Inventory and Supply Chain Management

If you manufacture a product, consider this: 70-80 percent of your manufacturing costs can often be found in the raw materials used to produce the product. You can considerably reduce production costs by focusing on your supply chain. In this session, we'll go over some of the strategies for managing various types of supplies, and provide tips on getting the best price possible.

First, let's start with how the supply chain works. The supply chain is the relationship between you and those who supply you with products, materials, and services. The chain includes the relationships as they go down the entire product production cycle. This means raw materials, distributors of the raw materials, manufacturers, distributors of the manufactured products, retailers, and finally the customer. Regardless of where your business falls in this chain, you'll have issues with supplies.

Basic purchasing
Purchasing for your business may include office supplies, production materials, utilities, and services by specialists. Typically, the procedures for purchases are:

  1. Specifying the information related to the needed product.
  2. Determining the supplier -- Lists of suppliers should be kept in order to compare pricing. Quotes should be requested for large orders, but are usually not necessary for small orders.
  3. Negotiating prices
  4. Purchase of supplies
  5. Delivery and inspection of the supplies
You can reduce your costs through bulk purchases (assuming you have the storage space readily available), grouped packages of products (often available at a reduced price, but be careful of being too dependent on one supplier), purchasing in bulk by joining in with other businesses and buying the items together (aka, collective purchasing), Just-in-Time (JIT) orders (timing orders so they arrive just before you run out of your supply - saves space for storage and tied up capital.)

Just In Time (JIT)
Let's talk some more about JIT. This method of purchasing is part of the total quality drive. It is becoming more and more popular as software programs allow for more accurate pinpointing of process flows and timing of supply needs. The benefits of JIT are obvious. Your order comes in when you need it so long term storage of supplies is not necessary (space, energy, and transportation savings). Your money is not tied up in inventory that stands the chance of not being used due to changes in any number of things. Quality issues with the supplies are more important and dealt with more immediately than they are if your workers can simply go to storage and get another part.

One thing to remember is that your suppliers must also work under this system. If they can't guarantee delivery on the date you indicate, then your system won't work. Make sure you have a written agreement about the delivery needs. In return, your supplier can get payments quicker and their cash flow will benefit as well.

MRP: Manufacturing Resource Planning
Manufacturing Resource Planning (MRP) can help you plan and determine the supply needs and timelines for new manufacturing processes. As a result, you'll be able to predict delivery times, respond to changes, and have better control over the various phases of production. See the Links section of this article for software and services related to MRP.

Supply Chain Strategies
If your business depends on revenues from products produced then you probably should organize the supplies and services into groups that can help you set strategies for getting the best deals and help you make the most money.

The supplies (or commodities) you purchase fall into four categories depending on their availability, price, and quality. The first group is Leverage commodities. These are readily available, high volume supplies, that you can get from a number of suppliers. This group can save you the most money if you negotiate with your suppliers effectively. By this we mean,

  • getting competitive bids
  • requesting value-added services like inventory control services, or storage
  • breaking out transportation costs
  • collective purchases (mentioned above)

Another group is Routine commodities. These are the everyday things you use and don't pay that much attention to. They are low priced and can be purchased in many places by anyone. This is the type of product you want to get for the lowest price possible. They don't have a big impact on your business. To get the best deals on this type of supply

  • Get competitive bids and set up a long-term agreement with the best supplier.
  • Simplify the ordering process to take the least time possible.
  • Request value-added services as mentioned above.

The next group is Strategic commodities. These include supplies and materials that have a large impact on your success and profitability. They are more complex, not available through many sources, and are usually high dollar items. Strategies to keep your supply coming at the right price and the right time include:

  • Establish good relationships and long-term agreements with your best suppliers
  • Consider joint possibilities for new product development and branding
  • Ask for the same value-added services as you get from your Leverage commodity suppliers, such as inventory control, system links, or (if the volume is high enough) on-site representation.
  • Always have a back-up supplier.

The final group is the Bottleneck Commodities. These items have complicated specification requirements often needing special manufacturing processes. You don't often have alternate products you can use in place of Bottleneck commodities, therefore they can have a big impact on your overall business if you can't get the supply you need. The best strategy with this type of commodity is to try and engineer the need for them out of your process. Your next best options are:

  • Finding a supplier who wants an ownership stake in the business.
  • Establish long-term agreements with preferred suppliers.
  • Exchange technology or knowledge with the supplier to create the relationship you need.

Negotiating the Best Deal
Not every negotiation session is centered on price. Surprised? Some people are. After all, isn't that what's important? Yes, and no. Price is important, but so is quality, delivery time, service and maintenance issues, order response time, etc. There are many things to bring to the negotiating table. And, even though price may not be what you're talking about, the end result of your negotiations should be cost savings -- often significant ones.

Here are some angles you may not have considered when negotiating deals with suppliers.

  • Payment terms --Ask for improved delivery time or other service related to the supplies in exchange for shorter payment terms.
  • Warranty --The warranty on the products you purchase from suppliers can be negotiated considerably. You may be getting (and paying for) more warranty coverage than you need. Visit this issue and see if you can reduce the length for a reduction in item cost.
  • Timed cost reductions --If you can't get the price you need right away, but need the product anyway, try to get the supplier to agree to future reductions by a set percentage of the item cost. This would be based on the assumed increase in quantity you will need and can mean significant eventual savings for you.

Clearly, your business's success and the value passed on to your customers is affected greatly by your supply chain. By spending the time setting some strategies and negotiating the best deals, you can keep that continuous improvement momentum going.

Now, let's move on to less obvious part of the operations managers job.