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

Multi-Tasking: Burning the Candle at Both Ends

We work in a world where multitasking is the norm. If we don’t work on at least two (2) things at the same time, chances are we won’t get much done in a day.

Some of us admire those who multi-task while some others frown on those who do. Those who are against multitasking argue that it is the result of poor time management.

But everyone is different.

There are those of us who are high-income professionals who earn plenty of passive income and could afford to spend a great deal of time for travel & leisure.

There are also those of us, however, who are low- to middle-class income earners who live hand-to-mouth from pay-check to pay-check, with very little in savings to show.

Many high-income earners living the easy life wouldn’t espouse the thought of multi-tasking, as they’d see no rationale for it, given they could buy resources & delegate time-consuming duties to subordinates.

Low- to middle-income earners would likely be where we’d find most multi-taskers. They’d be those of us who are not only doing the time-consuming duties delegated by high-income earning superiors but also, they’d be the those of us who would try to get as much more work done, especially if that work will result in either reducing expenses or generating additional hard-earned cash.

We can liken multi-tasking to burning a candle from both ends. We get double the light by burning a candle’s wick at each end, but we shorten the candle’s useful life by half. Hence, as Ms. Millay poetically stated above, the double-burning candle won’t last as long but for the time being, we at least would have a “lovely light.” We reap double the benefits in half the time when we multitask.

Multitasking has become more of a requirement than a choice. Some so-called self-help experts say we have the freedom to do whatever we want; we have the power to be proactive; we are free to decide how we lead our days.

Yeah, right. To the high-income earners who have money & time on their hands, that may be true. But for we who are low- to middle-income earners, opting to do whatever we feel like shall likely result in negative consequences.

Most of us who are not-so-well-to-do face challenges which constantly demand our attention and actions. Our superiors assign us tasks which we can hardly refuse. We cannot ignore responsibilities to our families or our households. Government agencies command us to comply with rules, regulations, and requirements, especially if it involves applying for benefits such as social security or public health insurance coverage.

We are saddled with tasks which we are bound to do within limited periods of time. For higher income earners, they could afford to let someone else do these tasks for them. For low- to middle income earners, we would be that “someone else” on top of what we’d need to do for ourselves and our families.

Hence, we multi-task out of necessity because we don’t have the luxury of time. We don’t have the freedom to choose because opting for the alternatives would bring forth unenviable outcomes.

We multi-task to ward off uncertainty and avoid adversity. We aim to get things done as much and as fast as we could. In short, we try to be more productive with what time we have available.

About Ellery’s Essays

Credits:

The ‘Suki’ Way to Supply Chain Excellence

On a typical early morning at any wet market in the Philippines, groups of housewives & domestic helpers would be seen moving from one vendor’s stall to another to buy fish, vegetables, poultry, & meat. Most of what the stall vendors sell are fresh, or just delivered via dealers or transporters who retrieved the products from provincial farms, fisherfolk, and cooperatives not more than twenty-four (24) hours before. The vendors are familiar with most of the housewives & helpers, and they are often prepared with the items they know their regular customers will buy.

The vendors tag their regular customers as “suki.” A suki is a Filipino term for “regular customer.” It is said to have been derived from the Hokkien Chinese phrase “tsu kheh” (meaning: “primary guest”). One is called a “suki” because of the frequency of their patronage.

Suki customers are not limited to Philippine wet markets. We see them in just about every trade segment such as retailers, dealers, wholesalers, fabricators, & import-export businesses. Suki relationships are quite more visible in small enterprises, as many owners rely on regular customers for much of their sales.

The suki customer relationship isn’t a new thing; it’s been around since ancient history as in when individuals began trading with one other. We like to buy from whom we are familiar with and likewise, the same to whom we sell to.

Malls, department stores, and niche retail chains had changed the business landscape in the 20^th century and had grabbed many customers from the traditional mom & pop retail stores, forcing many to close. It didn’t help that the CoVID-19 pandemic from 2020 to 2022 also compelled many customers to purchase from online traders as most brick & mortar retailers had to shut their doors due to mandated restrictions against face-to-face transactions.

Despite the adversities, many small enterprises persisted in the suki way of doing business. And many of these small businesses not only survived but flourished.

Small businesses innovated with the times such as by regularly communicating with their suki customers via online messaging, smartphone texting, or by simply calling them on a traditional landline telephone. Wet market vendors during the CoVID pandemic, for example, would deliver to their suki customers after receiving screenshots of the latter’s handwritten items-for-order lists. Customers would pay either in cash or via smartphone wallet transactions.

