May 4, 2017
Hidden Causes of Excess Inventory (4 of 5)
Supplier constraints lead to planning complications
Dealing with suppliers requires some give and take. Even the best and most efficient suppliers out there will have some constraints that need to be accounted for to keep prices competitive. Restrictions like Minimum Order Quantity or Minimum Order Value are common, and the nature of the supply chain requires planners to factor in lead times, as well. When you add up these various concerns, it’s understandable why so many planners rely on carrying additional inventory, sometimes referred to as “buffer stock” or “safety stock.” That extra inventory is quite helpful in case of the occasional minor disruption. With longer lead times or higher minimum orders, two things are usually true: calculating the appropriate buffer stock becomes trickier, and planners need to work out their orders further in advance. These aspects complicate even the most basic planning tasks and can leave warehouses with excess inventory that goes well beyond the need for normal buffer stock amounts.
Let’s start with minimum constraints. At the simplest level, this is imposed as a minimum order quantity (with maybe some multiple). It’s important to remember to factor these minimums into ordering parameters and the calculation of safety stock. One twist that may seem counterintuitive is with larger purchases quantities: often, the buffer amount will need to be adjusted down.
One important restriction to keep in mind here comes with container loads and fills. There may be some variable components when transporting container loads of products, but typically the goal is to use as much of the weight or volume capacity as possible. Often, planners are able to do this is one way or another, due to the volume or the use of shipping consolidation services. If these options don’t apply, adding containers is an option, too.
When filling a container, it’s important not to just load it up with all the same stuff — that’s a surefire way to build up a bunch of excess inventory. Similarly, it’s not a great idea to fill up a container with other random items, either. The ideal is to identify items that should be ordered in the next couple weeks and determine a top-up quantity that fits with the overall buying plan. That’s the smartest way to get the most of any extra container space without getting bogged down with unhelpful and costly excess inventory.
Another common stumbling block is related to lead time and the stock’s visibility while it is in transit. Losing sight of stock that’s en route can end up in double ordering. Some stock tracking systems don’t provide much help here. When a stock transfer is posted, the system might immediately place the stock in the receiving warehouse, even though it isn’t there yet. That’s bound to drive a warehouse manager crazy! Some companies create an “In Transit” warehouse in the system as an intermediary to account for the ongoing shipment. That’s helpful for basic inventory control, but it makes planning more complicated. To avoid any problems here, a planner needs to see that stock is in-bound and when it is scheduled to arrive, which can be done by adding some custom fields in the “In Transit” warehouse database.
As for lead times, it is critical that planners and suppliers have an accurate and appropriate calculation. Any discrepancies or lack of visibility will lead to stock-outs or excess inventory. Plan each location in isolation and consider the lead time as the measurement of time between the moment and order is placed and when it is available for sales, assuming no unusual disruptions or complications. That’s the best way to ensure all of the various aspects are factored into the lead time for a specific product.
If this seems complicated, keep in mind that these restrictions and considerations aren’t always applicable. However, more complicated environments also exist, and the only reliable solution is a better set of tools. The right tools make the process easier to manage and comprehend. They can’t change the fact that the ordering and planning process is often quite complex, but they can provide a solution that will keep planners on top of the various issues at hand. Without the right tools for the job, such complexities are bound to lead to excess inventory or stock-outs.
See the next lesson: Hidden Causes of Excess Inventory (5 of 5)