Another Ducking Digest?!
May 15th, 2023: JIT Supply / Inventory Planning
Welcome to Another Ducking Digest. This is a weekly, 10-minute news show hosted by myself and Lindsey Smith. Lindsey has 30 plus years’ supply chain experience and most recently served as the SVP of supply chain for a mid-market manufacturer. Each week, Lindsay and I share news relevant to supply chain professionals working for small or mid-sized manufacturers. I am actually hosting the show from Danville, California today, so I’m on Lindsay’s timezone. I am going to be working remotely from the Bay Area for the next couple of weeks. So it is cold and overcast here, not sunny and warm like I am used to in Austin. So today, this is a topic that is very, very near and dear to my heart. I have several friends that work in supply chain roles in retail, and one of the things they have been talking a lot about is massive amounts of inventory that they have sitting in their warehouses that they are not able to move and/or gonna have to start significantly discounting. So our topic for today is inventory management pivot away from just in time without breaking the bank. So, Lindsay, as our expert, I would like to have you share with us today why, how, and when is this just-in-time planning approach best used for small and mid-sized manufacturers.
Thank you, Sarah, and good morning. Yeah, I think absolutely, Sarah, this is where SourceDay brings a lot of value to the table, that you do enjoy this perspective across multiple supply chain cohorts and contacts, and you’re able to provide this amalgamation of current experience. So thank you for that. You know, I think the message to our supply chain listeners is it’s not just me. It’s not just you, right? It’s a widely shared pain point. Secondly, we wish that it was just break the bank, right? If it was, in my experience breaking the bank, going cap in hand to the CFO or my boss and saying, “Hey, I made a mistake. Hey, I forgot to get this cleared in time. Hey, I’m gonna have to expedite. Hey, we’re gonna have to switch to air freight.” Then, you know, that’s just a money discussion.
You know? And even if it’s 10 or a hundred thousand, it’s a money discussion. It can be a painful discussion. But what we’re talking about here is risk. Risk is far more insidious than whenever we talk about business risk, that’s a broader-reaching consideration. And we’ll talk about that in a minute. Okay. So let’s take a step back. How, why, how, when we use this approach, this tool, it continues to be widely used as a tactic in multiple industries. You know, the lean, our lean training tells us, minimize inventory, cut down the amount of stuff in receiving, just have what you need come in, reduce waste, potentially increase efficiency, maybe even reduce our warehouse space. Overall, improved productivity, multiple industries including a favorite for our small manufacturer. Obviously, there are challenges and criticisms, you know, especially when we talk about the supply chain disruption.
So the key, I think, for today is when can we still lean on it as a valuable strategy? ‘Cuz like any tool, we have to use it appropriately and with appropriate caution. In the small manufacturer space, we don’t enjoy the purchasing leverage of the Toyotas and the Fords of the world. But, you know, I think for today, what considerations do we have to make before we go ahead and enter the world of setting our min to zero and setting a hot lead time? You know, that opens the door to a JIT situation. So good practice, good practice with managing any transition, moving towards a future state, moving towards a vision is first, we need to describe the current state. And for JIT, that’s three areas, you know, profile who we are as a buyer, profile what it is we’re buying as a commodity, and profile who we’re purchasing from on the supplier base.
So, and in each of these, we saw some change as buyers. In 2023, our percentage cost of goods of purchase parts pretty much constant predictable demand versus less stable demand. Okay, we saw a hit on, we’re seeing a hit on that, right? The big question is, what’s the consumer gonna continue to do in 2023? Are they gonna be as robust as they have been for the last six months as a buyer? You know, how much warehouse space do I have? You know, I’ve seen beautiful warehouses go to crowded challenging areas in the last 12 months, and it’s not unusual for a small manufacturer to be working with a skinny cash flow. So as a buyer, where do we rely on that continuum? Looking at the commodities that we’re buying, again, some change in 2023, and for small-medium manufacturers, that can be a really simple one-pager for each of my main commodities. You know, if I’m spending three or 10 million a year, where am I spending my money? Built-to-print machine parts, printed circuit cards, electronic components, cabling, injection-molded parts, and just have a couple of paragraphs on each one. You know, we’re not trying to create a textbook solution here and especially for JIT, where are we at for lead times on each of the commodities?
