Bear in mind that in spite of the fact that many of your closest suppliers probably have actual lead times of 3 to 10 days, if you buy from them, let’s say, once per month, then you will never be able to have less than approximately one month supply of inventory. And then there is the additional and dreaded safety stock to plan and contend with. Of course, if demand changes, a product may have to wait several days, or maybe some weeks, before your supply chain rules can react to the re-ordering requirements, and the changes which may or may not be permanent changes in demand.

For some time now, I’ve argued:

1. That a “reasonable way” must be found to increase the frequency of re-order;
2. We must be better able to recognize the customer’s “buy signals,” and be less reliant on forecasts (whether moving averages or more sophisticated algorithms);
3. We need to think differently about inventory and supply chain methods as a way to generate a “de-coupling” of demand forecasts and their inherent variability.  The answer isn’t necessarily adding “safety stock” — expecting it to act like some “fire-wall.”

The key to speed-of-flow

I’ve also long suggested that another fundamental consideration is the “speed-of-flow,” the velocity of the supply chain," its impact on coping with the average inventory levels that result, and the demand variability initially driving replenishment. Even manufacturing Titans like Henry Ford recognized the importance of speed-of-flow and its ability to mitigate variability. For a long-time now, I’ve also argued that supply chain managers need to focus on and rationalize the traditional “inventory drivers” (lead times, safety stocks and re-order quantities — EOQ’s) as potential impediments to flow. Somehow though, as the “conventional wisdom” in distribution inventory management developed and broadened, we got off track from what probably should have been more intuitive.

And still, yet another consideration. Reordering isn’t always about procuring from an outside vendor; the scenario can also be a branch within your distribution network reordering from a centralized distribution center (CDC) — in other words; a stock transfer. The same issues are present; the same mitigation may be required.  It may even raise some other unique issues.

The Greatest Enemy to Speed-of-Flow

The greatest enemy to flow is “variability,” demand forecast variability, and even vendor delivery variability, and for wholesale distributors, the resultant “amplification of variability” (demand nervousness and ripples in demand) between CDC’s and suppliers — and between a branch location’s points-of-sale and its source of replenishment (the CDC — or maybe direct from the supplier.)

In fact, something called “The Law of System Variability” (Smith & Smith, 2013), tells us “that the more variability between discrete areas, steps or processes, in a system, the less productive that system will be; the more areas (demand shipping locations), steps or processes and connections between them, the more erosive the effect.” 

So, what do we do? I don’t believe that traditional purchasing and inventory modules, most often incorporated in wholesale-distribution enterprise systems, deal with this well — or as well as it should.

A deeper look at this ‘chronic conflict’ is available in a white paper by MCA Associates;  “The Business Intelligence & Supply Chain Challenge: Create Profit, Service Level & Working Capital Improvement.” Learn why this picture is “worth a 1,000 words.” It’s on our website at www.mcaassociates.com.

Learn how you can have the opportunity for less inventory and less opportunity for stock-out — both at the same time!

Don’t be a hostage to old thinking, particularly those rules — the conventional wisdom — that have been around since the 1950s.  It’s about time we resolved this chronic conflict!