Tuesday, August 21, 2012

Specialty Bolt and Screw Provided Leadership for Fastener Quality Act

Over the last decade, as a result of creative efforts by Specialty Bolt and Screw, the safety and comfort of everybody has been expanded and improved. When President Bush (41) signed the Fastener Quality Act in the late 1990’s, it marked a milestone in corporate/government cooperation to address a real safety concern with an effective response. Specialty Bolt and Screw was a founding member of iPower New England in the early 1990’s and became involved in the national issue of fastener safety in response to inferior foreign product that was misleading domestic customers on quality standards.

Together, with four other national fastener suppliers, Specialty Bolt and Screw (SBS) was called upon by congressional leaders in the Senate Commerce Committee to craft a tough, realistic, and verifiable piece of legislation, which when enacted became known as the Fastener Quality Act (FQA). Kevin Queenin, President of SBS pushed the industry to initiate and sustain serious efforts to restore responsibility, accountability, and traceability with the industry.

The impact of the law has been recognized widely as many of the issues faced by the military and commercial businesses during the 1980’s have been ameliorated. According to Kevin, the work on the legislation, the awareness it created, and the law itself, even with its many subsequent amendments, has contributed to lasting changes, which have greatly enhanced quality in the product produced and distributed by the North American fastener industry.

As a major player in the iPower New England supply chain system, it’s gratifying to have leaders like Kevin and his team keeping a focus on what’s best for the customer and the industry. You can read more about the law, the technology, and the training effort that is on-going to understand how to continually supply conforming product to its customers.

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/.

Tuesday, June 19, 2012

The Case of the "Just in Case" Inventory

(I've asked our Business Development Manager, Jeff Casey,
to share an interesting story about a customer we helped
that he was directly involved with.)

By Jeff Casey

We got to the customer site and issues of overstocked inventory jumped out at us the minute we began the plant tour. The customer’s floor setup was textbook cellular manufacturing and its vendor managed inventory program for fasteners was centralized by region meaning more than one cell could pull material from a kiosk of hardware. We call this type of configuration mother/daughter whereby the production cell employee fills small bins as required for use at his or her work bench. The fasteners were stored in bins on freestanding sheet metal racks with pitched shelves (technically known as a double-sided pick rack).

It didn’t take an Ernst and Young cycle count to realize that the yellow plastic bins were wildly oversized and overfilled for this low volume OEM. These bins were stuffed to the gills. If you had conducted a blindfold test asking someone to lift a bin and guess at the contents responses of solid bar stock or M80 grade concrete replete with steel rebar would not have been farfetched. They never would have guessed the actual contents: (one example) twenty thousand pieces of an M4 X 8 Socket Head Cap Screws 18-8 stainless steel topped with a quarter inch of dust. Can you say – over-inventoried?

Not only had their supplier over-inventoried them, the customer had enabled it, nay, encouraged it. Many of these sturdy shelf racks failed under the crippling weight of the jam packed little screws, nuts, and washers. The customer had quite an unusual response to their overstocked condition. Instead of rightfully demanding the supplier return and credit the material, a well intending but misguided employee repaired the racks by welding additional supports to accommodate the load. “Keep it coming,” they must have said, “Problem solved”.

To turn this problem around, we interviewed assembly technicians, extracted fasteners from the subassembly BOMs and combed through each cell to ensure we had gathered a comprehensive “where-used” profile. One hundred and fifty man hours later we were ready to embark on the program implementation. But before we could begin to build a point of use system we had to do a little housekeeping.

Step 1: Over four tons equaling $120,000 of excess fastener inventory was removed from the floor and moved to a centralized burn-down area.

Step 2: $68,000 worth of active parts were redeployed to the production cells

Step 3: $53,000 was deemed dead inventory and sold as scrap metal

Once implemented, our inventory specialist managing the new point of use system predictably began to notice a growing noise level on the production floor. While there we no material issues, fear, uncertainty, and doubt began to set in. As we had seen many times before, the assembly technicians had become addicted to the calming effects of piles of inventory. We took $120K off of the floor and folks began to get the shakes. It took a while but within a couple of months we had won their confidence and the noise level receded.

Today the program has grown into a widespread lean point of use replenishment system with easy to understand visual controls. Two important but not unexpected benefits grew out of the program implementation. First, it opened up twenty hours of free time for the fastener commodity buyer to focus on more strategic initiatives. He’s not chasing parts anymore and the customer is saving on all those UPS Red charges, too. It is still hard to believe that with $120,000 in excess inventory they still had stock outs!

Second, once the double side pick racks had been removed and the excess inventory was burned down enough floor space was opened up to accommodate a new production line the plant had been competing for.

While this was an extreme case of Just in Case inventory, many of our current customers had similar symptoms. If you think you may be suffering from a bout of Just in Case why don’t you give us a call!

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.

Tuesday, May 1, 2012

VMI Programs Gone Awry?

Early and in different times in my manufacturing career, I reported to two senior executives that were responsible for plant operations. While they were different in just about every imaginable way, they shared at least this one thing in common. They were both taken-in by suppliers providing parts and supplies using VMI programs. Excess inventory and price gouging were the culprits in both scenarios.

