Transcript: What the Duck?! Episode 56

What the Duck?! Episode 56 Transcript

FROM STOCK OUTS TO STOCK STARS: How to Improve Your Inventory Management with Simon Watson

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. Thank you for joining me for “What the Duck?!” Another Supply Chain Podcast brought to you by SourceDay. I’m your host, Sarah Scudder, and this is the podcast for people working in the direct materials part of the supply chain. I’m @SarahScudder on LinkedIn and @Sscudder on Twitter. Today, I’m going to be joined by Simon Watson, and we’re going to discuss how to improve your inventory management. If you work for a manufacturer and are looking for ways to enhance your inventory management, then this episode is for you. Simon is a medical device procurement specialist with over 10 years of experience in supplier and inventory management. Welcome to the show, Simon. Thank you; I’m happy to be here. I am back in Austin, and it is in the 80s, which is absolutely amazing. We’re able to go outside and not melt, so it’s a good week. Yeah, awesome.

So, Simon, I like to start off the episodes by having our guests share their personal story about how you got started in manufacturing. Sure. So, I got started in manufacturing because my roommate in college was working in the warehouse for Philips Ultrasound, and they were hiring. At the time, I was working for Hollywood Video and looking for more of a big-person job. They had an open spot, and he recommended it to me. After I graduated from the University of Washington Bothell, they had a position at the vendor management desk that they thought would be a good fit for me. That was my first step into the procurement side of manufacturing. So, you started out managing third-party repair vendors for a very large company. What did the transition into inventory management look like? Sure. So, my original role, as you said, was managing third-party vendors for our repair shop. We had a retired repair operation for the ultrasound group, and I worked very closely with the inventory planning team because they were always concerned about the lead time and how often the repair vendors were getting stuff back to us in a timely manner. That was my first step into it, and the planning team was always highly respected in the organization I was in. I had a request to the manager to do a job shadow a couple of times, as it was a goal I wanted to step into that group. The job shadow went really well, and when they had an open position, I applied, and the interview went really well. That was my first step into inventory management outside of the minor PO and invoicing kind of management I was in at the vendor desk. What would you say was the hardest part of transitioning into inventory management?

We, because it was a repair shop, we had repairable items, and from an inventory planning point of view, those are a lot more complicated than your average consumable because you have to think about return loss and scrap rate and things like that. So, I think that was the item with the biggest learning curve, outside of, you know, the usual things that pop up with end-of-life notifications with a very large organization. And being part of the repair shop, we were supporting much older systems, so some of the parts were kind of harder to come by. So, we had to get a little creative with some reclamation projects and things like that that we were doing.

So, you mentioned returns, which I think is sometimes a forgotten part of the supply chain. People are focused on getting their parts, getting their materials, getting their product out the door. But then there’s a whole other world depending on what industry you’re in with people actually returning things. So, how did you navigate and manage the whole world of dealing with returns?

Absolutely. So, being part of a very large organization, we had a lot of powerful tools. The main one we used was SAP. But we had pretty good data since it was older ultrasound machines that we were mainly servicing, where we could see, you know, that if we sent out a serialized item in March, it would kind of be in the field for x amount of time, and then it would come back in this period. So, we knew, you know, the cycle is probably about two years per part. And then you could look at the overall ship rate and then your overall return rate and see kind of, you know, if you ship out this many items, two years later, you can expect to get this percentage back. And then you can work with, we were split into two divisions: one of them was the repair shop that I was a part of, and then we had a group that would manage the global warehouses, and they would have, we worked with them closely on some projects to kind of improve that return loss because obviously, you know, we wanted to be as green as possible and to keep costs down. The lower your return loss, the more usable products you’re getting back, and the less new material you have to buy to supplement.

So, for those that are listening, our audience is primarily people working in small to mid-sized manufacturers. Not everyone may have a ton of experience dealing with returns. So, walk me through what you do actually once you get a return because there’s a lot of processing and then figuring out what to actually do with the product.

