be actionable. At the very least, to open a discussion about how we can encourage a continuous flow of product from supplier to purchaser (through your distribution facilities) to the end customer — the point of consumption.
Use Inventory More Effectively
In particular, if you are a multilocation wholesale distributor, where and how much you stock of a SKU is important to you and particularly during these times of product shortage. This could be a key area for thinking differently about how you allocate and replenish each stocking location more effectively. What actions can be taken to possibly re-optimize those inventories at distribution centers and at your branches?
Think about it as a different form of inventory rebalancing.
Often when in-depth analysis is done, it shows high levels of buffer stocks maintained relative to the overall inventory valuation. And it is often caused by the impact of all those inventory drivers we use — safety stock, lead time, those resulting ROQ/MINs & MAX/EOQs, etc. — being applied the same way for all SKUs, regardless of demand variance at each location.
We all know the real role of inventory; it’s to function as a buffer. That is, to enable a smooth and continuous flow of product. It’s intended to contribute to the efficiency of procurement, inventory availability and value-added.
In wholesale distribution terms, we know production is not the assembly of product but rather the ability to get product procured, stocked and then out the door efficiently and timely from a distribution-operations-cost-and-service perspective. That’s paramount — it’s why you are in business.
The orders you place with suppliers are traditionally based on forecasted demand. This can lead to a mismatch between what is ordered versus what is needed. You experience this in both good times and bad, don’t you? It is the ever-present forecast variance that becomes the culprit. Now, you can call that variance a bottleneck or a constraint. So why not mitigate it rather than allow it to intensify and aggravate in-stock positions during difficult times?
Have we done everything possible to reduce demand forecast variance? I don’t think so! At some level, we expect suppliers to keep high inventory levels, or we use consignment agreements or vendor-managed inventory, often hiding the process and structural issues that still exist within.
So, why not a process that looks at the actual inventory condition, based on rules, and then orders inventory to be replenished when needed? “We already do that,” you may say. And then you might quickly add, “We’ve already spent thousands on improving our inventory replenishment systems.”
I ask you to bear with me on this. What’s probably missing is something called a pull signal, a simple binary signal that says, “I’m ready for more — or I’m not.” It’s closer to its demand origination — that is, the customer (their buy signal) — and puts responsibility for final ordering in the hands of your operations team, who best know their particular product line situation.
Again, you might respond, “Wait, that sounds pretty much like what we’re already doing!” I suggest you’re probably not. In all likelihood, you are more likely to be pushing inventory; responding to those ROPs or MINs that along with their associated ROQs/EOQs and MAX parameters (those inventory drivers!) are based on demand forecast and, therefore, subject to the evil forecast variance.
We all know there always will be demand variability — a factor we’ve all encountered, surely in more recent times. I suggest we not be solution-constrained, particularly when many of those solutions we currently use literally come from 1990s thinking.
Is there a better way to maintain variable SKU buffers at DCs and branch locations that are action-promoting? And would it protect against uncertainty, rather than some across-the-board dictate to increase those safety stocks? And what’s the role of target inventories? Could they be useful?
So, there’s a lot to re-learn here, and our thinking should be different — even though it challenges the conventional wisdom about safety stock/buffer stock calculation and all those inventory drivers we’ve mentioned.
A New Breed of Supply Chain Manager
What should the supply chain manager of the future look like?
Although some people may say we need data scientists, the key attributes that I believe are required include:
The ability to develop the necessary data requirements, data flows, data visualization and the usage format to support supply chain decision-making at every level of the demand echelon (i.e., manufacturing or another supplier source) and at the distribution network echelon level. That sounds like a data architect to me.
Skills in supply chain management risk, resilience and supply chain relationship management.
The term “data scientists” is more of a key attribute for demand planners. They must be able to follow the money for daily inventory-planning decisions with objective analysis supporting a high-quality planning basis. Particularly during these times, critical analysis is required for product shortage and allocation decision-making.
So, this new breed of supply chain manager must be able to lead and align what should be a data-rich environment, providing greater insight capability. In other words, yes, they become the data architects.
Even our old friend Nostradamus would have found making a prediction rather difficult when it comes to our current supply chain woes.
However, let’s not pretend that the current crisis means throwing new or different practices out the window or that it is seemingly impossible to mitigate. And it doesn’t always mean needing new or significant investments in software. Instead, a new way of thinking about the continuous design of your supply chains could outsmart the disruption — at least most of the time!
Let’s prioritize the adoption of capabilities that eliminate functional and data silos, which are barriers to continuous supply chain design. Rather, create an environment for learning, planning and execution with the entire community of your supply chain decision-makers, internally and externally.
If you believe, as I do, that a clear connection exists between performance and the competitive value of the information that resides in your company, then the use of business intelligence and its associated analytics can differentiate your company from the competition.
Why leave the numbers and information you possess to interpretation or your own “beliefs of experience”? Why let the information languish because of uncertainty about how to act on it?
With some creative thinking, our future supply chains can be more balanced — efficient and resilient at the same time — while becoming more collaborative rather than only transactional.
The current gridlock probably means facing additional pain for a while, but there is a pathway ahead.