In the case of this company, their procurement processes were disconnected from the operational processes. This caused difficulty for them in getting the critical tools, spares and consumables they needed in the field on time.
The company started buying extra inventory and holding stock offline, so the field staff always had the critical spares that they needed. These spares, particularly in this industry, are incredibly expensive. One component might cost hundreds of thousands of dollars, and now you have two of them because you can’t rely on your supply chain to get them there when you need them.
This company also had seasonal demands which their procurement processes didn’t account for. There was always a stormy season which damaged the assets that were exposed to the weather, and they would need spares to replenish those assets. The procurement process was an even buying pattern that was based on the average annual requirement and did not consider the peak and troughs in the seasons.
This is an example of operational demand not being clear to the procurement team and thus driving extra inventory. They hadn’t bought enough at the time so the people on the ground would drive the procurement process to buy more. From the perspective of the procurement team, they can only see the inventory that is in the system and as they were holding an invisible “squirrel stock” in the field, the system indicated more inventory was required.
The system also indicated the same level of demand through all seasons when high levels weren’t needed until the field was loaded with spares. Then the weather inevitably destroyed them, and they had to be written off. All of this drove cost because they didn’t have their systems under control.
Our approach to assisting this organisation was to review the demand management approach (including procurement) as it related to the inventory management methodologies. After recognizing the disconnect between procurement and operations and applying our suggestions, the company experienced a significant reduction in operating costs and working capital requirements.