Delivery Lead Time – Which inventory opportunity will deliver the greatest return?
Supply chain teams are under constant pressure to achieve ever-more ambitious inventory reduction goals. However, given that high inventory levels are caused by a broad range of factors, identifying the best strategy to reduce the inventory can be a real challenge. The question for supply chain leaders is: how can you determine which inventory reduction opportunity will deliver the greatest return?
Most supply chain managers know that excess stock exists within their business. Yet in order to identify what caused the problem in the first place and, more importantly, determine how best to fix it, this requires time, effort and resource. 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 5 simple analysis techniques. Over the next few weeks, we will be releasing these top tips to help you make more objective decisions as you pursue your inventory reduction goals.
Ultimately, by adopting these 5 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. Furthermore, long lead-times mean businesses need to plan to much longer horizons. Therefore, as a consequence the business is less able to be flexible to changing customer demand in the near term. However, even for items with short lead times, if badly managed, these can also create a huge amount of avoidable excess.
Before you start changing lead-times...
It is often very enlightening to first analyse the current stock cover held for items with different lead times. For instance, there may already be opportunities to reduce stock even with the current lead-times. As highlighted in the table, if you had an assortment of items and you grouped them based upon the given lead times (weeks) and then worked out the average amount of inventory cover (weeks) for each group, you can quickly see where the inventory reduction opportunity lies.
In this example, it would appear there are two main pain-points that could offer fruitful inventory reduction opportunities. The first and most obvious issue is the fact that the vast majority of the assortment is subjected to lead-times of over 12 weeks. The second insight gained from this analysis is that stock cover often appears to imbalanced with the lead-times. For example, items with leadtimes as short as 1 week seem to have an average of 12 weeks cover. Clearly, this analysis will prompt further investigation into what is causing the imbalances.
What should you do now?
In this example, there are two very clear inventory reduction opportunities that exist. In order to exploit each issue, a different approach must be taken.
Pain point A: “The majority of my items have been 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. While your supplier may themselves be subjected to capacity or supplier 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 just be a case of renegotiating the terms of the supplier contract. However, where this is not possible, more strategic action must be taken. For example, in order to reduce the lead time, any of the following could help:
- Providing suppliers with purchase forecasts in order to enable them to 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
- Incentivise your suppliers to prioritise your order, thus ensuring a more competitive lead time. Instead of suppliers providing rebates to customers for volume bought, it is also possible for customers to provide incentives for suppliers for volumem sold, thus ensuring it is in the supplier’s interest to match 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, is there a strategic reason why you are holding so much inventory? Perhaps there is a rebate opportunity based on order volume or an existing service level agreement with a customer in place. In this instance, following actions should be considered in order to achieve the desired inventory reduction:
- review true customer consumption patterns and align 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?
Consequently, to achieve the desired inventory reduction, the following actions should be taken:
- Review the buying process and investigate whether more governance should be put in place
- Improve collaboration between the supply chain and purchasing team
- Review the compatibility of item and supplier minimum order constraints with demand
- Review the 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 inventoy reduction goals
There are many different inventory reduction strategies that can help deliver impressive results. However, prioritising excess inventory issues associated with lead times can offer a great starting point for inventory optimisation. In addition to highlighting where excess stock exists within your assortment, this analysis can provide invaluable insight into the effectiveness of your buying processes!