VicinityFood Has The Recipe for Inventory Success

VicinityFood is a comprehensive food ERP software system designed for food manufacturers. Their food manufacturing software solution grows as you grow, allowing you to unify your business departments, improve operations and drive sustainable growth. Learn more about the company at VicinityFood.com.

I would venture to say that we probably haven't seen something like this in probably 14,15 years. Back to 2008, is when I'm remembering back when petroleum products were hard to get in everybody's allocations, etc. It's very similar now, where everybody's scrambling to find ingredients. So, therefore, being able to know what inventory you've got and how you can address those become important. So, how we're recommending clients to handle this is start looking at projecting your usage in the future based on either historic trends or looking forward in using forecasts. In other words, what do we think people are gonna be buying from us three months from now, six months from now, a year from now, and then run through an analysis of how much you're going to be needing by time period, whether it be by month, by quarter, etc, and determine based on lead times when you need to order things. This is typically done through MRP systems, material requirements planning systems. But even if you had to do it on the back of an envelope, it would be better than nothing.

In other words, identify what your gross demand is going to be by ingredient as you move forward. And being able to take that and match that with quantity on hand you've got now as well as the expiration dates, so you don't want obsolescence in the warehouse, and start identifying what kind of levels are necessary. With VicinityFood, our product, all the transactions that we do update inventory quantity on hand in real-time. So as soon as you consume an ingredient into a batch, it reduces that inventory, giving you a much cleaner picture of the inventory that you've got. We also support safety stocks and lead times on ingredients and packaging and finished goods and things like that. And that basically helps to buffer the supply chain so that you know how much you've got. But you also hold a little bit extra, based on expiration dates and shelf lives, to be able to handle variations in production. Forecast can drive MRP which basically means you can look out into the future as to what people are going to be ordering. And our system will help you identify when you've got shortages, and lets you put in purchase orders or contact the supplier to be able to anticipate that shortage before it becomes a critical emergency.

FP: Speaking of forecasts, how can an accurate food usage forecast benefit the manufacturer and why is this important?

RS: If you ask most food manufacturers about how many ingredients they're going to be putting into process next month, next quarter, next year, whatever, you typically hear them refer to usage for the past year. Basically, it's kind of like driving your car through the rearview mirror. It can be done if nothing in front of you changes. If the road's straight, there aren't any changes in the traffic pattern, you're great. The problem is in 2022 and beyond, life’s proven to be anything like the past. So, we can't really take what happened last year, the year before, and think that that's exactly what's going to be happening in this upcoming year or the next couple of years. And very few food companies spend time predicting the future, but they spend a great deal of time analyzing the past. And while the past can be somewhat of a predictor, you need to be careful about that.

One of the things I ask customers often is, what makes a great customer for you? Who are the people you like to work with? And almost every time the response comes back is that they're predictable, that they can help me see into the future so that it helps us limit the rush orders, it helps stabilize the supplier's production, and therefore, you look good in the result, in treatment, in price, and availability of product, etc. So being able to work with those customers, letting them know or with your suppliers, and letting them know, what they should expect from you in the future will actually pay huge benefits for you. Ask the question, “Who would you rather supply? The one that told you six months earlier that they needed this product versus the one that's demanding it tomorrow?” Just kind of keep that in mind.

And I think that's one of the big challenges around forecasting is the communication to the supplier on what needs to happen. As I see it, the solution is a system that can take both that quantity on hand we were talking about a minute ago with the resulting forecast-driven MRP. In other words, we're saying, "This is what we're expecting to sell in the future. Therefore, we need to make it," and drive that out by date, and have a solution that will allow you to do that without a lot of extra effort will really pay huge dividends in reducing outages but also making you look a lot better for your supplier, and hence, potentially getting a better price or availability of certain raw materials. Now, VicinityFood does exactly that. We use a basic MRP model that you can read in every textbook, but basically, at the end of the day, it's looking at where you've got shortages, whether it be shortages of produced products through sales orders, etc. And it tells you need to make this product. But it also shows where you're going to have shortages of raw materials so that it can tell you need to put in a purchase order by this date based on lead time to have it available for that production time. In the end, forecasts help you become that better customer so that you're going to get more of an edge with those suppliers.

FP: Why is it important to review vendor performance on a regular basis?

RS: Like every company out there, vendors change over time. They might have supply issues, management may change; they may have been involved in an acquisition. Over time, virtually every company changes. These changes can often have an impact on the quality of the product that they're sending you, the price, or even the delivery or customer service associated with that. So being able to go back and look at this over time is important. You can't really expect our suppliers to be the same as they've always been over time. That's just not realistic. Coming up with a systematic strategy to assess their performance of suppliers is important. And I would suggest that each type of supplier needs to have their own criteria. Your packaging supplier is different than your frozen products or dairy or things like that. They have different characteristics associated with them; therefore, some of the metrics that you use to compare them really need to be specific to that group of suppliers. And once you've got a group of these suppliers, develop a process to assess their performance for that group and routinely judge their performance.

For example, I put in an order on Monday, they told me it would be here on Friday, but it showed up the following Wednesday. Being able to track the variances from expectation is important. You know, from my perspective, I'm not as hung up on the actual lead time because remember, I've got MRP working for me, and I could have known that I was going to have that shortage. My bigger issue is do they do what they say they're going to do? In other words, if they got a two-day lead time, do they hit two days, or did they say they have a five-day and they hit five days? If the same two suppliers get delivered to you in five days, I just find the one that was able to predict it and be more transparent about what's going on is a lot more helpful.

