What the Duck?! Episode 16 Transcript
ICEBERG CRUSHER: Mitigating The Risks Of An Iceberg Of Inventory With Mike Ryan
Welcome to What The Duck, a podcast with real experts talking about direct spend challenges and experiences. And now, here’s your host, SourceDay’s very own manufacturing maven, Sarah Scudder. Thanks for joining me for What The Duck, another Supply Chain podcast brought to you by Source. I’m your host, Sarah Scudder, and this is the podcast for people working in the direct materials part of Supply Chain. I’m @SarahScudder on LinkedIn and @SScudder on Twitter. If you are new to the show, make sure to follow this podcast so you don’t miss any of our direct spend supply chain content.
Today, I’m joined by Mike Ryan, and we’re going to discuss how to mitigate the risk of buying too much inventory. If you work for a manufacturer and are struggling to balance cash flow and purchasing inventory, then this episode is for you. Mike is known as the “Inventory Iceberg Crusher,” kind of a fun nickname, so we’ll have to dive into that and unlocking cash frozen in inventory. He has the ability to quickly break down complex supply chain problems and identify actions to generate cash, improve EBITDA, and create repeatable and consistent results. Prior to starting his own business, he worked in operations and supply chain for five manufacturers.
Welcome to the show, Mike. “Oh, thank you, Sarah. I appreciate the opportunity.” So, I like to start off our episodes by diving into personal stories, the journey that got you to where you are today. So, I think it’s interesting that you actually started your career as a pressure casting project engineer, which I don’t really know what that is. So, I’d like to have you start there. What did you do, and what’s the most important thing you learned in that first job?
Gotcha. So, I am a ceramic engineer by trade, which, for all intents and purposes, is a material engineer, and my first job out of college was with American Standard, making sinks and toilets.
And it was my role to oversee the production, schedule production, and make sure that the right stuff got made at the right time. And ultimately, the biggest thing I learned in that role, because it became a leadership role where I was responsible for, uh, one of the four teams, uh, the business operated 24/7, and communication and collaboration, working with all different kinds of people, uh, from the president of the business to the folks on the shop floor and being able to communicate what the needs of the business were. And when we ran into challenges, figure out in what ways we could overcome them.
The transition really came with my move to Goodyear. Uh, I had originally joined Goodyear in a finance role, so I started out in corporate finance helping improve the processes. Ultimately, the communication between the finance department did that for a couple of years, and then Goodyear was undergoing this massive supply chain transformation. And, uh, I had an opportunity to join that team, and it was great. Uh, ultimately established and implemented a sales and operations planning process, got externally certified as Class A and, uh, you know, class A means you have the process and you are generating the results. So it was really with Goodyear that I shifted from operations to supply chain.
Ultimately, what it means is that at that point, and this is going back 15 plus years, manufacturing really ruled the roost. Manufacturing dictated what got made when, and the business was really run on a model of absorption. Let’s make as much as we can, as fast as we can to absorb as much overhead as humanly possible. What that meant was there were warehouses that were literally bursting at the sea with tires that not very many people wanted to buy. So the massive transformation was understanding, starting with sales, starting with the customer, what does the customer need and when, and then translating those requirements back into manufacturing.
And then we, at the beginning, literally had a list of do not make. Here are the 20 items that you will not make, or you will seek employment elsewhere. These are the 20 items that we need you to focus. And that was a huge shift in that it went from being purely a manufacturing-driven organization to more of a sales-driven organization.
I think that’s a challenge that a lot of manufacturers face. They forget to talk to and spend time with the customer. Yeah, well, manufacturing likes to make, but sales wants to sell. And if those aren’t lined up, the business is not gonna create the results it wants, and ultimately the customers will not be happy and they’ll go somewhere else.
And hence the topic of our show today in conversation around how to mitigate excessive inventory. We work with a lot of manufacturers, and they have really struggled the past couple of years, in particular, with way too much inventory. And if you’re not making things that people wanna buy, it’s what happens.
That’s how we end up with the iceberg of inventory. And the idea is that the product on the shelf effectively is cash frozen in inventory. It’s not like I can take a tire and go to Walmart and buy a gallon of milk. It doesn’t work like that. Alright, I have to convert that finished good back into cash so I can utilize that cash.
