Ellery's Essays

The Benefits & Pitfalls of Commodities Trading

A commodity trader at a food company observed that prices of coconut oil, an ingredient in most of the company’s products, was forecast to trend higher. He, therefore, ordered more than two (2) months’ supply of coconut oil, buying from several vendors who offered the lowest prices.

When the coconut oil price indeed increased days later, he boasted to his boss that he saved the company hundreds of thousands of dollars.

The company fired the commodity trader. The boss told the trader that he violated policy, which was the company does not speculate in the buying of ingredients. The company buys based on the demand of its products, not based on the prices of commodities.

The profession of commodities trading is about buying and selling items that are considered indistinguishable from wherever they are from. Agricultural items like seeds & oils (e.g., soybeans, palm, coconut) and metals (e.g., gold, silver, nickel, iron) are examples.

Commodities traders either work independently or work for companies who seek and buy ingredients or raw materials for their products. Their aim is simply to buy items at the cheapest price and profit from them whether they sell them to other buyers or they are converted and sold as finished products.

Companies like the food company do not like to speculate with commodities, even though many traders do it. The rationale is speculation is a two-way street: sometimes one wins big; sometimes one loses a lot. Prices may look like they’re increasing but then they fall, bringing about losses. But the prices may also go down and traders would save money for their companies who buy based on demand.

Supply chain managers also frown on commodities speculation. Delaying purchases may save money by prospective lower prices but could cause shortages downstream to the manufacturing departments who need them and result in unavailable products for customers. Buying more before price increases could build inventories beyond storage capacities or risk obsolescence or degradation over time. Supply chain managers don’t like out-of-stock or having too much in storage. Supply chain managers prefer steady-stream flow pulled by demand from users. Hence, speculation is a bad word. Buying based on need sounds better.

There are therefore benefits as well as pitfalls in commodities trading. Enterprises learned this the hard way when the CoVID-19 pandemic hit in 2020. Almost overnight, businesses suddenly could not receive inbound raw materials from international sources due to quarantines and lockdowns. Shortages occurred from factory floors to supermarket shelves. During and after the pandemic, some companies relaxed their rules against speculation; some have made it a practice to buy based on seasonal and global current events.

Experienced commodities traders don’t just look at price when it comes to buying and selling items. They look at the big pictures behind the commodities. What’s the harvest of cocoa have been like in Africa? What’s the story of some governments aiming to invest in mining of rare earths in the Pacific Ocean? Has China been dropping prices of steel to reduce inventories?

Supply chain management shares the thinking of wise commodities traders that one should be familiar what’s going on behind the scenes other than being experts in one’s internal operations.

Commodities traders also don’t treat their vendors as adversaries. Rather, they see them as alter egos to negotiate with. Negotiation is the key job of commodities traders and good negotiators aim for the ideal of win-win outcomes. As much as commodities traders don’t form friendships with vendors; they don’t try to make them enemies as well.

Commodities trading is an inherent function in many businesses. There are pitfalls and benefits to the job and there are costs and rewards depending on how we work with them in our supply chains.

About Ellery’s Essays

Fast-Food Doesn’t Mean Available

Late one Sunday morning, while driving, I had a craving for an extra-long chicken sandwich from my favourite fast-food restaurant. I stopped by the restaurant’s nearest fast-food drive-thru only to hear the lady’s voice from the box say the sandwich is out of stock.

When calling the hotline of another fast-food restaurant close to 12 noon on another day, the order-taker on the other end of the phone said that the order will take one hour to serve. All the motorcycle delivery people were busy. The same message was repeated at other fast-food places I called.

Fast-food restaurants are famous for being quick whether it be in serving food at the store or when delivering door-to-door. They are infamous, however, for having no stock of one’s favourite item and turning away customers at peak hours. Fast-food companies never seem to have enough food or delivery people to serve customers.

It’s a complicated tangle of not having enough capacity, supply, and delivery capabilities at the right moment.

Fast-food giants release tons of advertising about how good their products are and how convenient it is to order via mobile apps and the web. They continue to set up more branches and attract more customers.

Fast food’s market reach had spread far and wide and had made it an obligation for their commissaries to produce and deliver to more places than they have ever served.

Fast-food chains keep inventories to a bare minimum for the obvious fact that their items have very short shelf lives. Delivering to meet demand versus ensuring little or zero inventories at the end of the day at all locations is a constant challenge for commissary planners.

