Tag Archives: purchasing

‘The Johnny Tightlips’ and Two Other Popular Approaches to Supplier Relations

“Before you send that email, there are a few lines I want to take out. We don’t want to share that information with that supplier.”

“Really? But this supplier has done so much for us – shouldn’t they know what’s going on?”

“Not yet. Maybe later – but we don’t want to put any tension on our relationship right now.”

Three Approaches to Supplier Relations

Most companies have a list of key suppliers that you just couldn’t live without. Your dependence on them reminds you of the support you get from best friends, siblings, or even your spouse. But sharing personal information with family and close friends is often easier than sharing business information with your suppliers. What if they take advantage of you? What if they share that information with your competitors? What if they become your competitor?

Navigating your supplier relationships depends a great deal on your business model and the character of the suppliers you work with. Perhaps you could benefit from increased information sharing. Or – perhaps you should hold back a bit more. Here are three approaches to supplier relationships to consider.

The Johnny Tightlips

Johnny Tightlips

Johnny Tightlips is one of my favorite characters from the Simpsons. His catchphrase, “I ain’t sayin’ nothin’,” characterizes the attitude that a surprisingly large number of businesses take. While this arms-length relationship seems cold, it also has served many companies quite well.

The stories of suppliers moving upstream and becoming a direct competitor with their customers are numerous and instructive. For example, Asus was Dell’s supplier when they announced their own brand of personal computers that would compete directly with Dell.

If you’re a fan of poker-like negotiations, then keeping your cards close is highly advisable. Millions of dollars have been won by letting the other party speak while you sit quietly and listen. In fact, using a “pained pause” may be a great tactic to try next time you’re in negotiations. This tactic is described as, “When your negotiating partner makes a too-low offer, sigh, look him or her in the eye and say nothing.” Your silence puts pressure on them to do better, negotiate with themselves, and make a better offer without a word from you. For more on the Pained Pause, check out this Lifehacker Article.

However, relationships with Johnny Tightlips suppliers are only good as good as the benefits they bring. Unless you have most of the power in a supply chain, it’s unlikely that your suppliers will sacrifice much for you. When hard times come, they’ll more likely to switch to your competitors since there’s no loyalty or relationship in place.

Here’s a couple of my favorite Johnny Tightlips appearances:

The Open Book

The Open BookOn the opposite end of the spectrum is the open book approach. Your suppliers provide valuable services to your company – much like your employees. Treating them the same as employees, especially in regard to information, makes a lot of sense.

Being open has a myriad of benefits. Suppliers are able to collaborate with you on new ideas. Because they’re higher up the chain, they bring valuable insights about what efforts they’ve seen previously work or not. They also may have innovative ideas that they’re more likely to share with you because of your relationship with them.

An open policy also can be lifesaving when the road gets bumpy. Suppliers are much more patient when they know what is going on – why payment is delayed or orders are down. Though the rough spots are often the most difficult times for honest communication, that’s when it’s most impactful. A detailed email explaining the situation openly can open the door for more lenient payment terms and with the relationship intact.

Before your open your books completely, here are some important questions to ask:

  • Has your supplier proved their trustworthiness yet?
  • Is there any specific information that poses an unusually high risk if shared?
  • Have sufficient contracts been signed to prevent unauthorized sharing outside the business?
  • If you are a public company, are SEC guidelines – especially insider trading rules – being followed?
  • Have we sufficiently explained the policy to those who interact with our supplier?
  • Are your instincts prompting you to hold something back? Why?

Despite the risks, opening up communication often yields impactful results.

The Game of Kingdoms

The Game of KingdomsA middle ground is a philosophy I call the game of kingdoms approach. Imagine your company as a kingdom – complete with a castle and city walls. Your suppliers and customers are also kingdoms. Some are bigger than you, and some smaller. Just as a king engages with other kingdoms, you work with other companies.

The much larger kingdoms – the ones you’d like to have on your side if a war starts – merit investment in open communication. You want to build those ties in diplomatic ways by sending emissaries and fortifying trade routes. The smaller kingdoms may require less work. Taking a diplomatic game approach and envisioning various castles often helps me make better decisions on supplier relations.

Besides, “inter-kingdom diplomacy” just sounds more fun than “supplier relationship management.”

What’s Your Weapon of Choice?

Which approach do you currently use with your suppliers? How might you benefit from adjusting your communication style?

Share your thoughts in a comment, and be sure to check out our recent podcast where we talk with the former VP of Operations at Skullcandy about vendor relationships and metrics.

