Chapter 23
SUPPLY CHAIN MANAGEMENT

IN This Chapter
Managing logistics
Purchasing basics
Warehousing and storage
Inventory management
The green supply chain

Introduction
Your supply chain consists of all the interdependent business processes that go into selling your product, from purchasing, to manufacturing, to warehousing and inventory management, to distribution. Every business has its own supply chain, as well as its position in the supply chains of other businesses.
In some ways, “supply chain” is a misleading term. “Supply cable” is a better one. A chain consists of links in sequential order, while a cable is made of intertwined strands. You can think of each of these strands as a channel—a set of interdependent activities that run from the beginning of the cable to its end.
For example, the manufacturing channel refines raw materials and assembles parts to create a finished product. The logistics channel delivers the product when and where customers need it. The human resources channel recruits, trains and maintains an efficient workforce. And the communications channel binds all the other channels together in their complementary functions. To complete this analogy, note that the strands of a cable are much stronger together than apart!
The Supply Chain and Logistics Worksheets will help you prepare this important part of your business plan.
MANAGING LOGISTICS
To assess your supply chain, you need to look at everything involved in sourcing, manufacturing, storing, selling, shipping, tracking and servicing your product.
Materials and equipment. What materials, parts and equipment do you need to produce your product? Where will you get them? Do you have the space you need to manufacture your product? Will product substitutes perform as required? Will your existing equipment be able to meet increased sales, or will you need to expand?
Suppliers and partners. Who are they? Where are they? Can they still meet your needs if you grow or change your business?
Transportation. How will you ship your items? Do they require special handling, documentation or licenses? Can your transportation system handle an increase in volume if sales take off? If you offer services, how, when and where will you deliver them?
Business location. Do you need an additional or new retail outlet, warehouse, factory or distribution hub? How much parking do you need for customers, employees and company vehicles? What are your zoning requirements? Should you be in a retail or industrial district? Do you need to be near other facilities (e.g., an airport, train station or shopping mall)?
Other technology. Do you need telephone networking systems? Inventory management, customer management or accounting software? Cash registers or checkout scanners? Credit card and check processing? Alarm or security camera systems?
All plans and decisions, from choosing a new facility to choosing partners, should be based on an understanding of your supply chain and your place in your partners’ supply chains.
Cost Control and Performance Audits
Cost and performance auditing is the process of evaluating and improving your company’s efficiency by looking closely at its supply chain. There are two kinds of audits: internal (by your accountant), and external (through a public accounting firm).
The advantage of an internal audit is that it costs less to perform. An external audit is more expensive, but often identifies problems that your own staff might not.
A comprehensive audit involves looking into every aspect of your organization for possible areas of cost cutting and control. Through this process, you can find out whether materials orders are being matched with requests, or if one of your employees might be stealing from you.
Purchasing Basics
Your business should have formal standards and procedures in place for its purchasing activities in order to ensure that inventory items arrive when needed. One method of doing this is to create a purchasing plan that addresses:
Inventory needs
Order and reorder schedule
Finding qualified suppliers
Preparing a pre-qualified bidders list
Soliciting and evaluating bids
Generating materials requests
Assigning purchase orders
Evaluating cost and quality
Ensuring timely delivery
Evaluating transportation alternatives
Controlling transport costs
Inventory management
Setting and meeting quality and environmental standards
Meeting legal requirements
Evaluating Suppliers and Vendors
Where do you get your raw materials and other supplies? What alternative sources do you have? Today, these questions are more important than ever. Even if your supplies come from a warehouse a mile away, that warehouse may receive them from suppliers all over the world.
Just as your marketing goals guide you in pricing your product, they should guide you in choosing suppliers and vendors. A low price does you no good if the product doesn’t fit your strategic goals—or can’t be delivered when you need it—so always consider these criteria when evaluating prospective suppliers:
Quality and service
Location
Technical skill
Reputation and business ethics
Competitive pricing
Cultural fit and communications
You need to feel confident that your suppliers can meet your needs, so visit their facilities and compare them to those of rival companies. Is their facility clean, well ordered and efficient? Can you communicate well with management? Is their price competitive? What value can they add? What are their terms of sale?
Once you choose a supplier, create basic performance criteria and regularly review the company’s performance. Are their deliveries consistently on time? Is their quality management adequate? Have issues with their products or services caused problems downstream for your customers? Are their communications timely, professional and accurate?
