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This column is focused on push vs. pull supply chains. So, if you go no further, check out and understand Figure 1; it’s a great example of a picture worth a thousand words! If you are concerned about a recession on the way — weakening demand, hard landing or soft landing, etc. — the strategy outlined here can help you better manage your inventory under almost all conditions.
I suspect you’ll want to know what success factors focus on helping you better understand Figure 1 and why they are so important to anyone in the distribution and supply chain business.
Mitigating the forecasting facts of life;
Managing the inventory drivers;
Measuring and monitoring your inventory key performance indicators (KPIs) differently.
Yes, it’s always difficult to react to any specific economic situation and yes, it’s hard to determine the right amount of inventory when significant demand uncertainty exists — all while still meeting on-time delivery objectives. As industry consolidation continues, it also means more multilocation inventory planning and the decisions that govern where and how much inventory is stocked at a particular location. This is exactly where demand forecasting has major vulnerabilities — specifically, high forecast error.
However, with a few relatively simple but important process steps, your company, I believe, can reap the benefits of combatting this forecast uncertainty. It doesn’t even require any new software either, only a different way of thinking.
1. The Forecasting Facts of Life
Historically, we’ve “pushed” inventory to other locations possessing higher levels of forecast variance. Now, I’m not suggesting we do away with forecasting — however derived — or as a business process. However, Figure 2 surely represents a frequent occurrence (the numbers on the left, for each location, represent forecast; the numbers on the right side represent actual demand).
The forecast at the distribution center, when aggregated, is most often more accurate. The “fact of life,” as shown, is that forecasting is more accurate the higher the level of aggregation.
2. Managing the Inventory Drivers: A More Strategic Approach
Why not replace pushing inventory, based on demand forecast, with “pulling” it? Pulling inventory encompasses improved speed of replenishment by ordering smaller quantities more frequently. More frequent replenishment will tend to use more actual demand data to drive replenishment. Statistical variations are minimized rather than magnified. And yes, it means less safety stock — exactly where many inventory investment dollars are tied up.
So, looking again at Figure 1, you are:
Increasing replenishment order frequency (more replenishment cycles);
Shortening overall replenishment lead times;
Reducing order sizes;
Minimizing safety stock requirements;
Using more actual demand to drive immediate replenishment needs.
Further, average inventory is lower, inventory peaks are lower and the lows of inventory are higher.
You are fostering a continuous flow of inventory from the supplier to the distribution center to branch warehouses — instead of those “lumps” of inventory you see in Figure 1 on the left side — and increasing the velocity of the supply chain. You are lowering your vulnerability to demand variance stock-out because there is less opportunity for stock-out between each replenishment cycle — even with less average inventory. It’s not exactly just in time, but it’s surely not just in case.
Look at it this way (see Figure 3): Let’s say your soda machine vendor visits your company every two, three or four days to refill the soda machine. The worker fills it to the maximum (an inventory target; in this case, the capacity of the soda machine) based on consumers’ consumption of the product.
Regardless of the frequency of soda replenishment or the actual consumption, it’s more likely that a product will not be out of stock — and we remain aligned with what I’ll now call the ‘customer’s buy signal.’
3. Other Factors: Inventory Targets, KPIs and Supplier Relationships
Space limitations prevent me from too much additional topic expansion here, but there are a few additional components of this continuous flow transformation of thinking.
Inventory targets for every SKU. It’s not all that difficult to determine (see Figure 4).
Key performance indicators. These visually monitor and measure ongoing inventory management effectiveness.
Potential impacts on suppliers. New relationships that incorporate this pull philosophy.
The importance of the targets is as much about monitoring them as anything else. The great part of it is that not only can you monitor the target in terms of total inventory but also by location, A-B-C stratification rank — slice and dice it any way you want. Regardless, it now becomes actionable.
Summary of the Major Differences in Thinking
This pull mechanism is what we want to connect to throughout the supply chain. It’s an important linkage that synchronizes the supply chain to more actual customer demand — the customer’s buy signal.
Focus on inventory drivers such as the real lead times, safety stock factors (often they are the same since originally initialized) and reorder quantity/economic order quantity factors.
This is not about another new technology project; rather, it’s a business project, doing the right things. It’s about process, not software implementation and training.
If you want to know more, you can email me for a copy of our complete whitepaper (our contact email address appears at the end of this column) or visit our website at www.mcaassociates.com and download “The Business Intelligence & Supply Chain Management Challenge” whitepaper.