Supply Planning: 5 Strategies To Build a More Dependable Operation

Why is effective supply planning important?

The goal of supply planning is to ensure that the right products are produced in the right quantities at the right time and delivered in a timely and cost-effective manner.

However, effective supply planning helps companies minimise excess inventory and production costs, reduce stockouts and lost sales, and improve customer satisfaction.

Ultimately good supply planning should help you answer a few simple questions with absolute confidence.

1. What are my inventory requirements?

   What do I need? And when do I need it?

2. Where should I source from?

   Which suppliers can I count on? Which suppliers should I avoid?

3. How much can squeeze costs?

   How can I fulfil my inventory requirements at the lowest possible cost with minimal risks of delays, shortages quality issues etc?

4. What should I do in the event of disruption?

   What happens if supply is disrupted? What should I do if actual demand looks completely different to what I expected? If I need more or less inventory than expected, how quickly can I respond?

5. How can you monitor performance to set the foundation for continuous improvement?

   How do I know what ‘good’ looks like? What KPIs should you measure? How can I use these performance insights to work with suppliers to build a more robust supply chain?

Let’s answer these for you now.

1. What are my inventory requirements?

Before you can work out how much inventory you need, and when you need more, you need to have clarity on a few points:

What inventory do you currently have on hand?

We have said it before, and we will say it again: there is no point in investing in inventory you do not need. Therefore, before you place a new order with your supplier, you need to take stock of what inventory you have on hand.

How much stock do you have throughout your network? What inventory will soon arrive? What inventory is on the water? What inventory’s been ordered and is yet to leave the supplier?

Top Tip: To understand your current inventory situation, you need robust data. Find out how you can keep this critical asset in tip-top shape with our guide to Masterdata.

What demand do you expect to see?

For this, you need robust forecasts that consider:

• Seasonality
• Product lifecycles
• Customer demand volatility
• Promotions & events
• Confirmed customer orders.

The list could go on… And we cover more of this topic here.

However, it’s important to note that this vision of the future should be the result of consensus.

But what does ‘consensus’ mean in layman’s terms?

It means the forecasts have been built based on robust statistical analysis, enriched with market intelligence, and then validated by the wider business.

If all these steps have taken place, you have a clear understanding of what inventory you have on hand, along with what demand you expect to see.

You should be able to determine exactly how much inventory you need.

Of course, you also need to consider lead time.

There’s no point ordering 10 years’ worth of inventory if the lead time is only a couple of weeks.

But let’s enter the tricky waters of lead times later.

2. Where should I source from?

You understand the expected demand and you know exactly how much inventory your need to fulfil it.

Now, it’s time to go to market.

However, selecting the right supplier is an important process. After all, there may be several suppliers who have the capability to fulfil your needs.

But, as we’ve established many times before, not all suppliers are created equally. It may also be the case that you need to rely on more than one.

It’s never a one size fits all decision. There are lots of factors you should consider when choosing a supplier.

The importance of each factor depends on your business, your market, and the expectations of the business.

But here are a few things you should consider:

• Quality

  Are the materials or components fit for the purpose? Having below-quality products has very real effects on how your customers perceive you.

• Price

  Is the price acceptable based on the quality on offer? What volume discounts, promotions or rebates are on the table?

• Delivery times

  Is the price acceptable based on the quality on offer? What volume discounts, promotions or rebates are on the table?

• Payment terms

  Are the payment terms and methods suitable for your requirements? If something sounds too good to be true, chances are it is.

• After-sales support

  What happens if something goes wrong? How easy is it to get in touch with them for ongoing support after your order? There’s little more frustrating in life than being left on hold. And you can amplify that greatly when your customers are at the door and promises have been broken.

• Ethics

  Does this supplier meet your & your customers’ ethical standards? Calling yourself a green or ecologically friendly company means nothing if you have unscrupulous suppliers. And should people find out, the hit to your PR won’t be great.

• Other considerations

  Does the supplier offer other key benefits? For example, experience, reputation and warranty period? What about communication? Or Flexibility? A supplier that is easy to deal with will make life much easier than one that you constantly clash with.

Top tip: Read our guide to supplier selection for more tips on how to find the right supplier.

3. How much can I squeeze costs?

Even after you’ve negotiated the best deal with your supplier, there are levers you can pull to minimise costs throughout your supply chain.

The goal here is to attain the highest possible level of service at the absolute lowest supply chain cost.

And this is where the EOQ can help us out.

EOQ stands for Economic Order Quantity, which is a mathematical model used in inventory management to determine the optimal order quantity that will minimise the total cost of ordering and holding inventory.

The EOQ model considers two conflicting factors: ordering costs, which increase with the number of orders, and holding costs, which increase with the amount of inventory held.
By finding the quantity that balances these costs, the EOQ model helps determine the optimal order size that minimises the total cost of inventory management.

Read our EOQ guide.

4. What do I do in the event of disruption?

This is all well and good. But as we highlighted in the introduction, disruption is just par for the course of supply chain management.

There are lots of reasons why there might be an imbalance between supply & demand.

Supply fails, which could come from a factory closure or a cargo ship that sinks or poor supplier performance.

Or demand is different to that which is expected.

So, what happens when supply fails to fulfil demand?