You know, three to seven days is a beautiful thing. Seven to 10 weeks, not so much. And then the transient ones, right? You know, semiconductors went from off the shelf to a few weeks to 52 weeks last year. And then the one that causes buyers to have to go and have a little quiet time, not accepting new orders, which is just a nightmare. And then another consideration for our commodity, how physically large? You know, as my warehouse fills up, how many of the darn things can I get in? One of my favorites is shipping crates. Shipping crates pretty much have to be in a JIT program just because of their owners’ physical size. So that was the buyer, the commodity, and lastly, the supplier. Small manufacturers work with different suppliers than the big guys that hog the headlines in the media, right?
And this is probably where we saw the largest area of change in 2023. Certainly, anyone who has any supplier that has a vulnerability to international freight delays, that’s a big concern in a JIT program. And obviously, where we want to tap the brakes whenever a supplier ideally has a solid trend of on-time delivery, great potential for being a JIT supplier last year, not so much, right? We saw that the case. So being able to track, keep an eye on which suppliers are having difficulty, and get beyond the anecdotal stuff. And this is where we need to watch our numbers and say which suppliers, which commodities, which parts. As a small manufacturer, the relationship, we don’t have the purchasing leverage of the big guys. We manage our relationships. We look for disproportionate care and attention by virtue of staying close to the supplier.
Key in that relationship is a willingness to work with us. Flexibility is key because as we adapt to the situation versus being hindered by rigid contractual services, supplier profile. Key information is, are they already successfully managing a similar program for other customers? If so, great. What perspective and advice can they offer? So willing and flexible, but also able. The definition of this is willing and able. Key differences between the big guys, the high rollers, the heavy haulers, Ford and Toyota, with contractual terms on one side, versus us as a small manufacturing leveraging relationship post-pandemic in 2023, increased financial sensitivity, less certain outlook on demand.
So I wanna give a shout-out to our live listeners. We’ve got John from Tampa, George from Orlando, Larry from Canada, Toronto, specifically Susan, who lives in Europe but is traveling around the US for the next couple of weeks. I’m not sure what state she’s in today. Rachel is joining us from the East Coast. We’ve got Kevin joining us from Dallas. So thanks for those who are tuning into our show today, feel free to drop us a note or comment. Today we are talking about just-in-time inventory management and its impact on small and mid-size manufacturers. So Lindsay, to recap the three best practices that you just mentioned, you said this is something that manufacturers need to really look at when assessing inventory strategy is to profile who we are as the buyer, profile our commodities. So do a short paragraph write-up about the main commodities that we’re purchasing and then profiling our suppliers and having a sense of who our suppliers are and what risk each of our suppliers may have. So now that you’ve set the scene for the different aspects of purchasing planning that we need to consider, how do we move ahead? What’s next?
Yeah, that’s where it gets tricky, right? It’s easy to talk about how the world should be and how do we actually make it happen. And I think maybe four things before we do some examples. Four things: continue to view JIT as an option, obviously in your discussions with your folks that are looking at excess inventories, balance or and/or shortage critical shortages. How do we balance vendor flexibility and rescheduling? How do we trade off JIT versus safety stock? Because there are still, even though we have, this is the beauty of it, right? We have a warehouse full of parts and yet we still have shortages. It’s the nightmare of the supply chain team. So I’ve got the wrong mix, I’ve got too much, and I’ve got the wrong mix.
So definitely, definitely, says tap the brakes. We can’t continue even keel. You gotta take a step back, put together a plan view, GIT as an option, view it as an alternate to safety stock as part of our plan. It compliments other tactics. Wherever we have an effective Kanban delivery system, we can use GIT delivery as inherently as part of that, wherever we have vendor stocking. Now there’s the gift that keeps on giving that rather than have the safety stock on our side of the fence and our balance sheet when, whenever one of our close relationships with a supplier can be leveraged to have them carry it if they’re willing to do that, that’s a beautiful thing. So multiple, multiple supply chain approaches can work alongside together, especially where we’ve got strong supplier relationships and inherent supplier preferences.