When buying materials produced outside the United States, assess foreign firms just as carefully as you assess domestic firms. Check their references carefully, both in their home country and in the United States. If an order is large or important enough, consider visiting the supplier.
You’re only as good as the weakest link in your supply chain, so look for partners who will match your dedication to quality and customer service.
Expediting
The goal of an expediting department is to ensure that suppliers follow through on their commitments regarding scheduled shipping dates. At first, your purchasing and expediting departments may consist of a single employee. As your business grows, it pays to divide this activity into separate functional areas.
Your expediting department should:
Report on the status of materials that are due to be shipped.
Alert management to errors and delays.
Identify and resolve problems that might delay shipments.
Coordinate deliveries with vendors.
Report on each vendor’s performance.
…
My brother and I have been fixing bikes since we were old enough to ride them. Being kids, we rode them hard on terrain they weren’t exactly designed for—like rail yards, and escalators in abandoned malls.
Our parents made it clear early on that if we came home with any more broken bikes, it wasn’t their problem. So we didn’t have any choice but to learn how to do repairs ourselves.
Josh had a real knack for it. Our dad was an engineer, and I remember him coming into the garage to cuss us out for getting into his toolbox. But then he took a look at the repair stand Josh had built, and he was so impressed he forgot all about being mad. We had open access to the tools after that.
CycloPed Design started out as the all-consuming hobby of brothers Josh and Tim Horvath. Through trial and error, they’d taught themselves everything there was to know about bike repair and maintenance. After graduating from Schoolcraft College in Livonia, Michigan—Josh with a degree in engineering, and Tim with a degree in marketing—they began designing and selling their own bicycle parts.
Theirs was a niche business that relied on its best seller: a patented rubber/silicone brakepad. Josh and Tim imported their patented rubber and silicone mixture from a chemical company in Salvador, Brazil. It was then shipped in block form to their small warehouse facility in Livonia.
There, the brothers and their team would mold the rubber into brakepads and ship them to high-end bike manufacturers all over the world.
…
Quality Control
In the context of purchasing, quality control refers to checking the quality of inbound materials. It should start before a purchase order is issued and continue with periodic checks to ensure that all materials meet your specifications.
There are three ways of looking at quality:
Quality as an absolute standard is the typical layperson’s conception (e.g. “pure” gold; the baseball player with the most home runs; Grandma’s cherry crème pie, which takes the prize at the county fair every year). The standard is objective in that it can be measured, and subjective in that most people agree that it indicates absolute quality.
Quality as serviceability. If you’re a contractor, would you use high-quality redwood for the studs behind the wallboard? And if you own a diner, would you use prime beef for a $12 rib-eye steak? You wouldn’t, because a lower grade is serviceable for the price.
Quality as meeting defined requirements is often confused with the other two definitions. It may be the most important in terms of commercial sourcing, because the supply chain is customer-driven. If you think of customer requirements as the “demand” part of “supply and demand,” then it’s easy to understand “supply” as the activity of meeting those requirements.
Quality control in purchasing entails:
Negotiating with suppliers to ensure that materials meet quality specifications
Visiting supplier facilities to confirm product and manufacturing quality
Inspecting parts and materials when they arrive at your facility
Alerting suppliers to mistakes in design or production, so that unsuitable goods can be replaced and nonconforming but usable goods can be discounted
Checking quality during the production process to make sure the materials are performing to specifications
As noted above, quality control procedures include visits to your vendor to check on specifications. For example, if your vendor produces valves that your customer will use under hydrostatic pressure, you must take steps to ensure that the valves meet contractual specifications. If the valves are not able to withstand the pressure, your client’s entire system could fail.
You should conduct periodic quality control tests well before the delivery date, so you can catch mistakes before they become more costly to fix. It’s also a good idea to identify acceptable alternative sources in case of supplier problems.
Collaboration and Communication
The trend toward collaboration represents a sea change in business culture. Instead of seeing other businesses as adversaries, we increasingly look beyond competition to find complementary strengths on which to build alliances and partnerships. The logic of collaboration in the supply chain is that certain expectations are created among collaborators, among them:
Willingness to communicate and share information (including information formerly considered proprietary)
Contribution of added value
Quality performance
Standardization
There are downsides to collaboration, of course. For instance, increasing transparency may put the security of your business at risk. Also, as larger businesses embrace emerging technologies and insist that their partners do the same, there’s a risk that these new standards will form a serious barrier to entry for smaller businesses.