The suki customer relationship inspires us to the following insights as to what supply chain excellence is all about.

Not only customers but vendors & service providers are key to supply chain success.

We’ve heard the line that “customers are number one.” Or that our businesses should be “customer-centric,” or “customer-focused.” Just as much as there is some truth in these terms, we should place just as much emphasis on how we deal with our vendors & service providers, those we buy our materials or procure services from. The quality of what we input into our supply chains determines how good our output will be to our customers. “Garbage in, garbage out” is a phrase we should remember if someone believes we should take our vendors or service providers for granted.

2. Communication counts.

We invest a lot in information systems, as in state-of-the-art computers and software. But how much do we invest in setting up lines of communications between ourselves and our vendors, service providers, & customers? The irony is that we don’t have to invest that much if all it takes is to regularly pick up the phone and call our partners to ask them what they will buy, to inquire regarding the availabilities of needed materials, or to schedule services.

3. Supply chains rely on relationships.

It’s not enough that we preach policies of friendliness with our partners, or we establish lines of communication. We should set into our supply chain strategies the building of relationships with those we do business with. Relationships are what supply chains are made of and we should value them.

4. We should treat every vendor, service provider, and customer with equal respect.

Our supply chain strategy shouldn’t be about narrowing down our relationships to the few customers who buy the most from us, or those group of vendors whom we buy the most important items for our operations. As much as it’s worth to work with a few, we should aim to have equally prosperous win-win relationships even with the customers, vendors, & service providers who don’t have the majority share of our businesses. The rationale for treating every vendor & customer equally is that we boost the growth opportunities of our relationships. Every relatively small customer or vendor are seeds that we can reap potentially huge harvests from.

5. We should not stop seeking continuous improvement not only in our operations but also in our relationships.

As supply chain professionals, we tend to focus inward when there is pressure to do better in our operations. What we should do instead is to look outward, with our partners, in seeking better results. Working with our partners is a first step and not one that comes after working on our internal operations. Supply chains encompass the processes from source to the final end-user and go beyond the borders of our enterprises. Improving our relationships benefits the overall supply chain and our enterprises as well.

6. The ideal supply chain thrives on partners working together towards common goals.

The informal relationships between enterprises and their suki customers arise from common ground between each: a rewarding win-win business.

Many enterprises, especially large corporations, do a lot of organisational development within and between departments. Many hardly work with their vendors, service providers, & customers. Small businesses can exploit this oversight of larger firms by simply treating every customer as a suki, and offering to be one for vendors & service providers.

Mogu Mogu is a product line of nata de coco beverages & snacks from Thailand. When the Philippine dealer introduced Mogu Mogu to Filipinos in 2008, it “started out with distribution in schools, events and some major chains, growing year by year. In less than five years, the company was able to complete the map, and have placements in all regions of the country.”

I witnessed how the young chief executive of the Philippine distributor would sit with customers and talk about the Mogu Mogu brand with them, ranging from prices to product placements. The owner treated every customer, as in every individual retailer, like a suki. He didn’t stop at a retail chain’s executive offices but instead made the effort to visit individual stores or branches to talk to proprietors. Because he made himself available and regularly communicated, retail stores would be well-stocked with Mogu Mogu items. More than fifteen years later, Mogu Mogu is a multinational brand available in just about everywhere in the Philippines as much as it is globally.

Mogu Mogu overcame obstacles from established beverage & snack multinationals simply by treating customers like their suki. They did likewise with their service providers—their dealers & distributors—who placed Mogu Mogu items in groceries, supermarkets, and mom & pop sari-sari stores (corner stores located mostly in small villages).

The traditional suki relationship offers lessons for supply chain optimisation. Simply, it tells us that our relationships with partners, i.e., vendors, service providers, & customers, are not only important in principle but also worthy of cultivating in terms of communication and investment in collaborative improvement. And it’s not only just a focus on a few but an emphasis on all—every vendor, customer, & service provider deserves our attention.

The benefits may not come instantly but when they do, we would not regret it.

About Ellery’s Essays

Supply Chain Improvement Doesn’t Start with Fixing One’s Own Operations

It’s a popular notion that we fix our operations before we think about collaborating with our partners, i.e., vendors, service providers, & customers. We, after all, would like to show a position of productive strength when we negotiate with our partners as we try to convince them to enrol into whatever agenda we have (e.g., higher discounts on purchases, shorter terms of payment from customers).