Sure, absolutely. So, you have your standard warehousing side of the company where you’re going to have to figure out, do you usually, you don’t want to store it with finished goods materials, so you’re going to have to set up a defective section of your warehouse. So, you’re going to have the material returned back. Most of it is probably going to be serialized, so you’re going to have a record of how many times it has been out to the field and come back. You’re going to have to have some internal discussions to figure out how many cycles you want a part to come back to you. Then you’re going to have to put it through your repair shop, do some testing to make sure that it’s functioning correctly. Depending upon if it’s an assembly or a consumable, more consumable part, you might have to do some actual repairs in the repair shop, swapping out individual components, things like that. And then once it’s tested as good, you package it in new packaging, put it back into your finished goods warehouse, and then either ship it directly to the field or to your 3PL if you have a third-party logistics site And then from there, customers can order it as needed.

Okay, what was the strategy if you get a return, the product doesn’t move after a certain amount of time, and I don’t know what that is, let’s say it’s three months, let’s say it’s six months, what do you do then?

Sure. So, we would do annual reviews and figure out maybe instead of making this what we would call repairable, maybe we just make this a consumable part where it’s a low mover but you still have to support the customer base. So, you, but it doesn’t make financial sense to invest in all of the logistics side of having it sent to the field and then sent back to you and processed at the warehouse and training for the repair shop to do the testing. So sometimes, from a pure financial point of view, you would just switch that part from repairable to consumable, and then you just purchase brand new parts to support your demand. Other than that, you might want to switch it to consumable because there’s some technical know-how or repair equipment that becomes difficult to come by. There might be some specific component that is becoming more difficult to procure. For example, we had some old CRT monitors that we used on the ultrasound machines, and those are very old as it comes to TVs. The technology advanced rapidly. So getting the parts to repair these old CRT monitors was becoming more and more challenging.

So at a certain point, we just made them consumable because it was, you could get them back from the field at a decent rate, but the repair parts you needed to make them as good as new were more expensive than the units themselves were worth. So at that point, it made sense just to make them consumable and buy a new one.

So for items or inventory that you were managing that wasn’t a return, these were new things that you were actually producing, what was your most effective Inventory management strategy like, what actually worked?

Sure. So, we came up with a min and max range for inventory. So, obviously, in inventory management, you don’t want to hold too much inventory, but you never want to run out. So, we came up with an algorithm that basically took what your lead time was and your average demand. So, you do lead time times average demand, and then that would be your minimum. So, if it got underneath that barrier, then you would get a flag, and you’d have to invest in purchasing more material. And we had a maximum range too because you don’t want to be carrying more inventory than you really need. And that was average lead time times the average demand plus whatever the largest spike we saw in the past 18 months. So, every now and then with some parts, you see some seasonality spikes, like in the summertime in some locations where it’s a lot more warm and humid, electrical devices might fail at a much higher rate. So, you need to factor that into your demand plan, and you’ll see these large spikes that if you try and smooth everything out like some companies do, it might leave you in trouble in the middle of the summer months. So, we would have a max range that would account for those large spikes, and you wanted to keep your inventory in between those two brackets.

Okay, and how did you manage… so, I would argue that one of the hardest parts of being in inventory management is the fact that your ERP has crappy data. It’s not that your ERP is crappy, but the data in the ERP is bad, and so it’s really, really hard to do forecasting and planning. So, how did you… or what was your… I mean, nobody’s able to do it perfectly, but some companies definitely are better at it than others. How were you able to accurately forecast and plan?

Absolutely. So, from the inventory side, we had a pretty robust cycle counting schedule. So, we had parts divided up into ABC brackets, which is pretty standard, and depending upon the dollar amount or how high the inventory turns, we would categorize them into different brackets. So, A parts were cycle counted every month, B parts were cycle counted every quarter, and C parts were cycle counted once a year. So, you want to make sure that we would do a yearly review to make sure that we were cycle counting the right parts at the right time, so you knew what you had in-house. The other advantage we had, being split into an in-house planning team and a global demand planning team, is that we had these two different systems that were basically looking at the same part. So, we could compare and contrast, and if there was a large discrepancy between what the field was thinking and what the repair shop was thinking, it would get flagged, and we could identify them and have a quick meeting, look at some of the base data, and see if somebody entered something incorrectly or if there was something going on in the field that the repair shop wasn’t aware of. So, having dual sources that you can go to that were more or less synced up was another big advantage that we had.

Okay. And how did your dual sourcing strategy work? Did you have a primary, and then you were sending business to a secondary or third supplier to keep them happy and engaged, or did you have people just waiting in the wings that if your main supplier wasn’t able to fulfill, you would bring in additional resources?