We can’t really fault commissaries for falling short as demand continues to grow. We can’t blame branches for not being able to deliver as orders outpace their capacities.

But meanwhile, as I resigned that Sunday to not getting the sandwich I want, I just settled to eat lunch at home.

About Ellery’s Essays

Missing in Supply Chains: Productivity

If there’s one thing I find missing in every business news story I’ve read, it’s: productivity.

If there is an article about productivity, it usually is in the context of labour efficiency or how much output workers churn out over a given period. Some media writers define productivity as to how many tasks we complete versus what we plan in a day.

These definitions are well and fine but unfortunately, they distract us from productivity’s higher meaning.

Productivity builds from efficiency in which it is not only how much is produced over a given time but also how much is delivered and progressed towards strategic objectives in ratio to resources spent and assets utilised.

Efficiency is:

Output / Input (or Capacity)

Productivity is:

Actual Output / Target Output / Input of Resources

Most business firms don’t have productivity measures pertaining to the above, if they have any at all. Instead, many businesses opt to measure efficiency or just plain output over a given time. They balance this by monitoring cost although as a separate indicator.

This is understandable as measuring productivity in relation to used-up resources is more complicated than just calculating output or cost. We’d rather like to keep things simple, after all.

Productivity, however, is more than just a measure. It is an attribute or characteristic that our business organisations we should strive for, even more than quality and value.

Productivity encompasses how well we progress toward our goals given what we value; it’s not just how much we make versus what we put in and for how long. Hence, it covers aspects such as quality (how good our products & services are), net worth (the financial value of our enterprise net of costs & liabilities), sustainability (the conservation & utilisation of resources), agility (velocity of accomplishing goals), versatility (flexibility & responsiveness to change with the times), and resilience (how well we address adversities).

In short, productivity should be the core of our mission in how we do things and we should aspire for it particularly when it comes to our operations, or more specifically, our supply chain relationships.

Supply chains are the operating relationships within and between our enterprises. Productivity is what we aim for in our supply chains. Because when our supply chains are productive, chances are our enterprises are also optimally productive, as we keep pace with our partners to make it so.

Every client firm I’ve worked with had unique problems with their supply chain operations.

Examples:

Inventory was too high.
Customer orders weren’t being served; if they were, they’re often too late or incomplete.
Some items were always out of stock.
There was costly waste in materials, operating hours, off-quality products, and rework.
Machine capacities were not fully utilised.
Scheduling was haphazard.
Customers were rejecting and returning too many items.

Often, these problems led me to an underlying issue: the supply chain operations of the client firms were simply unproductive. Not only in the sense that the enterprises’ operations were lacking in capacities in manufacturing, were not performing up to par in their distribution networks, proper policies & procedures were absent, or there was poor planning or coordination between functions (e.g., purchasing, production, logistics). But also, in that the firms had very little in the way of systematic and structural relationships with their partners, i.e., vendors, customers, & service providers.

A medium-sized printing press company was purchasing cardboard paper of various specifications from three (3) vendors. The company’s buying department had pre-allocated business to the three (3) vendors, giving 50% to the first, 30% to the second, and 20% to the third. When the printing press’s production department requisitioned any needed carboard, the buying department will order from the three (3) vendors based on the preset allocations.

If the first vendor failed to deliver the ordered quantity at the specified time & quantity, the buying department would revise upward its orders from the second and third vendors. Sometimes the buying department will cancel the order from the first vendor if the second and third vendors deliver completely and on time.

But none of the vendors ever delivered completely and on time. This was because the printing press company’s buying department always gave not more than one to three days for the vendors to deliver. At best, each vendor delivered partial quantities, never mind if they had to scramble their schedules to produce and dispatch the printing press company’s orders.

One can imagine the exasperation of the three (3) vendors. Because the deadlines were tight, and there was uncertainty in how much order quantities would be changed if not altogether cancelled, the three (3) vendors would build in extra charges into their quoted prices.

The printing press company would complain about the ‘high’ prices and eventually seek new vendors who often at first would offer lower prices at least until they experience the same exasperation from the demanding printing press’s buying orders.

Productivity was far from perfect for the printing press company and its vendors. And it was likely that the printing press company’s delivery productivity to its customers was not that great either. Indeed, the printing press company was often adjusting its production schedules given the uncertainty of whether the cardboard paper it needed would arrive or not. Its customers would complain about unserved orders and late deliveries, to the extent that customers would revise quantities downward, if not cancel orders altogether.