One of the two was so incensed by the experience that years later he was still personally reviewing all the requisitions for expense and C items. It was not unusual to get a call from him in the early morning hours challenging you about the need for a box of screws, wipers, or a desk chair.

In both cases, these senior executives ran into vendors selling inventory instead of vendors managing inventory. How then did these vendors selling inventory get away with it for prolonged periods of time?

Here are two tell-tale signs of a VMI program gone awry:

1. If it ain’t broke don’t fix it. Bin Inventory has a direct relationship with production floor noise level. It doesn’t take a wily vendor long to understand the culture of your manufacturing floor. Topping off bins is a much less risky activity than suffering any noise from the floor. If the floor is too quiet and the bins appear too full, it is time to get the vendor in your office to explain how ROP and ROQ is calculated and what turns they are achieving at the bin level.

2. Lumpy Gravy. We won’t accept it on our turkey dinners but we will readily accept a weekly lump sum invoice for thousands or even tens of thousands of dollars on a regular basis. Even the most jaded accounts payable manager can be lulled into a false sense of security by the monotonous beat of a constant dollar value week after week. Gone unchallenged the lump sum invoice is a breeding ground for untethered price increases. If the vendor is worth his/her salt they will have operating and financial systems that enforce contract price agreements.

What then are best in class approaches to ensure your VMI program stays in control?

1. Create Point of Use instead of Centralized Inventory Locations

2. Lean replenishment systems should be synchronized to the demand at the production cell level

3. Create easy to understand visual controls to signal inventory replenishment

4. Demand consistent application of the above three steps to keep the program simple plant wide.

5. Demand quarterly inventory turns report at the Bin level

6. Require Monthly PPV reports to a baseline cost based on shipment activity.

Don’t let your VMI go awry.

Monday, April 9, 2012

Thinking Differently About the Supply Chain Has Led to Innovation and Customer Success

As an OEM, you face the challenge of managing lots of high volume low cost parts. Up to 50 percent of the items used in your manufacturing process may only represent five or 10 percent of total spending. Yet, these items are vital to a successful production floor.

At iPower, we treat these high volume low cost parts with the same importance, intensity, and innovation as you do managing the “A” items. In fact, our approach is to challenge the status quo. We believe in thinking differently to produce unparalleled results. Our record over the past 20 years shows that our approach has worked.

The supply chain that iPower represents currently serves a wide range of OEM’s, including those in semiconductor, flat panel display, solar photovoltaic, medical, wind turbine and other cutting-edge automation, vacuum solutions, and marine at Point of Use. To accomplish this, iPower has assembled a broad-based team of industrial distributors with the widest breadth and depth of industrial components, packaging, and supplies in the region. The companies that make up iPower Distribution Group of New England represent 1.2 million items; $140 million in inventory; and $800 million in sales. That’s a lot of capability.

And here’s the best part: At iPower, we do not markup any prices on any Tier 1 components, packaging, or supplies. Nor do we charge a handling fee, software fee, or user fee. We have no fees of any kind. In addition, in every contract we have a price optimization clause guaranteeing competitive prices. It’s more than a claim: it’s a fact. Our 20 years of delivering supply chain solutions have documented the results. Thinking differently has helped our customers get the edge on the competition and to achieve profitability.

Our industrial supply chain footprint includes the following major categories:

· Electronics
· Fasteners
· Industrial Automation
· Industrial Supply
· Motion and Fluid Control
· Packing

You can read a more comprehensive list here of products and materials that we bring to the supply chain and learn more about our capabilities. We would be happy to share our thinking as it applies to your requirements.

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.

Monday, April 2, 2012

A Washer Saved is a Million Dollars Earned

You have embraced lean; you have implemented manufacturing cells, and established pull systems for smooth demand/high repeaters. But what about the excess “C” and Expense item inventory that seem to be building up in the cells or in the corners of your warehouse as the design of the equipment or production mix changes?

Your first inclination may be to sort it by material type and sell it for scrap just to get out from under foot. The thought of searching for other uses for the parts is overwhelming. It is very probable the excess parts are called a different part number in another manufacturing cell(s). Before you jump to conclusions see how one of our top accounts partnered with us to provide a big financial return by managing the small things.

Coping with “Not Required” Parts
Our customer produces a broad mix of low volume, very large, complicated, and expensive equipment that requires thousands of small electro-mechanical components. The shifting tide of production levels and model mix has forced them to learn how quickly and efficiently to teardown manufacturing cells and reconfigure them for the next repeat or new product. Predictably the wheels fly off the cart when it comes to identifying and moving the hundreds of “not required” expensed items out of the cell and the new items in. It’s here that our unique Point of Use inventory system made a million dollar difference for this customer.