Sure. So, when I say dual source, I mean that we had two different teams that were doing the inventory management. So, that was my team that was doing the MRP. Yeah, so it was my team that was doing the inventory management for the repair shop, and then there was another team that was looking at a 3PL, and the 3PL would order from the repair shop. So, theoretically, that auto volume and demand should always sync up. But every now and again, you would see a spike in the field early because they’re a leading indicator, right? They’re getting that demand from the customer base a few weeks ahead of the order from the repair shop, or the repair shop would see more inventory building up because the return loss had gone down or the scrap rate had been improved. So, we had these two separate demand sources that we could compare and contrast. But we also did have some dual sourcing for Supply. It’s always useful to have that. Usually, you know, you want to have… sometimes strategically you want to do 50-50, sometimes you want to divide it up more on one side than another because of capabilities or cost. But the dual source from a purchasing point of view is always useful because it gives you a backup in case, you know, you have some Supply constraint at one, you can lean on the other. And if you have a good enough forecast and you know and have POs out, you should have enough lead time to kind of shift demand between the two and not have it affect their production line.

So you were at this organization, so this was kind of your first company that you started at in the space and progressed up through the ranks. You decided to pivot and make a change, and you moved into a buyer planner role. So, would like to have you kind of talk through why the pivot and what you did in this buyer planner role?

Sure, absolutely. So, during COVID, my previous company made a business decision to outsource the repair shop to a third-party company. I had a few offers from different groups to do some project management-type roles to stick with Phillips. But since I had been there for my entire career, I kind of figured that if there was going to be a time that I left to go see what it’s like in another company, this would be the time. I had an offer from a very, very, very large retailer and an offer from a small medical device startup company. Since I had a lot of experience in the medical device field and had been at a large company, I chose the smallest startup one because I wanted to see what the culture was like at a smaller company and be able to lean on the experience I had in the medical device field, which is obviously highly regulated. So, having that experience is a big advantage.

So, in this new org, what did you do from an inventory management perspective? Was this still a big part of your role there?

It really isn’t. Most of what we do at my current company is through contract manufacturers. So, I do some inventory stuff if there is like a supply constraint somewhere in the supply chain. Then I can use my inventory management experience to kind of jump in and help fill that gap. But mainly what I’m doing is helping to make sure that our forecast is getting communicated out well, that everyone in our supply chain is on the same page and understands what short-term and long-term goals are, and kind of manage those relationships and make sure that everyone’s effective and on the same page and understands what we’re doing from a business point of view.

So, what’s the hardest part in communicating that out to so many different people? Probably just translating, right? I mean, you have your internal team that you know people have their shorthand and you know you’re in a building with people and you’re all discussing the same things over and over again. And then being able to go to an outside company that has their own processes and standards and you’re not the only one that they’re dealing with and being able to explain to them what your end goal is and how what you’re trying to do and the processes you have in place, how that aligns well with what they do, and being able to translate from a regulatory and quality point of view. This is a change notification process, for example, and this is how it needs to pair up well with what you do in your building. So, what would you say is the hardest part of your job?

I would say probably just every now and again, right? You have a company that maybe has an issue internally with Supply or a project that is getting higher priority than you, and sometimes they would rather not have that be communicated out to customers. So, you might have an issue that somebody is dealing with that is causing you pain points that you aren’t aware of, and you have to be able to build up that level of trust to have them explain what’s going on to you without them thinking that it’s going to have a negative effect on the relationship. We also deal with some contract manufacturers that have agreements with government organizations, so they have to be very careful and secretive about parts of that building. So, you have to be, if you’re going on-site to do a tour or something, you have to communicate ahead of time and understand, you know, you might ask a question about what does that equipment do, and they might not be able to answer efficiently or at all depending upon what their other agreements are in place.

So, for those who are listening who don’t work in the contract manufacturing space, how does that work and what is your inventory management strategy?

