Dealing with a Chaotic Supply Chain – Part #2

by | Oct 7, 2021 | Analysis, Best Practices, Forecasting, Order Cycles, Purchasing, Replenishment Parameters, Replenishment Source, Stocking Decisions, Vendor Managed Inventory

Dealing with a Chaotic Supply Chain – Part #2
By Jon Schreibfeder and Matt Schreibfeder

We continue to experience disruptions in the supply chain.  Material that used to be reliably available now is often hard to come by.  Last month we began our discussion of developing accurate (or as accurate as possible) anticipated lead times for shipments from suppliers.  This month we continue our conversation by examining how to calculate meaningful anticipated lead times.

As we discussed last month, our recommendation is to set the lead times in your system equal to the longest normally anticipated lead time.  Here is how we suggest you calculate a meaningful anticipated lead time which is a critical replenishment parameter:

  1. Examine all stock receipts from primary vendors over the past three to six months. That is those vendors you deal with on a regular basis.  The information you will need for each transaction includes:
    1. The receiving warehouse
    2. The item number
    3. The vendor number
    4. The purchase order creation or release date (i.e., the purchase order issue date)
    5. The date of the stock receipt

 

  1. For each stock receipt, calculate the actual lead time for the shipment by subtracting the date the purchase order was issued from the date the purchase order was received. For example, if the purchase order was issued on September 20th and received on September 30th, the actual lead time would be 10 days.

 

  1. Compare the actual lead time to the lead time maintained for the warehouse/item in your ERP system. If the actual lead time is greater than the system maintained lead time, the shipment was late in arriving.

 

  1. As you go forward, keep track of the percentage of late shipments for each vendor as well as the average number of days each vendors late shipments arrived beyond the system lead time. Note that recently we have found that for many organizations more than 50% of their stock receipts are late in arriving.
  • Calculate an average lead time by vendor for all stock receipts arriving from that source of supply.
  • For those vendors with a high percentage of late shipments, calculate a new suggested lead time for each vendor by increasing its average lead time by a percentage. Determine the number of potential late shipments by comparing the actual lead time for stock receipts received from that vendor to the suggested lead time for that supplier.  Again, keep track of the percentage of late shipments for each of these vendors as well as the average number of days each vendor’s late shipments arrived beyond the system lead time.
  • Continue to increase the percentage applied to the average lead time for each vendor until the percentage of late shipments is less than 10%. This percentage is subjective; adjust it until you are satisfied with the results for each supplier.
  • Use the resulting suggested lead time for each vendor in calculating replenishment parameters
  • Monitor future late shipments by comparing the actual lead time to the revised suggested lead time. If shipments are arriving more than seven days early or seven days late, you might want to again revise the vendor’s lead time in your ERP system.

 

  1. Examine the results for each of these problem suppliers to see if lead time problems involve specific items or product lines. You may be able to increase lead times just for those products.

Accurate lead times are a critical component in the calculation of reorder points and minimum quantities in every ERP system.  You must monitor them in order to provide the best possible customer service and minimize stockouts.  Next month, we will explore what to do when the material you need is not available.

In the meantime, if you have specific questions or need assistance, please let us know.