Building materials and industrial supply companies also face additional difficulties, such as large product assortments, volatile markets and erratic customer purchasing behaviour. Because these industries are completely dependent on their supply of inventory, having the right materials at the right time, in the right place is essential. Without the right stock no bridges, buildings or highways are going to be constructed.
Currently, the most significant factor affecting our customers is the global pandemic that’s causing severe disruption to supply chains worldwide. Reliable lead times are more valuable than ever, and with this in mind here are some tips for managing lead times more effectively.
MANAGING BOTH LONG AND SHORT LEAD TIMES
Having a large product assortment means working with multiple manufacturers and wholesalers. Because of this, lead times can vary greatly within your A-, B-, and C-class items. To keep availability high on the SKUs you need most, make sure you set achievable service levels for your items with the longest lead times and frequently review them. Often, service levels are either unrealistic – 100%, without exception! – or are set and only reviewed when there are shortages.
Another way to prevent stockouts on items with long lead-times is through strategic use of safety stock. If you expect a seasonal increase on an SKU that takes 60 days to arrive, plan your initial order accordingly. Doing so might increase inventory capital costs in the short term, but keeping customers happy with consistent availability is a must.
For slow-moving SKUs or high-dollar items with erratic demand, it’s also necessary to have working relationships with multiple vendors, especially ones geographically closer to your DC. While it’s true that onshore or near-shore suppliers can have higher costs, it’s worth it. Having a ready backup supplier allows you to avoid single points of failure that might otherwise cost you sales now and – more importantly – in the future.
MANAGING DELIVERY LEAD TIMES FOR MAXIMUM RETURN
Most supply chain managers know that excess stock exists within their business. They also know that one of the biggest influencers in lowering inventory levels is a short, stable lead time.
While knowing these things is helpful, identifying the source of excess stock and how to fix it will require time, effort and resources. Consequently, all inventory reduction opportunities should be analysed and prioritised accordingly. To help you assess where you should focus your inventory reduction efforts, we have put together simple analysis techniques.
Ultimately, by adopting these analysis methods, you will be better positioned to determine the following:
- Which issues require immediate attention
- Which products you should focus on first
- What actions you should take to deliver the greatest return
TIP 1: ANALYSE SUPPLIER LEAD TIMES AND COVER PERIODS
Analyse stock levels by lead time
Longer lead times inevitably result in higher inventory levels. After all, the longer the lead-time, the greater the risk of lead-time demand deviation. This necessitates a greater amount of stock cover in the warehouse.
Long lead-times also mean businesses need to plan farther ahead. Doing so is necessary, but can make you less adaptable to changing customer demand in the near term. However, even items with short lead times can create a huge amount of avoidable excess if they’re poorly managed.
Before you start changing lead-times…
A good first step is to analyze the current stock cover held for items with different lead times. By doing so, you may find that there are opportunities to reduce stock within your current forecasting strategy. As highlighted in the table, if you have an assortment of items that are grouped based on the given lead times (weeks) and then worked out the average amount of inventory cover (weeks) for each group, you can quickly see where inventory reduction opportunities are.
WHAT SHOULD YOU DO NOW?
PAIN POINT A: “THE MAJORITY OF MY ITEMS HAVE EXTREMELY LENGTHY LEAD TIMES”
In most situations, the lead times are determined by the supplier. However, this does not necessarily mean that it is out of your hands. Though your supplier might also be subjected to capacity or vendor restraints, there is always room for negotiation. The question that needs to be asked is: how can your suppliers reduce lead-times?
In some cases, this may simply be a case of renegotiating the terms of the supplier contract. However, where this is not possible, more strategic action must be taken.
A few ideas for reducing lead times include:
- Providing suppliers with purchase forecasts to help them better prepare for your order
- Requesting your supplier to “ring-fence” strategic inventory in order to mitigate the impact of lead times on their side
- Incentivize your suppliers to prioritize your order, thus ensuring a more competitive lead time. Many suppliers providing rebates to customers for volume bought, but it is also possible for customers to provide incentives for suppliers for volume sold. This ensures that the supplier has an interest in matching supply with demand.
PAIN POINT B: “WE ARE HOLDING FAR TOO MUCH INVENTORY ON ITEMS WITH SHORT LEAD TIMES”
Unlike the point above, this issue requires a more detailed investigation. After all, if there is a strategic reason why you are holding so much inventory, you’ll need to figure it out before revising your forecast. Perhaps there is a rebate opportunity based on order volume, or an existing service level agreement with a customer in the place. In this instance, the following actions should be considered in order to achieve the desired inventory reduction:
- Review true demand patterns and align them with a fulfilment plan to reduce unnecessary demand spikes
- Carry out a cost/benefit analysis to determine whether any supplier rebate is really worth the additional inventory holding costs
However, if there is no clear strategic explanation, this excess could be the result of poor ordering practices. For example, are your review periods too long or is the master data incorrect?
Here are some ways to reduce excess inventory for items with short lead-times:
- Review the buying process and investigate whether more oversight from operations or finance should be put in place
- Improve collaboration between the supply chain team and purchasing team
- Compare item and supplier minimum order constraints with actual demand to see if they’re compatible
- Review your economic order quantities
- Review and update incorrect Masterdata such as units of measure
- Improve the buying team’s knowledge and understanding of the principles of inventory management
TAKE CONTROL OF LEAD TIMES TO ACHIEVE YOUR INVENTORY REDUCTION GOALS
There are many different inventory reduction strategies that can help deliver impressive results. However, prioritizing excess inventory issues associated with lead times can offer a great starting point for inventory optimization. In addition to highlighting where excess stock exists within your assortment, this analysis can provide invaluable insight into the effectiveness of your buying processes!