In today's episode of Another Ducking Digest, Sarah Scudder and Lindsay Smith delve into the intricacies of manufacturing supply chain department budgeting. Each manufacturer's unique supply chain warrants distinct budget models, influenced by factors like industry, expenditure levels, market dynamics, commodity characteristics, sourcing methods, pricing contracts, and tariff implications. The budgeting process can be as intricate or as simplistic as desired, ranging from a comprehensive assessment of historical data and market demand trends to cost considerations, technology integration, risk management, supplier relationships, and workforce development. They emphasize the importance of aligning the budget with both corporate objectives and 2024 supply chain strategies, engaging key stakeholders, and staying informed about industry developments and peer use cases.
In today's episode of Another Ducking Digest, Sarah Scudder and Lindsay Smith delve into the intricacies of manufacturing supply chain department budgeting. Each manufacturer's unique supply chain warrants distinct budget models, influenced by factors like industry, expenditure levels, market dynamics, commodity characteristics, sourcing methods, pricing contracts, and tariff implications. The budgeting process can be as intricate or as simplistic as desired, ranging from a comprehensive assessment of historical data and market demand trends to cost considerations, technology integration, risk management, supplier relationships, and workforce development. They emphasize the importance of aligning the budget with both corporate objectives and 2024 supply chain strategies, engaging key stakeholders, and staying informed about industry developments and peer use cases.
Lindsay and I are back as always on Monday morning to talk about topics that are relevant to those of you working in supply chain for small and mid-sized manufacturers. Last week at the end of the show, I had asked Lindsay to, "I think it's really relevant and important. I know that most of you, us, me, and my team included, are working on budgeting for 2024. Figuring out what we need to ask for, how we're going to build our business case, what ROI and metrics do we need to tie to these buzzed asks?"
Lindsay has a lot of experience doing budgeting and putting processes and systems in place for presenting and getting things approved and executing. So, I thought that would be a really, really relevant topic for us to talk about today. Those of you that are joining live, drop us a note in the comments, tell us where you're joining us from, feel free to share a random or fun fact about yourself as well. So, with that, Lindsay, let's start off with just kind of some of the basics around supply chain Department budgeting for next year and some of the considerations that really need to be looked at as we're building out a budget. Thank you, Sarah. Good morning. Yeah, the, I think going into this, why is it well, it's a little tricky, right? That has to be tailored to our particular situation and what we're thinking of there is, you know, all Supply chains are unique. So it's not a big stretch to say that the budgeting process at different U.S. manufacturers will similarly be unique. Unique both in terms of the environment, so what we're thinking of there is the industry, the amount of money, the market conditions that we're seeing in terms of growth or even sales or the commodities we're sourcing, the how we buy, you know, are we, do we have the flexibility and albeit the higher cost of via distribution, or are we, are we hung out there with getting a lower price directly from manufacturers, perhaps remote manufacturers with less flexibility? How does all that factor in, and, you know, I, the second idea is how do manufacturers choose to model this? Is it, are we one line on a spreadsheet or is it, is it a three-page exercise of analytics and, and the, you know, the, the process can be as complicated as we want or it can be a rubber stamp of, you know, well, we're going to take last year's number and bump it three percent, you know, but I think, I think that's unhealthy. It's, it's always good to have someone tell you you don't have to do some work, but we don't want to be marginalized, certainly, it's going to be a stretch to say it's a chance for supply chain to shine, but we certainly want to use it as a chance to reintroduce ourselves since there's going to be a budget review with the, with the management team, with the leadership team. It's an opportunity to help send the message to reset of, here's what supply chain really does. So from the selfish supply chain perspective, we want that, we don't want to miss that opportunity to talk to our personal agenda. So, you know, how do we do that? You know, we can, I think the wrong way is to be a storyteller, Lindsay, you know, that's, that's charming, but yeah, it doesn't really get us too much credibility. I think KPIs, data, and KPIs are our friends. So reintroduce supply chain, what does that mean? What do we want to say about supply chain? How much money do we spend? How many buyers do we have? How many suppliers do we have? Are the suppliers controlled? How many, what portion of the suppliers are overseas or in remote regions and that have incumbent inbound shipping expense over and above just domestic inbound LTL Road Freight charges? And then how many, closer to Sarah's heart, you know, how many open purchase orders do we have? You know, how many POS did I place last year? How many are open at any one time if I place it, you know, 20,000 last year or two thousand or four thousand open at any instance? How many of them are delinquents, you know, the what, and then especially for budgeting, what was my PPV last year? You know, what, what, you know, of all the numbers we see, of what is it, the core, the core CPI index that we've all been reading about, about inflationary pressure? How, what does that translate to in the, the, the micro environment of a single company? So yeah, I try, I, I came up with seven considerations, and the first one's what happened, where did we come from, bit of a rear-view mirror exercise, right? But set the baseline as here, here's where we came from. So I think it's a healthy exercise to go back and say, you know, what happened in 2022? What happened in 2023? And then ask ourselves, what's, what's going to change? Is it, are we seeing from a product lifetime management perspective or a new product introduction perspective, what are we seeing change? What, what do we expect? So, so have that come at it with that informed understanding because there's so much going on. I think it's important to also really look at them globally. What's happening?