I would, however, advise the opposite. We should negotiate and collaborate with our partners before we invest in improvements.

Supply chains are composed of not only operating relationships between departments within an enterprise but also those between our enterprises and our partners. Supply chains don’t stop with the vendors or our customers we directly deal with but continue with connections with upstream enterprises who sell to our vendors and with the downstream individuals who buy from our trade customers. Supply chains commonly have multiple sources than single ones as various components, parts, & ingredients would make up the merchandise that flow through them. And likewise supply chains would have multiple final end-users for the different items & services that stem from their links.

In short, our enterprises aren’t the centres of the supply chain world. Supply chain productivity is dependent on how well we as linked organisations work together. It is therefore logical that we prioritise negotiating and collaborating with our partners.

We don’t have to be in positions of strength to negotiate with vendors & customers. Rather, we must have strong clarity regarding our values & principles.

And we should listen and be flexible as well to the insights our partners may convey about their values & principles.

We hear about large corporations flexing their muscles and arm-twisting suppliers to adapt to their rules, standards, & terms of payments. Some large corporations ‘invite’ vendors and tell them they are lucky to be chosen. But if the vendors don’t comply with the conditions the corporations set, the corporations would expel them immediately, without hesitation.

Some multinationals would also even dictate to customers on how much to buy and how much & when to pay. Some consumer goods companies, for example, would choose a few customers to be exclusive dealers, and punish those who encroach and sell in another customer’s ‘territory.’

These influential enterprises see this kind of domination as advantageous as they believe it expands their market share and provides a means for revenue growth.

But a domineering style has its limits. Newcomers (who some firms would call disruptors) would find creative ways to work around and compete with the established behemoths. Individual online traders, for example, would sell directly to consumers, bypassing the middlemen and exclusive dealers.

Vendors also won’t sit still for long under what they would consider oppressive relationships. Some would study the standards of their large customers, learning their ways of management, and develop more superior products & services. We had seen this happen among former semiconductor vendors who introduced their own product lines against the likes of Apple, Intel, and Motorola.

Supply chain improvement doesn’t take place without at least some basic collaboration with partners. A big successful business enterprise may at the onset commandeer the supply chain of its products & services for some time, but eventually, it would be to its benefit to work with partners, no matter how much smaller they are.

Of course, we as entrepreneurs or managers should be always aiming to expand our spheres of influence. But to do so requires empathy, synergy, and a win-win philosophy. It would be a laborious path, certainly, but the rewards would be long-term.

Supply chain improvement begins with working with partners, not without them.

About Ellery’s Essays

The Two Fundamental Tasks of Business

A business enterprise has two fundamental tasks:

Create demand;
Fulfil it.

All activities of an enterprise revolve around these two tasks.

Demand creation is about cultivating an idea, enrolling followers to that idea, and manifesting that idea in products or services that the followers would buy.

Demand fulfilment is about making available or delivering those products and services that the followers want to obtain.

Marketing and selling products and services traditionally are the activities of demand creation while the procurement, manufacture, and delivery of products and services are the basic elements of demand fulfilment.

Demand creation and fulfilment go hand in hand. The success of each depends on the other. Demand created and fulfilled results in added value to the business enterprise.

The tasks of demand creation and fulfilment are not necessarily limited to Sales, Marketing, and the Supply Chain. Finance, Human Resources, and Research & Development (R&D) play active roles as each provides the resources and strategic guidance to the enterprise’s management in the exercise of both tasks.

The manifestation of demand is the customer’s order or desire to purchase. This comes in many forms such as consumers choosing and paying for items at the supermarket, the purchase orders from a buyer to a vendor, or a signed contract for importation of merchandise.

There are some private companies that stress demand creation over fulfilment and there are others who focus more on fulfilment than creation. Entrepreneurs starting out would tend to prioritize demand creation while mature corporations may opt more for demand fulfilment.

Business firms that sell products that are in constantly high demand but in which the firm has limited resources and capabilities would probably put more emphasis into demand fulfilment. Cement companies, for instance, would be planning more on increasing capacity than on advertising especially when the construction economy is strong.

Consumer goods firms, on the other hand, would invest heavily on marketing and sales to spur demand while at the same time stress on delivery reliability. Cosmetic firms, for instance, would spend heavily on promotions and display counters at department stores to attract customers while at the same time stock inventories of multiple items to ensure outright availability.

