Strategic Inventory Placement(Pharmaceutical, Agrichemicals…)

In many B-to-B industries suppliers produce the same basic product for several to many customers. The product may be the same, but often the packaging and (or) the labelling will be different. Labelling and packaging is often different from customer to customer, but also within a single customer packaging and labelling might well be different from country to country. Agrichemicals and generic pharmaceuticals are examples.
This variation in packaging causes inventory and availability problems that endanger suppliers’ business since clients can get the same or very similar product from another supplier. Switching does not solve the problem for a client it simply transfers it to another company. Performance is unlikely to improve in any sustainable way.
Suppliers need a solution that makes it possible to guarantee availability, with, at the same time, reducing the amount of stock in the supply chain. A robust effective solution would most probably also take some of the pressure off price.

Are Suppliers & Customers Partners, Competitors or Enemies?

Businesses in a supply chain are really only paid when the final customer, the consumer, has paid for the product – everything else is an advance payment. Every company along the supply chain is competing for that consumer’s dollar. In the B-to-B part of the supply chain a supplier and his customer negotiate price that will, to a large extent, determine profits and return on investment of the B-to-B pair. It is clearly a conflict situation since both the purchasing agent and the salesman concerned are charged with maximizing profit for their company … at least usually. Companies within a supply chain are certainly competitors.
Supply chain collaboration is a buzzword that sounds and real collaboration could be great. Whatever level of cooperation or collaboration is actually achieved, the fact remains that two parties within a chain compete. A level of mistrust is likely to remain.
In many supply chains customers throw orders to their suppliers over a wall– many times as a surprise (in terms of volume or timing). Orders can arrive at really inconvenient times. The supplier may suggest a way to solve the problem – for instance by sharing demand information. A supplier might offer a significant discount for much earlier commitments from clients. Can these proposals work?
Sharing demand information is often problematic because it seems to give away proprietary information that may get into competitors’ hands. On top of that, even if demand forecasts are shared, we all know that these tend to be quite inaccurate. Actual orders are often significantly different. Demand forecasts are inadequate and usually not so useful for suppliers.
A firm order placed well in advance sounds very attractive for a supplier (and for the client if he gets a nice discount). However reality will almost certainly catch up with the client. Close to delivery time he needs a different mix of products. He will request last minute changes to his orders. The supplier loses the discount and gains no stability benefit for his production unit.
Our problem is to find the robust, simple solution to get the best information about near term demand to the supplier’s production unit and to his suppliers. The criteria for such a solution must be something like:

1. Visible, transparent information about current demand for all stocked items (those not made to order).
2. Visibility must be such that all nodes in the supply chain have absolute clarity about the priorities to ensure correct replenishment of stocks in the supply chain.
3. The system must have a simple and dynamic way to adjust target stock levels to current demand as it changes over time.
4. A supply chain must carry stock at the most appropriate strategic locations with the following two targets: a. Minimize stock levels within the supply chain. b. Guarantee near 100% product availability.
5. A monitoring system to provide early warning of an arising capacity problem.
6. The key performance indicators that show the supplier and his customers what their respective performance levels are.

Make for Availability is a process and system that meets the above criteria. If a part of the business is Make to Order, then the two processes can be easily integrated into one mixed mode solution.
In addition to the basic criteria above, the process needs to be able to cope with:

1. Seasonality (Agrichemicals have very seasonal demand).
2. Promotions – especially in retail situations.
3. Sudden peaks in demand – for instance when the supplier gains a new large customer.
4. Sudden loss of a significant account.
5. The need to forecast longer-term demand remains – in order to support decisions about capacity changes.

In today’s business environment the technical challenges to support such a process can easily be overcome.

Selling the Concept

That companies compete for the profit of a supply chain makes the sale (of such a concept) a difficult one. In addition most purchasing personnel and their counterparts from the supplier’s sales organisation do not normally negotiate about inventory, information and availability. They are used to discuss price, product quality, product features and benefits. These people will need to master the core of Make for Availability and the corresponding business offer being made.
Before purchasers and salesmen can even talk about the solution the process must be absolutely clear for a sales or purchasing person to make a coherent offer. The solution may well be a paradigm shift for clients (or suppliers). The process may well indicate that a better location for stocks exists and should be used. There are considerable implications in the way the process must function; who will do what; where will inventories be stored etc. Not too difficult a process to understand, but a purchasing organisation must be in a position to sell the benefits in such a way that will almost certainly gain the clients’ cooperation.

Where should Inventory be located?
Do we need so much?