Fundamentals of Inventory Management
Another valuable strategy is to proactively manage inventory. Visibility of on-hand levels at each node in the supply chain, traceability on what is moving between facilities, and information on harvest plans can provide an accurate chainwide picture of inventory levels. The short shelf life of many produce commodities also makes inventory management essential.
“Probably 80 percent of my team’s time is spent trying to make sure they have the right amount of inventory, both locally in our facilities and in transit,” says Sun Rich’s Fernandez. “We buy a lot of product from overseas, so you must have enough in-transit inventory that arrives in time to supplement on-hand inventory.”
Ranking and Categorizing
Segmentation is another key strategy. Prioritizing your key commodities, suppliers, and customers based on their financial impact will help you allocate time and resources appropriately. For example, if 80 percent of your profitability comes from 20 percent of your customers, then they should be the focus of your forecasting, inventory management, and product allocation activities. Such efforts will naturally drive collaborative partnerships and will ensure that you can procure important products when in short supply.
“Customers should work with suppliers to categorize produce items with an ‘A’ to ‘D’ coding,” asserts Dr. Richey. “Watch the high demand ‘A’ items closely and keep suppliers in the loop about real-time changes in demand. Develop strategic plans for dealing with these products.”
One way to actively manage key products and formalize relationships with key partners is to establish contracts. A supply contract requires that a supplier commit to supply a fixed or minimum quantity of a particular commodity for a fixed term, usually extending over the life of the season, and at a fixed price (see sidebar for more information on contracts). These contracts promote stability in an otherwise volatile supply and demand scenario.
“The overall purpose is to create shared risk for market price fluctuations while providing a steady supply of product,” explains Jason Read, an attorney with Rynn & Janowsky, LLP in Newport Beach, CA. “The buyer has a steady supply of product. The shipper has a steady customer and is not at the whim of market ups and downs. Growers appreciate having that locked-in, fixed selling price for their product.”
The contract also promotes product availability for the customer. “When “supplies are tight, the buyer has a better chance to be covered with the needed product at the contract price,” notes Watson. “Especially with weather extremes, which can cause huge swings in available supply.”
Responsive Strategies
It’s not possible to eliminate every potential supply-demand balancing problem; unexpected events occur and unusual situations arise, but that’s no excuse to be ill prepared. Supply chain managers must participate in strategic scenario planning to mitigate risks of over- and under-supply situations.
