How can you become a master data maestro (and save your business thousands in the process)?
The slightest mention of master data sends shudders down the spine. “Please! Anything but the ‘m-word’” I hear you cry.
But we can’t just brush it under the carpet and pretend like the problem doesn’t exist. It's gone on for too long now. We need to overcome this stumbling block once and for all!
Almost all businesses have some form of master data. In fact, many organisations have lots of it. So what’s the problem then?
Well, it is a simple equation: Rubish in = rubbish out
Sure, most business have lots of data. But this doesn’t mean it is correct or complete. Furthermore, just because the data is in place, this doesn’t mean that master data is used effectively to make informed supply chain decisions.
In fact, we typically see that around 50% of the businesses we help lack the core master data which are fundamental for ‘good’ inventory management. It’s always the elephant in the room. But, as the inventory expert, Tony Wild, once highlighted: “inventory is the physical consequence of missing data”
So, if master data is SO importance, why is it always overlooked (or worse still, ignored completely)?
The answer is simple: keeping master data up to date and complete is hard work! But you don’t need to worry!
After working with thousands of businesses across the globe, we understand the challenge companies face. That is why we have put together this simple guide to master data to help you out!
Why do so many businesses struggle with master data?
What is master data anyway?
Who should ‘own’ the master data?
Why do we need master data for inventory management?
How can you use master data to determine the order level?
Practical example: determining when to order
How can you use master data to determine the order quantity?
How can we use master data to determine the review period?
A practical example: fixed vs variable ordering
How can you use master data to optimise your inventory?
How can you correct your master data (the easy way)? And what if you missing the data?
Why do so many businesses struggle with master data?
We all know that master data is essential for making effective supply chain decisions. But equally, everyone knows that keeping master up to date is a painful undertaking. As a consequence, master data is often forgotten about...
But here is the bitter truth: if your master data is incomplete or out of date, you will make poor decisions. FACT.
“But the data was 100% correct when I imported it” you cry.
I hear you. But things change. Even if the data was perfectly correct when it was first imported into your system, data is easily deleted, corrupted or misinterpreted. Or maybe the data is just no longer a true reflection of the reality.
Imagine if you use a different supplier? Or maybe your supplier has changed the way they fufil your demand? What if your own storage costs have changed? Warehouse space isn’t as cheap as it was back in the good old days...
The point is simple: the quality of your master data erodes over time. And if you want to make effective inventory decisions, you need a robust basis of quality data.
Afterall, if you fail to keep this vital information up to date, this could cost your business millions in mistakes!
What is master data anyway?
According to Wikipedia, master data can be defined as: "data about the business entities that provide context for business transactions"
But in the context of inventory management, master data is the fundamental bits of information that determine the ‘what’, ‘why’, ‘how’ and ‘who’ of everything to do with inventory.
To give a few examples, inventory master data covers the following areas:
- specific details about the product in question (size, SKU number)
- Information about the supplier (lead times, MOQs)
- Details about currently inventory position (location, inventory level)
- Details about the customer
- Information around the past demand
- As well as many other key data elements
Who should ‘own’ the master data?
Who should own the master data in your business? Should it be the guys in IT, finance, operations, or even management?
This is a difficult question to ask. And many businesses don’t have a clear-cut answer. You probably think that it depends on the business in question…and to a degree, you would be correct!
Okay, there could well be a technological process or system that the IT team need to support. However, master data is everyone’s problem. From the demand planner to the CEO, we all have a duty to keep it clean. Afterall, everybody benefits!
But should management really be expected to spend their time updating data? True, this is unlikely to be the best use of their time. However, they must set the boundaries and ensure that all teams are doing their bit.
Why do we need master data for inventory management?
So, we all agree that master data is really important in a business. And it's clear that everybody needs to see master data as a fundamental part of their role. But do we really understand what this data is used for? Do we understand how master can help us to make better decisions around inventory management?
In essence, master data is used for everything. And different teams will use the information in slightly different ways. But when it comes to supply chain management, correct and reliable master data is an absolute must for satisfying customer demand. Afterall, without this data, it would be impossible to know how much inventory you need to fulfil your customer’s demand.
To properly understand the importance of master data, we need to first define what ‘good’ inventory management looks like. The foundation of inventory management revolves around two key questions:
- When should you place an order?
- How big should your order be?
In the next couple of points, we will explore how you can use master data to determine order levels and order volume. But this is just the tip of the iceberg. From making assortment decisions to selecting the right supplier, master data is the back-bone of every supply chain decision!
How can you use master data to determine the order level?
To begin with, we are going to focus on the first question: When is the right time to place an order?
Is it when you sell the last unit? Or is it when you start to run a bit low? Or should this decision be based on something else?
Ordering at the right time is vital. If you order too soon, your warehouse will become clogged up with excess stock you don’t need. But on the other hand, if you order too late, you will face costly stock outs. If the product in question has extensive lead-times, the problem is only exacerbated!
Thankfully, there is a simple formula for working out the order level:
Average demand X (lead time + review time) + safety stock
However, to apply this formula, we need three key pieces of master data:
- The average demand you expect to see for the product in question during the supplier's lead time
- The requirement for safety stock to cover volatility in demand and supply
- The lead time & the review time (Note: we will dive into this later)
So, let’s break this down:
Working out the average demand during the lead time
Obviously, we need enough inventory to satisfy demand while we wait for our next delivery to arrive. This is called the cover period.
So, we therefore need to know what the typical lead time would be. And we also need to know what the demand we are anticipating during this period. Typically, we base this on historic demand.
Working out the requirement for safety stock
Safety stock is necessary to accommodate variations in demand and supply. To anticipate the variation in supply, we need to look at the supplier’s track record for delivery reliability. Do they deliver when they promise or do deliveries always arrive late?
In terms of demand history and delivery reliability, we need a sufficient amount of data in order to make a good estimate.
