These last few years have seen a great deal of fluctuation in both availability and price of primary raw materials for the wood packaging industry. Domestic lumber markets have been in turmoil, and buyers of lumber have been faced with unprecedented uncertainty. Consequently, the person handling the procurement role has become even more critical to the health of the business where lumber typically accounts for as much as 80% of the cost of the finished goods and is a key influencer on cash flow, inventory levels and production capability.
Managing the supply chain for wood packaging often relies on an in-house system of integrating customer demand with inventory levels and production scheduling to build up a plan for lumber purchases.
When markets are moving and there is a real risk that you may find yourself caught short of raw material there are a couple of strategies that can be employed to manage risk and reduce uncertainty.
Build Better Demand Visibility
Procurement isn’t just about sourcing a steady supply of raw material for your operations; it has a large larger opportunity to provide business intelligence if you’re purchasing data is properly managed.
Generally, procurement data is captured with the use of spreadsheets but doesn’t provide much analysis to help understand procurement opportunities. There are some procurement analytics programs available but they are typically imbedded in expensive production planning programs and therefore expensive to acquire and implement.
There are three types of analytics used trying to looking at procurement data:
1) Descriptive analysis: this is the record of purchases used to understand what has happened in terms of processing yield, grade, species, price, delivery and inventory levels over various time horizons.
The other two types of analysis are really the crucial elements to getting better visibility of your future lumber demand.
2) Prescriptive analysis: think of using it to anticipate price or availability changes to better understand what lumber inputs need to change to ensure you have sufficient inventory to work with.
3) Predictive analysis: think of using client demand data to predict what will happen across future scenarios, such as when a major client adds a second shift, what are you going to need by way of additional timber supply to meet that new demand.
Once better visibility of demand is achieved, this data can be used to determine your purchasing requirements.
Outsourcing Procurement
For some manufacturers that find this analysis difficult to manage on their own, lumber wholesalers and brokers have stepped in to offer support on this critical business function. Often this analysis is supplied through some form Vendor Managed Inventory (VMI) whereby the supplier takes on a role for managing the clients inventory not only at the clients facility but more importantly at the saw mills supplying the raw material.
VMI isn’t for everyone, it’s a relationship that needs to be built on a high degree trust and transparency but it does have several advantages for the wood packaging manufacturer.
For some, VMI represents too much of a loss of control over a critical business function. For others, it provides a higher level of confidence that raw material will be there when you need it. A word of caution though, to avoid any problems it’s best to retain a reliable supplier and have a measurable and enforceable service level agreement along with a specified reporting structure (annual, six months, six weeks) that you can use to provide management oversight.
By outsourcing procurement companies are able to concentrate on their core capabilities, confident that their purchasing is being effectively and profitably managed. Some estimates put VMI usage at as much as 20% of the companies engaged in wood packaging manufacturing in Canada.
Whatever your choice of data capture, analysis of your procurement trends and behaviour is critical to reducing uncertainty about what’s happening in the lumber markets for today and the years to come.