So it’s not carved in stone. That’s what we learned in 2023. It’s not one and done, it’s not like setting up our MRP just as we revisit lead times and we all hate doing that, you know, every 12 or 6 months. It’s a dynamic. So we’ve got to revisit it and have a discussion, and that actually opens a door to an opportunity because we can, rather than fretting over it ourselves, we can open up the discussion to include others. And of course, I’m thinking primarily of finance, so revisit the approach just as we adjust lead times. Look at how we’re doing for on-time delivery, how are we doing for relationships, as you said, how are we doing for overstock? What other vendor services can we tap into? How overall, how is the environment changing? And…
Lindsay, I’ll interject here. Rachel Hassel put a note in the chat that I just wanted to call out. She said, “Just-in-time makes me feel a bit sick to think about. I’ve only implemented this when vendors have held stock on their end.”
Beautiful. 100%. Yeah, that’s the voice of experience yet, yes, I’ll do it, but here’s how I’ll do it. You know, rather than giving myself another thing to lose sleep over, do it, knowing that the vendor’s got my back and explained to them, “Hey, I’m leaning on you. You asked for my business, I gave you my business. I’m partnering with you. I’m relying on you that when I call and say I need it Monday, you’ve already got a week’s shipment ready to go.”
So Lindsay, can we talk about maybe you can share some commodity plan examples, some specific things that you’ve experienced in your career?
Yeah, and you know, the exact, sure. The challenge with the examples is they’re all about me, right? And we’re all, we’re all every supply chain is unique. So it’s gonna be, it’s gonna be a little different for every, every supply chain professional. Sheet metal, for instance, sheet metal. Typically we source it from local suppliers that doesn’t often lend itself to long-distance shipping. Maybe it’s a six-week lead time, maybe it’s a 20-30 day delivery schedule. So probably not an immediate candidate for GIT versus say, machined parts. Smaller form factor, the high mix, low volume stuff. Probably we continue, you know, the five-seven week lead time weekly deliveries. Now, you know, maybe that’s, if we bundle it at a third-party coating painting Ken etch service provider, then maybe that makes sense for a bundled week delivery, weekly delivery.
I like bundling deliveries, especially whether it’s a set of parts. There’s no point in the supplier giving me 10 of the 12 parts I need. That’s no use to me. I need 12 of 12. So having them all grouped together as suppliers, again, a beautiful thing that I know the supplier knows he needs to give me everything to get paid and I know I get everything right. I’m not gonna have too much of one and not enough of the other, you know, the reverse machine parts opportunity there with Asian source parts. But if you’re going to continue to leverage that, then let’s explicitly leverage it. What I mean is we talk about it, probably we want to carry, save. What I’ve done is carry a month’s safety stock of the lower-cost parts of him enjoying half-price sourcing. Then yeah, carry a month’s safety stock.
So not, not a GIT candidate, print circuit board outsourcing, I mentioned, you know, bring it in as a set. If it’s tested and known good, then maybe we can run the business hot if it’s untested and there’s a question mark or are they gonna be able to go straight to production or are they all gonna get stuck in rework or return the vendor? Then not so much shipping rates, as I said, absolutely GIT indirect spend. M R O are good friends at Uline, they held up real well. A couple of changes that we saw in 2023, a lot of us use McMaster car for our hardware, GoTo, you know, amazing catalog, amazing range of parts and just a real victim of 2023, right? Yeah, that we saw parts going from off the shelf to 2, 3, 6 months, which is horrific, right?