You also need to understand the target service level.
Note: this is not a number that you can look up or calculate, but a criterion set by management to determine how high (or low) this should be.
Once the service level is clear, we can determine the requirement for safety stock in two main ways:
- The number of times a product is out of stock
- The number of units that are of out of stock
This safety stock criteria is therefore also a management variable, and to a large extent determines the level of risk.
Finally, the data to determine the order level is now visible! When the current stock falls below the order level, another order must be placed.
Practical example: determining when to order
Imagine you are the inventory manager at Pedal Cycling Ltd, the U.K’s fastest growing distributor of bikes and cycling accessories. You need to determine the optimal moment to place an order for SKU# 35647594945
What information do you need? In the checklist below, we demonstrate what master is required.
To make things simple, lets imagine that the demand is fairly consistent and suppliers typically deliver on time and in full (if only this were true in real life!)
So, in our simple example, as soon as our inventory falls below 510 units, we need to place an order!
How can you use master data to determine the order quantity?
We now know when we need to place an order, but how much stock should we order at this moment?
Again, it depends!
Regardless of the strategy, determining the order quantity is a trade-off between two types of costs. The first is the cost you incur related to the cost of holding products in stock. The later relate to the costs associated with placing an order.
Other data needed to determine the order quantity are the forecasted demand for the item (which we can base on the historical demand and the purchase price of the product.
When it comes to order quantities, there is typically huge potential for optimisation here. However, for the purposes of this article, we will keep things nice and simple. If you are interested in reading more, check out our guide to economic order quantities.
How can we use master data to determine the review period?
Already, we have seen that eight different types of master data are required to determine the order quantity and order level. But we are not finished yet!
We also have to decide whether we want to order at fixed times (e.g. once a week) as well as whether we want to order in fixed or variable order quantities.
Variable review times and order quantities allows us to remain responsive to the changes to the market. However, if you have large assortment, this may not be most efficient approach for item.
The alternative is to review products at set intervals and order in fixed quantites. While not as responsive, this approach may be best for more stable products.
But how can we determine when it is suitable to adopt a fixed of variable approach. The answer to this depends on three things:
- The strategic importance of the product
- The volatility of demand
- The volatility of supply
For the last two points we can use data that we have already collected. For the volatility of the demand, you can use the historical demand data. For the volatility in supply, we can look at the historic supplier reliability.
For important products, it is important to react quickly and immediately as soon as they fall below the order level. For less important items, you can safely order at fixed times.
A practical example: fixed vs variable ordering
Let’s return to pedal cycling ltd. Imagine that you need to determine whether the review period and order quantity for two different products should be fixed or variable.
Below are the two products in question:
Given that demand for product A is volatile, the risk of going out of stock outs is high. Furthermore, given that margins are strong, a stock out situation could cost you dearly in terms of lost sales. Finally, given that this product is bought by you most important customers; stock outs could also harm customer relationships. With all this in mind, you need to remain on top of this product. Therefore, it probably best to adopt a variable approach to both order quantities and review periods.
On the other hand, demand for product B is far more stable. Therefore, you can anticipate future demand with greater confidence. Furthermore, given that the margins are relatively low, the impact of stock outs is likely to be much less. Therefore, the goal should be around ensuring the process of ordering is as efficient as possible. For this reason, you may be inclined to order at set specific times (e.g. once a month) in set order quantities (e.g. 100 units or a full container’s worth).
Using master data to optimise your inventory?
Based on these essential master date elements, we can already begin to make three more interesting analysis for management. The first is the ABC analysis, which the management can use to determine which (and how many) products the company should pay attention to.
The second analysis is the so-called Incremental Margin Analysis, which provides management with insight into which products contribute positively to the net margin.
The third analysis is the Delivery Time Deviation Distribution. This is an instrument that the supply chain team can use to gain insight into the performance of suppliers.
The table below provides an overview of the 9 essential master data blocks that are required support for each analysis. The fields shaded in green are management variables, which the MT has direct or indirect influence on this.
How can you correct your master data (the easy way)? And what if you’re missing the data?
Across your assortment, you probably have millions (if not billions) of data points. To update all of these would be a huge undertaking. So where do you begin? Well, you need to start with the important products.
And to identify the important products, we suggest you turn to your trusty ABC Analysis and focus all of your time and energy on the “A” Items. After all, these are the products that make you money or the products that your customers demand. The benefits of getting master data for this small proportion will be felt immediately across the business. And once all of the A items have been updated, you can move on to the B items and then finally the C items.
(See quick master data checklist page)
Conclusion: How does your business stack up?
In this article we have explored the importance of master data. We hope blog has been insightful.
Now that you are an expert on master data, what other areas of your supply chain do you need to work on?
Take our inventory power quiz now & discover where you can gain performance improvements!
The Intergovernmental Panel on Climate Change (IPCC) reports that warming of the earth is creating a serious threat to the planet we live on. The most likely cause of the problem: carbon emissions. In order to reduce carbon emissions, the European Union (EU), United Nations (UN) and many individual countries have introduced or are currently introduced legislation to force companies to reduce their global footprint.
How do you manage the carbon footprint of your supply chain?
Whether a business is faced with new legislation or decides to take action based on its own accord, the starting point to reduce emissions is typically focused on optimising the usage of their buildings and fleet vehicles. However, many businesses fail to optimise the operational decisions they make around inventory management, production and transportation.
As highlighted by CDP, a not-for-profit charity who help organisations to manage their environmental impact, carbon emissions in supply chains are on average four times those of a company's direct operations (e.g. carbon emissions from buildings, machines).
Given that these areas alone could help businesses to achieve huge reductions in carbon emissions with little or even no investment (Benjaarfa et al., 2010), it is a real shame that inventory management is so often overlooked.
What is the supply chain carbon equation?
