There are many catch phrases floating around the offices of supply chain and purchasing managers everywhere. Comments from management filter down that operations need to be more streamlined, there is pressure to show continuous improvement in process, and profit requirements are ever increasing. Often this is easier said than done.
Purchasing managers are tasked with keeping overhead as low as possible, often at the expense of service. One way to accomplish that is to run a ‘Just-in-Time’ (JIT) operation. To run an effective JIT operation, managers must take delivery of raw materials, packaging, printing, and pallets into consideration. If service is interrupted in any of these areas, the best laid plans are destroyed faster than you can say, ‘integrated, supply side, Six Sigma, streamlined operation.’
There is an old saying in the trucking industry: if you bought it in a store, it was shipped in a truck, and more times than not it was packed on a pallet. A local pallet supplier can meet the demands of his customers by delivering by any means necessary. He has the flexibility to make fast decisions and implement them.
Pallet rental companies such as CHEP, which has over 80 million pallets in its inventory, are not as flexible. If you were to ask a pallet rental company representative if it is possible to run a JIT operation, you would get two different answers. The sales manager would say, ‘Definitely,’ and operations would say, ‘Are you crazy?’
Pallet rental companies use forecasting as a tool to plan operational and service requirements. Forecasting customer needs is done by the sales department, and the information is sent to the planning department. The planning department will determine how many pallets go where.
If forecasting is over or short in a
region, it will adversely affect operations for many rental pallet users.
When forecasting is not accurate, shipments can be delayed and pallet quantity may be reduced. This makes it difficult to run a JIT operation strictly using rental pallets.
Forecasting Is Your Friend
Forecasting is not an easy skill to master. It is like reading a crystal ball. There are several types of forecasting for different products to determine material usage.
Forecasting does not have to be complicated when determining pallet stock levels. Every business has cycles, seasonal trends and unexpected surges. For example, water companies will experience seasonal surges during the summer and then trend down entering fall and winter. The produce industry is seasonal, and demand depends on what crops are in season. Barring an act of God, growers know when their crops will be ready for picking within a week or two every year. For example, ordering raw materials, packaging and pallets for the grape season will begin at the end of May, creating heavy demand; I have witnessed how this surge put a strain on pallet companies, creating issues to meet demand.
The inability to forecast accurately creates inventory issues that result in poor quality, less than full loads, and customer service complaints. This is an unfortunate reality for companies dealing with rental pallets every year. If shipments are short by 50 or 60 pallets and a company receives two loads per day, you would be short a whole truck-load every week.
Using a Forecasting Including Trends and Seasonal (FITS) variable formula is the easiest way to plan your weekly usage. Here is an easy way to forecast your pallet needs and identify when you are running low.
Sample Scenario and Forecasting
You are a purchasing manager. On Wednesday, June 9 you have 725 pallets in inventory. You are responsible for ordering pallets for next week.
In June of 2008 you purchased 14,500 pallets. In all 2008 your company bought 125,000 pallets. Your projected growth for FY09 is 12%, and you have not been notified of any sales promotions. Based on this information, how many pallets would you order for the following week?
In order to figure out your seasonal variables, take your total pallet usage for 2008 of 125,000 pallets, add in your estimated 12% projected growth and divide by 12 months. That is an average of 11,667 pallets per month. Take the amount you used in the same month a year ago and divide it by your monthly average: 14,500/11,667=1.24. Multiply this number by your monthly average: 1.24×11,667=14,467. This is your monthly forecast for June: 14,467
pallets.
Take your forecasting to the next level. You want to know if you are above or below forecast for Wednesday, June 9 based on an inventory of 725 pallets.
As of today you have ordered 4,090 pallets. To figure out if you are above or below forecast, take your monthly forecast and divide it by the number of days in the month, then multiply by the number of days you are into the month. June has 30 days, so we divide 14,467 by 30: 14,467/30=482 pallets, your daily forecast pallet usage. Since it is nine days into the month, multiply your daily forecast pallet usage by nine to determine your current forecast pallet usage so far for the month: 482×9=4,338 pallets.
The number of pallets you have ordered so far for the month (4,090) is below your forecast for how many pallets you should have used so far for the month (4,338). To determine what percent you are below your forecast, subtract 4,090 from 4,338; 4,338-4,090=248. Multiply 248 by 100 and divide by 4,338; 248×100=24,800/4,338=5.7. Your current pallet usage so far for the month of June is 5.7% below forecast.
Being able to identify if you are too much above or below forecast on a daily basis lets you know if there are issues with operations. For example, if the sales department failed to inform purchasing about a promotion (not as if that would ever happen), you will be able to detect an increase of material usage and adjust accordingly.
One last thing before you are done. As noted above, you currently have an inventory of 725 pallets, and you should keep at least a three day supply in stock.
Take your current forecast pallet usage so far for the month, 4,338, divide by 21 working days left in the month, and multiply by 3; 4,338/21=206; 206×3=618. You should always have 618 pallets in inventory.
Emergencies
There are a couple ways to maintain your JIT operations when experiencing service failures from a pallet rental company or pallet dealer.
First, I would keep at least a two day supply of pallets in stock for a buffer. This will ensure that you have the time to react and solve problems.
However, this will create less of a JIT operation, take up more space and cost extra in pallet rent. For customers that pay daily rent on pooled pallets, the cost can sneak up on you if you are not careful. Do not misuse the pooled pallet by keeping it in your pool too long; rent will accrue every day you hold the pallet. If you see a trash can or heavy equipment on a rental pallet, take it off, load the pallet and ship it.
Second, have an alternative source of pallets for emergencies. Although it is discouraged, a pallet rental company’s customer can ship to another customer without fees. It would be considered a private deal, and quality cannot be guaranteed.
If you are in the middle of your high demand cycle and experience service interruption from a pallet rental company, you can make a deal with another pallet rental customer to temporarily cover your needs. Let’s say a load of pallets was delayed, and you need 100 pallets. Arrange with another pallet rental customer to ship you 100 pallets.
It is important that you reconcile this on your books. If you ship 100 pallets to someone, make sure you account for it in the reporting system or return the 100 pallets when your shipment arrives.
A typical pallet rental contract will not prohibit a shipper from sending pallets to another customer. Check with your legal department to ensure you are not violating the contract.
Has a vendor’s lack of planning ever caused an emergency for you? Running a JIT operation is the way to go, but it can be tricky when you are relying on vendors that fail you at certain times of the year.
I have seen forecasts by complicated, expensive programs, and the numbers are off by 200% in either direction. I also know an old warehouse manager who orders the correct amount of pallets he needs every time — no computer forecast necessary.
The bottom line does not always have to do with cost, but service and accuracy. Failure will happen. Expect it and be prepared.