Another downside to standardized communications and information systems is that the desire to put everybody “on the same page” can lead to groupthink. What happens if the page that everyone’s on is wrong?
Despite these and other problems, the collaborative capabilities created by the combination of new technology with a demand-driven business model will inevitably transform the way businesses buy, manufacture, sell and ship products.
Coordinating Production
Suppose you run a contracting firm that specializes in installing tile, and it sources its quality tiles from suppliers in Mexico.
If you suddenly got lots of installation jobs from a new housing development, your suppliers would normally be pleased. But what if this happens when one supplier is on vacation, another is swamped in orders from other buyers, and the third can only meet a quarter of your needs?
If you’d alerted your suppliers to your marketing push in the new housing development, and had discussed their near-term production capabilities and scheduling, none of you would’ve been taken by surprise. As the new jobs came in, the suppliers could’ve avoided shortfalls by distributing work among local subcontractors.
Lack of coordination between a seller’s marketing goals, and a supplier’s capabilities and schedules, breeds inefficiency that translates into lower profits. The moral is, coordinate with your suppliers.
Warehousing and STORAGE
Smaller businesses often don’t need a warehouse. As your business grows, warehousing usually becomes more important. Making a decision under pressure is never ideal, so it’s smart to think about your warehousing needs before your business outgrows its current space.
When setting up your warehouse, you obviously need to start by weighing material and delivery needs against available storage space. There are two basic approaches to determining your warehousing needs:
Internal warehousing gives you much greater control over your inventory, but also requires greater fixed costs.
Public warehousing offers less control, but there’s no capital investment required in land or the warehouse itself. If you’re in an area with very efficient and dependable transportation, public warehousing is a viable option.
Warehousing can be divided into two types: manufacturing and storage. The former stores raw materials and work in process. The latter stores finished goods until they’re ready to be shipped.
You might also consider storage options across your supply chain. Vendors, wholesalers, distributors and retailers may have excess warehousing capability. You may be able to expand your manufacturing warehouse capacity by having vendors hold components for you until you need them. Or maybe you can increase your storage warehouse capacity by transferring finished goods to wholesalers, distributors and customers. Either way, your goal should be to develop a supply chain that lowers your carrying costs and allows you to focus on the things you do best.
Big or Small, Here or There
When choosing a warehouse site, try to strike a balance between size and location. Do you want one large warehouse in each target market, or many small facilities? Always make these decisions with growth in mind. Where possible, choose a flexible space that will allow you to cope easily with increased demand.
Warehouse siting usually depends on the following factors:
The size of your products
How much you sell in a given period of time
The location of your office
The location of major suppliers
The location of your customers
Transportation
Your staffing requirement
How fast your products sell
If your product is very complex or large, it’s best to locate your warehouse close to your sources, because the benefits of being close to multiple sources outweigh the cost of faster transport. Of course, you’ll need an efficient, dependable transporter who is willing to carry smaller loads frequently.
If you sell large quantities of your product, or it’s relatively small, it’s wise to locate the warehouse closer to your market. Your turnover will be higher, so the benefits of faster delivery may outweigh the cost of bringing raw materials to your plant.
Physical Layout
How large will your receiving and storage areas be? Do you need loading docks, or is a rollup door adequate? By anticipating your physical warehousing requirements, you can avoid problems that might prevent you from keeping your warehouse in order.
If your employees are well trained, they will be the strongest link in your system—unless poor facility design keeps them from doing their job. The layout of your warehouse should help, not hinder, their efforts to unload, sort, stack, find and ship goods.
The flow of materials through your warehouse, and the position of ramps, docks, racks and other activity areas, should be designed with employee efficiency, safety and comfort in mind.
It’s also a good idea to look into various security systems. Keyless entry systems, video monitors, and related items can help prevent theft.
Product Life
Products differ in their resistance to temperature and humidity. Let’s suppose you intend to open a warehouse in Tucson, Arizona. The desert climate is ideal for some types of goods and disastrous for others. If your product requires temperature control, your warehouse will need adequate air conditioning and weatherproofing.
Another consideration is something that’s found in every desert: dust. If your products must be stored in a high-purity environment, you might be forced to rent a modern (i.e., more expensive) building.
As you can see, maintaining the proper temperature and air purity is not always easy when operating in the desert. What problems will you face in your location?