As highlighted above, there are many areas of supply chain management that can be investigated and optimised. However, when focusing on inventory management, it is all about making the right inventory decisions at the right time. But most importantly, it's all about looking at the facts instead of gut feeling.
The most important areas to reduce carbon emissions are as follows:
Accurate forecasting helps companies to make sure the right products are available at the right place at the right time. Although this sounds easy, this presents many inventory and supply chain managers with a real headache. As a consequence of ineffective forecasting, many business face overstock and understock situations.
Robust forecasting helps supply chain teams to detect trends, seasonality and volatility. However, each industry has its own complexities:
When it comes to the food industry, managing perishability is a major role in preventing and reducing waste. To create effective forecasts, it is of vital importance to take an item’s shelf life into account.
A better and more accurate forecast for food items can reduce waste and therefore minimise unnecessary carbon emissions. To achieve a more reliable forecast, this could mean forecasting based on shorter horizons. For fresh products for example, a daily level forecast is likely to deliver the best results.
Furthermore, for items with a very short shelf life, it may be possible to adopt a differentiated approach to minimise risk and waste. When looking at ready-to-eat meals for instance, it is not necessary for every meal to be available right until the end of the day. As a result, a forecast can be developed on a group level.
For example: the customer should have a choice between an Italian and an Indian meal. But within the Italian meals, this does not necessarily mean that every type of pasta must be available until the end of the day as long as at least some of the pasta meals are still on offer.
This means that the safety stock does not have to be calculated on item level, but on item-group level. As a result, the risk of waste at the end of the day is drastically reduced.
The fashion industry is well-known for its markdowns at the end of the season. However, if products are still not sold after heavy discounting, they have to be destroyed.
Of course, the fashion industry is subjected to its own set of challenges; long lead times and short product life cycles with many new product introductions. However, providing that seasonal patterns and demographic figures, such as size curve distributions per store, are all taken into account, it is still possible to develop accurate forecasts.
By using these forecasts to optimise stock allocations across the stores, this, in turn, will reduce overproduction and waste. Furthermore carbon emissions caused by avoidable internal transportations due to bad allocations can also be eliminated.
When it comes to promotions, many retailers struggle to ensure the right stock is available at the right place, at the right time. As a result, these products need to be discounted, stored somewhere until Christmas next year, or even worse, destroyed.
Ultimately retailers that are able to accurately anticipate promotional demand typically see the most advantage from the promotional activity in question.
The final example is from the manufacturing sector. For most businesses, production capacity is limited. Therefore, accurate planning of production is critical.
To plan production effectively, a robust forecast needs to be established based on future sales. Given that manufacturers are often subjected to long leadtimes for raw materials, the production process can often take many weeks. As a result, it is not uncommon for manufacturing businesses to set up production in order to satisfy demand in six months time.
Inaccurate forecasting techniques can lead to purchasing the wrong raw materials, resulting in unnecessary transportion and production costs. Both of which has an adverse impact on t he company's carbon footprint.
Forecasting is not the only area that is important of inventory management to consider. The way in which products are ordered and shipped is also key to reducing carbon emissions. If you need a couple of pallets of your supplier’s products every week, it depends on the situation whether it’s optimal to order on a weekly basis.
If freights can be bundled with other suppliers, this might be a good solution to fill a full container.
Alternatively, it might be beneficial to order full shipments on a less frequent basis. This will not only reduce costs, but will also lead to a reduction in carbon emissions. Of course, the type of product determines if this is a viable option.
Furthermore, very few companies calculate the actual costs of inventory. Is sourcing overseas really cheaper? Often companies are forced to buy in big MOQs (minimum order quantities) when they order from overseas.
Local sourcing might seem to be a bit more expensive on first glance. However, in reality, local suppliers may be able to offer more flexibility, shorter lead times and lower transportation costs. Furthermore, the lower levels of risk may reduce the need to hold safety stock as well reduce the overall inventory holding costs. Ultimately all of these factors can help reduce carbon emissions across the supply chain.
Start with your own supply chain
Starting inventory optimisation within your company can directly help reduce carbon emissions. Analysing data to create better forecasts, managing the supply chain in a more efficient way (e.g. by ordering full truckloads or combining freights) as well as becoming more agile to react faster to the market are all ways that will help you to reduce your business’ carbon footprint.
Download our excess stock top tip ebook today to achieve supply chain success!
Stock-outs are the work of the devil. As the ultimate crusher of customer satisfaction, these supply chain pests must be avoided like the plague!
Stock-outs are deceptive beasts
Availability issues sneak up on you when you least expect it. However, left unchecked, stockouts have the ability to devour profits margins in just a matter of seconds. So what can you do to avoid them?
In this article, I will highlight the 7 deadly sins you need to watch out for. By taking steps to avert the pitfalls of poor inventory management, you can ward off stock-outs to ensure a more profitable future for your business. Let me elaborate…
Forecasts form the basis for all decision making. And yet, many businesses depend on basic forecasts that lack the sophistication to truly reflect future demand. Without a robust forecast, stock-outs are inevitable. After all, how can you hope to achieve the optimal level of inventory to satisfy your customers with a forecast you can't trust?
2. Supplier performance issues
Are your suppliers always letting you down? Did you find they are always late? Or do your suppliers fail to deliver exactly what was agreed? Supplier performance issues can not be ignored. And they certainly should not be accepted!
3. Volatile demand
Volatile demand is no excuse for availability issues. You must do everything you can to close the gap between forecasted and actual demand. After all, wherever there is a misalignment between supply and demand, this represents a cost. Where demand outstrips supply, the cost is a lost sale. Where supply outstrips demand, the cost is waste. Therefore, be vigilant and remain responsive to shifts in demand!
