Posted by: Matthew Molinari | May 27, 2012

American Pickers or American Supply Chainers?

Over the last year, I’ve become a pretty dedicated viewer of American Pickers on the History channel. It seems a bit odd since almost every episode is identical: drive around, find a location, search for junk, try to buy it. However, just this morning something clicked – it’s the perfect example of supply chain management.

The way that Mike and Frank do business demonstrates several key components of supply chain management and logistics but I don’t think they are even aware of it. They always introduce of themselves in the same manner – “We’re pickers from Iowa”  – but maybe they should start introducing themselves as supply chain managers from Iowa.

Here are two of the more interesting ways in which Mike and Frank operate using the theories of the supply chain:

Location – Every person that Mike and Frank deal with could certainly sell these goods themselves directly to the consumer but why they choose not to brings to light the concept of location. First off, Antique Archaeology, the store that Mike and Frank use to resell the goods offers the items to a wider range of customers. Second, Mike and Frank know how to find collectors where the average person they visit has no real connections to resell the goods. The pickers also have an orgnized warehouse with the goods whereas when they find it, it is in a dusty box in a building that is about to fall over. Most customers wouldn’t be interested in buying the item under those conditions.

Much like Heinz Ketchup doesn’t sell directly to the consumer these people aren’t interested in taking  on the responsibility of selling. So much of operations comes down to what you think you can do best and whether the extra effort of selling to consumers rather than to retailers is worth it. For the people on the show, the time and effort of marketing to individual sellers isn’t worth it.

That is why they are willing to sell an item for $200 that Frank and Mike openly admit they can resell for $600. The convenience of having someone come to your location and take the goods is worth taking less than you could get on the open market. Supply chain management is about knowing where to find the items you need, and others will want, at the right price.

Demand – The most impressive thing that I notice about how Frank and Mike operate is that they must determine the current demand for items on the fly and in an instant. As they negotiate for items, they very rarely are able to contact an expert for what an item is worth. They operate mainly on the low margin end of the spectrum by buying lots of items and making a little bit on each one. Typically, the only purchases that they make a lot of money on are classic cars or motorcycles.

Many times, it seems like they are operating using at least a 50% margin but when you consider the travel costs and storage costs of holding the items, they probably end up only making about 3%-4% on most items. Their motto actually is quite a bit like Amazon who looks to sell anything they can make a buck on. Amazon started out as an online bookstore but quickly realized that they could expand to selling everything and anything as long as there was some profit to be made.

Frank and Mike operate in a very similar model with specific focuses (motorcycles, oil cans, bicycles) but they will buy anything that isn’t nailed down and they see some margin on. In order to do this, they must be aware of what they can sell the item for because if they buy too many rusty cans that don’t sell, they won’t be able to pick for very long. The common phrase used on the show is “there’s no meat left on the bone for me at that price” and they are very careful to purchase items they know they can turn quickly and for a profit. The supply chain is all about forecasting supply and demand and operating at a sustained profit within those parameters.

I think if you look at your business you’ll notice many similarities between how Mike and Frank operate and your own supply chain management. So how does your business operate like a picker?

Posted by: Matthew Molinari | May 22, 2012

If You Supply It, Will They Demand It?

One of the most important aspects of a business is determining how much of your product you should produce to keep up with customer demand. There are so many different things that can influence the demand levels which in turn can dramatically change how much supply you should produce. On the one hand, if you produce items and demand suddenly drops, you’ll be stuck with an inventory surplus; but you may also find that your demand forecasting was off and you ended up not producing enough which created a shortage in the market.

Neither situation is ideal obviously because either you are stuck holding onto inventory you can’t sell which costs you money or you can’t meet demand which means you are leaving sales revenue on the table.

Take a look at the simple graphic below as it details the basic thought process you should follow when trying to determine the levels you need to produce to keep up with demand. Point “A” represents the natural equilibrium when the demand from customers matches exactly with the supply that is being produced. This is the ideal situation but more often than not you will not be able to hit this point exactly.

If you were, you would never have excess inventory at the end of the month, you would not need any safety stock and a customer would never have to wait for their item to ship because it is currently out of stock. That point is reached in a perfect world and quite frankly, you’ll never get to that point – not in a million years.  However, the idea is to get as close as possible to decrease costs and increase sales.

The spot located within the triangle created by points A,B,Q is the cost associated with producing the item (all your expenses) and the area labeled as Producer Surplus is the revenue earned by selling above the costs incurred to produce.

