iPower Makes the Supply Chain Easy

The "A-B-C's" of Inventory Control Often Focus on the "C" Items

2012-02-27T11:42:00.003-08:00

It’s the details that get you; not the big picture. The big picture, which includes 20 percent of the “A” items needed by an OEM to manufacture its products, gets all the attention. But, the 50 percent of “C” items consumed in the manufacturing process (representing as little as five percent of the total cost of goods) often are overlooked. That’s too bad, because for those with an average on-hand inventory of $1million there could be up to $100,000 in lost savings.

Customers at iPower New England with inventories in the $1million range have documented from $44k up to $104k in savings for those pesky “C” items. The examples I am citing have Point of Use ranges from 3,000 up to 15,000 items. The “C” item is not something to overlook.

The experts at APICS (The Association for Operations Management) have written that OEM’s typically find 20 percent of “A” items, which represent 80 percent of costs are carefully managed and ordered frequently to minimize investment. At the other end of the scale, the bulk of “C” items – up to 50 percent – are only five percent of the cost and are typically ordered only once or twice a year. It’s at this point that lack of attention can lead to loss of control.

The carrying costs for inventory can be enormous. Costs come from putting away stock, moving material in the warehouse, rent and utilities for square footage, insurance, taxes, cycle counting, shrinkage, and opportunity cost for the money invested in inventory. Typically, carrying costs can be two percent, which can be significant. For a customer with $1million spent on items for manufacture, if the inventory can turn 15 times and inventory stay below $66,000, the savings per year can top $100,000.

Read more about our iPower-VMI programs and how it can have an impact for you.

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The iPower Distribution Group of New England is a leader in VMI programs. iPower delivers the widest breadth and deepest supply of Tier 1 commodities in the Northeast. Our supply chain provides $800m annually of industrial components, supplies, and packaging materials. To learn more visit us at http://www.ipowerne.com.

Your VMI program may be compromised if the part numbers on the bin don’t match

2012-02-13T12:25:00.000-08:00

Over the past couple of years we have seen a growing trend among customers where VMI item part description does not match the component in the bin on the floor. This is easy to understand when you consider many of our customers have experienced acquisitions and consolidation of both product and manufacturing lines. Typically overloaded procurement and planning teams inherit new BOMs, part numbers, and vendors without the benefit of adequate part descriptions, where-used data, or usage data. While there are many reasons for inadequate information, our experience shows there are three main reasons:

1. Disparate operating systems limiting access to data. The data may be in the system or in reports but no one knows where it is or how to get it.

2. Poorly maintained item masters with on the fly engineering changes. How many times have you heard from the production manager or engineer, “Don’t worry, it’s just a simple fitting we’ll write the ECN tomorrow. Just get the part”!

3. In some cases, there are no part numbers or item masters for expensed items. The only information available is from Accounts Payable systems. In most cases, part descriptions on invoices are truncated. We have had to do countless invoice crawls though mountains of paper invoices to piece together part description and usage information. Now if you add this data problem to the need to respond quickly to copy exact, less than lead time orders from new customers; it is very understandable how a procurement team can be held captive by its suppliers. Procurement has to rely heavily on its vendors to know what is being supplied and how much is actually needed to support production.

How then does a procurement team in this situation ensure long run cost effectiveness of their VMI programs? What are the warning signs that the supplier has the upper hand?Here some important questions to make a quick diagnosis:

1. Are the part numbers on the bins the supplier’s part numbers?

a. If the answer is yes, then ask for a report cross-referencing their part numbers to yours
b. Ideally , Barcode labels should reference your part numbersc. If you do not have your own part numbers for the items in the bins the climb just got a lot steeper.

2. Assuming you have a part numbering system for expense items, who controls the system of record for part description?

a. It is very likely you both have systems of record for part description
b. It is time to compare description data
c. If you do not have manufacturer name and part number in your system, get it! Manufacturer name and part number are 2 of the 3 essential ingredients to long term cost control.

3. Who controls the system of record for transactional data (how much is being used and where is it being used)?

a. Most of the time we find it is not you!
b. Make sure you ask for detailed usage reports including ROP /ROQ and number of shipments per location.
c. You will soon find out how they are doing on managing your inventory!

If you get resistance to these very reasonable requests for information it is time to be concerned. After all somewhere in the not too distant past your organization must have provided the supplier with the information and/or guidance to what was required. You own your part description data; the supplier is only using it to provide you the quantity and location of where it is required.

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The iPower Distribution Group of New England is a leader in VMI programs. iPower delivers the widest breadth and deepest supply of Tier 1 commodities in the Northeast. Our supply chain provides $800m annually of industrial components, supplies, and packaging materials. To learn more visit us at http://www.ipowerne.com.

Does Your V M the I?

2012-02-06T08:11:00.000-08:00

You’re Thinking Lean: 1) Produce Only What You Sell; 2) Consume Only What You Need; and 3) Inventory is Evil

The question is, “Is your VMI supplier capable of meeting your requirements”? Is the Vendor really “managing” your inventory or are they just selling you inventory at their convenience?

