The COVID-19 virus brings inventory management into sharp focus to preserve cash. Consider the following quote from Ella Wheeler Wilcox: One ship drives east and another drives west by the same winds that blow. It’s the set of sails and not the gales that determine the way they go. Inventory management principles and practices for all times are examined as well as special trimming of the sails for COVID-19. Emphasis is on purchase orders and raw stock inventory.
Inventory tends to fall during rising demand and to rise during falling demand. During steady demand, it may not get much attention. It can be likened to a sailing ship under gale, dead calm, and steady as she goes conditions. When the gale or the dead calm strikes, the crew’s skill (training) and preparation (plans & materials) developed during the steady as she goes times makes all the difference. The “Cabin never leaks a drop when days are bright and fair.” from the song Arkansas Traveler comes to mind. Consumers want what they want when they want it and this changes quickly. Responsive companies, in order to meet these demands, strive for smaller inventories of old parts to use up and quicker build-up of inventories of new parts.
It is not a question of what is the right inventory to keep for all parts and all times. Sometimes it makes sense to hold a lot of parts, sometimes less is better. The important thing is to be purposeful of how and where you hold your assets and how to respond appropriately under a variety of conditions of supply and demand. I remember an old Bill Cosby record about new sneakers – “He could stop on a dime, give you nine cents change, and go on!” Responsive and agile as well as steady and purposeful is the name of the game for the buyer and planner.
About 3 ½ years ago, InSource faced a shortage of Deutsch connectors to support its harness and controls business units. For the most part, parts were obtained either by substituting similar parts by other manufacturers or by going to the open market and paying higher prices. This stimulated a hard look at sourcing and inventory management practices. InSource purchases about 7,000 different part numbers in quantities from a handful to hundreds of thousands from 466 suppliers. Some of the parts are commodity (used by many companies) parts from distributors while others are custom parts from manufacturers. We discovered the following are important:
- Shorter lead times. Short lead times reduce uncertainty of how much you are going to need when you place the order. One can ramp up and ramp down quicker. One can lower both inventory and open order quantities which are driven higher by uncertainty of supply.
- Appropriate batch and economic order quantities. The traditional delight of the buyer is to buy large quantities to get a good prices. InSource seeks to price based on EAU (estimated annual usage) and not order/release quantity. Minimum order quantities of custom parts from manufacturers and reel quantities of commodity parts from distributors are a reality. Within these constraints, InSource seeks to set economic order quantities for A (high $spend), B (medium $spend), and C (low $spend) parts to receive parts about bi-weekly, monthly, and at least quarterly respectively. This allows us to order parts weekly and keep the parts flowing. When dealing with minimum order quantities from manufacturers, multiple releases are used to schedule the shipments.
- Distributor stocking on commodity parts. With the connector shortage referenced above, InSource found itself dealing with arms-length suppliers when our preferred suppliers did not have the parts. Preferred suppliers are needed more than ever when supply is short, so we sought suppliers who would stock for us and plan/execute for us in times of short supply (gale or dead calm to the sailor). We have done a lot of this and plan to do more.
- Managing the custom parts and the longer lead times better. Some manufacturers manage releases better than others. Some foreign suppliers manage freight consolidation better or have warehouses in North America for lower costs and shorter lead times. Some manufacturers are specified by our customers and yet are more accommodating than others. With persistent efforts, we continue to improve our sourcing.
- Partnering with and moving business to preferred suppliers. InSource needs suppliers who do the above 4 points better. Some have come from existing suppliers, some we have found over the last 3 ½ years, and some we are still looking for. Finding the right preferred suppliers and partnering with them to better respond to our customers’ needs is key to all of our success. We need them through thick and thin. It is in our best interest to have fewer, better suppliers. A Supplier Scorecard system was introduced in July 2019 with 19 suppliers currently participating. Improved ratings come from improvements in the above 4 points. Sharing demand with preferred suppliers helps them respond to our needs.
- Devote more time to how we buy than to buying. By traditional means, it takes a lot of time and effort to buy all the parts we need. IT support and productivity gains in buying have been made, but there is much more to do. We have more accurate data as to supplier, lead time, minimum order quantity, minimum reel quantity, and economic order quantity. We can bring information like past usage, inventory, and open orders to view on a single dashboard to save looking at multiple screens. “Up to Buy” reports with suggested purchase quantity for review/change by the buyer have been developed. We just introduced “Up to Reschedule” reports and cutting purchase orders automatically.
- Reducing open order commitments. Open orders represent a commitment to the future and tend to be great in times of rising demand, ballast in steady as she goes, and strangling for falling demand or obsolescence. Waiting to place another order until called for by lead times and economic order quantities, gives us a better handle on how much we actually will need and frees us to take other actions if, say, a downturn would start before we needed to place the order.
- Quoting packages of similar parts. Quoting packaging such as connectors & terminals in Harness group, resistors & capacitors in Controls group, and screw machine parts in Refrigeration group helps sort out lead time, batch size, pricing, and stocking improvements. This also lets us compare new suppliers against current suppliers. Some of our best suppliers have been added in the last 3 years. Once parts are well placed with a supplier who is doing well on our Supplier Scorecard ratings, we are not so quick to send out quote packages to other suppliers.
The COVID-19 virus required special trimming of the sails. In our lifetime, we never experienced a world-wide economy shut down so quickly (17 million new USA unemployment claims in just 3 weeks). We sensed a “dead calm” situation with a high level of uncertainty of how much and how long. We knew the health concerns of the virus would impact our available workforce. Customer demand would likely slow. While we had a healthy level of parts to support an aggressive build schedule, eventually parts supply shortages would impact production schedules.
The onset of the COVID-19 pandemic was in mid-March. For the rest of March, we assessed our situation, studied state and federal orders and laws, and figured out how to comply. We needed to protect our employees and serve our customers, and preserve cash. Beginning April 1st, we took the following steps inventory management steps:
- Asked our suppliers to stop parts shipments and placed new orders sparingly for 2 weeks.
- During the 2 weeks
- Contacted customers and assessed available production capacity and adjusted schedule downward.
- Reviewed Open purchase orders/releases due in April and pushed out those with no demand.
- During the balance of April
- Assess customer needs and production capacity and adjust production schedule.
- Review purchase orders/releases due in May and push out those with no demand.
- During May, repeat for June, etc. as long as needed
“The wind is always changing, and all sails need frequent adjustment. There is no such thing as set-it-and-forget-it, so check yourself often”, writes Jonathon Vieker. Inventory management and sourcing will always need sailors AND more analysis, more tools, and proper application makes better sailors.