Issue link: https://www.e-digitaleditions.com/i/66147
Choosing the Right Supplier By Jason Bader, The Distr ibution Team Jason@Distr ibutionteam.com. iarwithmy inventorymanagement philosophy knowthat I am constantly asking buyer's to look beyond the clerical function of the job.We buy sophisticated computers to handle those mind-numbing tasks.The fact thatmany distributors do not use their software to free up the buyers time is a whole other can of worms.When you make the move to investor of company money, don't be satisfied with price analysis alone.When did we develop this myopic view about the role of the inventory investor? If you are just focused on saving the net-price nick- els, you are missing the big dollars available in total return on inventory investment. Total return on investment is achieved byworkingwith sup- A pliers who support your overall inventory replenishment goals. Do they ship complete? Do they have consistent lead times? Do you get the products you ordered? Do they help you manage your dead and slow-moving inventory? When we choose suppliers that do not live up to these ideals, there is a cost.We investmoney to cover up these substandard practices. This investment comes in the form of safety stock. Bear in mind, safety stock is an insurance policy designed to protect our customer service goals from poor performing suppliers. I sure hope our insurance premium is smaller than the percent we saved in net price. If you really go back and do the math, you will start to understand the value of those suppliers who give you a total return on investment. The Hidden Cost Behind Every Inventory Management Decision I recently had the opportunity to spend some time with a supplier who exemplified what I am looking for in a total return on investment.This is a company that understood the cost structure of a distributor.Letme ask you something.When was the last time a manufacturer understood the terms inven- tory turn, carrying cost and gross margin return on invest- ment?When most of us mention relationship concerns in any of these areas, the majority of our suppliers look like a deer in the headlights. It just isn't where they are trained. One of the most frustrating things I experienced as a pur- chasing professionalwas erratic lead time.Early on,Iwas naïve enough to believe that I could guess on an arrival date by look- ing at the geographical distance between myself and the man- 1 6 FEDA News & Views ufacturer.What I failed to understand was the time it took for my order to get out the door of the supplier. If my customer called at noon, they expected it to ship the same day. It was a customer service expectation.When a supplier doesn't ship quickly,what does it really cost us? Let's say that I have two suppliers in Charlotte and I am located in Seattle. Supplier A ships in 24 hours; Supplier B ships in three days. Both have the same transit time to Seattle. In order to meet my customer service obligations, I will need to order Supplier B three days sooner than Supplier A. I will have three days more inventory in my facility when I have to make the investment to Supplier B.What is the car- rying cost on that three days of inventory? Do I really trust that they will get my order out the door in three days? Been burned enough times on that one. Since I can't trust Supplier B, I need to insure my customer service obligation. Let's add a couple of days of safety stock. Now I have five extra days of inventory accumulating carrying costs. Are you getting the picture here? Just to make sure that we are on the same page, carrying costs are the dollarswe invest to feed,clothe and shelter the products we bring into stock. It is usually represented as a percentage of overall inventory dollars.That percentage can fluctuate between 20-30 percent of inventory value. Some of the components include rent, insurance, interest, labor, shrinkage and opportunity cost.The longer we hold on to continued on page 18 re you a buyer of product or an investor of company money? This is the question I invite all purchasing pro- fessionals to ask themselves.Those of youwho are famil-