It’s no surprise then that the printing press company would encounter complaints like what we see in the list above.

Many businesses like the printing press spend time trying to fix their internal systems and structures without looking at the big picture of their supply chains. As much as the printing press can make its operations more visible (e.g., putting up performance measures), more methodical (e.g., writing detailed policies & procedures), and more participative & coordinative (e.g., implementing a sales & operations planning system), the company could only go so far in reaping benefits. If vendors and customers aren’t in the loop and working with our enterprises, we would never improve our and our partners’ supply chain’s productivity, no matter how much we invest in our own operations.

Productivity is not efficiency, and it isn’t just a performance measure. It is an attribute or a characteristic we aim for not only in our internal operations but also in our supply chain partnerships with vendors and customers.

Many of the complaints we have about our operations are rooted in issues with the productivity of the systems and structures that underlie our operations and our supply chain relationships.

When we take the initiative to fix our operations in the context of improving the productivities of our supply chains, we will be making big strides toward breakthrough improvements.

About Ellery’s Essays

Five (5) Lessons from an Elevator Story

A high-rise building (let’s call it Building A) has been fixing its nine (9) elevators for the last twelve (12) years. Several times an elevator would fail, and passengers would get stuck, causing trauma and panic. Fortunately, the building’s security quickly rescued trapped passengers and suspended access to the dysfunctional elevators. But for the building’s owners, elevator reliability was a big problem.

The building management had resorted to buying and stocking spare parts but it didn’t alleviate the elevator problem. Management could not predict the next breakdown and parts on stock would never be enough. Management resorted to quick fixes to keep elevators running but breakdowns still happened.

In another building (call it Building B), the building’s management had just replaced two of its three elevators. The management was in the process of replacing the third.

The Building B’s management was replacing every part and electronic component of all its elevators. Except for the chassis and cab, Building B’s management was changing everything.

Building B’s two (2) newly replaced elevators were running like brand new. Both elevators ran smoothly and reliably without a hitch. The total cost of the replacements amounted to about 30% of what Building A spent per elevator.

What did the Building B’s management do better?

1. Building B had a clear, concise goal

Building B’s owners via its board of trustees defined what they wanted. They wanted the elevators to work with minimal disruption. The choice of words was important. For so long, Building B’s management was preoccupied in reacting quickly to elevator breakdowns or failures and at least cost. The tactic was to have frequent inspections and keep stock of spare parts. But that wasn’t consistent with what the owners wanted. The owners wanted minimal disruption. It wasn’t about controlling the cost of maintenance or reacting fast to elevator breakdowns. It was about making sure the elevators were always available to the building’s occupants and reliably delivering them to their destination floors.

Building A’s management on the other hand continued to focus on just buying parts and nagging the contractor to respond to breakdowns more quickly. It was more of reaction than action with a tactic of repairing only when needed.

2. Building B had a clear strategy

With that goal clearly set, Building B’s owners and management moved to replace all the elevators’ components except for its chassis and doors. Every moving part, wire, cable, and electronic component would be replaced. Broken or not broken, worn or not worn, every item would be changed. The owners and management figured that changing every item would make the elevators virtually brand new and less likely to break down every few years. Changing everything also would open the building management to consider other elevator brands and newer models.

This was a problem with Building A: the management and ownership refused to consider alternative brand models for the elevators.

3. Building B developed a clear and complete Terms of Reference (TOR)

Building B’s management drafted specifications and criteria, otherwise known as the Terms of Reference or TOR to carry out the elevator replacement strategy. The management and ownership rewrote draft after draft until there was unanimous consensus on the specifics and language of the TOR. The TOR documents in detail what the building ownership clearly wanted as the endpoint of their strategy.

Building A had no such TOR and never did make one.

4. Building B led a transparent bidding process

Building B’s management invited contractors to bid for the elevator replacement project. Contractors submitted not only their prices but also their detailed schedules and scopes of work. The building management provided guidelines and templates for bidders to ensure uniformity. The management would reconcile the bids with the TOR and compared their quoted terms & conditions against the respective TOR’s provision.

The first building did not have any formal guidelines for bidding and because management and ownership wanted to stick with an existing contractor, there wasn’t any bidding.

