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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.


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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.


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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!


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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.


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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.


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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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