The main goal is to determine a price that maximizes your surplus without creating a decrease in demand from pricing customers out of the market or pushing them to a competitor. None of this is simple, if it were everyone would be an economics professor. That doesn’t mean that you can’t take a hard look at your supply chain to try to determine some of these factors and how you can maximize your outputs while creating the largest profit.

How does your company look to improve the supply and demand issues it faces?

Posted by: Matthew Molinari | May 21, 2012

Service Gap

Yesterday I went shopping at the Gap and ran into an interesting situation that every business must deal with. I entered the store about 15 minutes before they were scheduled to close. As I was browsing, a sales clerk came up to me and mentioned that the jeans were on sale, I said thank you and she walked away.

When I entered the store, I didn’t even look at the hours so I was unaware they would be closing soon. The sales clerk also didn’t mention anything about the fact they would closing the store in 10 minutes. If I had any idea, I would have just left the store and come back. By the time the employees mentioned they were closing, I was in the dressing room with a pile of clothes to try on. Now that I was aware, I was in the middle of trying things on and not about to rush out of the store but the clerks were clearly trying to push me out of the store so they could close up.

In my mind, they had their opportunity to mention something and I would have left without thinking twice about it. I sped up my purchasing process once finding out and ended up spending over $200 but at the register you could tell the clerk was still in a rush and ended up just shoving my clothes into a bag leaving them wrinkled.

Now, I’ve worked at a clothing retailer (TJ Maxx) and at restaurants where lingering customers can be frustrating but in each instance our managers made it very clear that under no circumstance were you to rush a customer out of the store. If you were open when they came in then it was up to you to be available for them until they were done shopping or eating.

I recently talked with a local restaurant owner who nearly fired a server for not offering the last customers of the night dessert. If you operate a customer service oriented business (aren’t they all?) then you need to train your employees to understand that as long as they are on the clock, they need to be fully engaged in ensuring they are giving full service to each and every customer.

I’ll be honest, I’ll probably end up going back to the Gap at some time but I’ll make it a point to never go back to the one at the Summit Mall in Reno just because of the way they rushed me out even after they saw how much I was buying. What sort of techniques do you employ to ensure that your employees work diligently the entire time they are on the clock?

Posted by: Matthew Molinari | May 20, 2012

The Importance of Processes

Last week I was fortunate enough to spend some time with Mark Estee who is the owner and head chef at Campo here in Reno. I went down with the F&B Purchasing Agent and a General Manager for our resort’s restaurants and spent about 3 hours listening to Mark talk about all the aspects of opening and operating a restaurant. He had some really great insights and his passion comes through immediately.

I thought that I would share two of the more prominent ideas that stuck out to me from the afternoon. Really, there were two key ingredients that I think helped Mark become successful at Campo – planning and processes.

Immediately when you walk into Campo you can tell that a lot of planning went into the design of the space. Mark was lucky in that the space was empty when he moved in so much of the set up of the restaurant could be designed to fit the specific needs of CamImagepo. Many place don’t have this luxury but when you think about how you want your kitchen or warehouse to function you need to think about every aspect of your business and how it gets done.

Once everything is in place is much more difficult to rearrange and even little mistakes can cost you time, money or quality of your product. Mark was very deliberate with all of his decisions and was able to accomplish a lot with limited space.

One of the main issues the restaurant faces is storage space. A few pieces of equipment are kept in a back storage area and must be wheeled in daily for food preparation. In some cases, even the best planning isn’t enough due to plant limitations. One thing that Mark mentioned was that having a budget and sticking to it is key. You can probably get everything you want and need if you throw enough cash at it but a benefit analysis should be done to make sure what you get out is worth all the cash you put in.

It was pretty clear that Campo operates using integrated processes across the business. There are systems in place to organize front of house activities as well as the back of house that all flow through to the managerial aspects of running a business. It seems as though they are operating based on the idea that having information available to employees at all the levels of the restaurant will be reflected through improvement on the financial statements.

You get the feeling that Mark is very involved with all his employees and expects that they are just as involved with making the restaurant a success. Personally, I think that this is a great approach to creating engaged employees who will end up contributing more to the business. There are many ways in which Mark achieves this and the most basic is having regularly scheduled meetings where key topics for the week are addressed.