5. Building B monitored performance and made corrections

Despite the objective, strategy, and TOR, the replacement of the first elevator at Building B did not go smoothly. The contractor collected the down-payment but did not deliver the parts on schedule. Installation was delayed. When installation was finally underway, the contractor saw design conflicts with the power system, elevator’s closed-circuit television cables, and fire protection system. Completion was delayed but the contractor and the building management resolved issues.

To avoid delay in the replacement of the second elevator, Building B’s ownership agreed to pay immediately the corresponding down-payment even as finishing touches were ongoing for the first elevator. But the building management amended the contract to penalize the contractor if there would be delays in the deliveries of parts.

The replacement of the second elevator went much faster given what was learned from the experience with the first. The replacement of the third went just as smoothly.

At Building A, the contractor didn’t provide timelines or formal reports when repairs were done. Most communications were informal and undocumented. Building management forwarded purchase orders and checked disbursement requests without supporting documentation. This caused excessive spending without really reaping quality work.

The key word to Building B’s successful replacement of its elevators was ‘clear.’ A clear goal. A clear strategy. A clear TOR. A clear response validated by performance.

When problems are well defined and solutions are clear, getting results becomes straightforward.

About Ellery’s Essays

Four Remedies to Mitigate Bias

https://en.wikipedia.org/wiki/File:Manila_Korea_Town,_Malate,_Manila.jpg

I won’t lease an office to a Korean. Every Korean I did business with didn’t pay the rent on time.

Many golf country clubs in the Philippines won’t accept Korean golfers as members. This is because Koreans don’t follow proper etiquette at the golf courses. They shout at other people, don’t wait their turns, and are rude to caddies and attendants.

My and other people’s prejudices against all Koreans are not justifiable, of course. We should not, after all, generalise our bad experiences with some Koreans to judge the entire nation of Korea. Being biased against Koreans or towards any individual or group is wrong.

South Korea is a developed country renowned for its cutting-edge technologies and successful industries. Koreans have shown world-class talent in the arts, reaping admiration from audiences around the world. They have one of the best disciplined and well-equipped militaries in the world as they continuously face threats from their neighbour, North Korea.

We buy many Korean items such as smartphones, appliances, cars, and health & beauty aids. Many of us eat at Korean restaurants. Many of us visit Korea as tourists. It, therefore, is quite unfair when we discriminate against Koreans and patronise their products and their country at the same time.

We should not judge individuals or groups based on our past experiences with them. It’s not right though it may seem logical for a few of us.

As much as some Koreans may exhibit unappealing behaviour, it doesn’t mean all of them are like that.

Despite the progress our society has made in stamping out discrimination, we all are guilty of having biases.

I avoid Koreans in my day-to-day business. As much as I know it’s downright wrong, my biases kick in as I recall bad experiences with these ethnic groups.

It’s not enough we show a respectful face when we encounter people we have negative biases toward. Directors at a posh golf country club politely denying membership to Koreans is still discrimination.

It’s even worse, hypocritically, when we visit Korea and enjoy the country and then come back to Manila and resume our biases toward Koreans. We don’t realise that the Koreans aren’t the bad people; we are.

Our biases stifle opportunities to have winning relationships with individuals or groups. Biases are bad for business.

What can we do to set aside our biases?

Treat every person we meet as an individual who has unique traits, not one that we automatically conclude as a representative of a group.
Seek to understand. Empathy takes effort and likely more so with dealing with individuals who are culturally different from us.
Welcome the differences as who knows what insights we could gain. We can learn from the talents & acumens of Koreans. How do Koreans succeed in the arts? How do they grow their business from small businesses to global conglomerates? We could only find out when we open up to relationships with them.
But we shouldn’t don’t surrender our principles in the process. We shouldn’t let our guard down as we empathise and welcome differences. Some Koreans are successful because they are assertive and persuasive. We should be ready to assert our own principles as much as we become open to what Koreans or any ethnic group can contribute in our negotiations with them. Collaboration is a two-way street after all.

Biases are bad. But these four (4) remedies may do the trick in not only mitigating our prejudices but also in keeping our doors open for opportunities, especially with individuals who could offer insights we never knew existed.

About Ellery’s Essays

If You Can’t Stand the Heat, Get Out of the Kitchen

I went to a lunch with former high schoolmates I’ve not seen in years. Most of us were glad to see each other. One of my schoolmates, an esteemed cardiologist, however, didn’t want to make conversation with me; he seemed to prefer to talk to other schoolmates who were either medical doctors or scientists with Ph.D.’s, or in other words, people who he saw as peers, not someone who wasn’t in their class.