Introducing iZap as a Solution
Through implementation of a Point of Use inventory system, using our “iZap” bar code program, we were able to address our customer’s challenge. Every one of the parts we supply to our customer at point of use has been crossed referenced to the manufacturer’s part number. It is not uncommon to find six unique customer part numbers calling for the same Parker #13493-8-8, which happens to be a ½ Inch Fitting. It is also not uncommon to find that the part is used in upwards of 40-50 manufacturing cell locations. Once the customer decides to reconfigure a manufacturing cell we immediately deactivate the part in the iZap system as well as all its brothers and sisters on the production floor. Therefore, the next time a reorder point is hit for any of the sister bins our system points the material handlers to the burn down location to retrieve the part for rapid replenishment. Once the inventory in the burn down location is depleted the system reactivates all the brother and sister bins for discrete reordering and replenishment.

Let Demand Drive Replenishment
Here is a helpful hint we learned with the customer along the way. Since demand for these parts in other production cells is hard to predict there is little to no value in re-distributing the excess parts to the remaining brother and sister bins. Better to just identify the burn down location and let the demand for the part in the active cells drive replenishment activities rather than compound potentially slow moving inventory with wasted motion.

Over a seven year period our customer has documented a cost avoidance (not buying parts that are already on hand) of over $1million. When it comes to optimizing your investment in floor stock inventory, we’ve demonstrated we can help.

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.

Thursday, March 22, 2012

It May Be Time to Question How Effective is your VMI?

Are you satisfied with your current Vendor Managed Inventory Program (VMI)? Do you have concerns about the whether or not it is adding any value to your organization? Here are seven questions you can ask yourself the next time you walk past a Bin on your production floor:

1. If 50 percent of my part count can be replenished through VMI, how many are on the current program?

2. Am I dealing with fewer suppliers today than before we started the program?

3. Is the VMI Supplier better at their business then the best of the suppliers we consolidated and no longer have relationships with?

4. Did I optimize price on the component based on the how I was purchasing before? Did I get any synergy in the aggregation of demand from the consolidation of like suppliers?

5. Is my inventory lower today in my plant with multiple points of use then when I had a single location and issued parts?

6. Am I getting any cost reduction ideas from the VMI supplier to help my business?

7. What are my buyers doing differently today now that they no longer have to manage all these Parts, Purchase orders and Expedites?

Now that you have had a chance to stop and think about it don’t you think it’s a good time to take a new look at an old program?

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

Monday, March 12, 2012

Why VMI Solutions with Integrated Supply Chains are Better For You

You want to expand your vendor managed inventory (VM I) program but you have a wide variety of component types that need to be added to the program. Your current VMI supplier for hardware is a reliable supplier but they don’t carry the other component s you really need:

1. Do you work with the current supplier to take on new lines?
2. Buy from other distributors?
3. Do you create a second and maybe a third VMI program to cover all your bases?

This a common problem many purchasing departments face when the success of the business drives the purchasing activity for “C” and “expense” items beyond the capacity of the team. What many procurement professionals do not know is that there is a third alternative. The third alternative is a VMI solution using an “integrated supply chain.”

You may be wondering what an integrated supply chain is and how it enables the VMI solution provider using it to outperform a conventional single commodity VMI program. Let’s look at it more closely.

Integrated Means Linked
An integrated supply chain means the wide variety of part types, i.e., Hardware, PVF, Electrical, Electronic, Bearing and Transmission, Motion Control, and Fluid Power, etc., sitting in bins on metro racks on your production floor - or on shelves in your MROP cribs - are linked to bar codes and connected via the internet to databases housing item masters and servers routing replenishment orders to approved Tier 1 suppliers. This configuration enables a one-to-one business relationship wrapped around a one-to-many supplier replenishment process.

What this means to you is you no longer have to make the tradeoff between extending a single commodity supplier like the reliable hardware supplier trying his/her best to also provide electrical parts, which by the way will cost you a premium to do so or creating multiple VMI programs throughout your production and maintenance facilities.

The Six Compelling Reasons
Here are six compelling reasons to investigate VMI programs with Integrated Supply Chains.

1. Because the “spend” for integrated solutions is higher than single commodity solutions the business relationship between the two parties is better balanced.

2.The integrated suppliers carry approved lines for the commodities they represent. You will never pay a markup because they had to go somewhere else to get the part.

3. They carry inventory for the lines they support so rapid replenishment is expected.

4. They are experts in their fields and provide technical support should the need arise.

5. You will have only one point of contact managing one highly scalable VMI process within your four walls, which means closer communication, less complexity, less confusion, and better results.

6. Because a high volume of transactions from many suppliers can be handled through the VMI program, the monthly summary invoice dramatically reduces the Procurement and Accounts Payable time required to review and approve payment.

When it comes to multi-commodity VMI programs, make no mistake about it. VMI solution providers with integrated supply chains provide lower cost component and supplies and simplify business processes without sacrificing quality or service levels.

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.

Monday, February 27, 2012

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

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.

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.

Monday, February 13, 2012

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

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.

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.

Monday, February 6, 2012

Does Your V M the I?

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.

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.

Wednesday, January 25, 2012

Bigger is Better When it Comes to VMI

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

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

Tuesday, January 17, 2012

VMI and Off Balance Sheet Obligations

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?


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).