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Seasonal variations in consumption occur for many reasons; summer, back to school, various holidays.  In fact, most industries experience annually recurring spikes in demand – even healthcare as they prepare for the dreaded flu season.  Furthermore, the duration of a season differs depending on geography and demographics.

 

Having recognized the existence of a seasonal pattern, one must anticipate its future effect on inventories.  To understand seasonal differences in consumption, forecasters look at an item’s seasonal index.  The calculation of an item’s seasonal index is quite simple.  The first step is to calculate the average monthly demand for a given year.  The second step is to divide the actual demand by the average demand. The result is the seasonal index. 

 

A seasonal index of 1.2 indicates that 120% of average demand was consumed during that month.  A seasonal index of .80 indicates that 80% of the average demand was consumed.  Because seasons fluctuate, calculating the average seasonal index over a period of three years will provide a more accurate representation of a season’s impact on consumption.

 

The seasonal index helps buyers provide an uninterrupted flow of inventory without overbuying.  Many buyers also temporarily adjust an item’s safety stock level as well to account for variations from one season to another.  Sharing this information with suppliers allows them to maintain their service levels as well – nobody wants to be caught short during periods of peak demand.

 


There has been a lot of focus on optimizing the supply chain for order fulfillment.  The on-going efforts to perfect the ‘order to cash’ process have yielded great rewards.  But what about returns?  Automation has reduced the number of returns due to errors however the world must move from a linear to a more circular economy and this will impact the entire supply chain.

 

The notion of a circular economy is really quite wonderful.  Imagine an industry that produces no waste or pollution, and where products are designed for safe and non-intrusive disposal.  Imagine an industry where 100% of unconsumed or partly consumed products are returned for re-use.

 

Kudos to the Association of Battery Recyclers for their contribution to the circular economy.  From their website:  “The members of the association share a dedication to environmental and community responsibility.” Spent batteries are turned into lead metal, plastic and sodium sulfate, which are used to manufacture new lead batteries and other useful products.  Their website also states that lead batteries have a 99% recycle rate within most of North America – impressive!

 

With greater awareness and increasing environmental pressures from various stakeholders, more companies are incorporating green practices into their daily activities.  I believe distributors can play an important role in the circular economy by selecting products and suppliers that behave responsibly and by participating in the efforts to recycle and/or re-use the products that they sell.

 

Goods are coming down the supply chain – we’re pretty good at that.  Now it’s time to move stuff back up.  Distributors can take an active role in balancing the financial responsibility of making money with their responsibility to benefit society as a whole.   This must include their responsibility to preserving the environment by actively engaging management into environmental thinking.


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The traditional role of wholesalers is quite simple; they buy significant quantities of products from different manufacturers, store them in warehouses and resell them to customers, whether retail, industrial, commercial, institutional or contractors. Their role is to have the right product when it is needed, at the lowest price. Pretty simple.

 

That was all good in the past, but now things are changing — and changing fast! In the last 5-10 years, companies like Amazon, Alibaba and eBay have completely changed the dynamic of the shopping experience. Consumers now expect to find what they need easily, at the right price, with high quality, delivered to them where they need it, how they need it and when they need it. And, although consumers can be quite loyal (for example, always starting their search on Amazon.com), they will quickly go somewhere else when they don’t find what they need. How do I know? I do it all the time!

What does this mean for wholesalers?

It means that wholesalers need to adapt and become more flexible or they will be left behind. Customer expectations are rising – merely providing products at low prices does not cut it anymore. They are looking to their wholesalers for more: they expect special treatment, they want value-added services, and they want their shipment packaged to their needs and delivered where they need it at the time they need it.

 

For example, think of a contractor ordering electrical products and needing them at multiple locations on a job site. That’s one order with multiple items that need to be delivered to different locations, even on different floors of the same building, and these deliveries have to be clearly identified and routed appropriately. For wholesalers, this means that processes in the warehouse where these products are coming from better be flexible, otherwise a lot of manual and costly interventions are going to be needed to pull it off OR expectations are not going to be met and the contractor may choose someone else the next time.