We’ve come to expect certain benefits from VMI programs such as Vendor Consolidation, Volume Pricing, Local Stock, Onsite Resources, and reductions in: Inventory, Stock outs, Downtime, and Paperwork.

How many times have you launched a VMI program and found it did not produce the measureable results as promised? If you take the time to closely analyze the problem you will find the supplier was actually incapable of managing the inventory. The V is not M-ing
the I!

What are the symptoms of poor management, you might ask? What is the frequency of the breadman on site? How much churn of personnel executing the breadman role? How many bins that are obviously over stuffed or nearly empty? How many substitute components? How many missed delivery promises?

Or even worse, are all the bins overstuffed? Do you really need all the material? I like to call this type of inventory strategy: “some is good - more is better!” This style of inventory practice for expense and C items may have worked in the 70’s, but not today!

Successful VMI programs are very doable projects, but only with highly capable suppliers. It takes suppliers with many cycles under their belts designing, building, and managing Point of Use VMI programs that actually produce results. The devil is, as always, in the details: complete and accurate part description, accurate usage measures, knowing where and when the part is needed, etc.

In project management circles there is a well-known model for predicting project success called KEP. KEP is an acronym for Knowledge, Experience and Performance. It’s important to use KEP to scrutinize how the Vendor intends to manage your inventory. If your suppliers are not providing you with observable evidence of 1) how they define your parts in their systems (i.e. do they have an item master for each part on the program with unique re-order points and re-order quantities), 2) how they establish and more importantly refresh /adjust re-order point and re-order quantities, or 3) how they identify and communicate off balance sheet obligations; then you are talking to a supplier that simply will not produce measureable results. More on this in my next blog.

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The iPower Distribution Group of New England is a leader in VMI programs. iPower delivers the widest breadth and deepest supply of Tier 1 commodities in the Northeast. Our supply chain provides $800m annually of industrial components, supplies, and packaging materials. To learn more visit us at www.iPowerNE.com.

Bigger is Better When it Comes to VMI

2012-01-25T06:27:00.000-08:00

Both small and large companies can benefit from strong, effective Vendor Managed Inventory programs. But, for large companies with multiple locations, multiple commodities, and thousands of unique items in multiple points of use; bigger is always better. That is, the supplier needs to be bigger. While a small distributor can handle a single commodity and perhaps meet the needs of a small manufacturer, the larger manufacturer would be ill served by such an approach.

As an OEM, you already know why VMI makes sense, and you may have some form of it in operation currently at your facility. There is less paperwork, less inventory, and increased availability. The right components and supplies are at the critical Point of Use. Direct labor is no longer doing indirect tasks, and there is better use of warehouse and production floor space.

My view has always been that the scale and scope of the supplier must match or exceed the scale and scope of the manufacturer to execute a plant-wide, multi-commodity VMI program. In a short commentary in Industry Week, an article sited industry experts that described a scenario we are all familiar with: the supplier will meet your needs for just-in-time delivery, but only if they receive a significant portion of their revenue from that manufacturer. Additionally, the supplier bears more inventory burden, which forces them to take on more risk. Therefore, the tendency of smaller suppliers is to only offer a narrow bandwidth of core items, due to their being undercapitalized and incapable of managing multi-commodity VMI programs. What follows are 4 reasons why size matters.

1. Larger distributors tend to have the IT infrastructure and the IT personnel to securely and reliably conduct high volume electronic commerce. Timely uninterrupted movement of data means continuous flow of material

2. Larger distributors tend to have the order/inventory management systems and inside personnel available to manage the required upstream relationships to ensure a continuous flow of material from the manufacturer to the distributor. Continuous flow of materials inbound to the distributor is often an overlooked and undervalued core process. This especially important for non-core commodities.

3. Larger Distributors tend to have broader business relationships at higher levels with other distributors to secure competitive pricing and availability of non-core commodities.

4. These advantages are critical to scaling a unified and integrated VMI program. Do not underestimate the advantage of one approach to:

a. Sharing data
b. Building out Point of Use locations
c. Scanning/transmitting requirements
d. Inbound freight packaging and labeling
e. Single point of contact
f. Looking up items, usage, and PO line status
g. Monthly summary invoice

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The iPower Distribution Group of New England is a leader in VMI programs. iPower delivers the widest breadth and deepest supply of Tier 1 commodities in the Northeast. Our supply chain provides $800m annually of industrial components, supplies, and packaging materials. To learn more visit us at www.iPowerNE.com.

Industry Week Article

VMI and Off Balance Sheet Obligations

2012-01-17T07:06:00.000-08:00

Recently, a consultant from Thrive Technologies posted a simple blurb on the LinkedIn APICS Group Page, “Why inventory turns is not a good metric!” As questions go it seemed a bit obvious but to my surprise it created 42 thoughtful and passionate responses. What struck me most from the discussions was many if not all folks responding to the question were mum on inventory obligations outside the four walls of their respective business.

Sarbanes Oxley requires corporations to disclose off balance sheet obligations. With the rapid adoption of Lean Manufacturing and subsequently Point of Use and Kanban Systems off balance sheet obligations are growing at a commensurate rate. Should these obligations be included in inventory turn calculations? Our view is that they should. (Below you can read the details of the regulations).