Sure, so we get reports from our main contract manufacturer that puts our final assembly together. So, they basically tell us, ‘This is what we have in inventory for your product.’ So, instead of having an in-house production line that is building a product, you find another company that has a production line that either they completely set up or operate, or in our case, we give them all of the direction and test equipment and things like that. And then they are saying, ‘You have parts A, B, and C that are used in your product. This is how much of that inventory we have in the building currently. This is how much we have on order.’ They send me a report about that. And then I try and align that with our forecast. And if I see something that’s a flag for me, then I reach out to the internal buying team to see if there’s some piece of information that I’m missing, like maybe they have more in the building but had to move it into an MBL location because of some paperwork issue or something. So, it’s in the building but doesn’t technically show in their inventory system. Sometimes it is something very small, like an alcohol wipe or something like that, that is no longer being manufactured, and you have to pivot and find another one. As a medical device company, you can’t just buy another one; you have to find one, qualify it, make sure that it has FDA approval and all of these different regulatory loops. So, there are a few challenges like that, but mainly, contract manufacturers are just running a production line for you instead of you having to own and operate and staff a production line for yourself.

Are you bringing any parts of assembly in-house, or is 100% of what you’re doing outsourced?

Basically 100%. There is some research and development and things of that nature that we do in-house, but those don’t make it to final production and get shipped out to the field. So, we do have an in-house lab and some engineering people that work on development-type products. But as far as actual inventory that is going to ship to a customer site, that is all done by contract manufacturers currently.

And then you mentioned you’re heavily involved in the demand planning and communicating that out. How are you effectively demand planning when you know your data is not 100% accurate?

Sure. Since it is a smaller company, it’s not part of a… it got purchased and is now part of a very large company, but they’ve been pretty hands-off as far as integration. We are very cross-functional, which is very helpful. So, we have a quarterly meeting involving sales, finance, and the executive team where we talk about what they’re seeing in the field. We have pretty steady and consistent growth, which makes forecasting reasonably easy. We do see some shifts in product mix and things like that from time to time, but for the most part, we can adjust, and any big shifts are covered by safety stock targets. So, we have a decent buffer that we are able to tap into if needed.

How is your inventory management strategy? You mentioned you have some buffer stock. How has that changed over the course of COVID and then post-COVID?

Sure. So, during COVID, I joined the company in 2021, towards the end of 2021, so I was not here for the beginning of COVID. But they, the reason my role was created was because they, during COVID, obviously, everyone had a ton of supply constraints, and they had not been building up quite as much safety stock. The executive team basically made a decision and said, ‘You know, we never want to run out of inventory. It’s a medical device that has a large effect on saving people’s lives. So, we’d rather eat the cost of holding more inventory than run the risk of doing just-in-time and ending up without anything for a period of time.’ So, we actually have a very aggressive amount of safety stock. We hold three months of inventory, so we have a pretty large buffer. But at roles I had in the past where we were a little less aggressive, it comes down to just the main thing is we talked about, you know, bad data in, bad results out, right? If you have confidence in your data and the ability that you have in reviewing it and making sure that it’s accurate, it makes forecasting very easy. But every now and again, something crazy happens, and you’re going to lose a little bit of that confidence, and then you just have to lean on experience. A lot of the time, when it comes to planning parts, they may be different parts individually, but they have some commonality that you’ve seen before, especially if it comes to like electrical components. So, if you have experience in the field, you kind of know some of the things you can lean on your past history and results and kind of go with your gut every now and again if you have a bad feeling about the data while you’re getting that analytical and cleaned up.

Given we’re almost in Q4, we’ve got a couple of weeks left in Q3 for those on a calendar year, what are you going to do different next year from an inventory management perspective, if anything, based on results and data that you’ve seen from this year?

Sure. I think the main thing that we are doing is I’ve set up some forecasting meetings with our different contract manufacturers. As you go down the supply chain, they had visibility to what our demand forecast was, but they didn’t have visibility to what we had in our 3PL. So, we would have some conversations and say, ‘You know, the safety stock target on product X is a little bit lower than we would like, so we want you to shift some of your demand to that.’ And tended to be a little slow to respond. I think part of that is that they didn’t have that overall big picture, so they weren’t seeing what we were seeing. And I’ve always had the belief that if you communicate effectively and make people understand what your end goal is, then you’re going to have better results. So, that’s going to be one of the big things we’re focusing on next year is helping some of our partners be able to understand a little bit more what our end goals are and giving them better visibility to where we are and on track to get there.

Well, Simon, thanks for coming on the show today. Where would you like to send people to find you?

Yeah, absolutely. You can find me on LinkedIn @SimonTWatson. 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’ at the end of your search. This brings us to the end of another episode of ‘What the Duck?! Another Supply Chain Podcast.’ I’m your host, Sarah Scudder, and we’ll be back next week.