Let’s start by looking at the business-as-usual basis.

Imagine your suppliers are normally very reliable and offer lead times of 12 weeks. So, if you place an order in week 10, your delivery will arrive in week 21.

To keep things simple, your retail customers are also consistent with an average weekly demand of 1000 units.

However, what happens if one of your main suppliers is suddenly hit by staff strikes or a factory fire?

Immediately, production drops.

In response to this reduced capacity, your supplier has no choice but to extend the lead time to 15 weeks or miss the order completely. Even a longer lead time of this nature is often more preferential than not getting the order at all.

But how long can that go on?

But given that the disruption’s likely to last for weeks or even months, your businesses now face some major supply issues. You’re faced with a real conundrum.

By the time your next order arrives, you will already be out of stock. And just, think of all the back orders.

Naturally, as soon as you hear that your order is going to be late, you double your order the next week to secure supply.

After all, if your supplier does face production issues, you want to make sure you get as much stock as possible. The last thing you want is for your competitor to ‘steal’ this limited supply.

But your supplier can not magically create extra capacity.

If anything, your additional order puts your supplier under even more pressure and the lead time’s extended even further. By the time your order(s) arrives, you have lost several weeks’ worth of sales due to stock-outs. But even worryingly: you are now severely overstocked.

The easiest thing to do is panic – perhaps that’s why the so-called bullwhip effect is such a big challenge today.

What’s the right way to manage supply disruption?

Step 1: identify your important products

Much like with suppliers, not all products are created equally.

For some products, any disruption could be a life-or-death situation. Whether that’s business life and death or real life and death.

For others, perhaps a supplier delay is barely worth thinking about.

As we’ll cover in the next few points, responding to supply disruption can be expensive and time-consuming. Therefore, you want to prioritise the products that matter most, first.

Top tip: To work out your product assortment priorities, click here to read our guide to assortment planning.

Step 2: Map the risk

Different items will be impacted in different ways. Some products may not be affected at all.

Therefore, you should focus on the products which are at the highest risk of availability issues.

For example, you should prioritise the products that are either already out of stock or are likely to be out of stock before the next delivery arrives.

So again, you need to break your products down into the following categories:

Step 3: Determine the best course of action

If you’re already facing inventory issues, the absolute worst thing you could do is misuse the stock you do have on hand.

This means managing the scarce inventory very carefully. However, even then, this will only get you so far and may only be effective in the short term.

To mitigate supply disruption, there are a few pragmatic steps you can take:

Option 1: Swallow the disruption

In essence, this means you analyse the risk and decide the best course of action is to wait for the disruption to resolve itself. However, the last thing you want to do is leave any customer disappointed.

If you’re suffering from extreme inventory shortages, there may not be enough stock to go around. Therefore, it’s important to work with customers to manage expectations.

Perhaps you could renegotiate delivery schedules? Perhaps you could offer an alternative product?

Either way, communication is key.

Option 2: Expedite the order

Around 90% of the volume of international trade in goods is carried by sea. The downside of sea freight is that the lead times involved are much longer than any other transportation method.

However, if your supplier has the stock on hand, you cut the lead time down by expediting the stock via air freight.

On the plus side, this could shorten the lead time from months to weeks or even days.

But be warned, the cost of expediting air freight is exponentially higher than any other means of transport. Consequently, this is not something you want to depend on as your primary means of distribution.

Option 3: Secure alternative supply

If you can’t secure availability from existing suppliers, it’s time to look elsewhere.

For certain products, it may be easy to source inventory from new suppliers. However, for other more specialised products, this may not be so simple.

This is where you may have to be a bit creative and work with multiple suppliers to secure stable supply.

What’s important here is that this is a considered decision.

Can the alternative supplier match the level of quality your customers expect? Can the supplier deliver within an acceptable lead time? Can the supplier fulfil your inventory volume requirements? Are the associated costs within budget?

All crucial questions to answer before burning your bridge’s current supply base.

5. How can you monitor performance to set the foundation for continuous improvement?

As we established at the top of this article, your supply chain’s only as strong as its weakest link. And that includes the suppliers you can count on.

Whilst great suppliers can make your business tick along without a worry, bad suppliers can break things very quickly. Sometimes with damage that’s irreparable.

Equally, you can’t simply judge your suppliers on today’s benchmarks. Your suppliers must be strong and suitable now, but robust enough for the future.

They need to be able to support your goals and growth plans. Whether that means innovating or simply expanding.

Looking for new suppliers every time you want to grow is far from strategic. And whilst missed deliveries are an obvious problem, not all issues are as easy to spot.

This is why you need solid KPIs.

How are they performing? Is there room for improvement? Are communication lines clear and open? Are you doing your bit to help them along the way?

Robust KPIs can spot problems when they’re still a potential. Far before they physically materialise. And once you have these in place, making decisions on their behalf becomes a whole load easier.

Top tip: Find out how you can set more effective supplier KPIs.

Final thoughts and takeaways.

Hopefully, if you have made it this far, you now have a comprehensive understanding of the mechanics of supply planning.

We explored the basics. We have looked at the specific supply planning processes. And, we have also looked at what happens when your operation is hit by unexpected disruption.

Now it’s time for you to apply these tips ‘n’ tricks to your own operation!