…
We had a pretty good run with our brakepads, but eventually competitors came in, and our manufacturers got bought out or switched to cheaper materials. At that point, we realized we needed to do something else.
First, we thought about bikes and bike-related products. But as Josh pointed out, we had a patent and expertise that could be adapted to other uses. I asked him what he had in mind, but he just shrugged.
At the same time, Tim was looking to buy a new pickup truck. He was test-driving lots of models, most of which were fully loaded with options and accessories he didn’t want. Cupholders, jump seats, front and back seat heating, rear spoilers, and more cupholders. And yet, there never seemed to be a good place to put his phone while he was charging it; even in cases where a truck had this feature, it didn’t fit his device.
What if he and his brother could design a universal smartphone holder and mold it out of their rubber/silicon formula?
I ran the idea by Josh, and he said he liked it. I wasn’t sure if he liked it because it was saleable, or because it would give him an excuse to create prototypes and run tests. But either way, he started working on it that same night.
…
Outsourcing Warehousing and Distribution
Warehousing has the potential to be time-consuming, hazardous and costly. It may require skills and resources beyond your capabilities, and it can tie up capital that might be better used elsewhere.
For these reasons, some small businesses prefer to outsource warehousing and distribution. Advantages typically include access to current technology and expertise, streamlined order processing and fulfillment, increased focus on sales and marketing, and the ability to scale up quickly as your business grows. Such arrangements tend to be most feasible for very high-volume sellers.
If you’ve read this far, you probably don’t need us to tell you yet again that there are downsides to outsourcing core business functions, or that outsourcing a function doesn’t mean you can stop paying attention to it. If you outsource your warehousing, you still need to understand your supply chain and to monitor and manage your service provider. Due diligence is a must, as is keeping an eye out for hidden costs and requirements.
INVENTORY MANAGEMENT
For retailers, inventory consists of merchandise. For manufacturers, it consists of raw materials, work in process and finished goods. Managing inventory is equally essential to financial management and to customer service; the goal is to maximize your ability to meet customer needs while minimizing the costs of ordering, processing and storing inventory.
Consequences of poor inventory management include:
Cash flow problems
Higher income taxes
Lost sales due to lack of product availability
Higher disposal costs for obsolete or spoiled goods
Slower order fulfillment
The hazards of inadequate inventory management, and the wide availability of reliable inventory management systems, gives entrepreneurs little excuse not to manage their inventory. However, such systems will accomplish little unless you gather accurate data on products sold, received and on order.
Types of Stock
Inventory management commonly classifies stock into three basic categories:
Cycle stock is standard inventory with a known level of demand. It sells in predictable amounts over a predictable timeframe.
Safety stock provides padding in the event of large orders, supplier shortages and other unforeseen problems. Business owners need to balance the security provided by safety stock against the cash, space and management time required to maintain it. A common solution is to find a halfway point where your business is above the safety level half the time and below it the other half.
Pipeline stock refers to goods that have left your facility, but have not yet been sold to customers.
Purchasing
Suppliers often give attractive discounts on bulk orders. You must weigh these savings against the cost of holding excess inventory (which includes the opportunity cost of not using this money for another, more profitable purpose). Also, if excess inventory fails to sell, you may end up losing money.
Don’t take advantage of discounts and special offers until you’ve looked carefully at your past and current sales figures. If you only sold 100 glow-in-the-dark bowties in the last three years, getting a great deal on 1,000 may not be a bargain.
Setting Reorder Levels
One of the simplest inventory methods is to identify a minimum required inventory level, based on past, current and projected sales, as well as on each supplier’s average lead time. When you reach this level, you will place a reorder; inventory management software can automate this process.
ABC Analysis
This method sorts inventory items into three groups based on their relative value to your business. The goal is to prioritize the management of high-value items and reduce the management of low-value items.
Group A comprises critical goods or materials that make up roughly 20 percent of your inventory, but account for roughly 70 percent of its value. These high-value items should have the highest priority in any inventory management system. Security should be high, and stock levels should be checked more often and maintained at safe levels.
Group B comprises items that make up roughly 30 percent of your inventory and account for roughly 25 percent of its value. These items will have a lower priority, but should be monitored regularly and formally.
Group C comprises items that account for roughly 50 percent of your inventory and about 5 percent of its value. These low-value items require little day-to-day management and less accurate counting methods. In some cases, they may even need to be discontinued.
