Monthly Archives: October 2012

Three Ways to Minimize Weather Disruptions in Your Company’s Supply Chain

Hurricanes, floods, fires, and blizzards are a few supply chain problems that most small businesses aren’t prepared for when they happen. Surviving weather disruptions is essential to growing your company and building trust with your customers. Although major weather disruptions may still cause delays, here are three methods to minimize their impact and continue to deliver on time.

Multiple Sourcing in Separate Demographic Locations

Toyota is famous for investing in its vendors. It understands the importance of having multiple sources for each part that goes into its cars. If one of its vendors has a problem, then it has another supplier to provide the part needed to keep production going. However, until the 1995 Kobe earthquake, most of Toyota’s multiple vendors were in the same geographic location. That earthquake paralyzed the entire region, including many Toyota vendors that were backup suppliers in the same region. Interestingly, after the 2011 earthquake and tsunami, the same problem occurred with the suppliers that sold to Toyota’s suppliers. Since then, Toyota has expanded its network of first and second tier suppliers to avoid problems caused by weather disruptions in particular areas. Geographic diversification, even at slightly higher prices, is essential to avoid supply chain disruptions in the wake of extreme weather or natural disasters. Even small businesses can follow Toyota’s example and diversify where they obtain their key parts.

Anticipate Upcoming Weather Disruptions

Unlike natural disasters, extreme weather usually has some advance notice. Whether it’s a couple days or just a couple hours, that short time before the weather hits is essential. Contact your customers and see if there is anything they recommend you do. Chances are your customers have plans on how to respond to the weather, but in the middle of other preparations, they may have neglected to inform you. Contacting them and coordinating your strategy can build trust and understanding. Expedited shipping, postponing orders, or changing quantities may be enough to avoid supply chain disruptions. Despite your best efforts, extreme weather may make delays or stockouts inevitable. However, if your customers know you are fighting alongside them, then you can alleviate many of their frustrations that would normally exist if you do not communicate well with them.

Apologize and Delight

Despite your best efforts, chances are that any major weather event will still delay some shipments. The key to minimizing problems is to communicate clearly what is delayed, when it will realistically arrive, and your regret for the problem – even if it’s not your fault. These actions will calm most frustration, but this is also an opportunity to shine. Consider sending your customers a small extra with their order as a “thank you” for their patience. Turning a frustrating experience into a good impression can go a long way in creating fans in your customer base. Your customers may not have complained to their friends about your product’s delay, but they will likely share what little extra you did for them because of it.

With these three simple methods, you’ll be able to keep your supply chain under control even when the weather isn’t.

What experiences do you have with weather impeding your supply chain? Feel free to share your successes or pitfalls with weather in a comment below so that we can all learn. In addition, be sure to subscribe to receive future articles.

Slash Obsolete Inventory with this Simple Hybrid Purchasing Strategy

Obsolete inventory, the stock of products that you’re not actively selling anymore, holds back many small businesses from future investment and growth. It ties up cash and hogs valuable warehouse space. While small businesses can certainly implement various methods of liquidating old products and move on, the best solution is to stop over-purchasing in the first place. Of course, never buying obsolete inventory is an obvious solution, but it’s a very elusive goal. Obsolete inventory has a way of sneaking into warehouses. As a cowboy would say, “how did all those sick cows wander onto my ranch – and how can I avoid them in the future?”

In order to reduce future stockpiles of obsolete inventory, you can work with your supply chain team to implement a simple hybrid purchasing and manufacturing strategy that combines small-batch validation with high-volume price discounts. It combines the power of validation and speed to market with the cost benefits of large-batch, long lead-time outsourced manufacturing. We’ll look to a calendar company to explain the hybrid strategy.

