Monday, December 12, 2011 at 11:20AM Let us continue with more financial based definitions for inventory.
There are five ways that Finance can value the inventory. Most companies choose a method and rarely change. The methods ar:
Thursday, December 8, 2011 at 8:09AM There is a relationship between Finance and the Supply Chain in almost any company. The Supply Chain has a majority of the assets of the company and is responsible for managing the lions share of the costs. The assets include factories, warehouses, and all the equipment and machines used in this facilities. The costs include the Cost of Goods Sold, labor, conversion costs, transportation, and distribution costs. When we add to all of this the value of the inventory being held, it is easy to see why Finance focuses on the Supply Chain.
It is the role of the Supply Chain to effectively and continuously manage the above mentioned assets and costs to help deliver the profit goals of the company. It is the role of Finance to ensure that exactly this happens. Finance accomplishes this by a mixture of partnering with and policing the Supply Chain. Finance prepares reports, briefs senior management, and oversees audits both internal and external to ensure that the company is being properly managed financially.
We have seen and experienced situations where Finance and the Supply Chain form a team and work together to achieve the company objectives. We have seen other companies where the relationship is more adversarial and Finance basically plays the role of a policeman. This often has to do with the culture of the organization and the personalities of the two executives leading the functions. It is in the power of the President or CEO of the business to nurture either partnership or adversity between Finance and the Supply Chain. There are CEOs that believe a little adversity, butting of heads, is good and the resulting course of action is more optimal for the vigorous debating.
Either way, it is imperative for the Supply Chain to understand exactly how finance views and calculates inventory. Let us look at few financial definitions regarding inventory management. While it might seem odd when first reading this, it is true. The Supply Chain does not have full control over the inventory as reported. When it comes to reporting, the Finance reports are what senior management and Wall Street tend to look at. Therefore, it is imperative for Supply Chain personnel to fully understand some basic Finance definitions.
There are two ways of recording and reporting inventory: Perpetual and Periodic.
Perpetual: This is the real time reporting, the day to day, hour to hour, reporting of what is on-hand in terms of Raw, Pack, WIP, Finished Goods, E&O, and what is in transit in each of these categories. Because of the sophistication of ERP systems, we can look at perpetual inventory levels in total, by part, and category any time we wish from any PC in the company. This inventory, these records and transactions, is what Supply Chain personnel deal with all the time. It is the inventory that is tangible and real. You can go out to the factory or warehouse floor and see this inventory.
Periodic: As the name suggests, this is the periodic reporting of inventory. This is more the space Finance controls. The most common periods are months, quarters, and fiscal years. This is less about transaction records and much more about reporting. The periodic reports are the official reports of the company. They are based on the perpetual inventory at a set close point e.g. 11:59 pm of the last day of the month. If this was all Periodic inventory was about, there would be no difference between what the Supply Chain sees and manages and what Finance reports. This is rarely the case. Finance takes this base data and makes adjustments and accruals. They add and subtract dollars, not units, to inventory accounts to fund or account for things such as scrapping obsolete goods, returns, warranty related transactions, in transits at the end of the period, and a variety of other bookkeeping details. This does impact the inventory levels positively or negatively depending on the nature of the adjustments. Supply Chain personnel need to know exactly how since these final numbers are what the inventory objectives of the company are set on.
Many companies use the term Consolidated instead of Periodic. Finance takes the Perpetual view at the end of a Period and “consolidates” all of the reserves, accruals, and other adjustments. We prefer the term Consolidated to Periodic.
The Supply Chain lives in the Perpetual world. Yet, the Supply Chain is measured against Consolidated objectives. Therefore, it is imperative that the Supply Chain be bilingual. We must know what we can control which is the Perpetual inventory. But, we must know what happens in month end Consolidations. The Supply Chain leaders need to know exactly what is consolidated at month end to better manage the Perpetual. They must also know how and why reserves, accruals, and adjustments are made and why. If a policy is flawed or will have a long term negative impact on operations, we can better advocate for a more balanced policy. Finance and General Management can and do use inventory as a cistern, sometimes, for costs that are in a gray zone from a Supply Chain perspective. The business decision may supersede Supply Chain logic, but at least we know what is being done and why. At least, we can make a good knowledgeable case for the Supply Chain point of view.
Thursday, November 17, 2011 at 1:28PM Very recently we got a phone call from an old colleague who works for a home decor company. He was about to go into a meeting with the executive committee where he was going to propose an SKU management process. He was trying to justify the need and wanted to pick our brains specifically on determining the total cost of carrying an SKU. He said that he had done an internet search on the subject and came up with nothing.
We were glad he called us. We live for questions just like this.
We offered him the following. Most people that look at SKU management look at the contribution to sales. They evaluate eliminating the lowest contributors. The decision is easier if there are other offerings of the same product to absorb the revenue that is being cut. Not moving on SKU management because of not having the exact costs is just an excuse not to manage, i.e. reduce, SKUs.
It is not an easy question.
This problem is the same as trying to find the profit by SKU. This is something that consumer products companies have struggled with for years. It is easy to track revenues by SKU. That comes right off of the invoices. The hard part is to apportion the cost properly. This can be done but it is not an exact science. The best we can do is approximate the costs. The easiest way is to use the percentage of sales to whatever cost base one chooses to use. This will provide as good as an estimate as one could get in short order. Getting an exact measure would require a very sophisticated accounting system and probably not worth the cost of tracking and maintaining the data to that level of granularity.
If we are to use Percent of Sales by SKU to evaluate SKU costs, why not just use Percent of Sales?