[Image Sources: Johnny Tightlips (modified) | Open Book | Castle]

How Skullcandy Rocked S&OP

How Skullcandy Rocked S&OPI’m excited to share with you the first episode of the Supply Chain Cowboy Podcast. I had a great interview with Mark Kosiba, former VP of Operations at Skullcandy. He shared his experience with forecasting, S&OP, and vendor scorecards – all very popular topics on our website right now.

I used to hate forecasting. I thought it took as much skill as tossing a dart at a bunch of post-it notes with numbers on them. But after talking with Mark Kosiba, I can see how a truly collaborative S&OP culture can transform a company. He took Skullcandy from just one spreadsheet to a set of world-class processes that earned Target’s ‘Vendor of the Year’ award. If you want to improve how you forecast, then you’ll definitely want to check out this episode.

You can listen or download the podcast from the link above or check out the full transcript. The podcast will also be available soon on iTunes for subscription.

I’d love your thoughts on what you’d like to hear more of as we record future shows.

Who Owns the Forecast?

As our small company has grown, my team has repeatedly asked the question, “Who owns the forecast?” When we were smaller, with just a handful of products and employees, that question didn’t matter much. We all agreed together on what we hoped to sell, and then we bought inventory in anticipation of that growth. Since we only had a few items, the decisions weren’t complicated. Purchasing too much wasn’t a problem either. We’d have overstocks, but it was only a few thousand dollars, which we could easily liquidate.

Today we face a much different situation – one in which we’re fighting hard to figure out the forecasting process. Compared to our beginnings, our customer base, order quantities, and SKU count have all increased exponentially. We’ve long passed the point at which our one purchaser could keep track of everything in her head. More precarious, however, is that overbuying has gone from a few thousand dollars of overstock to millions.
Hot Potato Forecast
We also began experiencing company misalignment as each departments moved forward with its own projection. Our salespeople set revenue goals, our controller had a year-over-year budget, and Operations had its excel sheets and run rates. All three pseudo-forecasts were vastly different. What resulted were overstocks, stock-outs, and unrealistic budgeting. We needed someone to take ownership of the forecast – but who?

Should Sales Own the Forecast?

Being in operations, my natural instinct was that Sales should own the forecast. After all, they interacted most with the customer, so they were obviously the best at translating those insights into numbers. However, the job of our small sales team was to build relationships with customers that brought in revenue. This required almost all of their time and effort; understandably, they wanted to focus on selling instead of forecasting. Sales agreed to give as much input as possible, but they needed someone else to own the forecast.

Should Operations Own the Forecast?

Our company looked to Supply Chain and Operations to own the forecast, but we hadn’t been doing a great job so far. We had workbooks upon workbooks of Excel forecasts, but it was only as good as past data could predict. Our limited MRP tool wasn’t robust enough to meet our products’ erratic patterns, so we had to manually calculate and guess every order. Because excess inventory was piling up, we tried to scale back our purchasing to preserve cash. However, this often forced us to use expensive airfreight to keep items in stock. We quickly realized that our current processes and tools wouldn’t suffice. While we could play a leading role, we couldn’t own the forecast. We could lend our analytical skills and champion the process, but without help from other departments, the forecast would continue to be unacceptably poor.

Should Finance Own the Forecast?

Even though our controller (our head accountant) wasn’t involved with purchasing or selling our product, she had to present budgets and revenue forecasts to our CEO and Board of Directors. Most of this forecasting was similar to the following:

Controller: “How do you feel about next year?”

Executive: “I see big things coming; I think we’ll grow by 25%”

Controller: “Ok, how about we budget conservatively at 15%”

Now to be fair, quite a bit more went into this analysis, but we never approached the level of detail that would make the forecast useful to Operations.

Recognizing this misalignment, our company met together to address the problem. Sales, Operations, and Finance all agreed that we needed one forecast the entire company could rely on. It needed to be as detailed as stating that, “we will sell Walmart $1.64 Million of Item X next year, and here is the week by week breakdown.” In fact, we needed that same level of detail for every item going to each significant customer. However, without structured collaboration, this level of specificity would be impossible to achieve.

The S&OP Process Owns the Forecast

Recognizing the need for collaborative ownership of the forecast, we began consulting other companies our size and researching best practices. Specifically, we learned that we must create a robust Sales and Operations (S&OP) planning process. S&OP is something that most companies are still learning, but the ones who figure it out seem to thrive. S&OP calls for structured and disciplined sharing of information to build a forecast that unites the company. Thus, everyone involved in the S&OP process becomes the owner of the forecast.