Our experience shows many companies with VMI solutions significantly underestimate their off balance sheet obligations. We have found that many suppliers even make it hard for the customer to know what the real obligation is. Often time it bubbles to the surface as a defensive tactic by the supplier when a customer desires to make a change.

We recommend you work with the suppliers of your VMI programs to disclose all non-cancelable non-returnable inventories carried on your behalf to support the VMI and have a formula in place to calculate agreed inventory levels. The formula should include but not limited to demand over lead time, MOQs, lot sizes, safety stock and manufacturers lead time. If they do not comply it’s time to look to others that will.

Should the off sheet obligation (i.e. non-cancellable and non- returnable) be counted in Inventory Turns? We think so what about you?

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Section 401a (off-balance-sheet obligations disclosure) is an addition to the Securities Act of 1934. Section 401a requires disclosure of "material off-balance-sheet transactions, arrangements, obligations (including contingent obligations), and other relationships of the issuer [that is, the company itself, an issuer of securities] with other entities or persons" if these arrangements may have a current or future material effect on the firm's financial condition, operations, and so on.

This particularly affects service contracts, such as those typically written with ocean carriers and vendor managed inventory (VMI) arrangements undertaken to hedge risk and move assets off the balance sheet. Increasingly, businesses that adopt VMI practices to reduce current inventory assets may include some form of penalty clause in their contracts for failure to use materials or early cancellation of agreements, and Section 401a clearly requires time-phased listings of these potential obligations. Also, market conditions might change and cause firms to cancel long-term purchase agreements with suppliers, with cancellation penalties or restocking charges as a result. SOX requires enterprises to outline the precise details of these potential charges and penalties. Along similar lines, companies must report and document any early termination or cancellation fees in any lease agreements or letters of intent (which are sometimes used to aid with delivery schedules and manufacturing lead times for critical items).

What's a Purchasing Pro To Do?

2009-06-09T06:50:00.000-07:00

One of the most consistently reliable and informative sources for hard data on purchasing and supply chain information is the Aberdeen Group's published research. A recent study touched on the challenges and solutions from the perspective of the Chief Procurement Officer.

On a recent handhout (view at our Work Bench) the Rising Cost Concerns and Waning Demand are presented in a concise and dramatic fashion. Not surprisingly, the suggestion is made that the best first step is to call iPower for help. You can do that by calling 508-380-5259.

iPower Receives Award for Performance

2009-06-09T06:32:00.000-07:00

We are especially pleased to have received the Outstanding Supplier award from Varian Semiconductor again this year. For two years in a row, iPower Distribution Group of New England has been recognized with the Strategic Supply Chain Award from a leading OEM in New England.

In a letter announcing the award, Lori Ciano, Director of Supply Chain for Varian Semiconductor, stated: "Varian Semiconductor has very high standards when it comes to the performance of our key suppliers." The News Release on the iPower website has more information.

Secrets of a Highly Effective VMI

2009-06-04T06:45:00.000-07:00

Our Blog is dedicated to helping purchasing professionals like you gain control of their domain through the use of effective business management solutions.

A Vendor Managed Inventory (VMI) certainly qualifies as an effective solution for part of the supply chain challenge. While many VMIs are in place today, how many are truly performing more than just a material handling function? To be truly effective a VMI solution must have the following characteristics:

- vendor consolidation
- master data management
- expanding spend under management
- inventory/stock-out/down-time reduction
- ongoing cost reduction projects

Our approach to the subject and presentation of the content is shaped by four axioms:

1. All good men (and women) are hardened in life's crucible.
Purchasing is a hot seat. Common artifacts of daily work life such as hot lists, MRB reports, rush requisitions, credit holds, and PO-Packing slips-Invoice mismatches stoke the furnace and increase the pressure. In this world, you are deemed only as good as the date and time of your last red shipment. The good news is that if you fumble a hot delivery redemption is usually less than 24 hours away. This Blog will help you better understand the inner workings of Vendor Managed Inventory Solutions because when done right they are both a pressure relief valve for an overworked purchasing department and contributors to the bottom line.

2. Do not let formal education get in the way of your learning process.
Mastery of purchasing skills has been and still is more experiential then academic. We will provide you with real life examples and time tested tools to help you assess the condition of existing or contemplated VMIs and point you in a better direction if required.

3. All Work is a process.
As we see it, the scope of the VMI (continuous rapid replenishment) process starts with the supplier(s) inventory management (not the conventional starting point) and ends with customer invoice payment (very conventional end point).

4.Work without a plan is a hobby.
Enough said.

So let's get to work. Assessment is the first step in the process to either restart or build a new VMI. We have constructed a simple matrix to help others think about the condition of their existing or contemplated VMIs. Read more here.

While there are many issues impacting the effectiveness of a VMI, the biggest concern is the openness of the business relationship. We measure openness by accessibility to critical data at both the part and transactional level. If your key VMI suppliers are holding the data cards close to his/her chest. You need to rethink that business relationship.

We'll talk more about this in future blogs. Write to me anytime.