So when we’ve got too much of the wrong stuff, we end up with an iceberg of inventory.
So another pivot that you made in your career, which is very relatable to supply chain, but you also took some pretty senior roles in operations. Mm-hmm. So why the change from supply chain to operations? It was interesting, having started in operations and then moving to supply chain.
You know, supply chain gave me that end to end, and there was an opportunity for a family office owned business where they had purchased another business from Tulsa, Oklahoma, moved it into Ohio. And the primary challenge there was integrating the operations. A big part of that was supply chain, you know, resourcing products that had been gotten west of the Mississippi to east of the Mississippi. That was challenge number one. And then really from an operational perspective, it. Changing how the product flowed through the manufacturing facility because, you know, they went from making two product lines to, in effect, making three product lines. So the whole layout and flow of that operation had to change.
And, um, you know, the way it was, the way it was presented to me is, “Mike, we’ve got a hot and it’s got your name written all over it.” I’m like, “Wait, I’m the hot mess.” They’re like, “No, no, no, no, no. We’ve got the hot mess.” So for me, it really was an opportunity to leverage both my experience in supply chain and operations or bring ’em together.
How have you seen operations and supply chain work well together? ‘Cause I know it’s something that is easy to say, but doesn’t always happen in manufacturing plants. Sometimes the departments can work in silos. Yeah. And, and the silos, I call it the flaming baton where manufacturing says, “Hey, I need a PO.” They throw it over the wall to purchasing and then they wash their hands and walk away.
What I’ve seen, especially in middle market organizations, 50 million to about 500 million in revenue, is much more collaboration between supply chain, operations, manufacturing, sales, finance, because people are realizing, “Hey, you know what? If we actually get together and talk, our lives get a lot easier. It’s remarkable.” So I think a lot more manufacturers are realizing that it’s important to have that interdepartmental communication because, you know, many hands make for light work, and everybody’s job gets easier when people are talking about the right things at the right time.
So when you and I were prepping for our interview, there was a common theme that I picked up on, and that was that many of the manufacturers that you worked for struggled to get their inventory levels right, that either meant too much or too little. Why is that? Well, it’s interesting. I mean, the worst-case scenario is too much of the wrong stuff and not enough of the right stuff. And in many cases, and it’s interesting, Sarah, because in general, inventory falls into three buckets. You’ve got your raw materials, your work process, and your finished goods.
And where the tall tent pole is, or wherever the big pile is, tends to indicate where the problem is. So if I’ve got a ton of work and process inventory, chances are it’s a manufacturing issue or an operations issue. If I have a ton of finished goods inventory, odds are that there’s a gap in communication between sales and operations.
If I’ve got a huge pile of raw material, typically, there’s poor communication between purchasing and operations. So starting where the pile of inventory is, that’s kind of the first fork in the road. And in a lot of cases, I typically see it’s at the raw material side or the finished goods side.
The raw material side is the whole idea of “I gotta bargain,” right? I bought six months’ worth of inventory, I saved 3%. You know, the buyer’s running down the hall, and the CFO is like, “Yeah, but our cost of capital is 9%, so you may have saved three. But you tied up a whole bunch of cash and it’s more expensive than what you actually save.”
So, you know, the idea of, in effect, it’s, you know, especially when it comes to direct material spend, it’s walking that tightrope of not too much, not too little, just right and understanding. Sometimes the best price comes at a cost, and that cost is cash flow. How do you know what is too much? I, ooh, that’s a great question.
And the huge asterisk answer is, it depends. It really depends on the two biggest things. It depends on lead time and demand variability. So if you have a one-month lead time and you sell a thousand a month, you know, plus or minus a hundred, it’s very, very predictable, right? And you can buy, make, and ship pretty steadily and consistently. When you have something that has a six-month lead time and one month you sell 20 units, the next month you sell 200 units, and in the month after you sell 60, it’s very unpredictable. So it’s ultimately a combination of lead time and demand variability that helps us determine how much is too much or how much is not enough. I would also argue there’s another factor, and that’s for businesses that sell products that are seasonal.