This Photo by Unknown Author is licensed under CC BY-NC

In another case, a fellow member of an office building board of trustees I was also a member of thanked me via an online text for the tikoy (rice cake) I sent him during Chinese New Year. He texted that the tikoy was a blessing in his otherwise slew of personal challenges he was facing. I responded with a cheerful emoji . He texted back saying his problems were not funny. I replied saying he shouldn’t be so serious. He didn’t answer back.

There are some people who are plainly different in how they see and treat others. We shouldn’t judge them.

Maybe my doctor classmate was hungry, and he just wanted to eat than talk at the time.

The senior board member may just had been grumpy at the time.

Still, we shouldn’t be impolite or rude or worse, disrespectful. The doctor could have just said he’d like to eat and maybe talk later. The board member could have been more tactful in his text.

Maybe I’m not a person who deserves more respect than others who have higher stature. But then, I long ago had stuck to a policy where I take what others think with a grain of salt.

We live in a world where many people really don’t care about their fellow men or women. It’s understandable given the busy demands we face at work and at home. We have already too much on our plates and spending time caring about the welfares of others would be an additional burden we could ill afford.

Still, we should not be disrespectful. And we shouldn’t dislike people who show disrespect. Instead, we should just shrug our shoulders and move on.

If we work in jobs or reside in homes where we can’t get along with superiors or relatives, we should either just learn to live with these people or move out. It’s a matter of how much disrespect we can take.

As the saying goes: “if you can’t stand the heat, get out of the kitchen.”

About Ellery’s Essays

What Do We Do with ‘Bad Orders?’

One of the most irritating things in supply chain management is handling returned items from customers. We spend plenty of our precious time & resources trying to get rid of them.

https://www.waste360.com/industry-insights/returned-merchandise-stockpiles-as-waste-one-company-s-solution

‘Bad orders’ or BO for short are otherwise known as unsaleable merchandise or trade returns. BO is a commonplace term in the consumer goods industry in which retailers return millions of dollars of products to their suppliers.

BO isn’t limited to consumer goods, however. Businesses in other industries face trade returns as well. Customers return pharmaceuticals, toys, tools, and even cars.

Reasons customers return products are varied and many; some of which include:

Damaged items
Wrong items delivered
Customer has no space
Delivery arrived too late (or too early)
Expired product
Obsolete product
Customer can’t pay

Businesses try to impose policies on trade returns. In most cases, they don’t work. This is because many customers will not agree to them. Customers don’t want to keep trade returns; they want to get rid of them and get their money back from the suppliers who sold the items to them.

A large consumer goods multinational, for example, told its wholesaler customers that it won’t accept trade returns. The multinational firm told wholesalers it would neither retrieve unsaleable products nor transact refunds for them. Wholesalers, in turn, told their downstream retail customers they also won’t accept returns. The retailers responded by switching their purchases to the multinational’s distributors, and then telling the distributors to retrieve their unsaleable merchandise when they delivered orders. The distributors had no option but to get the items, otherwise they won’t be paid. The distributors then brought back the items to the multinational who found itself back to square one with BO’s it doesn’t want.

Supply chain managers label the retrieval and handling of trade returns as reverse logistics. It involves setting up systems & structures to retrieve, re-process, and/or dispose of returned items. As in every organisation, managers need to justify the viability of such systems & structures. The challenge is how to convince executives to invest in such operations, which add expenses to already losses in sales.

The ideal solution in managing BO’s is to prevent them in the first place. But because, as mentioned earlier, there are multiple root causes for BO’s, reaching a no BO scenario would take time and a lot of work.

But we aren’t alone in our endeavour to eliminate BO’s or trade returns.

The trade returns problem is a supply chain issue. Our suppliers & customers just as much have a stake in solving the problem as our businesses do. We, therefore, should work with our suppliers & customers if we are to reduce trade returns.

We can set up a reverse logistics system in partnership with our customers & suppliers. An initial purpose of such a system would be to retrieve unsaleable items as soon as the customers ask. Likewise, our suppliers would do the same in taking way unsaleable materials when we request them to do so. We would negotiate both with our suppliers & partners on how to account for the unsaleable items retrieved and the amounts to be refunded. We would need to negotiate on the value of items to be refunded given the costs we and our suppliers & customers incur in the processing (e.g., disposal, storage, salvage) of said items.

