Inventory Turns – Somebody Pays

Recently we touched upon blanket orders. Today, we are going to look at them specifically as to how they might relate to inventory management.

So, my favorite cautionary snippet warns about “Not shooting pool with anyone who’s first name is the name of a major city.” To an extent, there is wisdom in that. Unless of course you’re THAT GOOD! And, most of us are not.

When it comes to the idea of keeping steel in inventory, there is another snippet that suggests; “Better that you be stuck in an elevator with 50 first graders with fevers, ice cream cones, and intestinal flu, than hold steel bars as inventory.” Doesn’t seem to leave much room for any discussion. Just don’t do it, at any time, for any reason. That used to refer to slow-moving inventory. Today, however, it seams to refer to any inventory, no matter who you are; service center, end-user, manufacturer.

In a nutshell, no one is to maintain any inventory, but everyone is expected to ship their products next day. In reality, that philosophy results in what I refer to as “kick the can”. Someone has the inventory somewhere; we just want it to be someone else’s expense. Inventory is a necessary evil then, so long as someone else is carrying it. Or, as an old and dear friend of mine would always say; “Somebody pays!” Just move the actual mass of hard steel down the line until it is not so visible. BUT, how many decision makers do you want to be between your “Just-in-Time” company and availability of the actual goods? There is no avoidance; to deliver products with the speed expected today, most of us should actually maintain some inventory (that includes end users, manufacturers, and even service operations). We just need to insure we are capable of managing that inventory with a competence that approaches an art-form level.

Heavy industry is alive and well. Globally, there is a big need for digging, busting, breaking, grinding and pushing; dirt, rocks, yogurt, whatever. Service centers are tasked with anticipating the needs of that industry months or years ahead of potential orders. No easy task. End users, however, may witness repetitive usage of materials within somewhat predictable cycles. They enjoy a level of “forecast insight” that steel service centers would love to have, no matter how slight it might be. Yet fewer than you would imagine utilize the benefits of a useful and available inventory management tool; “Blanket Orders”.

Committing “forward”, to a dedicated source of supply, for a dedicated quantity of material, may be facilitated by using a blanket order. Not a bad compromise that protects continuance of supply and improves cash flow.

-Howard Thomas, January 21st, 2020

Partnering

The “partnering” discussed here, in the steel industry, will refer to a working relationship between supplier and end-user, where benefit is derived by both parties.

One specific example that has been very effective is the blanket order, or blanket contract. Both parties need the potential advantages of a well-constructed blanket contract.

The vendor gets a bit of predictable inventory usage and potential predictable cash flow. The customer will benefit from: continuance of supply, firm pricing, cash flow (often a major concern in smaller mom and pop service centers), time and space savings, etc. When one of these “Partnering Contracts” is done well (fairly), there may even be cost savings to the customer, and increased profit to the supplier. Other benefits do not necessarily relate solely to purchase cost.

At risk for the vendor is default from the customer who’s needs may change during the tenure of the contract. A smaller service center may be concerned with exactly the same thing; a change to their customer’s needs mid-stream.

If you have never been party to a blanket contract for materials, you should be aware that there are certain predictable cautions and time proven verbiage common to most blanket contracts. The text will address standard issues like duration of contract, types of releases (fixed or “as-needed”), etc. Persons with limited familiarity, or who have never entered into a Blanket Order will likely have many concerns relative to over-committing, potential exit clauses, etc.  You should know, that similar to any type of contract there must be benefit for both parties. There is no “one-size fits all” contract.

Working with a familiar and trusted vendor and extensive COMMUNICATION will only improve the quality of any joint agreement. Formulate a rough draft of contract terms that express, and address, your concerns. There are no predetermined constraints or requirements that you will be bound to. Ensure the contract terms fit both parties.

In an earlier post, we discussed the definition of, Random Bar Lengths. Many people in this industry assume there is a fixed length spread. Not so. Bar length variances are basically determined by each supplier based on length variances that offer advantages. In appreciation for selling lengths that are the easiest and most economical to ship, a cost advantage is passed along to the customer. Look at a blanket contract in the same way. In your particular situation, what issues provide advantage? Would a good “escape clause” ease your concerns? What about an extended contract period, or releases on demand?

Blanket Contracts for Materials are an excellent form of “Partnering”. They should be viewed as opportunities, not restraints. When discussing “Partnering” be open to compromising on terms that will assist you in perhaps obtaining some “non-standard” terms that you feel strongly about.

The beginning of a new year is a great time to get dialog started.

-Howard Thomas, Jan 2nd, 2020