By Paul Martyn
In response to today's unprecedented economic uncertainty, supply managers have adopted a "wait-and-see" attitude. Many are wary of spending their company's most valued asset: cash. And since inventory is cash's evil stepchild, companies continue to aggressively reduce inventory levels. In fact, current inventory management practices have regressed beyond "Lean" and are anorexic. As a result, popular Christmas gifts, such as electronics and appliances, may be in short supply.
The Institute of Supply Management's Purchasing Managers Index (PMI) tells a strange and interesting story about today's supply chain management. The data suggest that today's organizations have deliberately whittled their inventories down to dangerously low levels.
At its surface, uncertainty is straight forward to manage. Factory physics, the science of manufacturing, teaches us that manufacturers have three buffers to manage variability in their businesses: capacity, time and inventory. It is clear when looking at the PMI that most companies are using only one of these buffers: time. ISM reports a long trend of contracting inventories with little or no noticeable increase or investment in capacity.
As a result, lead times for supplies gradually (and now dramatically) increased in the face of a steady trend of increased demand (new orders). The recent and striking increase in lead time is a reflection that much excess capacity is being put to use, leaving time as the only remaining buffer. Lead times have ballooned from 10 to 12 days to 53 days.
So, what does this mean?
As a purchasing manager, this is a challenging and strategic time for aligning internal stakeholders and forging solid and flexible supplier relationships. Suppliers have no inventory, their capacity is tightening and lead times for orders are increasing. Internally, sales forecasts are inaccurate the moment they hit the inbox, and operations managers are complaining about the timing of supply deliveries.
So, what can you do?
Good news. It is an economic certainty that business heroes will be made in the face of this historic period of economic uncertainty. In a recent Harvard Business Review article ("Embracing Uncertainty Rather than Whining About It"), Justin Fox aptly points out that "More uncertainty = more potential for big profits."
Strategies for Ensuring Correct Levels
Effective purchasing managers are uniquely positioned to drive company profitability by working with sales (revenue) and operations (cost) to determine the right supply levels and timing, at the best possible price. Here are four ways purchasing managers can aim to ensure appropriate supply levels regardless of the near-term economic outcome:
- Aligning the sales and operations stakeholders requires that purchasing managers negotiate effective combinations of service levels (i.e., lead times) and price with suppliers to meet the actual demand.
- Purchasing managers that provide order commitments, regardless of how large, will provide suppliers with the confidence to invest in inventory and/or capacity.
- Purchasing managers should insist, in return for minimum order commitments, on a guarantee on service levels.
- Purchasing managers should share their more "optimistic" demand plans with strategic suppliers and negotiate price and service level terms in advance of an increase in demand.
When the dust settles, purchasing departments that overcome uncertainty and make bold commitments to their suppliers will reap the benefits of predictable service levels and pricing. As economist Frank Knight highlights in his report, "Risk, Uncertainty and Profit," "Profit is the lure that insures improvement, and this lure must be sufficient to make men overcome obstructions and take risks." ¦
About the Author: Paul Martyn is the vice president of global marketing at BravoSolution, which supports procurement professionals with tools and services to identify sourcing opportunities, prioritize initiatives, execute projects with tailored solutions, and realize the benefits of their initiatives. BravoSolution generates value by supporting clients in the improvement of sourcing processes to drive their companies' strategic objectives. More information on BravoSolution at www.bravosolution.com.