Yeah, absolutely, and that's a tricky one. Certainly be aware of that, but then how does it translate to in our environment? Certainly look at the gross level, you know, the macro level, fascinating reading, right? But also at our growth level, SNOP process, our sales and operating plan. What, what do we see happening there? Are, is the sales team expecting growth in certain areas? How does that translate to the supply chain activity? You know, what, what, what specific big customer trends do we see and use these to, to, to distill down that global macro level to, since there's so much disagreement about, you know, where the economy is going? And then the, you know, the, the big, the 800-pound gorilla we've got to talk about is the cost of goods. You know, here's how much money we spend, here's how it translates to, you know, the company P&L is going to show a cost of goods line. We own that. So, we, we, we can add, there'll be a lot of opinions and anecdotes around that, but it behooves supply chain to talk to that in detail about the raw material component, the Asian sourcing component, the labor, the inbound LTL, and commodity-specific, you know, if I'm spending my 20 million dollars from 400 suppliers or 200 suppliers or 20 Asian suppliers and six of them are machined metal parts or five of them are injection molding or 20 of them are electronic components, I've got to be able to talk to that and say where here's where my risk is, and also, also, also in the cost, Lindsay is factoring in Freight and transportation, right?
Don't just look up the cost of the raw materials, but look at the whole picture of what does it cost to actually get it to you as well or get it to your customer.
So, I'm glad you said that, Sarah, because that's oftentimes a favorite, you know what we're talking about reusing this as an opportunity to reset the perception, perception of supply chain, and a favorite might be, 'Gosh darn it, these yahoos and perks saying they keep on, you know, everything comes in FedEx P1. Last year we spent twenty thousand dollars on FedEx.' To put it into perspective, you know, how much money did I spend? If I spent 20 million, what's that? Is it a tenth of a percent? I'd expect oftentimes inbound Freight in small domestic suppliers typically 0.1 to 0.2 percent point of spans. So use this as an opportunity certainly to identify, to underscore that we're sensitive to it and we're watching it. But let's not forget the 800-pound gorilla.
Yeah, the fact that we spend a fraction of a percent on Freight in some businesses. Right, if your business is very much a buy-and-sell business and, you know, with a lot of low-cost Asian sourcing, then yeah, the freight may be a far more significant conversation. Third favorite is part of our selfish desire and our selfish desire around the infrastructure of the technology, the automation, you know, the we can supply chain practitioners, buyers can lose sleep at night over their environment of trying to keep up with purchase order changes, trying to keep up with relentless ERP recommendations, and there's infrastructure, there's technology, there's automation, there's RPA (Robotic Process Automation) out there to help. And typically, you know, when you look at the range of tech deficit in organizations, it's the small medium-sized manufacturer that's trailing. So, you know, we shouldn't be surprised by that, we shouldn't, we don't have to get defensive about it, but we do want to have a little note here that says, you know, here's the opportunity, and that may, you know, to jump ahead a little bit, that may tie in with the selfish desires of other departments. You know, the IT department's no fan of the fact that they have a hacking liability or an IT security vulnerability because they've got an old network in manufacturing with lots of nodes connected to machines, and operations are talking about adding more nodes, or that the warehouse has a wireless network that's, you know, doesn't have the security patches on it. So there's an opportunity there to tie in and say, 'Hey, we've got to get the network. Perhaps we're going to put in a private 5G. Perhaps we're going to just rewire the darn thing or at least do a site survey to see how our network is. It wants to do that. It doesn't need the headache of, you know, mystery stuff out in the factory. And from a supply chain perspective, would love to have better network coverage in my warehouse so I can use my handheld terminals, right? So yeah, infrastructure, technology, and I live out here.
Different systems, CRMs, so look at what they're investing in and how they're getting things approved and what they're using because there's typically a pretty heavy investment in tech for sales, on the go-to-market, what I call the go-to-market team. That's a good suggestion, you know, that you go, you know how much is engineering getting to spend? How much is sales getting to spend? How much does IT get to spend? Here's what supply chain needs to spend, or here's what we need to tap into.