4. Unreliable data
The importance of good master data cannot be understated! Yet how often does your system tell you you have plenty of stock on hand while the shelves remain empty? stock on hand, order volume, minimum order quantities, and lead-times as well all other key master data is correct and up to date, you are making important decisions in the dark!
5. Fire fighting
Do you find yourself fixing problems that should never have existed in the first place resulting in a sub-optimal way of working. After all, when you are putting out fires, you are distracted from doing anything else. The result: more stock outs!
6. Broken Communication
How many inventory issues could have been avoided if everyone had communicated a little better? While operations, sales, finance and management all have a vested in inventory, they often only speak when there is a problem. If everyone in the process was engaged in open dialogue, many of the factors that cause stock-outs would be eliminated.
7. Human Error
Even the most competent of inventory managers make mistakes. Whether these mistakes are made in a random moment of madness or are the result of poor knowledge, it only takes one missed or short order to impact availability!
Commit these sins at your peril!
It’s all too easy to succumb to the sheer complexity of modern supply chains. However, you must avoid these 7 sins at all costs.
After all, stock-outs not only have a direct impact on sales, they are often wrapped in hidden additional costs. As highlighted by the Association for supply chain management, the consequences of a stock-out don’t end there:
“Not only is there the cost of losing out on a sale, but there is also often an additional cost associated with having to process a backorder as well an administration cost to review the item and place another order.”
And this is all before you factor in the long-term costs of losing a customer!
Immaculate inventory management will be your only saviour
But what can you do to mitigate the risk of stock-outs?
In reality, it will never be possible to avoid stock-outs altogether. There will always be some factors that you cannot foresee. However, there are steps you can take to drastically reduce stock-outs.
Given that poor inventory management is the common factor in all 7 of these deadly sins, this is your starting point on your optimisation journey. The goal here is all about finding the perfect balance between working capital, operating costs and the optimal service level.
But to keep stock-outs at bay, you not only need robust process-based tools that support effective decision making, but your team must also have a complete understanding of how these decisions will impact the wider business.
Slim4: saving you from stock-outs
Here at Slimstock, we help 1000's of businesses to maximise customer satisfaction & profitability. By offering the complete solution for forecasting, demand planning and inventory optimisation, our advanced inventory solution, Slim4, helps supply chain teams to make more informed inventory decisions.
However, we understand that supply chain teams need more than just the rights tools, they need the right knowledge and experience. With our Academy and structured training programmes, we ensure that our customers understand what the numbers mean.
For this reason, our customers typically reduce stock-outs by as much as 50%!
Let us show you how Slim4 could help you stamp out stock outs!
Complete the form below to register for a personal one to one demo with one of our consultants.
In order to thrive in the complex retail environment, businesses must have in place an effective Omni-channel strategy. However, this requires business leaders to have a different mentality. After all, to make the customer experience the number one priority, leaders must understand and appreciate the importance of establishing robust retail processes, inventory policies and assortment strategy!
For both traditional retailers and online “pure players”, developing an effective Omni-channel strategy is the first step in becoming a completely customer-centric organisation. However, an effective approach to ommi-channel must also maximsie sales through increasing product availability while protecting profit margins from avoidable cost factors. In this article, Peter Bocken and Walther Van Amstel explores what role category managers play and what it takes to excel!
What challenges do retailers face?
Retailers that were established in the online environment, the so-called “pure players”, now compete with directly with traditional retailers. While very different in terms of business models and the revenue structures, all retailers are ultimately chasing the bounty presented by the end consumer. The problem however, is that the lines between pure online retailers and traditional bricks ‘n’ mortar retailers are becoming increasing more blurred.
Without shelf space to contend with, online retailers often offer huge assortments. Consequently, inventory optimisation must go beyond simply determining the optimal levels of inventory. For these retailers, determining which items they themselves should or should not stock is an important question. In order to make such decisions, effective product life cycle management is essential here.
On the other hand, for retailers with physical stores, the challenge is less about assortment management and more about managing the distribution process between warehouses and retail locations. After all, demand patterns for a store in the centre of a major city will be very different to another store located in the countryside.
Given that pure players generally invest in a much broader range of items in much smaller quantities in comparison to traditional retailers, margins tend to be lower. Furthermore, with a high level of price transparency, online retailers are under constant pressure to keep prices competitive. With the additional requirement for effective SEO and paid click campaigns, marketing costs can also be much higher.
Fulfilment costs for online retailers are driven up by the fact that the end consumers order goods in individual units. However, personnel and location costs are but a fraction of the costs faced by a traditional retailer. After all, an online store has no real need for presentation stock!
Although, out of stocks have a big impact on the processes of traditional retailers, it can be very difficult to measure. For example, regardless of whether a customer’s purchase decision is influenced by a store assistant or not, in a physical store environment, the chance of product substitution is high. For online stores however, the internet has brought about much greater transparency. Within a matter of seconds, a customer can now easily find five different webshops, each offering the same product with the right price, delivery time and, of course, availability. Consequently, no stock means ‘no sale’.
Managing the long tail
Many webshops depend on their broad and deep assortments to provide a unique selling point. Within these large assortments, many different product variants are offered. This in turn can often mean that the famous 80:20 rule can sometimes shift more towards a 90:10 rule. However, while the percentage of articles within the assortment that bring in the bulk of the turnover is admittedly smaller, as the entire assortment grows, in absolute terms the total number of articles that contribute to the bulk of the turnover will only continue to increase. The tail of the assortment can also create value: given that price-based competition is much lower for these items, long tail products can demand much higher margins.
Many physical retailers also make their assortment available via an online channel. As part of their web shops, many blended retailers also try to offer an extensive long tail. However, unlike pure players, traditional retailers often attempt to integrate their online operations with their physical store processes. This provides the ability to encompass local non-moving items which would not normally sell into the assortment. However, this raises an interesting question: Which articles should be made available in physical stores and which should only be offered via the online channel online?