Don’t be afraid to charge for services

Interestingly enough, it seems like today’s customers are willing to pay for the additional services they ask for. Just like Third-Party Logistics (3PL) companies are expected to provide value-added services, wholesalers are now expected to do the same. Not only will wholesalers need to have the people and the systems with the appropriate capabilities in their warehouses, but they will also need to have the capability to capture the cost of such additional services in order to be able to charge accordingly.

Explore new partnerships

Another trend for wholesalers centers around collaboration and potential consolidation of the industry. Producers/manufacturers are trying to align themselves with fewer business partners than in the past, selecting them based on their capabilities, their reach, and (especially in the case of wholesalers) their ability to become more than just a distributor of their goods. To keep up, wholesalers need to explore new partnerships with their customers, suppliers and other potential solution providers.

Invest in distribution tools that can change with you

In order for wholesalers to respond to today’s demand from their customers, they need to have the right tools and the right systems in place. Demand Planning, Analytics, and Supply Chain Execution systems like WMS and TMS with complete function and feature sets are necessary for wholesalers to become more than just distributors of goods. Since change is constant, these systems have to be flexible, built with capabilities that can be easily extended as needed, when needed, and at a very low cost.

 

Increasing demands from customers is very challenging for wholesalers today, and at times it may seem to them that their existence is threatened. But at the same time it is creating a wealth of opportunities that will be very beneficial to them. Wholesalers that embrace the changes and undergo the transformations they need to make to serve today’s customers will be well-positioned to benefit from them.


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Given that accounts receivable (A/R) are essentially zero interest loans extended to customers, one might be forgiven for considering credit sales a necessary evil. Maybe one day crypto-currencies like Bitcoin will replace all other forms of payment, but in the meantime many companies have a ton of cash tied up in receivables. So how evil is your A/R?

 

According to a recent D&B study on payment practices in the US, only 53% of companies paid their suppliers within the due date.  The remaining 47% were late with 38% of companies paying within 30 days of the due date and the remaining 9% paying over 30 days late. Interestingly, larger companies are the worst offenders with only 10% paying within the due date.

 

How long does it take your company to turn credit sales into cash?  According to NAW’s Institute for Distributor Excellence, the typical distributor’s Days Sales Outstanding (DSO) is 46 days. As one of three measures required to compute a company’s cash conversion cycle, DSO is key in evaluating financial health.

 

Let’s review how DSO is calculated with an example using a monthly timeframe.  Company XYZ made $10.5 million in credit sales in January. At month end, their A/R balance is $12 million. There are 31 days in January, so Company XYZ’s DSO for January is a little over 35 days: 31*( $12,000,000 / $10,500,000 ) = 35.43

 

A more precise calculation of DSO would involve using the average accounts receivable in January rather than the balance at month end. If your company experiences seasonal business cycles, I recommend a yearly timeframe. As an alternative, trend the DSO by month {period} and compare the DSO of any given month to the same month of the prior year.

 

Assuming that collection policies are in line with industry norms, if your company’s DSO is higher than industry average then finding the underlying causes may surface performance improvement opportunities beyond collection activities. Supposing that product quality is not an issue, all business processes falling under the order-to-cash cycle need to be examined.

 

Evil A/R is a threat to cash flow! Fortunately you don’t need superpowers to tackle this villain.


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Holding inventory is a way of life. Everybody carries inventory of some kind. In my home, the central supply location is the kitchen. In supply chain speak, my kitchen is a multi-bin facility designed to optimize labour and storage. I also have a separate supply location for specialty items which require refrigeration. This would be the products that fall into the dairy and meat category. Some items are critical. Running out of sugar is one thing but a coffee shortage will definitely disrupt operations.