Demand creation and fulfilment are not limited to enterprises with tangible products. Service companies also fundamentally create and fulfil demand. Insurance companies, for example, aggressively sell life and non-life coverages and fulfil the demand via signed policies.

In a world where business has become more complex due to issues such as corporate governance, climate change, disruptions, and social upheavals, we sometimes tend to lose focus. As much as demand creation and fulfilment are fundamental to our business, we can be distracted by what other people say are more important things to address.

Business is about reaping value for stakeholders. No matter how cynical it may seem, we manage our enterprises to translate ideas into the reality of demand.

“Great things in business are never done by one person. They’re done by a team of people”

-Steve Jobs

About Ellery’s Essays

Why We Shouldn’t Ignore the Purchase Order

Vendors selling to a manufacturing company were really angry, a newly hired purchasing supervisor discovered on her first week on the job. They complained that their bills weren’t paid for months after they delivered materials or parts. At the same time, supervisors from other company departments were voicing complaints that their purchase orders (PO’s) hadn’t been processed for many weeks.

Upon inquiry, the company’s accountants told the purchasing supervisor there weren’t any pending long unpaid bills on their records. The supervisor also checked her computer and found no pending PO’s to be filled, other than what she already received since her hiring date.

The supervisor checked the purchasing computer and saw that there were missing PO numbers. She made a thorough search of the purchasing office and discovered two boxes of PO’s that were underneath a desk of a former employee. The PO’s, which were unsorted and dated up to two years before, consisted of undelivered PO’s and PO’s that already were fulfilled but were left unpaid and unrecorded in the company’s accounts payables.

When the purchasing supervisor reported the discovery to the company’s finance manager, an audit was done which showed the company had staggering debts to vendors. The company couldn’t outright afford to pay the debts at once.

Angry vendors blacklisted the manufacturing company and refused to sell to the company unless the company paid cash for new purchases. Because of tight cashflow, the company could only buy materials in small quantities. Delays in inbound deliveries caused shortages and disruptions at the manufacturing company’s production lines which resulted in late deliveries to customers, who in turn stopped buying the company’s products.

This is a true story and a sad one. But it didn’t have a hopeless ending. The manufacturing company eventually settled its bills although the company’s purchasing department had to rebuild relationships with its vendors.

In many accounting systems, PO’s that are yet to be delivered by vendors or PO’s that have not yet been submitted to the accounting department are not yet considered payables and are therefore not yet included in financial reports. This would distort financial statement reports and hinder management of cashflow.

PO’s are therefore a blind spot in organizations. As operations managers request and seek approval for them, they are not visible as liabilities. This can create sudden problems for companies just as what happened to the manufacturing company mentioned above.

Internal audits would catch this problem but only if or when audits are done. Absent a visible purchasing management system, managers wouldn’t be seeing the status of PO’s. This lack of visibility of PO’s can upset a firm’s budget and financial strategy.

An energy company allocates a sizable budget for maintenance every fiscal year. The company’s engineers submit PO’s to requisition spare parts or to contract services for repairs and maintenance of equipment and buildings.

The engineers, however, tend to submit most of their PO’s towards the last quarter of the year to use up any of their unspent budgets. The end-of-the-year rush of PO’s would spike spending, push payables up, and cause a drain in cash-flow. As some PO’s are submitted at the last few days of the final month of the fiscal year, a good number of purchase order liabilities would lapse into the succeeding year which would disrupt financial cash-flow forecasts.

The management of PO’s depends a great deal on the purchasing manager. Purchasing managers are responsible for instilling discipline in how PO’s are processed from requisition to bidding to negotiation to fulfilment.

But interestingly, there isn’t much discussion about how to manage PO’s. When it comes to purchasing, more of what are talked about are collaboration and negotiation. Purchase orders belong to a basic system that doesn’t receive much recognition.

In some companies, requisitioners for materials, parts, and services sometimes bypass the purchasing department and order directly from vendors. When asked, their reasons from range from “I need the parts urgently” to “purchasing is too slow.” When it becomes normal for employees to buy directly, purchasing departments are left just processing orders and payments. Costs can run sky high as buying becomes uncontrollable.

A basic PO system simply needs clear policies, procedures and enforcement to set standards to function well and contribute to a company’s budget and cashflow strategy.