Whereas pure players are experienced when it comes to managing an extensive assortment with a high degree of rationality and extensive or advanced automation, the traditional category manager is not as familiar with this. As a result, in many cases, the long tail does not get the attention it requires which can have a direct impact on margin.
Establishing an effective Omni-channel strategy for efficiency
Given that many retailers are struggling to compete, all retailers must focus on maximising the yield of their assortment. A higher stock turn can directly contribute towards the profitability of the assortment. However, turning stock round quickly can also bolster the innovative power of a retailer. There are a number of ways a retailer can improve the efficiency of their operations.
For instance, closing poor performing stores and centralising the tail of the assortment are just two examples which can have a hugely positive impact on the stock turn as well as the overall profitability. Furthermore, by managing the long tail more effectively, retailers can better position themselves to protect margins at the end of the product lifecycle.
Turnover per m2 VS sales by product per channel
The traditional category manager is always trying to achieve the right assortment for the space available: ensuring that the assortment is in line with both the store format as well as the requirement for presentation stock. The merchandiser is then responsible for translating the proposed assortment in an optimal planogram or shelf plan. The operational impact of a shelf change is so large that, on average, this can often only be done one or two times a year. Consequently, this can often result in suboptimal results from day one!
The product manager of a webshop is typically more focused on the performance of an individual item rather than the entire assortment. The responsibility of the product manager is to check on a daily or even hourly basis if an item is still profitable. Given that margins are much smaller, product life cycle management is even more important here.
Furthermore, to compete with webshops, category managers within traditional retailers also need to maximise the revenue yield at both a product and a channel level. Being able to differentiate the strategic approach for each shop and channel is an important prerequisite for a solid Omni-channel strategy. With the support of detailed data, the category managers can make fact-based decisions far more easily. However, this requires additional system support and a greater requirement for the work of analysts.
From ‘gut feeling’ to ‘fact based’ decisions
The decision processes behind inventory and assortment management are becoming increasingly more fact-based. All departments within a retail organisation are under more and more pressure to become leaner and more efficient. However, Omni channel retailing demands bigger assortments. This in turn means that even more people have to make quicker and more frequent decisions. As a result, automated ‘business rules’ and ‘situational awareness’ are becoming more and more important.
The second competency retailers have to develop, is the ability to extract valuable information from ‘big data’. All channels provide an incredible amount of data, of which the potential is far from being fully exploited. A lot of retailers are already able to see exactly how much revenue they have achieved in a particular store in the last 5 minutes for instance. However, few retailers are able to combine this information with data from other sources such as Google or Facebook through utilising smart algorithms and scenario planning in order to forecast what the future will bring.
Integrated stock control
Many retailers have separate stock responsibilities for each channel. In order to maximise overall supply chain performance, it is important that inventory stocked across all the various stocking locations are taken into account. A strong Omni channel approach to inventory management requires precise planning, effective management and complete transparency over the entire logistics network. Where is the stock? What is the current demand and what will the demand be in the next few days or even hours? And, more importantly, where demand exceeds supply, should the distribution quantities be actively adjusted? If so, which locations should be given priority?
Maintaining a high level of availability for the online channel is more important than in the stores. However, online stock should also be managed differently than stock in stores. An additional challenge associated with the online channel is the large number of returns which means that a sizeable proportion of the inventory is actually held by the end consumers.
Within many retail chains, the majority of the mistakes that arise at the head office and distribution centre are solved on the shop floor. However, often an average performance is more than sufficient here. In e-commerce, this is simply not enough to achieve a return. In order to keep both the return rate and customer complaints to a minimum, online retailers must do everything in their power to fulfil every customer’s order perfectly.
The goal for every order should follow the OTIFNENC principle: On time, in full, no error, no contact. The result of achieving this is an immediate boost to profitability. However, the category manager must first take more responsibility for the operational execution as well as ensure that they are acting on the basis of standard processes.
What is moq? In a perfect world, suppliers would supply the products your business needs in the exact quantity that you need them. More importantly, they would be more than happy to do this at no extra cost.
However, in reality, placing orders with suppliers is far more complex. Given that most suppliers will impose a Minimum Order Quantity, all constraints must be considered before the order is placed.
But what are minimum order quantities? Why do suppliers need to impose such constraints? What impact do MOQs have on your inventory position? More importantly, how can you optimise purchase orders to satisfy order constraints without exposing your business to risk?
What is a minimum order quantity?
Minimum order quantities or MOQs are the minimum order size that the supplier is willing to accept. This is often expressed as the minimum number of units. However, suppliers may also set the minimum order quantity in terms of order value. For example, Supplier ABC Ltd will only accept an order in excess of £1000.
As a major constraint, it's important that the minimum order quantities for each product is up to date and correct in the master data. If it is not, this could lead to costly mistakes or avoidable delays when placing the purchase order.
Why do suppliers have minimum order quantities?
While MOQs may price some potential customers out, suppliers still need to ensure that they make a profit. After all, the supplier still has transportation, holding, handling and administration costs to cover. Often these overheads account for a small percentage of the overall value of the order. However, the smaller the order quantity, the more these costs eat into the profit margin.
Take for instance the following scenarios:
In scenario A, the supplier makes a healthy profit. However, in scenario B where the customer order quantities are much smaller, the supplier makes no profit at all. Worse still, if the supplier would allow customers to purchase in single units, such as in scenario C, they would actually make a loss on every transaction!
While this is just a simple example, from the supplier’s perspective, selling the products in such small quantities makes no financial sense at all. As a result, suppliers set minimum order quantities to protect their own margins.
What impact do Minimum Order Quantities have on your inventory?