Fifth consideration is the risk management contingency. Good Lord, Sarah, you know, what one of the last couple of years, you know when's it going to stop? You know this COVID thing here just won't go away. This Chinese politics, I hate to say the words, you know, the punitive tariffs. Oh Lord, the staffing at the ports, both at the on the Chinese Eastern Seaboard as well as on the domestic West Coast, that all these uncertainties, the Yellow Freight going bankrupt for goodness sake, you know, how many disruptions can we deal with? And all none of these things add value, and yet they suck up, UPS potentially, they suck up so much time of a supply chain practitioner's day. So unfortunately, naive to expect it all goes away in 2024. So we're gonna have to continue, we don't know what it'll be, but we have to be prepared, you know, we have to be professor, we have to be prepared for what if Asian shipments stop or are delayed for a month, you know? Does that have ramifications in buffer stock in inventory? What, what if my, how many sole-source parts do I have? How many sole-source Asian parts do I have? You know, how many sole-source parts do I have from suppliers who are underfunded? You know, we've got to have that, and we want to present that as part of the consideration because a little bit of motivation by fear, you know, it's not, we're not just, for goodness sake, we're not just order placers, and we're trying to enable the company's success by dealing with all this, and we need some help and resources to do it, right?
Number six, suppliers, suppliers or relationships or negotiation. So it's, we certainly don't want to get up, let off the, our management peers with the given the latitude to dismiss us as, you know, we're order placers with our favorite suppliers that we go to lunch with every month. No, no, no, no, no, no, no, we got a profile the supplier base, you know, break it up by reaching this, identify the risks, identify who's sole source, identify, you know, 2023, 2022, who, how many suppliers did we have subpar performance? You know, one of the first meetings I was ever in with Steve Kaufman, CEO of Arrow, outtracks, he, he asked, he's interrupted a budget planning meeting, he said, 'Who's your worst supplier?' The answer caused a commotion, but, you know, it was one of our own divisions, but, you know, a great thing for the executive leadership to know who, who's our, you know, where, where's our supplier vulnerability, great thing for supply chain to demonstrate they have the answer. Where's, which, where's the cost pressure, you know, the, we win, we may not have seen the PPV in 2023, but where are we, you know, how many of our 200 suppliers are pushing on us that gotta, gotta give me price relief. Gotta give me price relief. Got to move, give me price relief. I'm not, it's, it's, it's that I can't stay in this business if you, if you don't give me some accommodation here. The cost reduction goes hand in hand with that just because we've got an inflationary price pressures or cost reduction initiatives don't go away, so we've got to present, you know, the balance scorecard, lastly, Sarah, organizational development, supply chain training, teaching the warehouse folks how to account, how to cycle count, how to problem solve cycle counting, you know what the most common cycle count errors are, you know, what the root causes are, helping the purchasing team with what we've talked about before, what did we call them, the secondary process, the background process, the exceptional process, that what you do when things don't go according to plan. What about Lindsay? What, so those were seven things.
Putting their budget together for next year. What about some best practices? You've done this a lot, you've had some wins, you've had some failures, you've made some mistakes. What are a couple of things that you can share with our listeners today.
Yeah, so absolutely, fundamentally, the budget has to align with the company's goals and objectives, but we also want it to align with, 'Here's where supply chain is today, and here's, you know, here's where we need to shift the needle.' We may not get an immediate win, but we'll continue to plant the seeds. Is this, this is, this is where we need to be for robotic process automation. This is where we need to be for the developer team. This is where we need to be for technology. This is where we are. This is our vulnerability because of supply chain transition. If we're not compelling, you know, or to be more compelling, I would say.
Secondly, involve the rest of the team. You know, IT wants a better network. Finance wants more assured cash flow. Operations want more assurance of supply, so that all dovetails nicely with supply chain development. So, the role of our peers is to collaborate on these three deliverables.
And then, lastly, Sarah, I would say, certainly, certainly try to stay abreast of the industry news, but, my, what a time sink that is, right? You know, with the forecasts and the trends, I think, and information overload, it's coming from so many different places. Sometimes it's hard to understand, like what's real, what should I be paying attention to. Also, so that's hard to navigate, yeah, it's both. It's what's real, what's just marketing hype, no offense, and what's relevant to me. And I think the relevant to me is a great thing to know. You know, the fact that Amazon is doing Last Mile optimization, that probably doesn't affect most of us, you know, or their budgets, you know, however many billion, that probably doesn't affect most of us directly. However, if we can see, if we can see use cases from similar-sized operations, you know, it's other companies like me that are spending 20 million, that have 400 suppliers, that have five buyers, and six people in the stockroom, and three in receiving and shipping, you know, what, what are they doing, you know, so a bit of benchmark, but also, you know, from the robotic process, the automation, where is it all trickle down to? What use cases are we seeing to improve things?
All right, Lindsay, looks like we are just about time. For those who have topics they'd like us to cover in a future show, feel free to drop a note in the chat or ping me on LinkedIn. We want to make sure what we are talking about is very, very relevant to the small and mid-market manufacturing space. With that, wishing everyone a wonderful start to the week, and we will see you next Monday. Thanks, Sarah.