Oh yeah, we’re doing our interview a few weeks before Christmas, right? So we’re right in the holiday season. And that’s a whole other factor when you’re selling something that’s got a very short window and that is time-sensitive. Yes, yeah. And seasonal products, you know, what I found there is the more the manufacturer can collaborate with the customer, the higher the probability of successfully meeting their needs without getting stuck with a bunch of off-season inventory. Especially where we see lead times from four to six months. So if we’re looking at the winter season, right, if we look just a little bit bigger than the holiday season, if we look at the winter season, these products needed to be ordered sometime between March and April, and having the conversations with the customers to say, “Hey, listen, I’m putting an order in,” best cases they pre-buy.
So the demand is established. You’ve got a purchase order in. Worst case is when it’s like, oh, well we sold 5,000 of these last year. I think we’re gonna get 10% more, so I’m gonna order 5,500. Where it’s basically a just a stab in the dark. And you know, lately, as of late, especially the last year, having confidence in the delivery date has caused a lot of businesses to overorder and overorder too.
And hence the discounting that we’ve already started to see. And I think we’re gonna see some pretty major discounting through December and into January.
I agree. I agree. It should, uh, be interesting if nothing else.
So how do you know what’s not enough? I. Well, the probably the simplest indicator of not enough is perpetually running into backorders where as soon as you either get a shipment in or, you know, manufacturing makes a batch and puts it on the shelf, if that product is spoken for before it gets to the shelf, it’s a not enough situ.
And it can become, and I’ve seen this area, it, it can become a vicious cycle where somebody orders five of something and immediately goes on backorder. What they’ll do is they’ll put an order in for another five because they’re worried about the product that’s coming behind it. And then once supply gets put in place, the true demand gets met.
But that kind of phantom or backup demand, a lot of times it gets canceled and just goes. So, you know, when we see backorders pile up, it takes, again, it takes conversations between sales and the customers to really understand what the true demand is and what the, you know, what we can call the fear demand is that I’m worried I’m not gonna get this shipment, so I’m gonna order another one.
Yeah, and I would argue if you are in a situation where you’re having significant backorders, the communication you have with your customer is absolutely essential. If I am waiting for a furniture delivery and I’m expecting it to come tomorrow, and I’ve made readjusted my entire schedule, and I’ve blocked off time to be home, nobody communicates with me ahead of time that the item went into backorder.
I’m gonna be pretty pissed. Now, if somebody communicates with me a week prior and lets me know, here’s what happened, it was supposed to be delivered on this date, it’s not going to, I’m still gonna be upset, but I’m not as upset, right? Because I had time to plan and prepare. And Sarah, I saw that when I was with GE, we ran into a situation where production had gone down and the ripple effect of delays to customer orders.
You know, we quickly realized that bad news is not like a fine wine. It doesn’t get better with age. So if I know today that the shipment that’s supposed to go out a week from now is not going to go out, I need to let our customers know today that that’s the case. Because at that point with GE, we were making Industrial Diamond and our product was a raw material into other manufacturing businesses.
Being proactive was almost universally appreciated because it gave them the opportunity to plan around the delay as opposed to finding out, you know, at nine o’clock this morning the shipment I was expecting isn’t going to arrive, which can be incredibly disruptive to another manufacturing. So manufacturers have had to deal with a lot of crap the last three years.
Just anything you can think of, I feel like has happened. Good and bad. There definitely has been some good. You work with a lot of manufacturers, small, mid, even some larger ones. What would you say is the biggest inventory challenge that manufacturers are facing right now? This episode will be coming out early December.
The biggest inventory challenge I’m seeing is kind of the back half of the curve. The first half of Covid it was buy, buy, buy. I can’t get enough. I can’t get it fast. My lead times have gone from 16 weeks to 30 weeks. I’m gonna double my orders. I’m gonna buy, buy, buy, buy, buy.
Now, on the back half of the curve, it’s “we’ve got too much, we have too much.” We don’t know what we’re gonna do with it. And figuring out in what ways businesses can creatively spur demand or even create demand to work through some of that excess inventory. Like you had said earlier, that problem gets compounded when it’s a seasonal product, right? Nobody wants a winter parka in July, at least not in the Northern Hemisphere.
So understanding and really monitoring and having processes in place to say, “Hey, we’re gonna do every two weeks, how are sales materializing versus how sales?” So if we see a dip or a drop off, we can start having conversations with the customers to understand what’s going on, um, you know, to help potentially incentivize some of that inventory to move as opposed to you reach the end of the season and all of a sudden you’ve got a half a warehouse full of winter gear as people are moving at the summer.
