We have been researching issues of flexibility and inventory and will summarize why these may be important to your business. Many companies are working through these issues. The topic takes on more significance if you subscribe to the opinion of Craig Barrett, CEO of Intel:
“You don’t save your way out of an economic downturn…on the down-swing, you have to prepare for the inevitable rebound.”
Why worry about supply flexibility for a product in this period of short lead-times and abundant supply? After all, your business may still be writing down inventory levels on your balance sheets. Here are four compelling reasons:
1. Revenue is precious – flexibility plans can provide an insurance policy to protect your revenue stream against supply disruptions caused by manufacturing problems at the supplier’s facility, transportation delays, unforeseen spikes in demand, etc.
2. Suppliers are willing to offer it – in a tough economic climate suppliers are eager to maintain market share. They are more willing to work with a company to create supply flexibility plans that add value.
3. Good programs lower inventory risk – most people do not realize that a leading cause of inventory is unmatched sets. In other words, inventory is left stranded because a part required to finish the product is missing. Good flexibility programs greatly reduce the risk of this happening without relying on a lot of buffer stocks.
4. Preparation for the market turn – by the time most companies realize that the supply market is tightening it is too late to benefit from a flexibility program. These initiatives take time to plan and implement and this lull in the economy is an ideal time to start.
Basically, it is a broad view of all of the pieces and processes it takes to make a specific product with an eye towards constraints, risk, and value. Said differently, a flexibility plan tackles two major issues: 1) it eliminates potential roadblocks in low-value areas so they never become a problem; 2) it reduces the roadblocks in high-value areas to an acceptable level and uses this constraint as a spigot to control the flow of product. The key is to reduce the response time for the high-value areas to a point where your company can meet its market needs without creating a lot of internal or external inventory exposure.
Revenue, Profitability, Inventory; a robust flexibility plan can help in all of these areas. It can protect the revenue stream for your company by reducing your vulnerability to supply problems. It also puts you in a stronger position to respond to increased demand from your customers and thus increases your revenue potential. A flexibility plan helps you to achieve profitability in two ways. You will be less likely to miss a sale earlier in a product’s life. These early sales tend to be the source of greater margin and profit. You also keep your cost down because you do not waste overhead reacting to supply crises. You are not forced to throw money at a supply problem - lower costs means higher profits. As explained before, good flexibility programs also help with your inventory. It protects against supply glitches that could force your company to have stranded inventory due to incomplete products. Once your flexibility plan is in place and working, your company can begin to forecast more conservatively, which can also help overall with inventory.
The key is to get started. For an EMS company that might mean picking a key customer and introducing flexibility plans as a service differentiator. For an OEM it might mean picking a key product or product family and developing plans to enhance the flexibility. For a Component Manufacturer it might mean looking at the supply chain for a family of parts to determine how to increase flexibility creatively to the customers without using a lot of buffer stock. The benefits are easy to articulate - now is a good time to start this type of improvement – the only missing piece is a willingness to invest the time and effort to make it happen.
Product flexibility plans are one of our specialties. We can help you determine the specific benefits for your business and what makes sense for you.
John Holton and Bijan Dastmalchi
Symphony Consulting, Inc.