As we gain experience with our reverse logistics system, we together with our suppliers & customers can identify root causes and work to address them. We can work, for instance, on repackaging goods to avoid damages in handling or reformulating materials to lengthen shelf lives.

Bad orders, unsaleable merchandise, or trade returns are pains for all supply chain operations managers. We don’t like them; we want to get rid of them as soon as we could at least expense.

We try to manage trade returns via setting up reverse logistics systems & structures. Seldom, however, has such systems & structures been successful in stemming BO’s given the myriad of root causes for trade returns.

The reason reverse logistics systems fail is because we try to impose them on our suppliers & customers. Trade returns is a supply chain problem. It requires we working together with our suppliers & customers to solve it.

We can, therefore, get underway with a reverse logistics system in which we set it up together with our suppliers & customers. We can plan to have an efficient system that not only gets rid of items from our operations but also have one where we identify and address root causes.

The underlying principle in working with our suppliers & customers is mutual benefit. When we and our partners, i.e., our suppliers & customers, adopt it, we will have made headway in minimising the scourge of bad orders.

About Ellery’s Essays

Avoiding the Wrong Supply Chain Strategy

One mistake enterprise owners make is to use the wrong supply chain strategy for their products. The effects can be costly.

The following are some true-to-life cases:

A large steel manufacturer hires an executive who formerly worked for a multinational beverage corporation. The executive identifies 120 best-selling finished product items based on historic demand and sets inventory targets for each. Sales managers focus their efforts on the 120 items while supply chain managers produce and build inventories correspondingly. The result? Massive overstocking of all 120 items as customer demand does not materialize. The new executive didn’t realize that past demand for each of the 120 items were mostly one-time purchases for building projects. Inventories pile up resulting in depletion of the manufacturer’s working capital;
A leading fast-food chain hires executives from the consumer goods industry. The executives initiate a cost reduction program that insists on cheaper ingredients and condiments for all fast-food products. They also cut back service crew head-counts and utility expenses at each fast-food branch. The results? Customers complain about poor quality food and service at branches given lack of servers and hot surroundings due to reduced air-conditioning. The fast-food’s revenue stagnates and loses market share to competitors;
A manufacturer of snack foods signs partnership agreements with distributors to sell the manufacturer’s products to rural areas. The snack foods manufacturer’s products are light but bulky and are priced significantly low. The distributors complain that profit margins aren’t enough to cover the high freight expenses to transport the snack foods products. The result? Distributors limit deliveries of the snack food products to few but large customers to maximize delivery truck loads to save on expenses. The snack foods manufacturer’s market reach remains very limited to urban areas;
A large food corporation sells frozen meat packages to supermarkets, grocery stores, and large restaurant chains around the country. Five-star hotels express interest to buy from the food corporation but want products delivered in single packs and not in full cases. The hotels want their orders delivered in three (3) days or they’ll cancel. The corporation’s president instructs the company’s supply chain to accommodate the hotels. The result? Freight expenses soar as the logistics department assigns exclusive less-than-truckload (LTL) special deliveries for the hotels’ orders. Supply chain planners break scheduled production runs to allocate manpower to repack products for the hotels to beat the delivery deadlines. Operating expenses increase as a result and so does waste from discarded packaging materials;
An importer buys large lot sizes of vitamin products to take advantage of volume discounts on landed cost. But despite the importer’s offering of lower prices, vitamin product sales stay steady and do not grow. The importer realizes regular consumers won’t buy more than they consume, which they base on the recommended dosage per vitamin type. The result? Vitamin inventories build up and some are scrapped as their shelf-lives approached expiration.

Many enterprise owners hire executives or engage consultants that have no knowledge or experience about the products they will work with. In many cases, the executives or consultants force their own perspectives from their previous jobs into the companies or clients they engage with. The results can be disastrous as in what happened to the steel producer in the first example mentioned above.

If they don’t hire outsiders, some companies try to imitate the supply chain strategies of their competitors or of big multinationals. The snack foods manufacturer in the above example was attempting to mimic its biggest competitor who employs large distributors. The snack foods manufacturer didn’t realize that its rival’s distributors delivers not only snack foods products but also all other lines of the competitor’s consumer items as well. This allowed for frequently full delivery loads and higher cumulative profits for the distributors, which was something the snack foods manufacturer could not offer.

