QUICK NOTE: After shooting this week's Two Minute Warning, news broke that some of the West Coast ports experienced labor disruptions as negotiations between the ILWU and PMA near the one year point. Yesterday, we sent out a note briefly explaining the situation. In case you missed it, we encourage you to read the note. And if you'd like a checklist of things to do in light of the disruption, sign up here.
We appreciate the responses that we have received to our recent Two Minute Warnings that have focused on understanding the correlation between how a company's supply chain practices and processes can impact a company's balance sheet.
Some of the responses have asked for examples that practically illustrate this correlation. With that thought in mind, let's take a look at how your supply chain practices are impacting your inventory.
I cite this example because recently I saw an urgent post on an association discussion board from a company president who was dealing with a supply chain disruption. They were in critical need of a few parts to keep their production line running. Absent these parts, his company was at risk of having to shut down one of their production lines.
Aside from wanting to ask that president if he was aware of how much having to shut down a production line for a day would cost his company, I could have asked something even more important: "How did your company let such a critically important part be in such short supply?"
I say "could have," but candidly, based on our webcasts and interviews with supply chain experts such as our friend and MIT Professor David Simchi-Levi, I think I already knew the answer: Like many, many other companies, this company had probably not mapped or stress tested their supply chains to identify the difference between parts or inventory that are necessary versus critical. When you run out of critical parts or inventory items, your operations are disrupted and your company is literally at risk of having to shut down.
And when your company is running on LEAN principles and doing whatever it can to eliminate waste, the absence of stress testing or at a minimum conducting a risk assessment analysis of your supply chain magnifies the risk. To mitigate the risk factor, companies change their inventory strategy from being Just In Time (JIT) to Just In Case (JIC).
The net result is that in a JIC world your company has extra inventory on its balance sheet. And that brings inventory carrying costs and the following question to the forefront: "Are you aware of how much each extra day of inventory is costing your company?"
Another area of your supply chain with balance sheet connections is your inbound supplier management program. The data we generate through our services can be an asset in helping you develop a supplier management program. This isn’t a theoretical exercise. Back in the 90s, we worked with Walmart to develop and launch their Must Arrive By Date (MABD) program. Their team used data to identify opportunities to work with their suppliers and be able to measure critical metrics like a supplier's fill rate and on time performance.
Folks, we are just scratching the surface here. Your supply chain processes are affecting your cash conversion cycles, operational efficiencies, and several other areas. At TranzAct we are passionate about providing timely and accurate data that helps companies identify opportunities for improvement that can help build a better balance sheet.
If you’re not sure where to get started, we’re here to help. To learn more simply give us a call, send us an email, or schedule time to meet on Calendly.
BY MIKE REGAN, CO-FOUNDER OF TRANZACT
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