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Value Analysis (VA): Using the Pareto Principle in Inventory Allocation during OTC Back-logs

value analysis using pareto

“We need a solution to this situation & we need it like yesterday, period. Resolve this matter urgently & give it top priority please. I can’t stress the importance any further than the backlogs that are worsening every shift.”

That booming voice coming thru the teleconferencing phone-line, belonged to the Global BU EVP at WWHQ. The room was filled with demand planners, logistics & transportation personnel (including shipping planners & a handful of the contracted logistics folks), customer service & order management teams, after-sales Field Quality Engineers (FQEs), & joining the foray as the direct reporting personnel to the Global BU EVP – yep, little old me.

The phone cut off as the EVP signed off with curt goodbyes around the room. I’d looked around, feeling the niggling sensation of a creeping problem that would blow out of proportion, with endless customers’ orders backing up & naturally, infinite complaints from all channels, sifting into my e-mail’s inbox. My eyes tuned to the drooping heads & honed in onto the ashen face of the Customer Services (CS) Director, & switching instantly to the Sales Director. Both of them looked as if they’d just completed the Boston Marathon & rushed into the meeting without a shower – red & sweaty lobsters. The Suppliers’ Development Team (SDT) at Contract Manufacturing (CM) had indicated bubbling problems with Quality Acceptance Rates (QARs) dropping steadily & the various compliance problems that swelled up with several of the major contract manufacturers (CMs); from product licensing & factory re-certifications, including BoM mis-matching (the main causation of the declining QARs). We could hear a pin drop & reverberate its echo as it bounces on the carpet as I’d calmly told everyone to return to their workstations & await a further next Point-of-Action (PoA) e-mail from me to their divisions’ heads. The CS & Sales Director took that hint that I’d needed the both of them in the room – sigh…years of working together, our collaborative mentality is almost telekinetic.

value analysis pareto“We need to re-position our allocations from the CMs & internal lines, fulfilling orders that are urgent to prevent line shut-downs at our customers” I’d said.

The CS & Sales Director began their tussle almost immediately – who’s the top paying clients, who’s buying & credit limits are ceilinged or at floor levels, who’s nearer or further at which destinations, who’s buying the most multi-SKUs, etc. It went on for the next 15 minutes or so, with my mind floating around in a haze until I’d decided to snap them both out of the argument & decided on:

Value Analysis Using Old Pareto's 80/20 Rule

“Let’s go with allocating ONLY 80% of stock-to-orders for the top 20% buyers, but only after their limits & terms have met eligibility.” Both the CS & Sales Director went silent with their mouths shaped in an O.

“Hang on! I’ve heard of allocating any AVAILABLE stock to 20% of the company’s VIP spenders with us, but…allocating ONLY 80% of AVAILABLE stock to 20% of the VIPs?” the Sales Director exclaimed.

The requirements were simple:

  1. We will post-goods-issue (PGI) orders for FCA / DDU / DDP / CoD terms immediately, but subjected to CS re-affirming & re-adjusting planned orders down to 80% of the volumes ordered. All pre-qualified top 20% buyers will get 80% of their order volumes delivered & Sales will re-work all forecast demands with the buyers & end-users for the next Sales & Distribution (SD) pull.
  2. All ex-Works terms must enact pick-ups within 24 hours upon order confirmation. If the TEUs / FEUs did not appear at our staging areas for stuffing within 24 hours, stock-at-hand will be re-allocated to the next buyer in queue. The same pre-qualifying restrictions will apply – 1st come, 1st served basis.
  3. Balance of stock leftover will be re-counted back into inventory for the next re-allocation. This method is to counteract shortfalls on the following month’s cycle counts, due to CMs’ backlogs. This will also buy SDT a little bit more time to work with the CMs in pushing out higher quality SKUs &/or rectify BoM discrepancies in detail. A little bit more time to ensure the CMs obtain re-certifications &/or license too! I can’t foresee early push-outs from the CMs, but I do know that if we don’t start nipping the problems at the front-end, the backlogs won’t be just orders clogging, for sure. The ramifications would entail RMAs occurring from all ends & corners of the globe, plus the After-Sales FQEs would definitely have a field day! Forgive me – no puns intended.
  4. All assembly lines’ shifts will remain intact (3x8 turns) with the exception of the warehouses & distribution centers (DCs), whereby I’d deliberately shifted the 2x8 turns to 2x10 instead, with a lowered head-count on the 2nd turn. I’m not allowing any clogging to occur at the staging areas due to late cut-offs, & to ensure TEUs / FEUs arriving for stuffing & pick-ups will be executed immediately.
  5. All Vendor-Managed-Inventory (VMIs) refreshers (or replenishments) were to be temporarily suspended if the VMI stock levels were still adequate at 50% volumes or above, across all SKUs. The top-up replenishment will only go to a maximum of 50% if the volumes fell below that threshold.

“Sigh…will it work?” both the CS & Sales Directors asked impatiently.

I was very quiet & still…crossing my fingers under the table & praying under my breath that the problems would be resolved as I bought time for SDT & the CMs. Looking back now, it had been a decade (or more) ago when this situation occurred, in Y2002. It was a breath of relief (tears of joy for many, too) when the problems were resolved within quarter-1 (Q1) & quarter-2 (Q2), plus taking almost whole of quarter-3 (Q3). The 9 solid months of sweat & toil, plus endless collaboration from every partners contributing in the value chain (the people & talents – both internal & external) sacrificing time & putting aside differences in a common goal; was significantly an eye-opener & many professional relationships were strengthened with the CMs & Logistics Service Providers (LSPs) eventually.

The turning point wasn’t just collaboration & harmony in thoughts & skill-sets; the key was that there was a STRATEGY - a PLAN that was carried out, without leaving any I’s un-dotted or T’s un-crossed. It could have failed, badly…but no, it succeeded instead. I do continue to use the same Pareto Principle in any given circumstance, not necessarily in difficult situations but also within any macro &/or micro circumstances; although the SoPs have changed & differed with the advancement of ERPs / MRPs / SCM concepts etc.

Oh…I still thank Vilfredo Pareto in my mind, now & then...

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Adrian Chen
I have the greatest passion for any companies, products, vendors, suppliers, services, &/or activities that are directly or indirectly associated or related to Global Supply Chain / Logistics / SIOP / Trade & Compliance.
Adrian Chen
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