My great fear, however, was the business proverb that that reads, “When an issue becomes everyone’s responsibility, the issue becomes nobody’s responsibility.” In order to avoid the “nobody’s responsibility” syndrome that often plagues forecasting, we all sat down together to define the role each department would play in our S&OP process. Sales would provide customer insight and commitments, Operations would provide historical analytics, and Finance would ensure cash and budgets were in line with the company’s strategy. Most importantly, the CEO would make S&OP a top priority, hold each department accountable to the process, and offer support as needed.
The S&OP Process Owns the Forecast
Many articles and publications suggest S&OP process timelines, but below is what our monthly S&OP process currently looks like. We do our best to improve and tweak the process each month.

Week 1: Review and Fine-tune

At the beginning of the month, Operations reviews the accuracy of the previous month’s forecast against actual sales. Using every bit of data available, we analyze and fine-tune a rolling 12 month-forecast. For example, in May, we forecast the next month, June, through May of following year. We re-forecast every month because accuracy improves as we move closer to each month. The team does its best to serve up the recommended forecast “on a silver platter” to Sales. The goal is for the forecast deliverable to be so easy to understand and tweak that Sales can’t help but give their input.

Week 1 Deliverable: A complete 12-month rolling forecast based on history and known data points for Sales to evaluate, review, and tweak. Currently, this takes the form of a formatted spreadsheet generated by our forecasting software.

Week 2: Sales Input

During the second week of the month, Sales reviews the forecast. Specifically, they review and add customer commitments of new items going in and old items coming out of each channel. Sales incorporates upcoming events, customer feedback, and promotions to help modify what the historical data predicts. If possible, week two also includes a deep dive into our customer’s systems to review their sales and inventory levels.

Week 2 Deliverables: A completely reviewed and approved forecast from Sales, which incorporates as much customer knowledge as possible. Sales also shares feedback on how to improve the Week 1 deliverable.

Week 3: Supply Planning and Vendor Communication

Based on the Week 2 Deliverable, Operations then builds a supply plan to support the demand forecast. Operations meets with Sales about potential stock outs and capacity issues. Sales, Operations, and our CEO approve any significant issues, such as large stock outs or airfreight expense. After signing off on the significant issues, the CEO also signs off on the entire forecast. Operations locks and archives the forecast, which means everyone can now rely on the forecast to remain unchanged (except in extreme circumstances) until next month. With a locked forecast, Operations can now move forward with building a purchase order plan. From that plan, Operations sends purchase orders and forecasts to key vendors. They also schedule conference calls with those vendors to discuss and plan for the new forecast.

Week 3 Deliverables: An approved and locked demand plan, approved purchase orders, and vendor forecasts for key vendors.

Week 4: Meet, Plan, Reflect, and Improve

During week 4, we round out the process with vendor meetings and continued data analysis. We also hold a reflection meeting to review that month’s S&OP process. We ask, “What went well, what went poorly, and what can we do better?” We then make assignments that incorporate the feedback into changes for the following month. During this week, we also format the forecast and purchasing plan so that Finance can incorporate them into cash planning and budgeting.

Week 4 Deliverables: Assignments to improve next month’s S&OP process and a forecast formatted to Finance’s needs.

Results of the S&OP Process Owning the Forecast

We still have a long way to go before our S&OP process and forecasts are world-class. However, we’ve already seen fantastic results from our collaboration. Our controller absolutely loves the level of detail in the forecast, which helps her finance the rest of the company in realistic ways. Our executive team can now see their corporate strategy rolled out in a week-by-week plan. Sales is able to focus on selling, but they’re now armed with detailed analytics of each customer’s performance. This helps them sell even more. Not least of all, Operations has been able to better support customer demand while also reducing inventory. Being on the same page with the rest of the company ensures that we order what we need, and avoid ordering what we don’t need. Additionally, Operations now has a forecast for our vendors. We are now working on reducing vendor lead times with the forecast as a tool. Shorter lead times will let us hold less safety stock inventory, which will help free up even more cash.

Perhaps the best result from our S&OP process is the structured collaboration between departments. The discipline and teamwork required to build a single, detailed forecast has helped us unite and become a stronger company. We all are tied into the decision making process so there is less blame when a problem occurs. Roles are more clearly defined so we are able to work on what is expected rather than guessing what we should be doing. Best of all, we’re reducing errors and inventory, which helps us continue our growth and success.

What have you do at your company to build your S&OP process? Please share your thoughts and advice in how we can improve.