Inventory Turnover
One way to measure the health of your business is to monitor inventory turnover, or stockturn. This is the number of times your average inventory turns over (is sold) in a given period. Are running shoes selling more quickly than golf shoes? Are mysteries selling more quickly than children’s books?
If your stockturn is too fast, you may be spending too much time and money reordering, in addition to paying extra freight costs by ordering inadequate quantities. You may also be losing sales due to lack of product. If stockturn is too slow, you may be offering the wrong products, targeting the wrong customers, charging the wrong price or advertising too little.
Your ideal stockturn rate depends on your industry and product. For example, cookies need to turn over much more quickly than jewelry. You can find helpful guidelines and benchmarks in industry publications or by talking to a mentor or advisor.
Markdown, Discount, and Return Policies
Markdowns (or sales) should be utilized to:
Clear out slow-moving or dormant stock
Dispose of broken or unpackaged items
Meet a competitor’s price
Make room for seasonal or promotional items, or a new product line
Provide dollars needed to purchase better-selling items
Common discount practices include:
Employee discounts
Quantity discounts (discount depends on quantity of item or dollar amount)
Professional or trade discounts
Seasonal discounts
…
Within a month, Josh and his team created several prototypes. Their new phone holder was flexible; it could easily be adapted to fit most types of phones and cases, and it also accepted different types of cords.
Meanwhile, Tim began addressing the logistics of mass-producing the cupholders for auto manufacturers. He concluded that they simply didn’t have the capacity to produce the cupholders themselves. Auto manufacturers would need large quantities, and they would have very strict quality, process and supply chain requirements. CycloPed would need to find a manufacturer with whom they could work closely. How they would ship their rubber to this manufacturing partner was an issue, too. Many elements of their business would have to be reinvented and relearned.
Even by Josh’s standards, it was incredible how fast we had a prototype and how well it worked. But for a long while, it seemed like there was nowhere to go with it. I remember driving around with the prototype, thinking “I may be the only person who ever uses this thing.” We’d had incredibly good luck with our bike parts, but the phone holder was a whole new ball game.
For about six months, we were just treading water. It gave us time to work on market research and a business plan, and we also put out some feelers toward VCs. But at the end of the process, we still didn’t have a clear path forward, let alone a deal.
…
Inventory Control
Tracking inventory doesn’t just help you keep your products in stock; it also gives you feedback on what sells and what doesn’t. This gives you the opportunity to improve, discount or eliminate slow-selling and obsolete merchandise.
Often, the hardest part of managing inventory is coming up with a reliable system. Different businesses have different needs, but at a minimum, most retailers and manufacturers will need a system with the following elements:
Inventory numbers. You should create a clear, consistent naming and numbering system for parts, materials, finished goods and merchandise. Numbers should be easily distinguishable and no longer than necessary; they should also group similar products, accessories and materials together. Labels and tags should be clear, accurate and easy to read. If bar coding is used, it should be easily accessible and legible; tags or stickers that need to be turned or adjusted before scanning can add a great deal of time to inventory management activities.
Relevant units of measurement. Some products will be sold or bought in units, others will come in boxes or bags, and others will be sold by weight or volume. Failure to specify the correct unit of measurement can result in ordering too much or too little of a product.
Storage and accounting. Perishable goods such as food items should be stored so that older items are sold first (first in, first out, or FIFO). Bulk items such as screws may be last in, first out (LIFO). This has important consequences for inventory valuation and taxation, which you should discuss with your accountant.
An accessible location. Inventory storage areas should be logically designed and ordered, uncluttered and easily accessible. Aisles should be wide enough to work comfortably. Assembly areas should have good lighting and be arranged to reduce the risk of stress-related injuries. Storage areas should be segregated so that products can’t get confused with one another. If you store reactive chemicals, you may need to keep them in separate areas or special containers.
Adequate and well-organized storage space for each inventory item. Shelving, bins and other storage containers should be easy to identify, restock and visually inspect. Aisle and shelf numbers, signs and labels should be clearly visible and secure, but also easy to update or change. Items on shelves and racks should be safely accessible (e.g., very heavy or fragile items should not be on the highest shelves).
Electronic Inventory Tracking
Although electronic inventory tracking systems can be costly to implement, they often pay for themselves in reduced labor costs and increased accuracy. Even if you implement one of these systems, you will still need to conduct a regular physical inventory to make sure your electronic records accurately reflect your stock.