And in some instances, enterprises just try to force their supply chain strategies to accommodate new customers. The large food corporation in the example above did not realize that the products it sold to hotels were no longer identical to the ones sold to supermarkets and grocery stores. The products it traditionally sells are frozen foods packed in cases. The hotels wanted products in single packs. Though the frozen food item is still the same, the product for the hotels is now different due to the change in packaging. The change in packaging meant stark differences in production and logistics operations which in turn led to higher operating costs.

The case was similar for the vitamin products importer. He tried to force a change in the supply chain strategy into his marketing strategy. He thought having cheaper vitamins would spur sales. But it didn’t happen because his regular customers would naturally not buy more than what they needed, which is their regular daily dosage. The importer later realized that a promotion of his vitamin products had to go hand in hand with expanding his market, i.e., to places beyond where he was selling. His business has continued to grow as he adds more stores in new markets. He still has to realize, however, that he would need to invest more in supply chain resources in order to assure continued supply for his vitamin business.

The character of a product goes beyond its physical make-up. How a product is marketed, sold, and delivered can and does matter as much as its physical design and function. Hence, it is important enterprise owners to not only put much thought on their product’s specifications but also to place weight in the process of supplying and delivering the product.

As much as there may be experts out there who can help or there are other organizations who manage their supply chains well, it would be best not to copy but to reapply what would best fit in one’s product’s supply chain.

It always is better to buy something that is tailor-made that would fit perfectly than to get something that is ready-made but doesn’t come out well.

About Ellery’s Essays

Building the Supply Chain at Both Ends

A supply chain essentially has two (2) ends: the suppliers (e.g., vendors, service providers) and the customers (e.g., clients, consumers, users). We who manage our businesses work both ends at the same time as our suppliers see us as customers and our customers see us as suppliers. We multitask as both suppliers and customers.

In our businesses, we buy and procure from our suppliers, and we convert what we receive into products & services which we market, sell, and deliver to our customers. Our operations are interlocked with our suppliers and customers, and we find room for improvement in how productive our relationships with them are.

Structures & systems are important in our operational relationships with suppliers & customers. Our business’s structure & systems should allow supply chain managers to multitask and work productively with suppliers & customers.

Our business’s internal operational functions should be able to work together seamlessly if we are to pursue productive relationships with suppliers & customers. Purchasing professionals should buy items that will not only lead to lower costs but also higher quality of finished products & services to customers. Planners should set inventory policies that would avoid last-minute swings in requisitions from suppliers and sudden shortages or surpluses of merchandise. Manufacturing should stick to schedules and perform to the reliability targets they agreed to. Quality Assurance and Logistics workers should not quarrel over what is acceptable to receive from suppliers and what can be released for deliveries to customers. There should be one leader for our operations, one executive who will oversee our business’s operations and its relationships with suppliers & customers.

A large consumer goods firm does not share this view. In its structure, the purchasing function is a stand-alone department that reports directly to the chief executive officer (CEO). The firm’s rationale for separating purchasing is to centralise procurement of all materials, supplies, and services. At the same time, the purchasing’s job is to buy at the lowest cost, such as availing of discounts via buying in bulk or in large quantities. The purchasing department also has its own internal control standards which are subject to audit. The CEO sees constant risk especially since purchasing accounts for over 80% of the total cost of the firm’s product portfolio.

The firm’s manufacturing operations also is under a separate department with its own top manager. It’s the mission of the firm’s manufacturing department to produce at the lowest cost and highest efficiency. Production line supervisors, therefore, push for longer continuous runs of one item at a time to avoid long shutdowns from changeovers.

It comes to no surprise that the supply chain executive of the consumer goods firm who’s left to manage the planning & logistics functions complained to a consultant that he has problems keeping inventories low and meeting on-time complete deliveries to customers. The supply chain executive practically has no control over purchasing and manufacturing which makes it virtually impossible for him to initiate improvements. Meanwhile, his boss, the CEO, insists that the supply chain executive should be accountable for inventories and delivery performance!

The productivities of supply chains depend on the progress of merchandise & the performance of services which flow from the sources to the final end-users. This requires that linked businesses along their respective supply chains to have structures & systems that allow, if not enhance, these flows.

