Hello my friends! Thanks for joining me again. I am really enjoying writing this blog; I hope you are enjoying them as much as I am!
Today’s topic is going to be about the “fail safes” that exist in Supply Chain that provide a buffer when planning doesn’t go as planned. Fail safes are not the same thing as storm safes. No, I am talking about the business theory not above ground storm shelters. Now granted it is easier ramp up production than it is to ramp down. But, hopefully by implementing some of these risk mitigation Supply Chain methods you can avoid the crash and burn effect of poor planning.
It is important to realize that sometimes things happen and it is impossible to plan for them. With under planning (remember that is actual demand being higher than planned demand) one issue you can have is not enough raw materials to meet the demand. Fortunately, when it comes to inventory you can implement something called safety stock. Safety stock (aka buffer stock) is exactly how it sounds – extra inventory on hand that mitigates the risk of not having enough materials (stock outs) to meet the increase in demand. Another fairly fast acting option is outsourcing a piece of your production to free up capacity. For example, if a part of your product requires machining and you do not have enough capacity to meet the demand, there are plenty of companies that specialize in machining parts that would gladly take some work from your business via an outsourcing agreement. As an effect, you could free up capacity to focus on more of your business’ core competencies or proprietary designs.
Moving along to some things you can implement to mitigate the risk of over planning (actual demand lower than planned demand) in Supply Chain. If the shift in demand is detected soon enough there is potentially an opportunity reschedule or push back any open purchase orders for raw material. You would do this by having your procurement team review all open orders and then communicating with the vendor if rescheduling a later due date or canceling (without a fee) is an option. Some vendors are flexible and can usually work with you as long as they have not invested too much capital in your order already. Altering open orders is essential to control inventory during an unexpected demand down turn. The last “fail safe” I am going to touch on is my least favorite. It is by far the last resort after all else has failed during a down turn in demand; layoffs. While I do hate when things like this happen to people because it affects their lively hood, unfortunately this is the ultimate price (in my opinion) of poor planning. At the end of the day companies must stay profitable. If sales are not keeping up with costs then the profit margins are suffering. The largest overhead cost in most manufacturing setting is the cost of labor, both direct labor and indirect labor. Reducing overhead costs is the most effective way to mitigate the risk of a down shift in demand.
Well folks, I am just keeping it real. Until next time, Andrew signing out!
Hello there. Thanks for joining me today. I once heard an influential CFO discuss how she would walk the streets with her head down looking for money. What she would find she would bring back up to her high rise office and put in a jar. At the end of the year there would be a substantial amount that she would then donate to charity. The point she made with this story was that every penny matters. Even for big corporations, every penny matters. I thought it was a fascinating story and it got me thinking about cost savings and how that can translate into business. More specifically how that would look like in a Supply Chain setting.
In my last post, I touched a little on some of the major planning types of Supply Chain. As I mentioned, planning plays a huge part in the whole Supply Chain process. If you are to have a successful business you must have successful planning. The price of poor Supply Chain planning is something that businesses cannot pay for long.
So let’s get into a little bit about what exactly is the cost of poor planning and how can a business mitigate those costs and even drive cost savings……..
Let’s first start off with what happens when you over plan in Supply Chain. There are a number of things that can cause you to over plan, market downturns, not considering seasonality’s in your industry are just to name a few. Once you set the ball rolling and you move towards meeting your planned production target, it isn’t as easy as turning off a switch. It is more like moving a titanic to stop the flow of the bleeding resources. Just think about it, a plan is set and you begin purchasing all the material needed to meet the plan. Depending on the lead times and commitments with the vendor’s you cannot easily cancel orders once the vendor already has resources invested in fulfilling your orders. So, the business is then left with either taking in the inventory with no demand or paying high cancellation fees to your vendors. On top of the material issues there is the capacity and man power that was planned for and now they are just sitting idle. Idle capacity is something that cannot be calculated into the price of your product. Instead idle capacity costs that are not absorbed flow straight to your bottom line. Ouch!!
On the flip side, under planning in Supply Chain can also have an adverse effect on a business. Going back to the idea of capacity planning, by under planning you do not plan enough capacity to produce the higher level of demand that expected. This causes a chain reaction starting with things like high WIP (work in progress) which impacts your inventory turns. Also, things like bottle necks in production where there is too much flow in one area of the manufacturing floor and this causes a back log throughout. By under planning you will not be able to meet the demand which in effect will not meet your sales expectations.
It’s all about the money and it is all connected in Supply Chain. That is why it is important to be mindful of the things that can affect your bottom line so that your organization is as profitable as possible.
My wife is more of the planner between us. I don’t know how she does it but I am sure glad she does! But, when it comes to effective Supply Chain planning….well, I’ve got her beat that is for sure (love you hun!).
Another break in the chain is poor planning. Now planning comes in several different forms when talking about Supply Chain planning. There are also different groups that require planning and those groups may depend on the other to have accurate planning. That’s a LOT of planning, yo! But to put it simply here is an, Joe’s manufacturing has placed an order of 10 widgets with XYZ Vendor. Joe knows that XYZ has a lead time of 10 weeks, so he plans ahead and orders to make sure the widgets get here when he needs them. Now XYZ Vendor has a demand plan that should as accurately as possible project how much raw material they will need to make the 10 widgets. So as you can see it is important for Joe to plan and for XYZ to plan. If one of the company’s plans is off, Joe is waiting for parts which mean his orders are not getting filled which means he is not making sales.
