Get Left & Right Hand Working Together


Is your inventory balanced? 

Unfortunately most companies do not have a balanced inventory.  They either have too much of a SKU or not enough.  This imbalance can cause customer complaints, lost sales, and higher operating costs.

If you recall from Article 1, a buyer made the major mistake of overbuying a large amount of computer cables from the supplier. An initial forecast started at 100,000, quickly moved to 600,000, then dropped to 200,000. We all know that forecasts ebb and flow. So what’s the problem? The main problem is that the 10 Principles were not followed:

The 10 Principles are:

  1. Get the Left & Right Hand Working Together (This Article)
  2. Clearly Define Customer Service
  3. Tighten Your PLM Practices
  4. Know Your Products
  5. Look Forward, Not Backward
  6. Get Your Lead Times Right
  7. Manage Your Partners, Don't Let Them Manage You
  8. Manage By Exceptions
  9. Use Integrated Metrics to Drive Improvement
  10. Conduct Periodic Tune Ups

In this article, we explore Principle 1, Get Left & Right Hand Working Together, and how that Principle directly applies to this case study and what it can mean to you.

Big problems in many companies today is that they operate in  silos. Each department can have different goals that regularly conflict with other departments and collaboration can be non-existent.

In this case, our buyer derived a forecast in his own silo.  There was:

  • No discussion with marketing in terms of how this product was expected to behave over a period of time
  • No collaboration with the supply chain group that managed forecasting & replenishment
  • No evaluation of how the purchase of the additional product could be negotiated or staged
  • No consideration of facility impacts
  • No understanding of how this new product would influence the sale of other related products
  • No check and balance with finance in terms of this major investment and how it impacted the corporate inventory levels

Some creative, yet practical solutions for this problem are:

Develop Product Lifecycle Management (PLM) processes that will allow collaboration over multiple departments

 Leading edge companies have defined processes that start at deciding when to add a new SKU all the way through to discontinuing/liquidating a SKU.

This is done by getting all the related departments together, determining specific criteria for adding SKUs, establishing measurements for evaluating ongoing SKU performance, detailing replenishment and purchasing guidelines, and establishing criteria for discontinuing a SKU.

As an example, you could use a combination of unit sales, gross margin contribution and inventory turnover as your criteria. That would tie the buyer, sales & marketing, and supply chain together to collectively deliver.

Document all processes, activities, decision points, and accountabilities and follow them. There are commercial PLM software packages available that fully manage the process and provide alerts for things such as SKUs performing outside the established parameters and activities that are late in the PLM process. If your product management characteristics are simple, you can also manage PLM using Excel. It is more cumbersome and won’t allow easy information sharing but it can provide a benefit.

 Use the analytical strengths of a demand planner to develop a statistical forecast

Sales & Marketing people tend to be very optimistic when creating sales plans. Demand/inventory planners tend to serve as a check and balance. While Sales & Marketing people can help to generate an annual unit forecast, proficient demand planners are able to see trends in the numbers, understand the impact of adding/removing a SKU from a line up can be, and can more closely watch SKU performance so that forecasts can be regularly adjusted.

In our example, the buyer and demand planner could have worked together to determine the initial forecast, then could have turned over ownership of the SKU forecast to the demand planner who would watch the trends very carefully.

 Implement S&OP processes to formalize collaboration

Sales and Operations Planning (S&OP) is the leading business practice to formalize collaboration. The scope and sophistication of it varies based on how complex your business is, and how many changes your business is going through. The greater the change and complexity, the more critical the collaboration need is. S&OP practices set up a collaboration forum in which data driving the demand and supply plans can be matched, so that subjectivity/ the gut feel of one person doesn’t dominate the significant decisions.

In our case study, if an S&OP capability existed, the buyer would not have worked in isolation to make decision. The S&OP team would have run the numbers and explored the risk and scheduled the buying to align with inventory investment objectives of the company.

 Consider upstream and downstream impacts of any buying decision

We have touched on this briefly but situations like our case study impact:

  • the supplier and its ability to produce this and other products
  • inbound transportation plans & cost
  • the warehouses ability to receive a large purchase and potential bottlenecks that can be caused
  • inventory productivity
  • cash flow problems caused by large, unanticipated purchases
  • possible negative impacts on other sales (cannibalization).

So it is imperative that all the every buying decision needs to consider its impact on other functions of the company.

Look at using a shared accountability to individual performance measurements

Consider our specific example; this buyer was accountable for driving sales and gross margin but had no accountability for related costs such as inventory costs. If this buyer continued to have a significant amount of his performance measured on sales & GM but also had some accountability for turnover, he would have considered implications of his decision and would have had to consult with the appropriate supply chain people, responsible for inventory decisions, prior to committing to the forecasts and inventory plans.

More companies are taking this approach. The joint accountability can include sales/marketing, inventory management, demand planning, inbound transportation & warehousing.

Review and analyze updated forecasts on a very regular basis with sales, marketing, supply chain, and finance

Forecasts for new SKUs tend to have wild swings.  As well, statistical forecasts tend to be far less reliable at the beginning of the sales cycle. With that in mind, closely watch the sales as an item is introduced and evaluate the contributing factors such as initial excitement, advertising programs, and so on. For instance, if a retailer does some direct marketing at the outset of a product launch, there will be a surge in sales but that will quickly flatten out after a short period of time.

Include market intelligence, statistics, sales & promotional plans, and logistics considerations in your decisions

Here’s where collaboration can really work. There is no shortage of information available with which to make marketing and buying decisions. Buyers & sourcing functions typically focus on upcoming trends, marketing & sales focus on promotional plans and other sales driving activities, and supply chain focuses on SKU forecasts, related trends, and forecast impacts when SKUs are added or deleted. Further, suppliers can be a great source of information. In this case, they may have been able to assist with the SKU forecast in terms of proportionately what other companies are doing with this type of cable, how their manufacturing facilities were gearing up, and so on.

In our case study, the buyer used only his information and intelligence. And look what happened.

As you can see from this article, there can be many overlaps between the 10 Principles and how they can impact one another. Getting the left and right hand working together is impacted by or impacts:

  • Clearly Define Customer Service
  • Tighten Your PLM Practices
  • Know Your Products
  • Manage Your Partners, Don't Let Them Manage You

We will discuss those impacts and identify the overlaps in each article. Next, we will address Principle 2 - Clearly Define Customer Service.

If you are interested in achieving a balanced inventory, we offer a No-Charge Starter Stage.  During this Stage, we will help you assess your current inventory management practices, develop a preliminary business case, and start working your Balanced Inventory Blueprint.

If you have not read the first article The Curious Case of Computer Cables, it can be found at www.supplychainsystems.com/curious-case-of-computer-cables.

CLICK HERE to check out all the articles in The Balanced Inventory Knowledge Series. Don’t forget to save this link, as your favorite source to learn supply chain leading practices  with focus on balancing your inventory.

For more information, contact us at info@supplychainsystems.com or information call 905.454.8529.

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