It starts with visibility and that means regularly updating the purchase order database and periodically reviewing reports. It continues with consistently acting on requisitions and moving the PO’s through bids, negotiations, and fulfilment in a manner that is timely and on target to pre-set performance standards. Direct purchases should be avoided, if not prohibited.

Just ensuring PO’s don’t remain pending too long and that they are processed for payment in a timely manner can be a big help in improving reliabilities of supplier deliveries, not to mention maintaining mutually beneficial relationships with vendors.

Actively managing the quantities, payment terms, and the timing of PO’s in coordination with requisitioners can make a big difference in managing working capital. Finance managers shouldn’t worry about spikes in procurements.

Purchasing is not just about bidding and negotiating for better value. It is also about how purchases themselves are managed within the confines of an enterprise’s internal supply chain. There is no dispute that purchasing’s key role is ensuring what is bought shall deliver the best value to an organization. One just should not forget the value of the system that governs the buying itself.

About Ellery’s Essays

Collaboration: The Secret to Supply Chain Success

It’s hard to find a supply chain success story. Either there isn’t any or enterprises would prefer to keep it private, not wanting to share any secret they consider proprietary.

Some so-called experts (ones like me who write blogs and claim they are) say companies like Apple, P&G, Walmart, and Toyota are supply chain successes. But these are companies, individual stand-alone enterprises. They don’t represent their respective supply chains; they’re just components or links. True, they may dominate their vendors & markets, but it does not necessarily mean their supply chains are wholly successful.

What in the first place is a successful supply chain?

Some would say that they are the ones who consistently deliver to customers at the right time, right quantity, right quality, at lowest cost. Others may say it’s one that simply fulfils demand to the satisfaction of customers. Or it’s the steady stream flow of goods and services through a series of operations, in which inventories are kept to a minimum, if at all.

A large corporation that sells food condiments boasted a 98% order-to-delivery performance, i.e., it fulfilled its customers’ orders on-time and complete just about always. Two of its biggest customers, however, say that’s false. They say that the condiments corporation order-to-delivery performance is at best 60%, in which the customers slapped penalties for the 40% of deliveries that are late or incomplete. The corporation tells its stockholders & employees it is a success, but its customers claim it’s a laggard.

Supply chains aren’t limited to one enterprise. It’s made up of linked participants: the enterprises or organisations which trade goods or services with one another. We see supply chains via activities such as the sourcing of raw materials, the manufacture of merchandise, the storage, handling, & conveyance of goods, the execution of services, and the exchange of information between customers, vendors, & service-providers.

The successful performances of one enterprise’s operations, however, do not necessarily translate to the success of supply chains in their entireties. Enterprises are dependent on their vendors, customers, & service providers, as much as they are independent in how they manage themselves. Enterprises define their own standards, plan their own strategies, and decide whether their own performances are up to par or not, but they don’t dictate to their vendors & customers.

Are there supply chains that consist solely of one enterprise? Some of us may cite the armed forces of nations. Armies of countries, federations, & empires set up their own infrastructure and oversee their supply lines as they defend or conquer their territories. The Greeks sailed ships, the Romans built roads, and the notorious Wehrmacht of World War 2 Germany constructed autobahns & railways to transport troops & war matériel quickly to front lines. The success of a sovereign country’s military may be traced to the success of its supply chain.

But single entity supply chains are more of a myth than real. Logisticians of leaders of vast empires like Alexander the Great and Genghis Khan had to negotiate with farmers, fisherfolk, livestock breeders, & villagers to obtain food & supplies. As much as they could threaten and subjugate those who wouldn’t agree, the benefits of cooperation and contracts outweighed the costs (e.g., there was no long-term worth to pillaging a village which wouldn’t be able to supply anything in the aftermath). From the past until present, there is hardly any supply chain with one dominant or single entity. Any successful supply chain would have to have at least some sort of synergistic relationship between linked participants. Militaries depend on vendors & contractors. Large conglomerates need to convince consumers to buy their products.

It’s hard to find successful supply chains, and we can that in everyday challenges. We as customers complain about not getting our products on time or sometimes, not at all. We see empty shelves in supermarkets. Some of what we buy don’t meet our expectations. Ships lose merchandise at sea. Inventories are too much or too little. Soldiers in the battlefield didn’t receive the right weapons or uniforms. Employers lay off workers because of lack of components on the production lines. Citizens clamour for food in one country while farmers throw away rotting vegetables in another.