Barcode Scanners
Barcode scanners read labels affixed to products or inventory and transmit this information wirelessly to your inventory management or accounting system. This makes it easier to add received materials to your inventory system and to track goods and materials through the production or ordering process. These systems are inexpensive and easy to use; the main downside is that you need to be able to access the barcode to scan it, which may be difficult in a mixed pallet or a warehouse with high shelves.
Radio Frequency Identification (RFID)
RFID tags allow you to track production inputs and finished products through your supply chain. This is especially important if you plan to work with government agencies, prime contractors or big-box retailers, many of whom require it as a condition of doing business. But even if you don’t, the affordability, accuracy and versatility of RFID have made it attractive to many small-business owners, who can also use it to keep track of warehouse equipment.
RFID tags can be read by infrared scanners, or they can communicate through a wireless network. Sophisticated tags can even transmit temperature data; thus, if you have a product that needs to stay at a certain temperature, a wireless RFID tag can confirm that the temperature remained constant. Also, some systems allow you to read dozens of tags at once, which is obviously much faster than scanning dozens of barcodes.
Real-time locating systems (RTLS)
RTLS systems use transmitter tags and electronic scanners to pinpoint the identity and location of a warehouse item, whether it’s a full pallet or an individual product. Some systems use radio frequencies, while others rely on infrared or ultrasound signals.
Point of Sale Systems (POS)
POS systems scan items as they sell, resulting in real-time tracking of supply and demand. This information drives reordering, inventory management and distribution.
In addition to keeping track of inventory levels, POS systems can monitor rises and declines in sales. A good system integrates with your accounting system and will also gather vital marketing data (e.g., through supermarket rewards cards).
The following outline explains how a typical POS system works.
When a customer places an order, that information is distributed across the supply chain so that suppliers send raw materials or parts to the production line.
The product is manufactured in part or in whole. If in part (form postponement), the components are dropshipped to a distribution hub for assembly.
The goods are shipped to a retail outlet or other pickup point, or direct to the customer. Upon arrival, they’re scanned and entered into the system database.
Supplier and internal inventories are updated based on the scanned data. The marketing department has a record of how many customers ordered which products. The sales record is used as an immediate forecast of customer demand in the coming weeks. This is probably the most accurate data to use for longer-term strategic equipment, financial, production and sales forecasts.
Benefits of analyzing POS data include better management of retail or wholesale inventories; targeted advertising; and making information on store offerings and policies easily accessible to customers.
A POS system can also link to your suppliers or collaborators. Suppose you run a pharmacy in a small town, and you’ve eased your inventory management burden with barcode-scanning equipment. Your pharmacy sells optical lenses, and some manufacturers allow you to link your POS system to their ordering system. When lens stocks reach your specified reorder level, the reorder is placed automatically.
Inventory Management Software
A good inventory management system will tell you what and when to order, based on:
What merchandise is on hand
What merchandise has been ordered, but not delivered
What has been sold, shipped and received during a given period
Because retailers and manufacturers have very different management needs, it’s best to choose a program tailored to your type of business. When setting up an inventory management system, consider what inventory you will need—and what problems might occur—during the various phases of your production process. You might plan your inventory strategy like this:
Review all aspects of your current supply chain.
Anticipate inventory needs.
Train employees to follow inventory guidelines.
Set up an information system that links all of your departments.
Compare inventory levels with actual materials usage.
Adjust inventory levels to match market needs.
Inventory management software should handle order processing tasks, such as printing invoices and purchase orders. It should also integrate with your accounting software. Conversely, many accounting programs have inventory modules. As with any business software, scalability is key; your inventory management solution should accommodate and facilitate growth, which in the supply chain context will almost certainly entail RFID or barcode scanning.
As you grow, your goal should be to establish a complete information system that integrates purchasing, accounting, inventory management, shipping and marketing systems.
Breakage
What should you do when you experience inventory damage? Options include:
Recovery. If the damage is minimal, can you repackage or repair your product? If a finished product is damaged beyond repair, can you recycle some of the parts? If possible, reprocess damaged goods, or at least obtain salvage value.
Inspection. Have your staff check for breakage when deliveries arrive, when goods move into and out of your warehouse, and throughout the production cycle.
Reconciliation with suppliers or transporters. Proper documentation is essential to obtaining credit or remuneration when goods are damaged in transit. Emphasize this point with your receiving department.
