In the previous article, we established the importance of classifying the materials within the company- to identify the most important items to the least relevant. However, in addition to the well-known ABC Classification, there are other beneficial mechanisms. The classification, according to the Regularity of the Demand and Behaviour of the Supplier, will help successfully differentiate the assortment. The important thing is to make sure we are focusing on the right items.
Classification according to the Regularity of the Demand
An item with stable demand will have simpler inventory management than one with very fluctuating or changing demand. The pattern of demand for items is one of the important factors to consider when establishing an inventory management model. However, it’s often difficult to determine the limit between a “stable” and an “irregular” article.
Patterns according to the Regularity of the Demand:
To establish a consensus of criteria (and not invent the wheel again and again), it is suggested to use academic research whose effectiveness has already been demonstrated, such as Silver, Pyke and Peterson (1998).
The regularity of the stable Demand:
According to the research mentioned above, it is established that a pattern can be considered a regular or steady demand if the
is less than 0.2. The formula to calculate this coefficient is:
Unstable Demand Regularity:
This formula is only applicable if the standard deviation of the Demand is less than half of the average Demand. Otherwise, we will be without doubt in front of an article with an irregular demand pattern.
In any case, having irregular items is not necessarily a sign of uncertainty, since there are items that do not sell every month, but that would have reasonably predictable behaviour.
For example, Christmas items are only offered during October, November and December, which would constitute an irregular demand pattern. However, it is entirely predictable to estimate that, in the next year, the sale of Christmas items will show the same design of sale.
Classification according to the Supplier’s Behavior:
In addition to patterns according to the regularity of the Demand, another factor to consider is the Supplier’s Behavior. The lead time in each of the articles is key when establishing when we should buy.
Companies have generally agreed to a lead time with the supplier. If this finally does not comply, we will face a risk of inventory breaks too high. On the other hand, when the supplier complies with the lead time, but this is not known in advance, the purchasing team will also not be sure when to buy. This will be a problem in the same way when establishing an inventory management mechanism.
In your company, is the pattern according to the regularity of the Demand of the articles analyzed?
Can articles with an irregular pattern be predictable, or unpredictable?
How is the behaviour of the provider and delivery times?
Does your company have a different assortment strategy according to the various groups of items?
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