 

Running out of coffee, however terrifying for my family, does not compare to the effect of inventory shortages on productivity and ultimately patient outcome in a healthcare scenario. Hospitals must play it safe by holding inventory to carry them thru probable spikes in usage. I use the word probable quite deliberately because probabilities play a big part in determining how much to invest in safety stock.

 

Variations in demand history provide an indication of the safety stock needed to maintain a desired service level. Another factor is variations in lead time. Planners use tools to assess the likelihood of a stock-out based on these statistics and set safety stock thresholds accordingly. Mathematically speaking, planners look at the extent to which an event, in this case a stock-out, is likely to occur.

 

Service levels represent the desired probability of a stock-out. A 95% service level translates into a 5% risk of completely depleting safety stock within an order cycle. Why not shoot for a 98% or 99% service level? Well, it comes down to money. Doesn’t it always? The difference in monies invested is substantial. As the service level increases so does the service factor used to compute safety stock. For example, an increase in service level from 95% to 97.5% will double the necessary safety stock. Retailers typically target between 90% and 95% service levels. In the end, individual organizations must determine what is economically viable for their circumstances.

 

My family’s coffee supply is managed using a simple 2-bin system. I keep two containers of coffee in my cupboard, when the first one is empty I open the second one and replenish the empty one. A simple, yet extremely effective method of supply for my morning cup of joe!


The fact that some choice is good doesn’t necessarily mean that more choice is better.
Barry Schwartz, “The Paradox of Choice: Why More is Less”

 

I find it fascinating that today, in our personal lives or in business, we need so many things that we did not have before. I personally never thought I needed that much, but when I look back at when I started my career, I realize that today compared to then, I do.

 

Lately, with the advances that have been made around internet shopping, it gets even worse. I have never been a big shopper, but now I find myself buying all kinds of neat things that I (most of the time) really don’t need. Why is that?


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There is a famous anecdote about Volvo car dealers heavily discounting green models because consumers preferred other colors. Volvo’s manufacturing plant, seeing the resulting spike in demand for green models, perceived it as consumer interest and upped the production. That’s right…even more green cars! Ouch!!

 

It’s a sad story that’s often repeated, and a story that begins with a demand-shaping strategy to offload unwanted inventory. It’s a prime example of how a dealer’s {read distributor’s} behavior can create confusion and lead to unnecessary increases in a manufacturer’s inventory holdings and, by extension, the stock of its suppliers, too.  


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“No one ever achieved greatness by playing it safe.”

 

This quote is attributed to Harry J. Gray, an iconic business manager and philanthropist who, through acquisition, assembled one of America’s largest manufacturing corporations. During his career, he received numerous recognitions and honors and was inducted into the Junior Achievement National Business Hall of Fame. My guess is that Mr. Gray was an expert at risk assessment and containment.

 

Wikipedia defines risk as a consequence of action taken in spite of uncertainty. Given that uncertainty is a fact of life in business, risk management is not only unavoidable but essential. In the context of inventory management, the most common risk strategy against stock-outs is to purchase extra inventory as safety stock.


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A lot of focus has been placed on advanced and predictive analytics, and rightfully so. I have written many posts and have spoken publically on the merits of advanced analytics for several years now.

 

What I find disorienting and misleading are marketers harping on how important it is to adopt advanced analytics right now. The thing that they just don’t get (or maybe they don’t want to get?) is that an organization will need to transcend a series of analytical maturity levels before they can truly capitalize on the benefits of advanced and predictive analytics.


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Good relationships are good for business. Building a relationship with a vendor takes time. It’s not uncommon for a buyer to work with the same rep for many years. They become friends, share stories and have a routine. That’s all good, right? Turns out the answer may be “not so much”.

 

Would a vendor take advantage of a friendly relationship? Probably not, but when was the last time you actually reviewed a vendor’s performance? Is your vendor still bringing good value? Are you challenging the status quo?


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