Yeah. And I would argue that goes back to what we were talking about earlier, the importance of procurement and supply chain and the manufacturing team working closely with sales and marketing. Because if you’ve got excess inventory, you’ve gotta move it, or you’re gonna have to give it away for free or a heavy discount, right? Which is gonna have a significant impact on revenue. So what can you do that’s really creative to create demand or offload some of this extra inventory, and that really is driven by sales and marketing. Absolutely. 100%. And it’s interesting because there are outside of Amazon, there are several discount retailers who were always looking. It almost becomes arbitrage, right?
I’ll buy this from you for $5, and I’ll sell it for six, and I’ll be happy with the dollar. What I’ve seen as of late is manufacturers becoming, I’ll say, more aware or more mature to make sure that the person who’s buying the bargain or the bargain outlet doesn’t turn around and compete with them on Amazon or some other outlet. So putting safeguards in place to say, “Hey, listen, I’m gonna sell you this product at this, but you can’t sell it on Amazon, right?” If it shows up on Amazon, then the business relationship is gone. So manufacturers are becoming more aware of, “Hey, there are discount outlets, but I have to be very aware of how to set those parameters so it doesn’t come back around and bite them.
Yeah. Amazon, I feel like is an entire episode in itself of how manufacturers can leverage Amazon, but also what they need to do to avoid. Cuz it can really be detrimental to your business. It can. It absolutely can. In some cases, it’s a blessing. In other cases, Sarah, it’s definitely a curse.
So you left your VP of operations gig. Mm-hmm. And you have started your own business. Yes. So why the change?
So, you know, we successfully integrated the two businesses, and then the third product line that we integrated was heavily dependent on the oil and gas industry. So when that market popped, uh, for all intents and purposes, the business popped. And I found myself, you know, okay, hey, where’s my next gig coming from? And networked had a conversation with a consulting firm out of the West coast, and we just clicked on the phone, and he says, ‘Hey, I’ve got a project. It’s in St. Louis. It’s right in your wheelhouse. Would you like to work on a project?’
And I’m like, “Hmm, I’ve got a wife and four kids who love to eat. So yes, I’ll work a project.” And, uh, Sarah, I had a blast. I had just an absolute blast. One project turned into two, two turned into three, and uh, I was talking with my wife about it and she’s like, “you could do this. You could hang up your shingle,” and uh, that was it. That was, that was the decision to, uh, create the MRI group and start solving supply chain and inventory problems for manufacturers and the distributors.
So there’s a lot of consultants, a lot of people that are helping in the operations and supply chain space. What makes what you do so unique and… so one of my differentiators is the ability to really understand the end-to-end supply chain and understand what the levers are. When people come with an inventory problem, it’s really an indication of a problem somewhere. Ultimately, inventory is an output. It’s the result of the balance or imbalance between supply and demand. So when there’s an inventory problem, whether it’s too much of the right, uh, wrong stuff or not enough of the right stuff, the problem is always upstream. And what I do is take these symptoms and these pain…and help figure out, okay, what’s the root cause and what are the fixes that we need to put into place? So it’s really, uh, I’m almost like a, you know, a doctor or a diagnostician or a detective and figuring out, Hey, here’s what ails me. Can you figure out where the problem is coming from?
So how did you get the nickname inventory iceberg crusher?
So it was interesting. It, you know, it started out with the concept of a mountain of inventory, you know, talking to businesses, you have a mountain of inventory. And, uh, it was a CFO that, a client that I had worked. And he is like, ‘just like a damn iceberg, right? There’s this much you can see, but 90% of the problem is actually below the surface.’ And I’m like, oh. I’m like, that’s gold. And it was funny, Sarah. So I had, I had the, I had the concept for the iceberg and I found a graphic designer. I said, ‘Hey, here’s the stock image I want to. Can you like interweave hundred dollars bills into the iceberg to symbolize, you know, cash frozen and inventory?’ They’re like, ‘yeah, no problem.’ Right? 24 hours later I check my email and it’s an iceberg with like Bitcoin embedded in it. And I’m like, I appreciate it. I get it. I, I get the concept, but really the manufacturers that I’m working with, um, you know, Bitcoin isn’t, , I mean, it is a thing, but that’s not going to resonate with the audience.