MOQs have a major influence over how many days of stock a business holds as well as how frequently purchase orders are made with suppliers. In the example below, we explore how low MOQs impact the inventory position:
High Minimum order quantity
Where the supplier has a high MOQ in place, the most obvious impact is that inventory has to be held in much higher quantity. As highlighted in the graph below, at the point of replenishment, the business will hold over 20 weeks of inventory. The consequent of this is that the overall holding costs will be very high such as a large volume of stock will take up a much greater amount of space in the warehouse. More importantly, however, a much higher level of working capital will have to be invested in order to satisfy the MOQ. Consequently, the risk of obsolescence is far greater.
However, the upshot of high MOQs is that product will not need to be reviewed or ordered as frequently. As a result, administration and ordering costs can be minimised. Furthermore, the risk of stockouts is also very low. After all, the supply chain team have several weeks to respond to any potential availability issue!
Low Minimum order quantity
Low MOQs have a very different impact on inventory. If suppliers are willing to accept a much lower minimum order quantity, businesses can hold a much lower level of inventory and replenish inventory when required. The real benefit here is that a lower investment of working capital is required and the risk obsolescence is reduced significantly.
The danger of ordering to lower MOQs is that the product will have to be reviewed and ordered far more frequently. This, of course, comes at a cost in terms of admin and order processing costs.
Unlike with high MOQ where volatility is absorbed by the fact that there is a high level of inventory in the first place, low MOQq will mean that the inventory levels are likely to be leaner. Consequently, low MOQs leave the operation more exposed to spikes in demand and supply issues. To safeguard availability from such factors, it may be necessary to hold a strategic level of safety or buffer stock.
Summary: High MOQ Vs Low MOQ
How can you optimise your purchase orders?
Disproportionate order quantities cause expensive high average inventory levels and unnecessary risks related to obsolescence. Equally, order quantities that are too small cause unnecessary warehouse operations and avoidable transportation, administrative costs. So how can supply chain teams find the balance between satisfying the MOQ and keeping costs and risk under control?
Up to this point, we have talked about the MOQ as though it is set in stone. However, where the MOQ is low, in reality, the purchase order will most likely be way above the minimum order quantity. Likewise, with high MOQs, there is always the option to either negotiate a more favourable MOQ or even find another supplier. Even so, all purchase orders, order frequencies and review times must be carefully considered!
Thankfully this is where the economic order quantity (EOQ) comes in to play!
In essence, the EOQ formula focuses on the main cost areas in order to determine the most cost-effective order quaintly. By ordering the right quantities, this will ultimately reduce the operational expenses while boosting the return on inventory investment, thereby resulting into integral optimisation of your total supply chain costs!
What availability issues keep you awake at night? | 5 signs that you need more stock!
One of the main reasons for keeping inventory is to provide customers with the best possible level of service. However, many business leaders still spend sleepless nights worrying about finding the balance between product availability and supply chain cost.
What are the main reasons for keeping inventory?
Inventory is required to satisfy customer demand. However, the actual level of inventory required is influenced by a number of factors:
• Volatility in supply
• Supplier constraints such as minimum order quantity
• The stocking strategy in place
• contractual service level agreements with customers
• Purchasing economies of scale & cost optimisation
• Minimisation of delivery costs
• Level of service expected by the customer
Are you holding enough inventory?
While too much stock can kill margins, too little can be equally as destructive to service levels. After all, how can a business compete if it is not able to fulfil demand in a timely manner?
Based on our experience of working with over 950 organisations across the world, we have outlined the most common signs that a business has availability issues:
1. Too many empty shelves that should be full
The first and most obvious indication that a business has availability issues is empty shelves. Of course, purchasing stock just to keep the shelves full is not a reason for keeping inventory. However, it could be a sign that something is wrong. Furthermore, where there are empty shelves in one part of the warehouse, this is often mirrored with a high level of excess stock elsewhere in the business.
2. An excessive amount of backorders
For many businesses, backorders are a kneejerk reaction to stock outs situations. Although customers may be willing to wait for the stock to become available on the odd occasion if backorders become the norm this can seriously hamper customer satisfaction. If the same products end up with backorders every month, questions must be asked as to why there is never enough inventory in the first place!
3. Over-dependence on air freight & express delivery
From time to time, it is necessary to invest in air freight to ensure that there are sufficient levels of inventory in the short term to satisfy demand. Yet, the additional cost involved in shipping stock via air or utilising express courier services can quickly erode margins. Consequently, as a long-term solution for securing availability, this is at best sub-optimal. Much like with backorders, products that regularly have to be bought in on rush urgent orders should be investigated.
4. Angry customers
If the first time a business notices that they have an availability issue is when customers complain, there is a real problem. After all, by this point, it's far too late to do anything about it. Even so, every customer complaint should be reviewed to outline the true source of the problem.
5. Poor sales figures
At least with customer complaints, the business is given an opportunity to at least try and rectify the issue in the future. In the vast majority of cases, however, availability issues will force the customer to take their business elsewhere. In the short term, this will result in missed sales opportunities. More importantly, there is a very real chance that the customer will never return again. As such, availability issues have a profound impact on sale turnover!
Do any of these familiar?
Replenishing stock: Don't get burnt! If you look outside your window, you might be surprised to discover that Summer has already officially begun. However, retailers should not be put off by the recent wintery weather.
While seasonal influxes can present retailers with great opportunities to profit, British weather is a volatile force and even the most marginal drop in temperature or hint of rain can have a devastating impact on sales. Research suggests that a deviation of just 1° from the seasonal average temperature typically leads to a 1% change in sales. Given that the UK retail industry is worth around £300bn, this minor fluctuation could impact retail sales by as much as £3bn.
What can you do to prevent your operations from being left high and dry by uncertainty?
Replenishing stock and noisy demand patterns
For retailers with many stores across the country, demand and automatic replenishment can vary hugely between each location. As a result, supply chain teams a face a real challenge in ensuring not only the right products are stocked in each location but that each location holds appropriate levels of stock: too much could result in waste while too little could leave customers disappointed.