With VicinityFood matched with Microsoft Dynamics as an ERP platform, we can manage vendor performance. we can look at price fluctuations, quality changes, where they hit their lead times, whether they've got deviations in shipping locations, and things like that, hence, the shipping lead times. And this information can be harvested by procurement, people placing those orders to make some meaningful discussions with their suppliers. When it comes time to renegotiate contracts or deal with quantity requirements, allocations for, say, a year, they've got this information to say, "Okay, you say you can provide all of this for me. But in the past, this is what you've done. You've always run short. Or maybe what we need to be doing is breaking these orders into smaller orders for us so that you can support them. Or maybe if we are able to provide bigger orders for you, maybe you can give us a price break." That information about the profile of each of those suppliers that is gained by real data becomes kind of gold for somebody in procurement trying to satisfy the ingredient requirements for a company.

FP: How important is it for a food manufacturer to know how changes in inventory costs will affect production?

RS: We're currently really in hyperinflationary times for all kinds of different reasons. You know, we're seeing it everywhere. We're seeing it at the gas pumps, the grocery stores, in our supply chain for ingredients. What we pay today is far more than we paid last year, and far less than what's predicted for next year. As ingredient prices increase, manufacturers really have three choices. They can increase their prices to the customers, they can absorb those price increases, or they can find substitutes, if possible. And so, as we expand our supply chain, we start to introduce increased transportation costs. The further... like, take those substitutions. If we have to go further for it, we're now adding even additional costs. There might even be currency fluctuations that we're dealing with that we didn't have to deal with in the past. And so, today, we have more variables involved in our pricing than we probably have had in a long time.

With this increased volatility, it becomes important to calculate the cost of production to ensure we're not selling the product for less than it takes to make the product. That whole concept, that fallacy is making it up in volume. The solution for all this is you really need a system to look at your current inventory costs and predict out into the future the cost of your raw materials ingredients. This gives the scratchpad for procurement to start talking and having intelligent conversations about significant price changes that are anticipated in the supply chain. For example, if a supplier calls me and says, "Hey, eggs are going up by 10%, in the next couple of months," I can easily see how that will hit my bottom line by doing an analysis of the different products that use eggs, in this case. And it's going to be important to look at this routinely because prices are going to change up and down. Largely, they're up at this point in trying to identify those products that potentially need a substitute or maybe it doesn't make sense to be continuing to supply that product. Or maybe it's okay that's a loss leader for you. But at least you're doing that with an open mind.

All of this has been done in the past. It's just been done manually. Now what we need to be doing is doing it in an automated fashion, a system that allows you to anticipate price increases or react to price increases, even before they get into inventory. At VicinityFood, we automatically record the current price being paid for each ingredient and packaging. Every PO that you do, it automatically updates the last cost of inventory. That's just built into the system that we have current cost immediately. But will also allow us to track and record anticipated changes by ingredient. This is typical when a procurement person is talking to a supplier and can make some quick notes on this ingredient's going to increase at this time. We call those proposed costs. And you can use those proposed costs in a cost roll-up to help you identify which produced items are increasing in price. It rolls through all the formulas, and does all that kind of stuff, and starts highlighting those products that you really need to look at because it's eroding your margins. So basically, you can do that as often as you want. We'd recommend you do it on a regular basis, certainly when you are renegotiating contracts for certain key raw materials. It basically gives management time to react to a price increase without a lot of effort. They can go out into the future as long as they want.

FP: Can you talk about the importance of data analytics to a manufacturer?

RS: The problem used to be that we didn't have enough data. I would argue that our new problem is we have too much data. Data can be accessed from all kinds of sources, whether it be from suppliers, your own internal database, or maybe even control systems you got in the plant. There's really an overload of data today. We used to key information into Excel and do analysis right from within Excel. That can be obtained electronically as well. In other words, you can take data from an external source and get it into Excel. The real question is, what do you do with that data? And from my perspective, you want to, as much as you can, keep the data in its original source. In other words, if you've got a control system, or market data collection, or warehouse management system, where possible, get that data from the original source without having to do an export and make another copy of that data. The reason for that is if somebody needs to come back and either make a change or adjust the data or backdate something, now you're not having to re-import, etc.

Now, I'm a real fan of Excel. I don't want Microsoft to get mad at me. I'm a real fan of Excel and Excel queries as a query tool. It's great to visualize data. The problem with it though is it's not a great database. And so, really, what you want to be doing is taking this data that you're getting from your own systems or your supplier systems and start correlating that with big data sources. Big data sources are data that you might not think is relevant to you right now, but it may be data that's out into the marketplace of new home purchases in this region. That would give you some indication that there are going to be more consumers of food products in that specific area. Well, that data didn't come from your system. It came from big data sources, and they're all over the place where you can correlate that data, bring it together with your data, and start identifying which products you should be marketing into what areas, etc.

The whole idea here is to move resources, move data analysis resources, out of the IT department into the hands of the users. Users are becoming more sophisticated. We don't really have to go get custom reports anymore. You give a user with some data capabilities, some Excel capability, visualization capability, and they're going to be able to create their own dashboards and be able to ask their own questions. At VicinityFood, we give access to all of our data through OData, which is just a technology that allows, say, Excel to reach into our data and mine data. It's staying in our database. It doesn't go into Excel but Excel can easily read our data. We can also do the same thing with disconnected systems like barcode data collection, the warehouse, and things like that. What we're really trying to do is leverage Microsoft and tools like Excel or Power BI. If you haven't looked into Power BI, it's a great dashboarding tool to create user-driven dashboards, where the consumer of the data can change the dashboards as necessary. So as their questions change, they can change their dashboards to meet that changing environment that their job or their role entails.