Hybrid Strategy Example: ABC Calendars

ABC Calendars sells a wide variety of unique and fashionable calendars. Each year, some of its styles do very well and sell out, but some of its styles barely sell at all. In July, ABC doesn’t know which of its styles will sell well, and in February of next year, its leftover inventory will drastically drop in value. Not too many people buy new calendars two months into a new year. In the past, ABC Calendars has moderated focus groups to forecast the winners. Based on forecasts, ABC sent out large purchase orders to its Asian vendors. These vendors produce in large batches with long lead times, but their low cost helps keep ABC’s margins high. ABC needs these margins to offset the money it loses from the styles that don’t sell. Historically, ABC has done pretty well picking winners, its right about two-thirds of the time. However, as the competitive market changes, ABC needs to do much better.

The real problem ABC Calendars is facing is that the low-cost, outsourced vendors require long lead times and high order quantities. This forces ABC to guess the winning styles before it has any real sales data. To make a good margin, ABC can’t rely on local or in-house manufacturing because it costs so much more. Nevertheless, ABC is trying a new hybrid strategy that will give it quick and valuable validation while still enjoying the lower margins that outsourced vendors offer. The following graphic and explanation show how ABC utilizes a hybrid purchasing and manufacturing strategy to reduce inventory and better calibrate which products deserve a large purchase order.

ABC defines the first step in each product’s life cycle as the prototype phase. More than just a working prototype to proof and pass around the office, this is a chance for ABC to get some initial customer feedback and validation. Even at a very high cost, this phase enables ABC to print around a hundred of each calendar design. It then places them in a few test stores to see how they sell. This first wave of customer voting with their pocketbooks will guide ABC to know which styles show promise.

Based on initial sales in the prototyping phase, ABC begins low-volume, higher-cost manufacturing. Whether ABC manufactures itself or uses a local company, it can slowly increase volume with smaller batches. It can then continue to sell to its early customers and obtain more validation. Usually the higher cost of local manufacturing erodes ABC’s profits. However, before it jumps into the investment of a large outsourced order, ABC doesn’t mind paying a higher price to gain market insight. It actually prefers giving up some margin to avoid piles of obsolete inventory later.

Now that ABC knows which styles have the most positive momentum, it’s ready to place the large orders and capitalize on the lower price from higher volumes. However, before placing goliath-sized orders, ABC plans its exit strategy for the items it’s ordering. ABC orders a substantial amount to carry it through most future demand, but not enough to sustain demand through February. Instead, ABC orders enough to satisfy around 80% of projected demand, planning to run out of inventory around mid-January. Then, when inventory starts to run low, ABC switches back to the local manufacturing option. Again, this decreases margin, but it helps guarantee its warehouse will be nearly empty when March 1 comes and demand disappears for its product.

In addition to printing calendars, any business that produces a large number of SKUs and relies on slow but cheap outsourced manufacturing can significantly benefit from this hybrid strategy. It’s certainly not a lean, one-piece flow or a built-to-order supply chain strategy, but it’s a realistic step in an effort to reduce inventory through hybrid purchasing strategic shift.

What are your thoughts? Please add your experiences or thoughts in a comment below. Additionally, please subscribe here to receive our weekly insights.

How to Turn Dead Inventory Into Cash Through a Warehouse Sale

Obsolete, dead inventory haunts most small businesses, especially growing companies in need of cash. Old product lines, failed concepts, or just too much of what used to be good inventory can weigh on your balance sheet and drag down investment in future opportunities. You may be sick of pitching your dead inventory to customers and about ready to send it all to the dump. However, one great way to recover some cash is to turn your warehouse into a temporary store and host a warehouse sale. A cowboy knows that with the right price, an old cow can still put some much-needed cash in his pocket.

Warehouse Sale Banners

In order to run a successful warehouse sale, you’ll need to do three things: effectively advertise, thoroughly prepare, and actively manage the sale.