So we’ve got to drill into is it the valves? Is it, is it particular brass fittings? What is it that’s going, going to, going from off the shelf convenience? And I, and I pay for a McMaster car, I shouldn’t pick on one supplier, right? I pay for the convenience of an industrial distributor. But you know, if, if, if, if I don’t get that convenience and instead having to deal with the extended lead time, then I got to take another look at my supply chain. The big one for a lot of us was semiconductors. Semiconductors moving out to 52 weeks and not accepting the orders. You know, obviously not a GIT candidate.
We had a, a few more comments and questions come in that I wanted to put on the screen here. John says, “great point on thought process of using GIT as safety stock. Many times the purchasing software may trigger a PO not needed because of a mandatory spike in demand, not seeing the GIT as a buffer zone.” And then Monica says, “I’m hearing and seeing GIT what is GIT? Keep in mind GIT with a G, not a J. Are we still intending to mean just in time?”
Good question. What does GIT stand for? Is it got in time? Just… I’m assuming John, and if John’s still in the chat, he can clarify. I’m not sure if John was meaning JIT or GIT i t, he’s in logistics if that’s a, a separate reference. I’ve also not seen GIT either. So we’ll see if John can clarify. Monica, we will see if John can clarify for us what the difference is, if any. And then Rachel says, “also late-stage differentiation can be a huge unlock for G GIT delivery options need to get in there during specification development to do that.”
Excellent point, excellent point. Wherever we have sets of parts, and I didn’t touch on that, so that’s a great one. You know, we can reduce, compress our lead time, improve our insurance of supply if we have a core element. If our tooling is made from standard copper slugs, then let’s have the copper slugs lined up as a more thoughtful, sophisticated supply chain. But overall, it’s going to, whenever we pull the trigger, we’ve got the shorter lead time to leverage rather than having to start from scratch. And we haven’t invested all our cash in the finished item. So wherever, especially where we’re buying 50 variations of the same thing, a lot of us who purchase connectors, you know, especially the aerospace defense connectors, you know, horrific six-month plus lead times. However, if you buy the rubber insert, if you buy the connector, if you buy the connector pins, if you buy the connector housing, bingo, you’ve got all the parts. Now you can just mix and match and enjoy a far more manageable lead time without paying for the finished item.
John clarified, GIT is goods in transit. So Monica, again, going back to your question, GIT is goods in transit. JIT is just in time. So definitely yes, different, and I’ll pull John’s comment up again one more time about goods in transit.
Yeah. And so, and there, there’s a, a great tactic to deal with last year’s situation, you know, here in California, the Long Beach queue, right? Yeah. They even moved the ships offshore because they were generating so much exhaust, you know, the one or 200 ships waiting to get into the port of Long Beach. The assurance that it’s on, on, on the water. And then, to John’s point, you know, if you’re depending on the nature of your business, you know, if you’re doing the freight clearance, if you’re doing the customs work, then there’s a risk if you’re working with a three pl, you know, as a small manufacturer, I’ve, I know enough to be dangerous, but I’m not, I wouldn’t present myself as an expert at clearing international freight. So I’d lean on a freight forwarder and let ’em know that, hey, you get all my Long Beach port business, I’d talk to him about the Dodgers game and get that relationship. I’d make sure that the written communication I’m giving them is super clear and I’m filling in his, their forms in a timely manner.
So I’m gonna leverage my freight forwarder relationship to minimize the risk of something that I think is in transit. You know, typically Asia to West coast, we allow 22 days on the water, including clearance. You know, I don’t need another 22 days of stuck in customs or waiting to get into the dock. So I’m not sure if I answered the question.
Lindsay, I think that is all the questions that we got today. For those who are tuning into our show regularly on Monday mornings, would love to get feedback from you on topics that you would like to have us discuss in the future. The purpose of this show is to be about a 10 or 15-minute way to kick off the week talking about a topic that’s relevant to small and mid-sized manufacturers and direct materials procurement. So please drop us a note in the comments if there are topics that you would like to have us discuss on future episodes. You can also ping Lindsay or me on LinkedIn if you have additional topics that you think about throughout the week. So thank you for tuning in today. We will see you next Monday at 10:00 AM Central time. Thanks, Sarah.