Any business who has the proper systems in place should be able to create a laundry list of topics for a weekly meeting based on the prior weeks data as well as the customer responses on-line and in other locations. The key to filtering the information is determining which metrics matter to your business and which ones are just nice to see once and a while. When your business requires multiple systems and each one is spitting out data, you need to determine which numbers are going to help you improve.

It may take a few months to finally determine which numbers matter but that’s ok. The important thing is to learn what can help you improve and then make sure everyone who comes into contact with creating those figures is aware of where you are at now and where you need to be in a month and in a year after that.

I learned a ton overall and I think Mark really has a grasp on what works and why but also isn’t afraid to change things if they stop working. What things in your business would you change if you could rework your plant or equipment?

Posted by: Matthew Molinari | May 15, 2012

The Post Sale Process

I saw this article a few days ago and it really resonated with me because the resort I work for takes the Net Promoter Score very seriously. If you aren’t familiar with the NPS format, check it out and start thinking about using it for your business. The basic premise boils customer service questionnaires down to one question: Would you recommend our business to a friend? The answer is ranked from 1 to 10 with 10 being the most likely to recommend to someone.

I think 50 years ago most businesses didn’t care about whether people would recommend their product because the means of communication were so different. If someone had a crappy experience at Sears, the likelihood of them being able to express it to a broad audience was pretty much zero. At most they would maybe tell their spouse and a neighbor but more often than not that experience would simply disappear.

Marketing was all about shouting out your message to customers and not expecting, or wanting, any feedback. That has changed drastically with the emergence of social media and now customers expect service 24/7. If they don’t get it you can expect them to send out a tweet or write a blog about their experience that has the ability to reach millions of people around the world in only a few minutes.

That is what the NPS is all about. It takes into account all aspects of your business and assumes that if you do them all well, the answer to the recommendation question will result in a positive score but if you succeed on all fronts but one, you may see your score drop to a 7. This is the new problem facing many companies in satisfying their customers. They are now required to think about their product from the very first stage of production all the way through the life cycle to when the product is disposed of by the end-user.

More and more often companies are spending time thinking about the post sale process and ensuring their product is quality, the warranty satisfies expectations, the call center doesn’t frustrate and repairs and maintenance don’t bury the company in expenses. I think the power of the NPS score is that it creates lifelong customers that you don’t have to keep fighting to find. Once you attract them and satisfy their needs they should stay loyal to you if you continue to engage them in a meaningful way and make them feel as though they are an individual and not just a sales number.

Many times we think of the supply chain from the beginning to the end-user but with customer relationship management and the emergence of social media we really need to use reverse logistics to ensure that the needs of the customer are being met so they will recommend you to all their friends.

How does your business engage customers and make sure they market you to their friends?


Posted by: Matthew Molinari | April 30, 2012

The Healthy Chocolate

Tonight I had the opportunity to visit the Xocai Healthy Chocolate (pronounced Show-Sigh)warehouse in Reno, NV. I had never heard of the company before tonight but I was very impressed with Andrew Brooks who is the Founder and COO.

Over the 2 hours I spent on site, Andrew spoke to our group about a myriad of items ranging from his experience of having his previous company sell products to Wal-Mart to what he thinks of social media (not a big fan).

Here are two of the more interesting things I came away with:

1) Their chocolate melts around 74 degrees which is much lower than other chocolates. This is due to the fact that Xocai chocolate does not have waxes and other additives that raise the melting temperature. This means their chocolate will melt in your hand and will most certainly melt in a shipping container if not properly stored. This presents a potential problem that  means Xocai must take special precautions in packaging.

In order to ensure the safe transport, Xocai’s warehouse has a flash freezer on site that is kept at a chilly 40 degrees below zero. The freezer stores both products as well as ice packs that are then packaged with the chocolate to ensure the packages stay at the proper temperature.

One of the main issues that the company still faces is that some of their containers are still styrofoam based to help keep the chocolate cool. While it is the most effective manner to ship them Xocai is more than aware of the sustainability issue that the packaging presents.

2) The company utilizes a warehouse management system that helps to minimize their shipping costs by detailing out which packaging box should be used for each unique order. Xocai is a network marketing company which means they do not sell their product in retail stores. Instead, they rely on others to sell their product for them (think Tupperware or Mary Kay).

This means that they deal with a lot of different sized orders that must be shipped out. Xocai holds all the inventory and ships the products out as their independent distributors make sales. They can not plan for consistent orders of the same size leaving the warehouse each day because of this. When you sell to someone like Wal-Mart you can package your shipments on pallets and it is more of a one size fits all approach.

