When working with your suppliers there are certain things that are in your control and certain things that are not. It is of paramount importance to identify those variables in which you (the customer) have control over, and what effect your expertise and your relationship with the supplier will have on pricing. In my experience, the top three “customer-controllable” factors that will have the strongest impact on cost include: 1) effective forecasting & planning, 2) an understanding of vital requirements and accompanying regulation of superfluous demands, and 3) monitoring compliance. When these three best practices are optimized, my experience has shown it will result in lean, efficient, and symbiotic relationships between customers and suppliers. Here I will talk about the first best practice: Forecasting & Planning.
Accurately forecasting consumption and demand of products/materials from your suppliers and communicating it, enables effective planning and allows the supplier to run a lean operation with rapid product turnover. However, when suppliers and customers are not aligned on expected volumes, delivery schedules, and appropriate run sizes (in the case of custom materials), excesses and shortages of product may occur that will have detrimental consequences to pricing and service levels. If there is an excess of inventory, this inherently takes up warehouse space in which the supplier absorbs this cost. If a supplier is consistently experiencing this with a customer, they typically will hedge the cost of extra or “flex” warehouse space and will absorb that risk in the form of higher unit pricing.
On a recent packaging project I participated in, a similar situation to the one I describe here took place in which the supplier had over a thousand units of finished goods taking up shelf space in their warehouse because the customer ordered a years’ worth of expected inventory and only ended up using half. Oftentimes a misstep in forecasting is a result of demand shifts, product recall, or other uncontrollable factors from the buyer’s perspective; however, sometimes they result from conscious decisions that are well-founded in their making, and tight controls should be placed in a similar circumstance. For example, if a buyer over commits to volumes in order secure competitive material prices a supplier will often stipulate large run sizes. In other words, the supplier agrees to the customer’s price demands by running larger quantities of product at once. This results in efficiencies from the suppliers’ standpoint and the ability to order materials from their supply chain in bulk (thereby lowering material costs). The higher cost of this practice to the customer comes from larger run sizes exacerbating the inventory levels (over ordering) in a situation where forecasted usage may have been slightly off. Again, though the intention of securing cost savings was well-founded in this example, the customer agreed to terms that exposed them to compounding risk as run sizes go up, only worsening the inventory that could potentially be stuck in the suppliers’ warehouse which drove up unit pricing in the first place.
During our market evaluation and sourcing effort, we realized that consistent poor forecasting practices were the primary driver for higher pricing from the incumbent supplier when compared to the alternate suppliers’ pricing in the market. As a result of our RFP and supplier optimization efforts, the obsolete inventory was bought out scrapped, or repurposed in order to take the first step towards fixing the problem. The long term issue however, i.e. the mistrust in accurate forecasting by the supplier and bulk run sizes indirectly initiated by the customer still needed some fixing.
This situation had transpired for over 15 years, where the customer would approve large run sizes in which they thought they were getting a “sweet” deal. Once it was identified that there were recurring forecasting and planning issues, which were being magnified by the large run sizes, the solution was clear. By implementing a forecasting and ordering best practices program (optimum inventory triggers, smaller run sizes, enhance forecasting capabilities, and consistent communication, etc.) excess warehouse space issues were resolved and true lower cost initiatives that offered a sustainable warehousing model were enacted and resulted in a win-win scenario for both the customer and supplier.