What makes supply chains successful is not in how well enterprises manage their own operations to prevent or handle failures but in how linked enterprises work together. Linked participants must agree among themselves what constitute success for their supply chains, otherwise there will inevitably be failure from the very start. A vendor may agree with an enterprise on performance measures but a supplier to the vendor may have a different idea. The same goes down the line to customers and their trading partners.

Supply chain success begins with consensus from linked participants on what successful means. Consensus requires negotiation and collaboration. Adversarial relationships must be avoided. Synergy must be the goal and the standard. We succeed when we work together, not by trying to dominate.

We may recognise supply chains as visible models to better manage the flow of goods and services from sources to end-users. But until we as actively linked participants realise the need to collaborate and agree on what would make our supply chains successful, we will continue to live with non-optimal unproductive relationships that shall lead to frequent failures.

Supply chain success will remain elusive as long as we don’t cooperate.

About Ellery’s Essays

My Phones Die Once a Month

Every month, like clockwork, the telephones at my office and warehouse die. As in no dial tone. As in no one can call in and no one can call out. Sometimes they are dead for a few minutes; sometimes they are dead for a week. The point is they die at least once a month, without fail.

My office is a leased space on the second floor of a school & office supply retail store. When my office phone dies, it means the phones of the store died too. Our neighbours’ phones also die at the same time, making it obvious that the problem isn’t due to a local circuitry glitch within our office or warehouse premises.

Why do the phones die? I had asked the question over and over whenever I report my phones as ‘out of order’ to PLDT, the very large telecommunications company where I subscriber my telephone services from. PLDT does not give me an answer beyond what it says is a ‘network outage.’ In my opinion, ‘network outage’ and ‘out of order’ are synonymous, therefore PLDT just parrots what I’m reporting and does not tell me the cause. The short answer is I don’t know.

PLDT seems to want to tell me the causes of my dead phones are none of my business, and so, they just tell me to ‘wait.’ They frequently tell me to wait like from 24 to 36 hours for what they call ‘service restoration.’ They sometimes give me a ticket number which I’m supposed to punch in to their portal whenever I’d like to follow up the ‘service restoration.’ And whenever I do follow up, I get the same canned text message: ‘the restoration of your service is still in progress,’ which in translation means ‘wait.’

I (and I would assume anyone who works in an office) can’t work productively without a landline phone. True, I (and just about everyone) possess smartphones which I (and just about everyone) would use in lieu of busted landline phones. Wireless services in the Philippines, however, is dismally horrible in which users suffer bad signal coverage dropped calls, and awful reception. Using the smartphone is also more costly than calling via a landline.

I have tried contacting human beings in PLDT when it looks like my telephone service won’t be restored within the day of reporting. Often, I end up talking to a chat-bot, which is a robot that responds with programmed answers. There were times I thought I was talking to a human only be realise it’s a chat-bot, when the ‘human’ kept on saying ‘I don’t understand what you’re saying’ to my questions.

I did go a few times to one of PLDT’s customer service centres, which are mostly located in shopping malls. Every time I visited, I’d find myself spending 2-3 hours waiting till a human behind a counter could talk to me. And when I did, the human would tell me to again (yes, you got it) ‘wait’ while he or she follows up via sending a message to whoever is in charge of repairs (PLDT won’t tell me who this would be nor would they provide a contact number).

We can conclude that whatever a subscriber does to expedite an urgent request for repair of dead phones is frustratingly futile. With our phones out of order, I, the school & office supply store, and my neighbours cannot receive calls from customers or clients. My business, the school & office supply store’s business, and my neighbours’ businesses suffer. Lucky us if PLDT repairs our phones quickly; poor us if it takes days.

Many impatient PLDT subscribers complain about their out-of-order telephones in social media but their rants hardly attract the attention of public news outlets or the government, specifically the Philippines’ National Telecommunications Commission (NTC), the agency supposedly tasked to tackle the quality of services of telecom companies. For all the complaints and the losses from once-a-month dying telephones, there is hardly any discussion. We can only speculate that government and media don’t want to take on PLDT because it is a very big company.

For ordinary subscribers like me, the school & office supply store, & my neighbours, the options left for us are to wait despairingly for ‘service restoration,’ and spend money on more expensive albeit poor quality smartphone services.

It’s another fact of life in doing business in the Philippines in which its so-called business-friendly environment is merely a myth.

About Ellery’s Essays