Xocai has a WMS that allows them to plug-in what the order is and it calculates which box should be used to ship the order. By doing this, they are able to minimize the amount of empty space in each box which means they also eliminate the amount of empty space on every truck and plane that they ship out on.

In the beginning, the company had picnic tables set up with employees determining which box would work best for each order. As the company grew, they actually used the experience of these employees to help set up the WMS.

Overall it was a great experience and I learned a lot from a very passionate and extremely smart owner. I always love an opportunity to get out and see supply chain techniques in action. What are some places you’ve visited that helped you see things first hand?

Posted by: Matthew Molinari | April 29, 2012

The Real Housewives of the Supply Chain

Today, I am shocked again by the everyday things that can reflect the importance of running a business the right way. In my last post I talked about how a simple trip to Wal-Mart reminded me of some supply chain techniques. I cannot express this next part enough but tonight I was watching The Real Housewives of New Jersey beause my wife loves it and happened to catch some rare words of wisdom in tonight’s episode.

Rich, the husband of real housewife Kathy, apparently owns some businesses one of which is a gas station. He took his son to visit the business in the hopes to pass on some wisdom that he had learned over the years. Two things he said really caught my attention.

First, Rich said that as an owner you have to constantly be present and overseeing the business because employees will see that you are paying attention to details. He went on to say that if employees see that you care, they will care and if they see you are neglectful they will follow suit.

That is some very insightful advice that any owner or manager should look to follow on a daily basis. I firmly believe that employees take their cues from their bosses so in many cases a failure on their part is really a failure on your part to set up a system in which they can succeed. Don’t get me wrong, some employees are just awful and no amount of help could fix that. But in many cases, the same employee under different leadership becomes a completely different type of worker.

The second great piece of advice given by Rich came in response to his son saying he wanted to go into real estate because it seemed like rules didn’t apply to people in that industry. Rich paused a second and responded that starting a business based on anything deceitful or dishonest was a sure-fire way to be closing your doors quickly after opening.

What a great piece of advice in this day and age when so many people are looking for shortcuts to run their business. The real key to a successful operation is knowing that doing things right is the only way to do them. I saw a funny Wendy’s commercial the other day that said their burgers were square because they didn’t want to cut corners anywhere in their business.

In the age of internet billionaires it seems like everyone is looking for that get rich quick idea and ignoring the fact that it takes lots of hard to make an idea work. I think this is especially true in the modern supply chain where you need to keep your moral compass pointed in the right direction in order to avoid scandals like Wal-Mart is currently involved in.

These two pieces of advice also tie into each other in many ways. Your employees see more than you think and they know if you are being dishonest in how you run your business. If you are taking liberties you can bet when you are gone your employees are taking those same ones.

What types of things do you do in your business to demonstrate these two pieces of advice?

Posted by: Matthew Molinari | April 28, 2012

Some Assembly Required

Today I went to Wal-Mart and bought my wife an early Mother’s Day gift. She’s been asking for a patio set for a while and now that the weather is finally cooperating here in Reno, I went out and found one that she ended up loving.

The experience brought to mind two separate issues relating to supply chain management. The first was how Wal-Mart was stocking their inventory and the second was how the manufacturer went about producing the item.

Wal-Mart is one of the best in the business at managing its supply chain. Take for instance their ability to reduce the number of miles driven shipping their goods across the country. So I fully believe that they have procedures in place that are based on years of research when it comes to how they manage their inventory but today I noticed that there were some questionable practices – at least for me.

As I was shopping for the patio furniture, I was able to test the options in an area with fully set up floor models. However, almost all the models that were displayed were not in stock on the shelves and the stock on the shelves had poor quality pictures. I was forced to walk back and forth between the show area and the two shelving areas to try to match up pictures with floor models.

Eventually, I had to give up and use my phone to go to the Wal-Mart website and search the boxes on the shelves to determine which one looked good. Overall, they had about 12-15 models set up and about 3 of those were in stock while they had an additional 5 in boxes on the shelf that were not displayed on the floor. Why not display them all or display only 2 or 3 and save the room? It seems like a great oppotunity to save on the labor of setting them up while also leaving more floor space for other items.

Anyways, after making it home and putting the furniture together pretty quickly, I found myself wondering about the manufacturer of the product. Some of the slots that the legs fit into were short and it would have been easier, and more sturdy, had the slots been an inch longer.