Understanding this demand challenge, Tesco took extreme measures last year to ensure that customers were able to buy exactly what they needed to make the most of the summer sun. With a super market within walking distance of one of the largest festivals in the UK, the super market chain replaced carrots and broccoli with crates of beer and cider in time for the Reading festival weekend. Anticipating over 35,000 festival going customers over the weekend, it seems Tesco understood exactly how this surge in demand would impact their operations and took the necessary actions to keep customers happy and maximise sales opportunities.
Considering that demand can be highly localised, it is important that retailers keep close control of their inventory situation at all levels of the operation: replenishing stock is essential! In the instance of Tesco, it made sense to hold extremely high levels of stock at one particular store in the run up to the Reading festival. However, in times of normal trading, this is unlikely to be the case. For retailers, determining exactly where in the chain stock should be held is one of the most difficult decisions to answer. After all, to what extent does demand fluctuate between stores? Should safety stocks be held at a store level or at one or all of the distribution centres?
The taste of summer
While having to cater for 35,000 festival goers over just a couple of days is an extreme example of a demand spike, volatility is something which must be managed on a day to day basis. Take for instance the sales of fresh meat: the weather can have a huge impact on the kind of fresh products people buy: a staggering 50% of consumers indicated that they based their purchase decision on the weather. As a consequence, retailers have to manage their inventories accordingly. Given the additional challenge presented by the product's short shelf-lives, failure to align operations with customer demand can result in huge costs as excess stock has to be wasted.
Given that retailers exist in a fast moving environment at the best of times, using monthly or event weekly forecasts alone is simply not sufficient to allow your business to pick up and respond to changeable daily demand patterns.
The flip-flop nature of sales
While the nature of food retail calls for responsiveness, fashion retailers face an equally daunting task during the winter months: making sure they have enough stock to last the season without being left with large levels of mark downs at the end of the season. Unlike food retail, where many items are sold throughout the year, a large proportion of fashion items are likely to be stocked for just a matter of weeks before being replaced with new lines.
As a consequence, this means that there is only a very small window in which to determine the initial allocation of stock, distribute items to stores and then convince the end consumer to purchase these items before products have to be marked down to make space for the next collection.
In order to maximise sales opportunities during this limited seasonal window, it is important that retailers get the initial allocation right. A poor decision and wrong automatic replenishment at this point could result in inappropriate inventory levels for the rest of the season. Furthermore, given that the weather could turn at any point in season, it is important that retailers take time to assess their exact order requirements for the second or even third automatic replenishment. If the order moment is wrong or if stock is ordered in the wrong quantities, retailers may leave themselves in a difficult position where excess stock or out of stock dictates their profitability.
Rain or shine: protect your operations by replenishing your stock
From the clothes we wear to the food we eat (not to mention the beer we drink), it seems different seasons has a huge impact on our purchase behaviour. While good and bad weather is partly to blame for the shifts in demand, there are a whole range of other factors which must be accounted for. As a consequence, retailers require complete visibility over anticipated demand at all levels of their operation. However, given that there is only a certain extent to which anyone can predict the weather, it is important that businesses have in place rigorous forecasting processes which encompasses historic demand, emerging trends, seasonality and promotions. Furthermore, it is also critical that the forecasting procedure accounts for volatility on a day to day basis in order to ensure operations are well aligned with the ever shifting demands of the end consumer.
Carefully managed, seasons can provide businesses with a potentially huge opportunity to profit. However, without the sufficient insight, they risk leaving themselves unnecessarily exposed to seasonal fluctuations in demand. With this in mind, what steps have you taken to prepare for the seasonal challenges that lie ahead?
How to know when your business is ready to upgrade from spreadsheet forecasting and ordering
For many business, Excel is synonymous with demand planning and ordering inventory. It’s often the go-to choice because of its familiarity and seeming ubiquity. There’s a good chance that the computer you’re reading this article on right now has Excel installed, or access to something similar from Google or Open Office.
But as businesses grow and inventory and complexity increases, Excel stops helping and instead makes your life more difficult. Worse, the inefficiency of ordering with a spreadsheet is costing you money through excess stock and wasted time.
Salesforce reports that almost 90% of spreadsheets have errors in them. So, while spreadsheets can seem like the “free” alternative to dedicated order management software, they’re anything but.
Choosing to use an integrated system like Slim4 from Slimstock means equipping yourself with the tools you need to simplify your life while increasing productivity and profits. The typical ROI for Slimstock customers is 6 – 12 months after implementation. How much more complicated is your ordering spreadsheet going to be 1 year from now?
While you consider the thousand-row answer to that, here are 5 ways to tell you’ve outgrown Excel –
1. Formula Errors Are Costing You Money
When you use Excel, formula errors are only a single keystroke away. And if the number of cells in your spreadsheet is heading north of 50K – and we’ve seen far worse than that – then your chances for errors increase exponentially.
Unlike Excel, getting accurate results from Slim4 doesn’t depend on entering both the data AND the formula correctly. With Slim4, the math is handled in the backend for you, ensuring accurate results. Order management systems are also built for seamless upgrades and data migration. Will the macro you rely on work the same in latest version of Office? Are hidden cells you forgot about being copied correctly to a new workbook by coworkers? Is having to worry about potential problems like this really better than simply avoiding them altogether?
JP Morgan Chase once famously attributed a mistake that cost them $6 billion to errors made in Excel. While the spreadsheet mistakes you see might not be enough to finance a lunar mission, they definitely add up (not unlike like boxes of unsold inventory in the corner of your warehouse that were accidentally ordered due to a spreadsheet mistake).
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2. You Don’t Know Who Changed the Spreadsheet
Even if you do detect the mistakes that your spreadsheets are 90% likely to have, how do you know where they came from? Because it only takes one error to ruin an entire workbook, even efforts to doggedly ensure responsible use can be quickly undone.
