Is your inventory balanced?
Unfortunately most companies do not have a balanced inventory. They either have too much of a SKU or not enough. This imbalance can cause customer complaints, lost sales, and higher operating costs.
If you recall from previous Articles, a buyer made the major mistake of overbuying a large amount of computer cables from the supplier. An initial forecast started at 100,000, quickly moved to 600,000, then dropped to 200,000. What caused the problem? The main problem is that the 10 Principles were not followed:
The 10 Principles are:
1. Get the Left & Right Hand Working Together
2. Clearly Define Customer Service
3. Tighten Your PLM Practices
4. Know Your Products
5. Look Forward, Not Backward
6. Get Your Lead Times Right (This Article)
7. Manage Your Partners, Don't Let Them Manage You
8. Manage By Exceptions
9. Use Integrated Metrics to Drive Improvement
10. Conduct Periodic Tune Ups
In this article, we explore Principle 6, Get Your Lead Times Right, and how that Principle directly applies to this case study and what it can mean to you.
In our case study, the Buyer added the new SKU to his line-up with no discussion about what its impact would be to overall sales and more specifically to other SKUs’ productivity. The initial forecast was developed with no check and balance and all related inventory plans were executed without challenge.
In our case study, lead time management likely would have not had an impact on the outcome since the causes of the inventory imbalance were not related. However, the application of lead time management can still be applied to how these cables would be managed.
Some creative, yet practical solutions for this problem that can be addressed in part by looking forward, not backward are:
Most importantly, Get Lead Times Right
Lead times have a significant impact on inventory levels and in stock positions and too often companies make the mistake of building too much fat in to establishing lead times or try to artificially shrink lead time. Both are equally dangerous. If you build fat in to lead times, that will inflate required safety stocks and inventory levels while artificially shrinking lead times will risk out-of-stocks and lost sales. Although the ultimate goal is to reduce lead times as much as possible, accurate and consistent lead times is what will drive a solid inventory plan.
Working with a vendor to understand all the components of lead time which include order processing, order preparation, shipping, etc. will allow the most accurate lead time to be determined. Each component can be analyzed and refined. If your lead times are inconsistent and you are forced to build in additional days, make sure you tie that lead time directly to your time phased replenishment plan so you are at least trying to optimize how you sync up your receipts with your anticipated disbursements. Calculate the cost of either lost sales or surplus inventory based on lead time variation. In many cases, companies don’t understand those costs which can be significant.
Properly Manage Inconsistent Lead Times
Let’s face it, lead times can’t always be consistent. The first attempts should be to regulate your vendor and identify what the proper lead time should be. However, seasonality, supply shortages, and other factors can sometimes cause lead times to be inconsistent.
Some inventory planning software can do this but in most cases companies struggle. If you simply cannot be consistent with lead time, an analysis of probable lead time should be done. One company used an 80% factor in that 80% of the time x lead time was accurate. These numbers were based on all PO line items for a particular SKU/location and were re-assessed monthly. It was not a perfect science but has worked better than simply picking something between the min and max lead times.
Over Time, Minimize Lead Time
The ultimate goal is to minimize lead time. As stated above, analyze all the components of lead time and work with vendors and transportation companies to develop a plan to gradually reduce overall lead times.
Validate Lead Times Periodically
Factors related to lead time can change. Improvements in processes will allow lead times to be reduced in some cases. In other cases, seasonality issues such as plant shutdowns, peak manufacturing periods, port bottlenecks, and so on can impact lead time. Depending on the variances in your business, it is a good idea to validate lead times as frequently as monthly but no longer that every 4 months.
Hold Your Vendors Accountable
If you determine appropriate lead times with your vendors, hold them accountable. It is a relatively easy exercise, assuming data is available, to calculate the cost of lost sales and the cost of carrying excess inventory.
Make Marketing and Promotional Plans with Lead Times Being Considered
Retailers continue to make the same mistake – advertise items where there is no chance of being in stock. This causes all kinds of problems. Most importantly, customer service suffers. Then there are other ripple effects that include lost sales, surplus inventory, express shipping costs, high forecast error, and more.
The typical cause of this is that marketing people are not aware of or ignore lead time factors. Before any promotion is finalized, inventory managers/analysts should confirm that the additional inventory will be available.
As you can see from this article, there can be many overlaps between the 10 Principles and how they can impact one another. "Getting your lead times right" is impacted by or impacts:
- Get the Left & Right Hand Working Together
- Tighten Your PLM Practices
- Know Your Products
- Look Forward, Not Backward
- Manage Your Partners, Don't Let Them Manage You
- Conduct Periodic Tune Ups
We will discuss those impacts and identify the overlaps in each article.
If you are interested in achieving a balanced inventory, we offer a No-Charge Starter Stage. During this Stage, we will help you assess your current inventory management practices, develop a preliminary business case, and start working your Balanced Inventory Blueprint.
If you have not read the previous articles, they can be found at www.supplychainsystems.com/biparticles.
In 2 weeks, we will address Principle 7 – Manage Your Partners, Don't Let Them Manage You.
For more information, contact us at firstname.lastname@example.org or call 312.667.4654/905.454.8529.