…
Right when we were feeling seriously discouraged, we managed to get into a supplier matchmaking program run by a local economic development group. We applied, not expecting much, but we actually got invited to make a pitch. It stretched Josh’s technical skills and my marketing skills to the breaking point. But in the end, we were one of the businesses selected to supply Ford Motor Company.
It was crazy. We were suddenly part of the supply chain of this huge manufacturer, which meant we had to look not just at our own internal operations, but at everyone in our supply chain. We had to rethink everything. Literally everything.
CycloPed has created a profitable niche: selling universal smartphone holders to Ford Motor Company’s truck and van division. They’ve maintained this position by carefully streamlining purchasing, production and logistics.
CycloPed purchases its rubber from a company in Brazil; ships it to a maquila plant in Chihuahua, Mexico; and trucks the finished cupholders to Ford assembly plants in Mexico and Canada. This was a maze that neither brother could have foreseen navigating years before, but it has made their company what it is today.
In order to sell to Ford, we had to jump through endless hoops, all of which made us a stronger company. They required that we use certain processes for inventory control, expense tracking and supply chain management. The learning curve was steep, but the benefits were huge. It gave us much greater control over our work with our main supplier in Brazil, and our maquila too.
Because they forced us to up our game, we had to be very diligent about turning around and applying that same pressure to our suppliers, vendors and contractors. Little delays and errors that we would’ve let slide a few years ago were suddenly dealbreakers. When we got the contract, we thought mainly about how it would affect us. But with a company that big and a supply chain that long, it’s amazing how far the ripples can travel.
…
Production Planning and Inventory Control
Your approach to production is a major factor in the amount of inventory you choose to hold. Typically, inventory decisions are based on a forecast-driven “push” model, a demand-driven “pull” model, or a combination of the two. The following production methods are common:
Material requirements planning (MRP)
MRP bases inventory levels and production schedules on forecasted demand. Usually, it’s used to manufacture products made from many components, especially in cases where there’s a phased production schedule.
Very simply put, MRP software generates a recommended schedule for purchasing and production based on forecasted demand, supplier lead times, stock levels and production time. The goal is to minimize inventory levels while ensuring that raw materials and finished products are available to meet demand. The major concern in an MRP system is the integrity of the input data that drives these schedules; small miscalculations can have devastating effects, resulting in overlarge inventories or high levels of goods that have to be scrapped.
Just in Time Delivery (JIT)
JIT is a demand-driven approach that attempts to reduce inventories to the bare minimum by producing goods only as needed. This means frequent deliveries and smaller order sizes, so it requires smaller warehouses, close communication with suppliers, efficient transportation, and real-time inventory management.
For retailers, JIT can be a relatively easy way to reduce inventory costs. For manufacturers, it tends to be far more complex. Often, you must coordinate multiple inputs and their lead times, as well as production time. For this reason, JIT systems often require suppliers to be located near the manufacturer.
JIT can cause problems if you don’t have a good contingency plan for disruptions in your supply chain. There’s also a risk that efficiency can become an end in itself, at the expense of a customer orientation. This can be dangerous. Smaller businesses need to stay flexible and adaptable. No system is flawless, and no supply chain is perfect. That’s why you must always have alternatives and contingency plans. Small businesses should use JIT processes when and where it makes sense to do so. JIT is a tool, not an end in itself.
Vendor Managed Inventory (VMI)
VMI is similar to JIT, except that inventory is monitored and managed by the vendor on behalf of the customer, based on an expected level of demand. Ideally, VMI increases efficiency while reducing inventory levels, replenishment times and inventory costs. VMI requires software applications that enable vendors and customers to share information. Like JIT, it can leave businesses vulnerable to supply shortages and other disruptive events.
Customer managed inventory (CMI)
CMI involves setting up an automated system to monitor and order inventory from your suppliers before you run out. This reduces the amount of inventory you need to keep on hand, while also speeding up delivery times. A good CMI system will anticipate and respond to fluctuations in demand (e.g., seasonality).
The Green Supply Chain
Studies show that green procurement practices and supply chains are increasingly popular at every level of business.
Although this is due in part to the growing visibility of environmental issues, and to steady consumer demand, many businesses are driven to implement these policies primarily because they want to weed out inefficient processes and unnecessary inputs. They’ve learned that in many cases, a greener supply chain is a more efficient and cost-effective one, because it requires a business to identify waste, underutilized resources, inefficient channels and subchannels, redundant production stages, unreliable partners, and inefficient or outdated equipment.