The core of this problem is that Excel simply wasn’t designed as a collaborative piece of software, so trying to use it as one will always lead to difficulties. Even if it is possible to develop and implement a system of documented changes, the time you spend administering it can no doubt be better spent elsewhere.
Instead of opaque or byzantine usage tracking methods, Slim4 makes seeing who made changes to your data a simple and transparent process. By providing an automatically logged audit trail, you’ll always know who’s making changes to your books and when.
3. You Spend Hours on Reporting
If there’s any benefit to using spreadsheets for complex ordering and inventory tasks, it might be the brief sense of accomplishment you get from producing useful information out such an unwieldy grid of data. That’s a meager reward. And, time spent cleaning and validating data before turning into charts is time you’re not spending on improving customer experience or having dinner at home.
As anyone who’s done it knows, even if you get good at creating reports from spreadsheets the monotony of it is unbearable and unnecessary. Slim4 quickly generates helpful, high-level reports like a Profit & Loss sheet to help with business planning. It is also equipped with a customised reporting dashboard to give you real time insights on key metrics that are always available, instead of having to create them by hand.
Ordering from a spreadsheet leads to frustration and errors
4. You’re the keeper of the spreadsheet and you need to go on holiday
If your company orders with Excel, it’s likely that someone in your office is the keeper of the spreadsheet. It’s the person you tell when the data needs to be updated, because the password is a closely held secret. Everyone knows it’s not a good system, but the keeper has made it work for the past 3 years, and it’s not going to change now. But what happens if the keeper quits, or gets fired, or just changes positions within the company?
The only thing worse than this is when you’re the keeper. No one’s doubting your ability to enforce columnar discipline, but what happens when you need to go on holiday? Even you have already named your assistant keeper, do you really trust them?
This is what’s known as a single point of failure, and it represents a serious liability for any business with one because the eventuality of it failing isn’t “if” but “when”. Slim4 removes the risks from single points of failure by being purpose built to allow multiple users different levels of access as assigned.
5. You’re Falling Behind On Ordering Best Practices (And It’s Costing You Money)
Is the fact that it works most of the time the best thing you can say about your forecasting and planning spreadsheet? If so, then it’s unlikely you’re making gains in efficiency. Slim4 is able to save companies money because it identifies inefficiencies, reducing stock levels by up to 30%. It does this by constantly updating with best practices and new features, such as ABC/XYZ stratification, and What-If? analysis.
What would you do if tomorrow your financial team asked you to lower warehouse inventory by 30% to free up capital? While it may be possible to make quick gains in the short term, without a coherent strategy these attempts ultimately end up sacrificing fill rate and CSAT. Slim4 is a system developed by people who understand inventory management. With Excel you have to design your own process, which may or may not be optimal.
Can you keep using Excel to handle your ordering? Probably. But if you can relate to even one of these five signs, then chances are you’re ready to upgrade your business from spreadsheet ordering and optimise your warehouse and your life.
To improve the prevention of inventory obsolescence, it is essential to take into account factors that are unknown or not associated with the problem. For example, more than 25% of obsolescence comes from poor management in the introduction of new articles.
INTRODUCTION OF NEW ITEMS
Obsolescence levels are usually associated with poor inventory management. However, more than 25% of this is generally produced exclusively after calculating the first purchase. When the introduction of new articles is planned, it is the sales and sales area (sometimes in conjunction with the supplier) who make it. They estimate what items will be released, when and in what quantities. Therefore, the first purchase is usually not the responsibility of the supply team. However, they can provide valuable information when it comes to rating a release as a success or failure.
Not all items that are added to the assortment will become a sales top. Even in many of them, the actual sales will not reach the expected ones. For this reason, it is necessary to establish a sound tracking system and thus react quickly. Some possible changes in plans can be the cancellation of purchases or even returns to the provider. It is precisely at this point that the planning department can help to recognize cases in which the sale is not aligned with the projections. It may be necessary to rethink strategies for the introduction of new articles.
The Power Mac G4 Cube was a powerful computer launched in 2000, but against all the odds was only one year in marketing. With design awards to his credit today, a unit is exhibited at the MoMA in New York.
THE PREVENTION OF INVENTORY OBSOLESCENCE
Regardless of the management that can be done to avoid increasing the level of current obsolescence, establishing a mechanism for evaluation of releases is a good option for the prevention of inventory obsolescence. Considering the obsolescence generated can be an additional impulse so that the projections of the new articles are from the beginning as realistic as possible.
Now, it must be assumed that whenever a new article is introduced, a risk is being taken. If the company aims to innovate its articles, this decision responds to a characteristic of the way of doing business and, therefore, innovation translates into risk.
In the case of Apple, it bet 100% on the innovation of its iPhones and products in general. They must continuously withdraw and add new products to the market.
DYNAMICS OF ASSORTMENT
It is well known that the lineup of companies is usually dynamic. While some elements are removed from the active assortment, others enter it. Making a correct phase in and phase out becomes vital when it comes to avoiding inventory obsolescence. Estimates of new products may only be a statement of intent and plans will not necessarily be met. If all the intervening parties of the company work together, it will be easier to evaluate the results obtained. In this way, generate learning curves that are the engine of an improvement in the prevention of inventory obsolescence when managing the introduction of new items.
Anyway, this does not mean that you cannot effectively make proactive management in the prevention of inventory obsolescence: if you have the right systems to obtain visibility regarding the status of the inventory and is complemented with a functional performance analysis, from the sale of new items, alarms can be triggered that allow reacting as soon as possible to a probable risk of obsolescence and, at the same time, prevent the problem from growing and growing …
Are there formal mechanisms for evaluating the performance of new products in your company?
Who determines the forecast of a release and the amount of the first purchase?