Why not add that extra inch I thought to myself? Then I thought about how many slots (4 per table) that would actually work out to and I bet it was hundred of thousands in savings on material by keeping them the size they are. I would love to find out the type of break even analysis that manufacturing companies do on items like that.

They must spend years determining exactly the size, shape and materials that they can use to produce the most cost-effective item without loosing quality or functionality. Then I went to assemble the chairs which came in a second box and notice that they gave me another wrench in that box identical to the one in the box for the table.

You cannot purchase the boxes separately so for some reason they supply you with the same piece twice. It is a heavy-duty wrench that only the Hulk could break so again, what numbers do they crunch to determine that making one piece bigger will cost too much but at the same time adding duplicate tools is costs effective?

These are the things I think of while putting together furniture and shopping at Wal-Mart. What everyday things make you think about the supply chain?

Posted by: Matthew Molinari | April 26, 2012

Think Like You’re Starting Over

The best thing about reworking a part of your business is that you are able to take all the things that don’t work and correct them. Many times these types of projects can be costly and stressful but in the end you can look forward to coming out on the other end with a more efficient business.

Unfortunately, you can’t rework you business every year or even every five years but that doesn’t mean that you can’t think about your operations in new ways.

The first thing many people do when embarking on a new project is make a list of all the items that need to be updated, why and what changes need to be implemented. I’d challenge you to think about your employees and business in this way everyday.

Just because you aren’t knocking down walls and spending tons of money doesn’t mean you can’t find opportunities for change and improvement in your day-to-day operations. The key is to start looking at your operations as if you were starting from scratch. Too often we get stuck in the monotony of routines and continue doing things the wrong way because that is how it was always done. And let’s face it, change is hard. It takes time and effort and a lot of work on multiple levels.

However, if you look at those smaller bumps in your daily routine and think about how they should be running, you can implement ways to change them. Take for instance your inventory storage room.

Perhaps it is a mess and it is effecting your purchasing, taking too long to count and leading to theft from a lack of tracking. Maybe you can’t rebuild the storage room but you can retrain your employees, buy some new storage racks and put someone in charge of monitoring the room on a daily basis.

What are some ways you’d like to go about reworking a current system in your business that is not operating in the most efficient manner?

Posted by: Matthew Molinari | April 22, 2012

Managing Your Inventory

One of the hardest things to do is to accurately monitor your inventory. There are so many variables that go into what is left on your shelves at the end of the month and it can be difficult to determine why your count is off. The idea of determining your costs seems so simple:

Starting inventory + purchases – ending inventory = Cost of Goods Sold

But what about waste, transfers to other departments, theft, unusable items, inaccurate counts? Where do those things factor into the equation? There are a multitude of ways to try to control these factors but I am going to focus on one in particular that is an easy place to start.

In order to control theft (or shrinkage as it is more commonly referred to) there are several different strategies you can employ. Take for instance your liquor, beer, and wine inventories which are more likely than other things to get up and walk away.

As much as possible try to keep the bulk of the inventory located in a central storage room with a lock. The only items that should be kept outside of that main storage location are the items that bring your bar locations up to par levels. Depending on the level of business you are doing your par level may vary from one bottle to three or four.

You want to make sure that your bartenders aren’t constantly running to the storage room to get more bottles but you also do not want unneeded bottles sitting around as those are more likely to appear to employees as if they are unattended which makes them more likely to not be there the next day.

Make sure that only 1 or 2 people have the key to that storage room and they understand that anything that leaves needs to be recorded on the sign out sheet. The keys should never be given to anyone except for the people who are in charge of them. It is amazing how quickly giving a key to one bartender in a crunch can turn into 3 or 4 people handling it every day and that negates the idea of having a secure room.

The other important factor is doing accurate bar breaks so that every bottle that is taken out is recorded and if an unused bottle comes back it must be checked back in. Tied into this procedure should be test counts throughout the month. 30 days leaves a lot of time for things to go off track so testing an item every day or two is a good way to catch issues early. Once you get the final month-end count, it is very difficult to go back and find when an issue started.

Overall, the key is to create a sense of accuracy and security so that everybody in the business sees that every item is being counted. It is also much easier to monitor the 2 or 3 employees who have keys than it is to watch all your employees. People are very smart when it comes to theft and they pick up on opportunities to take items when they feel no one is watching. If employees feel like the controls are tight and the likelihood of getting caught is high than they are less likely to try anything which means you keep more of your product on the shelf.

What are some controls your company uses to prevent shrinkage?

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