In addition, a greater emphasis on green and sustainable supply chain functions on the part of private business and government has forced many smaller and international businesses to conform to these standards. We will discuss this trend further in Chapter 29, Options for Growth.
To green your supply chain, you have to understand it. Therefore, the first step is to develop a complete picture of your supply chain, and your position in the supply chain of your partners. Having done so, you can either urge your suppliers to minimize their environmental impact or seek new suppliers who will. The greener your suppliers are, the greener your business will be. By the same token, environmental policies that fail to address supply chain issues will be superficial at best. As we said at the outset, no part of the supply chain should be viewed in isolation.
Each stage of the product life cycle should be considered in turn. How is the product manufactured? Where do its raw materials come from? Can you source them locally to reduce fuel use? How and where is the product stored? If it needs to be refrigerated, how efficient is your cooling system?
What packaging materials do you use? Can you make them greener, or get rid of some of them altogether? Can you use rubber address stamps instead of printed labels and tape? What shipping methods do you use? If you sell locally, can you rely on bicycle deliveries or electric vehicles? What happens to your product at the end of its life? Can you refurbish the product or reuse its container? Can you take it back to ensure that it’s properly recycled?
While it may sound complicated, the very nature of the supply chain ensures that countless businesses, products and services are being created to help business owners adapt and improve. From software programs that optimize delivery routes to save on fuel costs, to consulting firms that offer suggestions on streamlining production, reducing inventory and saving energy, small-business owners have plenty of tools and many sources of advice.
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One benefit of CycloPed’s contract with Ford was that Tim and Josh got a crash course in Six Sigma quality. Six Sigma focuses on eliminating defects and reducing variation; it’s defined as 3.4 defects per million opportunities.
Once CycloPed was chosen by Ford, it became part of the company’s supplier development initiative. Ford’s experts in Six Sigma standards came to work with CycloPed almost immediately. They helped Tim and Josh define quality objectives for their products and allocate resources to meet those objectives. They created baseline opportunities for improving quality and helped implement tasks. Last, they helped to assess and document improvements.
It was time-consuming and often tedious to continually remeasure, revise and rethink their manufacturing. But the results were clear: better quality, a more competitive product, and an improved profit picture.
In order to cope with all these new demands, we made one person accountable for implementing each supply chain task, whether it was managing supplier communications, monitoring supplier performance or keeping tabs on the costs. That way, if quality dipped or delivery time slowed, we’d know it before things got out of hand.
When you go through changes like we did in regards to our supply chain, you might think you’re in some totally new world. But as Josh pointed out, we were in the same world as before; we were just forced to look at it a lot more closely.
If I had one piece of advice for a business just starting out, I’d tell them to look closely at your supply chain right from the start.
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Conclusion
Managing supply chain operations means understanding each step in each of the business processes under your control. It also requires recognizing your position in the supply chains of other businesses.
How does your company create its products? What are its sources and what affects them? Which tasks are performed most efficiently by your company, and which by its partners? At which steps is value added for the customer? How can this value be increased?
These are the sorts of questions you need to ask when analyzing your supply chain. By integrating and harmonizing these functions, you can speed up manufacturing and shipping, lower your costs, achieve economies of scale, maintain high quality standards, improve competitiveness, increase innovation, and strengthen strategic partnerships and alliances.

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| NxLeveL® TECH TIP BUSINESS RESOURCES AND THE WEB
The Internet of Things The Internet of Things—in which Internet-connected devices, equipment and objects interact and communicate with each other—has massive implications for every aspect of supply chain management. The integration of real-time communication and feedback, cloud-based collaboration, GPS tracking, and complex data analytics is not only streamlining everyday inventory management tasks, but also making it possible to take human decisions out of many business transactions by essentially automating demand. For example, a smart furnace that senses its filter is wearing out would be able to place an order for a new one. The filter manufacturer’s inventory system would then locate the filter source nearest to the customer, choose the most efficient delivery route based on current traffic conditions, and track the filter’s progress toward its destination in real time. The growth of artificial intelligence, and the increased automation of regional and global processes, will allow supply chains to optimize activities without human input, and to anticipate and respond to shocks and disruptions. As technology expands and prices drop, machine-to-machine connectivity will be accessible to businesses of all sizes, and those who can’t or won’t adopt it are likely to be at a serious competitive disadvantage. To learn more, visit the Industrial Internet Consortium at www.industrialinternetconsortium.org.