Wednesday, June 27, 2012 at 4:24PM In Part I, we discussed the proper use of Excel with ERPs. We advised against using Excel to manage planning and other operational transactions. In Part II, we will backtrack on that advice, a little, and discuss when it is actually appropriate to use Excel spreadsheets for operations planning and other transactions.
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.
Monday, October 31, 2011 at 12:00PM There were floods in Thailand the past week. The floods were the result of inordinately heavy rains. There is no place for the rain water to go as the intense population growth have minimized the flood plain. The paving and building have also minimized the amount of water that can be absorbed by the ground. It is definitely a story we should follow from a humanistic standpoint as over 350 lives have been lost and countless numbers of people have had their lives and businesses disrupted. The property loss and clean up costs will be astronomical.
The impact of these floods have caused ripples in the global supply chain. As it turns out, Thailand is a major source of some automotive and computer components. The auto industry in Japan has been trying to catch-up for lost production due to the earthquakes there earlier this year and now they are impacted by this. There were reports that Toyota was suspending all production in the US for a week. They have also curtailed overtime in their Japanese factories and cut back their production in Vietnam and the Philippines. Honda halted their production of vehicles in Malaysia. Both companies operate factories in Thailand and those factories have been idle during these floods. Both companies rely on a supply base in Thailand for about 100 parts. Shortages of just one part out of thousands of components can shut down an automotive assembly plant.
Perhaps more importantly, Thailand is a major source of hard drives and thus more of a choke point for the computer industry. Western Electric has two plants in Thailand dedicated to hard drives. These factories supply 20% of the hard drives globally. The factories are not currently producing and Western Electric has stated it cannot fully access the damage and provide an estimate when the factories will return to full production. Acer and Samsung seem to be mostly affected by this shortage. Acer has even raised prices immediately much like orange juice seems to go up in price the minute a frost is reported in Florida.
We have commented on the global supply chains most companies are now part of . We have discussed in this blog the difficulties of a natural disaster in one part of the world influencing global commerce. From the volcano in Finland to the above mentioned earthquakes in Japan and now to these floods in Thailand we have commented on risk, disruption management, and contingency planning.
Luckily, none of these disruptions have been too long. The recovery has been quick in most cases. There has been no need for contingency planning beyond what we have recommended and what most companies do: Pull the executive team together and have “what should we do” meeting.
We like to remind our clients and readers to at least think about contingency planning when these types of disruptions occur to others. Take a moment and read our Practical Guide to Contingency Planning and add contingency planning on the agenda of your next management team meeting. Your organization will be better off with it.
Monday, June 13, 2011 at 11:37AM In part I of this two part blog we discussed Operational Definitions and how specific words, terms or concepts can have a distinct meaning in a specific organization or business and how people must be aware of this when communicating in effort to solve problems and improve operations. Now, let’s discuss how Operational Definitions plays an important role in Operational Measure and Inventory.
A recurring theme advocated, or mantra chanted, by process improvement experts is that:
Operational Definitions are even more basic. Without the right Operational Definitions, there can really be no Operational Measures.
In any particular situation, everyone has to know and agree on:
While Deming provides plenty of examples in his book, the problem is even more complicated in our modern world of ERP. We are awash in a sea of data. We need operational definitions more than ever to turn that data into information that we can then monitor and act upon.
Let us consider something as obvious as inventory. We all know what we mean by inventory… don’t we? Let’s start with a formal definition from dictionary.com:
Inventory: A complete listing of merchandise or stock on hand, work in progress, raw materials, finished goods on hand, etc., made each year by a business concern.
There we have it. What could be easier? Now that we all have the same understanding, we can easily measure it. It is just Inventory. Our experience at Cadent Resources while working with our clients is that we can break it down, per the above definition, in terms of stock on hand, work in progress (WIP), raw materials, finished goods on hand, etc. Etcetera? What is included in etcetera? What exactly does on hand mean? Here are some questions we make sure we review with our clients and feel everyone in a company interested in inventory needs to have good definitions for including general management, finance, supply chain (planning, inventory management, purchasing, and more), and IT.
This simple, or seemingly simple, area of inventory can be very complicated. When working with an ERP such as SAP or Oracle, the complexities can be daunting. There are so many levels and layers of transactions that must be considered. The system may have a definition different from the common lore held to be true inside the company.
Monday, June 6, 2011 at 7:19AM Operational Definitions were a large part of what W. Edwards Deming used to advocate in his teachings. Chapter 9 of his book, Out of the Crisis is dedicated to this concept. “Operational Definitions, Conformance, Performance.”
In the opinion of many people in the industry, there is nothing more important for a transaction of business than the use of operational definitions. P. 276.
The concept, while being critical, is nothing complicated. Basically an Operational Definition defines a word, term, or concept that has a distinct meaning in a specific organization or business. People cannot communicate effectively or hope to solve problems and improve operations if they do not all have the same understanding of the various terms being bandied about in the workplace.
One of the first things to be done is to define terms as precisely as possible. In our business, we run across this every day while working with prospects, clients, etc. In fact, just recently while presenting at a conference on S&OP. The attendees in our session were all seasoned Supply Chain professionals from well known companies. During the Q&A at the end of our talk we experienced a basic Operational Definition difference. In response to a question, we talked about the risks of making changes in orders within lead times. An attendee raised his hand and said “Don’t you mean outside of lead time?” It was immediately clear to us that we were operating under different Operational Definitions. His outside of lead time was our inside of lead time. We all meant the same thing however: If changes are made to an order when the promised delivery date of that order is less time than it will take to get the materials, schedule, and complete the production, then that order is at risk.
So, who was right? While we believe our operating definition of within vs outside of lead times is more using it. We throw around terms like Forecasting Accuracy, Inventory Turns, Days Coverage, Cash Cycle, and many others all the time. We assume, whoever is speaking or writing an email assumes, his or her audience is using the terms in the same way we are using them. This is not something we should ever assume. Even when we are the audience, we cannot be sure the speaker or writer has a clear operational definition of the terms he or she is using.
There is something that all teachers say. There is no such thing as a stupid question. This is, in large measure, true. The teacher, professor, or instructor always follows up the statement with the following explanation, If you are not fully understanding or grasping what is being discussed, there are probably others in your same shoes. I believe the second statement may be truer than the first.universally used, there is no right answer to this question. The term needs to be defined by the people.
The problem in both classrooms as well as in the workplace is that no one wants to look, well, for lack of a better term … stupid. It is a fundamental human trait to avoid being embarrassed. Also, if we are to question a term or concept, it needed to be done very early in the business relationship. If we wait a few weeks which then turn into months we find that asking a basic clarification or definition question is really embarrassing. Everyone assumes that everyone else understands.
Although it is quite possible they do, the question still remains, do they understand it the same way you are relaying it. In many cases, the answer is “NO.”