Effectively Advertise

Opening up your warehouse to the public creates a new shopping destination with which consumers are unfamiliar. Even if you price everything for pennies on the dollar, you won’t sell much at all if no one knows about the sale. Here are some ways to get the word out about your sale:

  • Fliers – placed on cars and passed out to friends. This is the most cost-effective way to begin advertising. Focus on parking lots of stores that relate to your products. Also, obey all laws and respect businesses’ rules.
  • Craigslist – post some of the higher ticket items you’d like to sell to generate interest bring people to you.
  • Newspapers and Classifieds – depending on your target audience, this is still a great way to reach people effectively.
  • Facebook – even if you don’t have a company Facebook page, encouraging employees to take some time at work to share with all their friends is effective at generating a crowd.
  • Neighboring Businesses – visit your neighbors, vendors, and customers and let them know about the sale. Many will drop by on lunch to see what you’re offering.
  • Signs – in conjunction with local businesses and neighbors, posting signs and arrows all around will help generate curiosity and customers. Just as garage sale signs lead people to the destination, you’ll want to place many signs to lead people to your warehouse, which may be hard to find otherwise. Billboards are an added bonus if budget permits.
  • Email Blasts – if you have an email list, this is the perfect time to use it. Offering incentives through the blast can help build loyalty to the company even after the sale. If you don’t have an email list, use the warehouse sale as an opportunity to create one.
  • Word of Mouth – kindly ask people who come and purchase from you to tell others about the sale. This can go a long way to bring in more customers.
  • Radio – if you have the budget, usually several thousand for an effective campaign, radio is a great way to bring in scores of people. Start advertising around 10 days before and increase the ads’ frequency leading up to the event.
  • Television – although commercials can be expensive, local news stations may have several options to feature the sale for less.

A successful marketing campaign for a warehouse sale, especially a first time sale, requires 10 to 20% of how much you would like to sell. If you only want $10,000, then a budget of $1500 will suffice. If you’d like to unload a lot more, then plan to advertise more.

Thoroughly Prepare

Chances are your warehouse was not designed for consumer shopping. Converting your warehouse into a store will help consumers feel more comfortable and spend more. Preparation requires two parts: (1) safety and traffic flow, and (2) pricing and merchandising.

Safety and Traffic Flow

Some of your customers will probably bring children with them. This is paramount to remember as you make your plans for the sale because a typical warehouse has many dangers to six-year-old boys running around. To both protect your shoppers and manage inventory that will not be included in the sale, you will need to block off areas of your warehouse where you don’t want everything touched. Some orange safety fence from Uline works great. You’ll also want to post signs to answer common questions you’ll hear, “Do you have restrooms?”, “Do you accept returns?”, “Do you take credit cards?”, or “Where do I check out?” IKEA does a great job with signage in answering their customers’ questions, so use IKEA as an example.

Pricing and Merchandising

Extremely low pricing is the key to moving your dead inventory. Remember, no matter how much you paid for it, your products are only worth what consumer will pay for them. Discounting 75% or more from what the product retails at is a good place to start, but you will likely need to reduce some products much more. Let the cliché of “Stack it Deep, Sell it Cheap” guide your pricing decisions. Remember, warehouse sales aren’t about margin; warehouse sales are about recovering cash from dead inventory. If for some reason they do generate margin, you may want to consider opening a retail channel.

Whether black marker on cardboard or nicely printed graphics, large signs work great at informing customers of your amazing prices. Usually showing several prices helps: Retail Price $79.99, Sale Price $29.99, Warehouse Sale Price $8. This technique helps the customers know what a great price they are getting.

Work with your accounting department to figure out how to include sales tax in your prices and sell everything at round numbers ($1 or $3 rather than $0.99 or $2.97). Although 99 cents is below a psychological barrier of one dollar, never dealing with coins at the checkout line will help people get through much quicker than counting out change.

For loose miscellaneous items, or anything you just have tons of, let people fill a bag for ten or twenty dollars. This creates excitement and sells products that you wouldn’t sell much of individually.

Although many people come to a warehouse sale expecting to dig through boxes, bins, and pallet, the easier you make it for customers to get to products, the more you’ll be able to move. Stacking six pallets, placing a slip-sheet on top, and then laying out items is a great way to bring merchandise up to where consumers can easily reach it. Additionally, wide aisles reduce congestion – especially for mothers with strollers or customers loading up on what you’re selling.

