- Blaming Shortages on Lead Time Variability
Suppliers will often be late, sometimes by a lot. Lead time delays and supply variability are supply chain facts of life, yet inventory carrying organizations are often caught by surprise when a supplier is late. An effective inventory planning process embraces these facts of life and develops policies that effectively account for this uncertainty. Sure, there will be times when lead time delays come out of nowhere. But most often the stocking policies like reorder points, safety stocks, and Min/Max levels aren’t recalibrated often enough to catch changes in the lead time over time. Many companies only review the reorder point after it has been breached, instead of recalibrating after each new lead time receipt. We’ve observed situations where the Min/Max settings are only recalibrated annually or are even entirely manual. If you have a mountain of parts using old Min/Max levels and associated lead times that were relevant a year ago, it should be no surprise that you don’t have enough inventory to hold you until the next order arrives.
- Blaming Excess on Bad Sales/Customer Forecasts
Forecasts from your customers or your sales team are often intentionally over-estimated to ensure supply, in response to past inventory shortages where they were left out to dry. Or, the demand forecasts are inaccurate simply because the sales team doesn’t really know what their customer demand is going to be but are forced to give a number. Demand Variability is another supply chain fact of life, so planning processes need to do a better job account for it. Why should rely on sales teams to forecast when they best serve the company by selling? Why bother playing the game of feigning acceptance of customer forecasts when both sides know it is often nothing more than a WAG? A better way is to accept the uncertainty and agree on a degree of stockout risk that is acceptable across groups of items. Once the stockout risk is agreed to, you can generate an accurate estimate of the safety stock needed to counter the demand variability. The catch is getting buy-in, since you may not be able to afford super high service levels across all items. Customers must be willing to pay a higher price per unit for you to deliver extremely high service levels. Sales people must accept that certain items are more likely to have backorders if they prioritize inventory investment on other items. Using a consensus safety stock process ensures you are properly buffering and setting the right expectations. When you do this, you free all parties from having to play the prediction game they were not equipped to play in the first place.
- Blaming Problems on Bad Data
“Garbage In/Garbage Out” is a common excuse for why now is not the right time to invest in planning software. Of course, it is true that if you feed bad data into a model, you won’t get good results, but here’s the thing: someone, somewhere in the organization is planning inventory, building a forecast, and making decisions on what to purchase. Are they doing this blindly, or are they using data they have curated in a spreadsheet to help them make inventory planning decisions? Hopefully, the latter. Combine that internal knowledge with software, automating data import from the ERP, and data cleansing. Once harmonized, your planning software will provide continually updated, well-structured demand and lead time signals that now make effective demand forecasting and inventory optimization possible. Smart Software cofounder Tom Willemain wrote in an IBF newsletter that “many data problems derive from data having been neglected until a forecasting project made them important.” So, start that forecasting project, because step one is making sure that “what goes in” is a pristine, documented, and accurate demand signal.