I have found some good ideas on how visibility can cut supply chain costs from consultant John Berry.
There are plenty of sophisticated methods and algorithms out there to help calculate safety stock levels. However without good supply chain data, it’s almost impossible to implement any kind of rigorous inventory management process.:
- The unfortunate reality is that organizations frequently don’t have precise information about on-hand inventory counts. This could be caused by a less-than-reliable ERP or WMS implementation. Data latency is another common culprit for inventory blindness. Often inventory data is processed in batches. In a high velocity distribution center operation, even a 15 minute batch window can cause huge distortion on on-hand inventory counts. In fact it’s common to see daily, weekly or even monthly inventory reconciliations. Often organizations outsource fulfillment operations to 3PLs without properly thinking through data integration. And often, inventory visibility is completely based on an emailed spreadsheet! Keeping safety stock to offset bad processes is completely wasteful.
- Dynamic supply chains must react with the constant push and pull of supply and demand. You’ve got a flow of supply that is either in production or on its way in from the supplier. You’ve got dynamic demand for that supply in the form of customer orders. There are so many variables that affect when supply will become available for fulfillment, and that in-transit inventory is often ignored until it has been received and placed into stock at a distribution center. However a great opportunity is being missed.
- If you are sourcing finished goods or components from suppliers, their ability to deliver on your lead time requirements has a huge impact on your safety stock planning. If your supplier is constantly late on shipping orders, you are going need more buffer inventory nearby your customers. Do you actually know how well your supply is chain performing?
- Inconsistent performance by your carriers can also drive up the need for excess inventory. It’s very important to track shipment transit times for key lanes and shipment modes. As with your supplier lead times, it’s wise to compute average, minimum and maximum transit times for all your carriers. When shipping internationally, transit times can be very unpredictable. You do not want to make assumptions about how long it takes an ocean container to move from Southern China to Long Beach during peak season. The more data you have, the better you can plan.
- Variability is the enabler of inventory planning. No matter how good your calculations are, it often seems like one unexpected event can completely turn your planning upside down. Often the knee jerk reaction is to increase safety stock. They key metric is how much variability do you have? Sometimes it can be helpful to graph your results over time to visualize performance and recognize patterns. Having historical variability measurements can give you the confidence to eliminate unnecessary inventories, or position inventory more aggressively, or to replenish in smaller batches which is a common lean strategy.
Improving your supply chain visibility and data quality can be a difficult journey. The data you need is spread across many individuals and organizations that don’t have much incentive to help you solve your problem. Inventory reduction programs can often shift millions of dollars off the balance sheet, while at the same time improve business agility.
In an upcoming post I'll provide a few resources that can help add some perspective to the process of developing visibility and more effectively managing inventory. Please add your comments below if you have experiences you would like to share.