The consumer goods firm with its structure of separate departments for purchasing & manufacturing does not help in the productive flow of merchandise through the supply chain it is connected to. Purchasers didn’t relate with the firm’s customers; manufacturing managers didn’t care about where their materials came from; and logistics professionals grumbled about having too much (or too little) inventories and receiving complaints from customers about late deliveries, out-of-stock items, and quality issues.

Operations managers are under pressure to ensure integrity and internal control. But they are also tasked to serve customers, control costs, and balance inventories. Trading off one for another is out of the question. We are given the responsibility to perform all adequately, not insufficiently.

Placing all internal supply chain operations (basically purchasing, manufacturing, logistics, planning) under one authority is key to a structure that would bring about total supply chain productivity. A supply chain organisation should have one leader that unites operations to one mission with a common set of goals.

Integrating the systems within and between operations is the other key to supply chain productivity. There should really be one set of systems underlying all operating functions which not only allows the firm’s supply chain executive to easily monitor performance but also provides a platform for managers to share one common schedule, one common database, and one operations strategy.

A business from day one of its existence already works with suppliers & customers. It is imperative that our businesses have systems & structures in place to manifest into reality whatever we negotiate and establish with our suppliers and customers. Needless to say, there is plenty of room for improvement in our relationships with suppliers and customers, which originate from imperfections in our internal systems & structures.

We are suppliers to our customers and we are customers to our suppliers. We who are operations managers multitask from both ends of our business’s supply chains. We need structures & systems which enhance, not mitigate, the flow of merchandise & services through the supply chains we are linked to. When we improve our operations with focus toward our relationships with suppliers and customers, we certainly can catapult our business’s competitive advantage and attain our goals.

About Ellery’s Essays

The Real Value of Demand Forecasting

“We start our planning with the forecast.”

This is what I’ve heard in the last three (3) organizations I’ve engaged with.

These three (3) organizations often started their Sales & Operations Planning (S&OP) meetings with a comparison of forecast versus actual sales data. In most cases, the actual sales data didn’t come out close to the forecast.

In one organization, when actual sales didn’t match the forecast, the vice-president chairing the meeting would scold the sales managers. She would insist that sales managers get their forecasts right the next time. And in every next meeting, the forecasts would just be as far off from actual, and the vice-president would just rant angrily again.

Supply chain planners frequently insist on accurate demand forecasts so that they can plan production and purchasing schedules that would match actual sales. But unless the organization has only one (1) customer and only one (1) product item to sell, forecasts never would come close to actual demand. Planners would end up changing production plans and vendors would complain about the changes they need to make in their supply schedules.

Just like why we need forecasts to get an idea of what tomorrow’s weather will be, we need demand forecasts to get an idea of how much of an item will be sold in the foreseeable future. Forecasts help us anticipate outcomes and plan appropriately.

But the real value of demand forecasting is that it allows our enterprises to be more in touch with our customers. The process of forecasting begins with gathering data about what our customers intend to buy over time. And more than that, what our customers feedback would give an indication of how they view our products and services.

Academics teach forecasting via scientific formulae and statistical tools. These tools rely on historical data and extrapolate possible outcomes through mathematical equations. With advances in data science and artificial intelligence that can monitor and predict individual behaviours, organizations are developing the capability to predict buying patterns more accurately.

Forecasting, however, is still just as much an art as it is a science. There is still a margin of uncertainty with every forecast that doesn’t make it easy for supply chain planners to come out with schedules that match sales by 100%.

If our enterprises can’t rely on forecasts to accurately predict demand outcomes, then why do forecasting?

As mentioned above, forecasting starts with getting in touch with customers and it is in this activity that forecasting provides the highest value to an organization.

By talking to our customers about how much they plan to buy, we become familiar with our customers’ points of view about the business. We become familiar how our customers see our products and we in turn see their outlooks. We get to know if they are optimistic or pessimistic about the business.

In other words, forecasting isn’t about just sales numbers on a spreadsheet that supposedly tells how much would be sold in so many months. Forecasting is about assessing how interested our customers are in continuing to do business with us.

When we seek a weather forecast, most of us don’t really ask how many inches of rain there will be tomorrow; we ask whether it’s going to be sunny or rainy. In some respects, demand forecasting is the same; as much as we value how much volume we expect to sell, we really want to know if customers like our products and will buy more.

When we understand our customers’ wants and needs, how they view our products, and their plans in terms of not only how much they will buy but also how much more or less they will buy, then we would have realized the value of forecasting.

About Ellery’s Essays