We had another colleague that ran the supply chain of a $1B Latin American subsidiary of a consumer products company. He had a very simple rule for which SKUs ought to be deep sixed. He simply said, “If we sell less than a pallet of an SKU per month, it is not worth keeping. It should be cut.” It was a brilliant and visual rule. It resonated with Sales, General Management, and certainly in the Supply Chain. Even marketing folks, who are always the most reluctant to cut SKUs, could not really argue with this very simple logic. On a sales volume of $1B, everyone understood that an SKU that sold such a paltry amount had to be absorbing more cost per unit than other products. Simply changing over in the factory, several months of supply run, and the inventory carrying costs probably made the costs of such an SKU disproportionate.
SKU management need not be complicated. It can and should follow some pretty simple and clear guidelines. It can be accomodated via spreadsheets or a tool such as DemandCaster which incudes an SKU rationilization component. We have found that this either is something that resonates with the executive team or not. If it does not resonate, they will ask for numbers and justifications they know cannot be obtained.
What are your experiences in this area?
Can you determine the cost of maintaining a single SKU?
What are your rules of thumb for putting an SKUs on the consider to cut list?
Thursday, August 25, 2011 at 5:18PM It is Back-to-School sale time. There are advertisements for the office superstores and the big box retailers. The goods that line the shelves, end aisle displays, and floor displays were ordered back in April and May. The goods were shipped in May from Asia and June for the goods still produced in the United States. Back then we were still in the belief that we were still in a recovery.
On August 12, it was reported that July retail sales (excluding autos) were up 8.5% from July 2010 but essentially flat from the June results. On the same day, the Wall Street Journal reported that economists that they have surveyed predicted that August sales would be the second month in a row with flat sales performance. The title of the WSJ article was “Heading Back to School, But not to the Stores” which basically sums it all up.
On August 16th, there is an article from the AP that Wal-Mart and Home Depot are upgrading their profit outlooks for this year. As we have pointed out in this blog, The Great Recession forced many companies to lean up. They have had to tighten up their planning and inventory management. They have learned to operate with less employees and adjusted the product offering and mix to cater to more and more value conscious consumers.
Retailers also have learned from 2008 when they wound up with piles of unsold merchandise that they had to discount up to 80 percent or sell to liquidators for pennies on the dollar. Some of their peers, including Circuit City, shuttered. In fact, several retailers that have survived the Great Recession by cutting costs, keeping inventories lean and pushing either low prices or high quality are reflecting confidence going forward.
Basically, with flat sales Wal Mart, Home Depot, and others are able to improve their profit outlook on flat sales.
Are you able to do the same?
The key is to tightly manage planning, inventory, and personnel. Things our clients have been doing since the start of The Great Recession. Any business that has survived The Great Recession has probably done this to some degree.
We believe that this is a never ending activity. An important part of the Lean philosophy is Continuous Improvement. Planning parameters and inventory levels must be constantly challenged, tweaked, and updated to allow your business to operate in its most efficient state. Even if your business is not retail, evaluating your product offering is must be done with equal vigor. Lastly, and unfortunately for the economy at large, employment must be tightly managed at well. We are seeing an increase in hiring freezes and outsourcing of support functions.
Sound planning and optimized inventory can be achieved. With a tool like DemandCaster and our process, this can be achieved in less time and with less people than you might think.
What are your current planning and inventory challenges? Post them here or send us an email, we would love to discuss your challenges and suggest opportunities for improvement.
Working effectively and efficiently, we will persevere!
Monday, June 27, 2011 at 9:14AM What is an 800 Pound Gorilla? Well as this blog is not about biology or animal species it is safe to assume we are not talking about the Western Lowland Gorilla, the Eastern Lowland Gorilla, the Mountain Gorilla, or any other Ape Family in the Animal Kingdom. We are talking about a small sub-class of Homo sapiens whose natural habitats are corporations and other organizations.
Yes, we are talking about people. They do not resemble Gorillas in any physical manner. Nor are these “800 Pound Gorillas” necessarily obese as the weight reference alludes. No, we are talking about a class of people, men or women, who are adept and skilled at getting their own way in organizations. The name comes because we generally assume that an 800 Pound Gorilla usually gets his weight in the Gorilla world. It may be a little offensive to gorillas but this is a common name given to corporate bullies.
The 800 Pound Gorilla is often the leader of an organization. It could be the CEO, President, General Manager, VP, Director, Manager, and even Supervisor. In his realm or span of control, the 800 Pound Gorilla is dynamic and forceful. The 800 Pound Gorilla gets his way through force of personality and often by intimidating those who oppose his point of view.
However, not all 800 Pound Gorillas are leaders. They might be natural leaders in a group or milieu where the actual leader may be the exact opposite of an 800 Pound Gorilla. More often than not, this sub-class of 800 Pound Gorilla is very knowledgeable and uses that knowledge as a club. There are also cases where these 800 Pound Gorillas are right and wrong.
The term 800 Pound Gorilla is not a positive term. They are, as in the above matrix, senior executives who throw their weight around and are often wrong, the term Gorilla is not often used for leaders that impose their will and are always right. We tend to call these leaders great and visionary.
At Cadent Resources, we are concerned with Demand Planning and Inventory Optimization. We see 800 Pound Gorillas mostly in the area of Demand Planning. These 800 Pound Gorillas insist on revising forecasts upward into what they “believe” the sales will be. In most cases the Gorilla is wrong. If the 800 Pound Gorilla is the CEO, President, VP of Marketing, or VP of Sales there is not much the demand planning team can do. There is also not much a well crafted S&OP process can do. The 800 Pound Gorilla gets his way and the Demand Plan is compromised.
If the Demand Plan is compromised too often, no one will want to play and the S&OP process will unravel. The entire effort will become ineffective. In fact, the best S&OP programs work when senior executives become Gorillas with the intent on making S&OP work.
We invite you to share with us your experience with 800 pound Gorillas both good and bad. Are you a Gorilla? Be honest.