Let’s break it down into the different kinds of planning that is found in Supply Chain. First there is demand planning, this is where you look at historical trends combined with known current and future market trends and evaluate how many widgets you need to meet the demand. A very important part of the demand plan, which is an area that a lot of companies do poorly, is Sales and Operations Planning (S&OP). This is where the sales team comes and asks for the pie in the sky and operations comes in and says “um, no you’re crazy”. Ha, seriously though, sales rarely looks at market trends and capacity; whereas, operations and production should be the voice of reality to even the production plan out.
Which leads us to the next type of planning, production planning. Production planning makes sure there is enough material and people on hand to meet the demand. So if the demand planning group determines there is going to be an upswing (or downswing) in the market, it is the job of the production planner to stock up the shelves and right size the manufacturing floor. Within the production planning there is materials planning and labor planning.
The last type of planning we will touch on is logistics planning. I think this is a huge area that companies could save a ton of money and is not something that they really focus on. To me it seems a little common sense but when you got to get a product to the customer, it needs to go….like now. Here is where logistic planning comes in handy. Assuming the production planning is on target, a logistics analyst should be able to group and pack shipments based off destination locations. This will reduce shipping costs if done properly.
When one or more of these processes are not running like fine oiled machines there can be adverse effects which if not fixed quickly can impact a manufacturing company’s financials in a bad way.
And that my friends bring us to the end and possibly the beginning of the next post. Until then, God Bless America!
Howdy from H-town, Andrew here. Man this has been a rough week. I work for a transportation company and it seems like we could not win for losing. There were so many delayed shipments and customer complaints. Well, live and learn I suppose. I can’t wait until I am in the position to make the decisions and not just a logistics analyst. Not to toot my own horn but I think I have some good ideas!
Anyway, everything that happened this week got me all excited about my post for today. Continuing on the same vein of mitigating Supply Chain breaks, let me talk a bit about what it means to error proof your processes. If you missed my last post on breaks in the chain you can find it on my previous post. We have come a long way with our technology advances and the need for human dominated assembly lines are a thing of the past. Now people are required to operate or tell the machines what to do instead of being the machine. It’s at that point, when people come in contact with the machine, that error proofing is most important.
What is error-proofing exactly? Well in the Supply Chain world it is when you improve reliability, quality and stability of a process. Human error and equipment failures are to be expected. It is the job of the business owner(s) to mitigate those errors as much as possible. One important way to error proof a process is to make sure you implement what could be referred to as a pyramid – 4 sides (groups). Be sure to have a safety group, reliability group, quality group and operations group that work together. When these groups come together it creates the needed checks and balances to mitigate errors.
Let’s just face it; errors are going to be made. You get a new guy and despite all your training efforts, he is going to screw up. In my opinion, it is not the error that is the problem but the failure to analyze errors and mitigate future errors.
That my friend is where companies drop the ball.
If something happens and your management team is not calling for an immediate root cause analysis to understand what happened and then implementing new processes to mitigate future errors, then that is where the failure is. If mistakes aren’t corrected and error proofing is not a second nature, the strain and frustration can be felt throughout the staff and ultimately affects the product to the customer in a negative way. Not good people, not good.
So, if you are a Supply Chain manager of any type and you are not taking a proactive approach to error proofing your Supply Chain group, then you should find another job. The lives of your employees depend on you and the success of your company depends on you continuously finding ways to improve and to adapt the ever changing technology wave. Today’s error might be tomorrow’s fatality, its important folks. With that said, my rant is over. Ah, I feel much better now! Improve, improve, improve……always try to improve the things that are broken. Later g!
Hello everyone, Andrew here. Let me start with the basics before we dive into this beast, what is a Supply Chain? Before I got my degree from Baylor in Supply Chain Management, I used to think Supply Chain had basically two parts, manufacturing and transportation. As I was educated in all things Supply Chain, I quickly realized that there was more to it, way more. In a nut shell, Supply Chain is everything and every person involved in the process of making a product from start to finish.
So, manufacturing and transportation are only a part of the whole Supply Chain. Each “link” of the chain has a process within itself that has more processes within itself all the way down to the guy in the basement with the red stapler filing paper away (ha, Office Space joke!). Many highly paid really smart people have sat in large rooms discussing how to make this thing run smoother and more efficiently. Who knows, maybe even now as you are reading this post there are some old people scratching their heads in some high rise somewhere and writing on white boards talking about Supply Chain issues!? Ha, I had a very weird mental image there. Ok, so back to the topic at hand. Whenever you have so many moving parts, there will always be a hiccup that can cause everything to come to a halting stop. When that happens, there is most definitely a break in the chain. However, remember those really smart people, yes those people have put together processes to mitigate the risk associated with a break in the chain so that the flow does not come to a complete stop. I mean come on; no one likes that email that says the product they just ordered is on back order, I know I don’t! To increase customer satisfaction and be able to quickly turn more products (aka make more skrilla) a business savvy company should plan for these types of breaks in the chain and “proact” (yea I really did just make up a word) accordingly.
What causes these breaks? There could be many things that cause a break in the chain, but from my own experience and what I have observed the main issues is poor planning or human error (which one might argue they are one in the same). Fortunately, or unfortunately depending on your point of view, robots cannot take over the whole process. So there will always be an element of human error and you can’t really plan for human error. You can only plan a little bit of a cushion for it by looking at historical downtime/nonproductive time when committing to a delivery schedule. To improve and error proof the process as much as possible you have to implement techniques that mitigate these errors. We will get more into those techniques in future posts.
Before I sign off let me summarize, yes there can be breaks in the chain but with proper planning and implementing error proofing methods, you can limit the breaks. Well that is all for now, until we meet again!
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