Actively Manage

You’ve gotten the word out about your warehouse sale and you know hundreds are planning to come. You’ve also spent hours with your team preparing everything with beautiful signage and low pricing. So far, you’ve done a fantastic job, but as the first customers walk into your warehouse, the bull ride has just begun.

The key to moving the most inventory – and generating the most cash – is having someone who can make pricing decisions present during the entire sale making decisions. You should have a big black marker in your pocket, and you should use it often. Know which products you absolutely want to disappear and reduce the price until they start moving. If five dollars is two high, try three dollars – or buy one at five, get one free. Be strategic in your pricing though, you’ll get more cash from selling two items for five dollars than each individual item for three.

Another reason to be out on the floor is to negotiate. “Interested in that old water cooler? – make me an offer,” – and accept almost anything. Talk with customers and answer their questions. With such low pricing, selling is very easy, and usually just explaining the price will make the sale.

Warehouse sales are also great opportunities for your product development team to talk directly with customers. Consider putting a few future products out at highly discounted prices to see which ones sell. Talk with people and learn what you can do to avoid dumping future inventory. In addition, the presence of people who can explain all the features and benefits of your product, and even give personal endorsements, helps convince many people to buy more.

At the end of the sale, invite liquidation partners to take everything that’s left over. This will not only help you save payroll dollars on cleanup, but also completely clear everything out so you can move forward. Selling at a loss hurts, but it does get cash in your pocket. A business can survive a net income loss, but a business easily drowns in a cash flow dam – which a warehouse sale can break through.

What experiences have you had with a warehouse sale? What’s worked or not worked for you? What else would you like to know? Add your comment. I’d love to help you have a successful warehouse sale.

Problems are Gold to be Treasured

Lean Quote Roundup

In his excellent book The Remedy, Pascal Dennis gives this beneficial advice on improvement:

“Problems are gold to be treasured, not garbage to be buried. Problems are the process talking to us, telling us where our management system is weakest. We need to use our stethoscopes to probe deeper, get to the root cause, and fix it. It we tune out problems, we’re lost.”

I love the mental image this quote produces. Treasuring problems is completely unnatural in most organizations. Problems in a business are like weaknesses in a sports team. A sports team’s fans don’t want to admit the team has any faults, but unless the team’s coach recognizes and addresses the weaknesses, they’ll never win the championship. Certainly, we all want to see our companies win, but we must be coaches, not just fans, to help them improve.

Problems are Gold to be Treasured

A healthy exercise to begin treasuring problems, and finding solutions, is a problem brainstorm. Gather your team around and spend 20 minutes listing all the problems and emergencies you have experienced in the last month. I like to use post-it notes for every idea so I can easily rearrange them, but a whiteboard also works well. Once you have a thorough list of problems, begin organizing them into main categories. “We ran out on item Z”, “we have way too much of item Y”, and “we had to expedite inbound shipments of item X” may all be grouped together into one category of “Inventory Management Problems,” or they may represent three different categories based on your circumstances. Usually, 80% of the issues fall into just a few categories, while the remaining 20% are outlying concerns.

The next step is to begin analyzing the common root cause of the problems in each category. I recommend the 5 Whys technique to dig deep into the problem’s origin. This will probably extend beyond the initial brainstorm meeting. A good analysis often takes an uncomfortable amount of honest thought and analysis. Often the instinct of self-defense drives us to hide problems. Focusing on solutions rather than blame can help break down obstacles hiding true problems.

The concept of listening to problems as the key to improvement has many other applications outside of business. Rather than ignoring problems with ourselves or relationships with others, we can instead use a stethoscope and learn the real reason for the trouble. Ignoring problems rarely leads to real and meaningful solutions. However, the reward for investing the effort to learn and enact appropriate solutions highlights the value of problems.

What are your thoughts? Add your comment below or subscribe to future posts.