Better Supply Chain Decisions through Data Analysis

“Should we cancel the purchase order? We need to know today – and we can’t be wrong on this.” Only two-thirds of stores had reported any sales data from a newly launched product, and my team needed to know whether or not to invest tens of thousands of dollars in additional replenishment inventory. We already had a very large number on order, and based on pre-sales forecasts, we needed nearly double what we had coming. But with just a few data points, was it possible to tell whether we needed the stock or not? It all came down to the data: Could it be trusted? Were my assumptions correct? Was there enough to act on?

Soon after finishing business school and starting my career, I was quickly surprised by the contrast between the discussions that took place in the classroom and in conference rooms at the office. In academic case studies, my classes would look over graphs and charts to find important business lessons that the professor was helping us discover. In the real-world however, emotions, hopes, politics, and persuasion often make decisions much less clear than a business school case study. The small business I work with often relies on its supply chain team to make many decisions that require extensive data analysis. With moderate experience with excel and databases, my team has been able to slowly help our company make better decisions by taking out the myth of emotion and replacing it with the confidence of data.

Data-driven Analysis

Forecasting, inventory, purchasing, logistics, and process improvement are often done by gut-feeling in very small companies. When you don’t have the systems or people to gather and process the information, making your best guess is often all you can do. When operations are small, this works most of the time because you are able to get a feel for most parts of the business since you’re involved with most parts. But as the company grows, staying connected with each part of the supply chain becomes increasingly difficult. If you haven’t already, this is when you must switch from trusting your feeling to trusting your numbers.

There’s an excellent quote that I like:

“In God we trust. All others bring data.”

-W. Edwards Diming [Source]

It highlights that no matter how much we trust our intuition about a decision, numbers are often what really matter.

Which Data to Use?

One of the biggest problems with data in modern systems is the sheer size of the information you collect. If academic case studies were 200 pages instead of 20, schools might focus more on training students how to sift through the noise to find the important data. However, until then, experience and past trends are the best guides for making decisions.

With so many numbers in your system’s database, each department or side of a decision can often build a data-backed case for why their solution is the best. It then becomes important for the head decision maker to be able to judge which information is most relevant and accurate. He or she should start by asking the following questions:

  • Where does this information come from?
  • How was the data collected?
  • What are the assumptions being made?
  • Why do the two (or three or more) data points show different trends?
  • How could these conflicting results actually be pointing to the same conclusion?
  • What numbers can we all agree on?

By agreeing on the same assumptions and the pertinent data sets, you can better reach agreement on how to move forward with the information you have.

When the Numbers Lie

Sometimes, the numbers tell a different story from reality. Even if all analysis points to buying more of product,  only you can tell that the product will soon be discontinued, and that you don’t need more stock. Often data analysis isn’t so much about manipulating the pivot table, but adding the pertinent information that the system doesn’t cover. Adding everything you know that the system doesn’t, and then looking at the data all together often helps you make the wisest decision.

Highest and Lowest Case Scenario

“It’s only about two weeks of data, but it’s enough to make some decisions,” I said.

“I’m just not sure if we can trust it yet. There’s so much we don’t know,” a sales analyst replied. There were still many questions that we couldn’t answer. How many stores had yet to receive the product? Could the product still be in the back room? What if employees had bought the product instead of customers? I needed some way to make the 10 days of sales data point to something – and I needed enough confidence in the numbers that everyone could trust them.

I looked at the data again, and I wrote out what assumptions I could make. To reach my averages, I assumed every possible reason sales could be artificially low was actually taking place. Based on these high assumptions, I determined that average sales per store would likely be less than 3 per week. There were enough stores that had initial sales data that I could confidently say sales would very likely be between a high of 3 and a low of 1 per week. This was significantly lower than the 10 per week forecast for which we were about to place a purchase order.

“The data is convincing – and even if the high boundary number doubled to six per week, we’d still have enough without this order,” the brand manager replied. “Ten per week just isn’t a realistic expectation. Let’s cancel the order.”

By giving a confident range of average sales, I was able to help my team make the right decision and avoid large overstocks of inventory – something we have continually struggled with throughout the company’s history. Sometimes there isn’t quite enough data to make a definitive argument. In cases where you have even some data, using high and low assumptions can often give you enough confidence to move toward the right decision.

We’re not robots – and we shouldn’t focus solely on numbers. However, by incorporating more data into our decisions, we can often find better and more predictable results. The key is to know what data is useful, opposed to noise, and how to use that data correctly. Looking at the same, accurate data, and deciding on high and low assumptions are strategies that have helped move our company in the right direction.

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.