Dealing with a Chaotic Supply Chain – Part #1
By Jon and Matt Schreibfeder
Most organizations are currently experiencing unprecedented challenges in inventory planning:
- Vendors frequently cannot consistently deliver what they previously supplied in a timely manner.
- Because preferred products are often out of stock, customers are buying substitutes. These alternate products would normally not be purchased if the desired item was available.
- Lack of transportation resources result in frequent delays in receiving replenishment shipments.
Over the next several months, we will explore ways to deal with these challenges and provide the best possible product availability to your customers. We will start our discussion this month with vendor lead times.
The lead time for a product is the amount of time it takes to replenish your stock of an item. Accurate lead times are imperative in avoiding stockouts. For example, if demand for a product is two pieces per day, and it takes seven days to receive a shipment from your primary source of supply, you must reorder the item when you have no less than 14 pieces available in stock.
Unfortunately, most ERP (i.e., enterprise resource planning) systems utilize an “average” lead time, calculating a mean average of the last several stock receipts. For example, if the lead times associated with the last three shipments were 16 days, 20 days and 15 days, the resulting average lead time would be 17 days [(16+20+15) ÷ 3 = 17]. This method works fairly well when vendor deliveries are consistent. But mean average lead time calculations produce misleading results if there is a sudden disruption in deliveries. If the last shipment arrived in 45 days rather than 15 days, the result would be a mean average lead time of 27 days [(16+20+45) ÷ 3 = 27]. What are the chances that the next replenishment shipment will arrive in 27 days? Recent experience shows that the next lead time might be closer to the 45 days associated with the most recent receipt, not to mention that you would be relying on safety stock for a month or suffer a stock out.
Best practice is to manually maintain anticipated lead times, setting them equal to the longest normally anticipated lead time. For example, if recent lead times have ranged from two to four weeks, set the lead time equal to four weeks or 28 days. Whenever the actual lead time associated with a just arrived stock receipt (i.e., Receipt Date – Purchase Order Date) is more than seven days greater than the current lead time in your system, contact the vendor. Ask them if this delivery’s lead time is representative of what to expect in upcoming shipments. If it is, immediately update the lead time for the product in your system to ensure that you reorder the product when you have adequate inventory to cover lead time demand.
Finally, when manually maintaining anticipated lead times in your system, be sure to include all four elements of an accurate anticipated lead time:
- The time it takes you to place an order once you realize stock of the product needs to be replenished
- The time it takes the vendor to process the order and ship the material
- The time it takes to transport the material to your warehouse
- The time it takes you to prepare the stock receipt for sale or use
Effectively forecasting anticipated lead times will help you avoid stock outs. Next month, we will continue our discussion of lead time and address the difference between it and ship time. If you have specific questions about dealing with specific inventory-related situations, please let us know. Our goal is to help you achieve the goal of effective inventory management; even in chaotic times.