So could you just try to, you know, take another shot and, uh, that’s how the inventory Iceberg was born. I people will have to, to check out your website or, and or LinkedIn so they can get a glimpse of the iceberg. So we have a lot of listeners to our show that are working for mid-market manufacturers.
They’re in direct materials procurement. What advice do you have for somebody who is trying to plan for 2023 [00:27:00] and try to do a better job next year of managing cash flow versus managing inventory? The first conversation really begins with sales and then finances right behind it to understand how is the budget being set, what are the assumptions being made?
And when something appears to be, uh, let’s say, either overly optimistic or overly pessimistic, the question I always ask are, okay, what are the reasons to believe? So if somebody tells me they’re gonna increase a product line by 23% next year, I’m like, okay, well what are the reasons to believe? Like, well, we’re gonna do a whole bunch of marketing.
I’m like, mm. Yeah. Are there specific customers you’re acquiring? Is there a specific, uh, project or program that you’re putting in place to capture market share? What I need are the reasons to believe, to create confidence in the plan. And what I almost universally see is if a salesperson can’t explain where the growth is coming from, you know, saying it’s this customer or this market or this new product, if the salesperson can’t explain where the growth is coming from, mm, it’s probably not.
I wouldn’t put a lot of stock in it.
How does the size of your manufacturing business play into your inventory planning strategy? And the reason I ask this, We work with manufacturers and varying sizes, and I think cash really, really depends on the size of the business, right? I’m a really small manufacturer. I have very, very limited cash, and that’s gonna dictate how I manage my inventory.
Versus a midsize manufacturer that has a little more flexibility. So I think part of it, yes. You know, availability of cash is definitely one aspect. What I see a lot more is how big the supply chain and operations organizations are. So if, um, working with, uh, you know, let’s say a 50 million business, chances are, you know, there are, it’s more than one person.
Who’s planning the procurement and planning the supply chain, right? So the bench is a little bit deeper. So most often the smaller the business, the, uh, shallower the bench, which just means, you know, you’ve got fewer people doing more work and it becomes more challenging. And, and you know, when you have one person who is managing both the supply and the…it’s human nature to say, “Hey, I only wanna look at this once over the next three months. I’m gonna place an order for three months and I’m just going to cross it off my list,” as opposed to saying, “Hey, this is something we need to look at every month or every two weeks.” So, you know, cash flow is definitely, or just a volume of cash on hand, is definitely a consideration. And right behind that, I’d say is the capacity and bandwidth of the people working in the… Thanks for discussing how to mitigate the risk of buying too much inventory today. Mike, my pleasure. If you have anything to promote or a project you want our audience to know about, now’s the time. Maybe tell us a little bit about what keeps you busy, busy these days and where people can find you.
So what’s keeping me busy these days is really helping manufacturers understand how the planning horizon has changed and understand that to have a process that’s gotta be definable, as in you can draw a picture of it, predictable, you can tell me what’s going to happen next, and repeatable, and that the same thing happens every single time. So helping manufacturers understand how to create definable, predictable, repeatable process. With the end goal of improving their inventory position, improving cash flow, and increasing EBITDA all while keeping the customers happy. That’s what I’m focused on. Uh, and really for more information, you can find me on LinkedIn. Uh, if you type in “I solve problems,” all one word, I’ll pop up. And, uh, you can always visit me at my website, themryangroup.com, m r y a n group, g r o u p, all one word, ion group.com. And also on my LinkedIn profile, I’ve got a link. It says “book 20 minute discovery call.” So if anyone is interested in having a conversation, I invite you to click the link and book a call and I’d welcome the opportunity to speak.
If you missed anything, you can check out the show notes. You can find us by typing in “What The Duck, another Supply Chain podcast” in Google to have optimal search results. Make sure to add “another Supply Chain podcast” to ensure you don’t miss a single episode. Make sure to follow this podcast and subscribe to us on YouTube. If you are new to the show, make sure to follow this podcast so you don’t miss any of our direct material supply chain. I’m at Sarah Scudder on LinkedIn and at SCU on Twitter. This brings us to the end of another episode of What The Duck, another Supply Chain podcast. I’m your host, Sarah Sutter, and we’ll be back next week.