Managing material commitments and liability

In today's global economy, a typical consumer goods product touches several trading partners around to world from its point of origin to its point of sale. Globalization drives specialization in labor and services. In a previous blog (Please refer to this blog), we discussed that companies no longer compete with each other. but their supply chains do. In order to stay competitive, consumer goods companies manage virtual manufacturing and distribution networks to make and distribute their products. This even extends to making commitments for materials that their suppliers would purchase. 

Running a virtual supply chain is not an easy task. Each partner in the supply chain must coordinate its operations in sync with each order. The strength of the supply chain is determined by its weakest link. To avoid disruptions, each player introduces buffers - both in terms of lead time and inventory. When you sum them all up, you may end up with long lead times and excess inventory throughout your supply chain. As a result, you will tie up your chase and react slowly to the market changes. One way to reduce your lead times and minimize inventory is to make commitments for goods to be products down the supply chain. 

For instance, as a brand that is purchasing finished goods from a set of suppliers, you may end up placing commitments for the materials your suppliers are purchasing to make your finished goods. The raw material vendor can then start producing the material without receiving a purchase order from your supplier. This reduces lead time. On the other hand, if your commitment was higher than what your suppliers committed, you will be liable for the excess material inventory. The raw material vendor will ask you to purchase the remaining amount at the end of the season. It is common to see many brands owning raw material inventories spread across many suppliers around the globe.

It is difficult to model this business process in a typical application. The brand never intends the purchase the material. The Bill of Materials (BOMs) that ties the finished goods to the raw material is not maintained in the system. A commitment is not a purchase order that carries a liability with it. Thus, most companies run this process outside of their systems mostly in Microsoft Excel spreadsheets. As forecasts and consumption rates change, most companies find it difficult to track their liabilities. 

Here is a way to embed the material commitment process into your business application. You can maintain BOMs in your system only for the most critical materials. For instance, rather than having a full-blown BOM for an apparel item, create one that has only the main fabric. Instead of running the MRP engine, write a simple report to explode your BOM based on a finished good forecast. Capture the commitment as an agreement in your system without tying it to a purchase order. If you would like to track the consumption against your commitment, you can create a service item (that does not have an inventory) and capture releases against the original commitment. With some intuition and modeling, you may find a way to incorporate the process into your application. 

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My name is Cem and this has been another gem.