In the current series of articles, we are looking at how to best set parameters in your replenishment software. There are four critical factors that determine how successful you are in having the right quantity of the right item at the right location at the right time:
The anticipated lead time
The order or review cycle
Last month we began by examining the forecast. This month we will explore the second parameter: the anticipated lead time. This is the amount of time it will take to receive and prepare an item for sale or use once you realize that you need more of the product. It is critical that you utilize accurate anticipated lead times in order to avoid stock outs. For example, let’s say you have a forecast of two pieces per day, and it takes seven days to replenish your stock of an item. You must reorder product when you have no less than 14 pieces in stock (2 pc/day * 7 days) to avoid a possible stock out.
Notice we say the anticipated lead time, not the “average lead time”. A lot of systems will calculate and use an average lead time based on the last several stock receipts from the primary supplier of a product. This works well if lead times for a product are consistent. However if the lead time for an item radically changes, using an average lead time may create stock shortages.
Let’s look at an example:
A supplier previously delivered products consistently in 14 days. But due to changes in production, the lead time for the latest (and future shipments) is 42 days. If you calculate an average the lead time, the result would be 28 days [(14 + 42) ÷ 2 = 28]. But the anticipated lead time for future shipments is 42 days. If you use the average lead time you will plan on replenishing stock when there is only a 28 day supply on the shelf. There is a very good chance you will run out of inventory before the replenishment shipment arrives.
Best practice is to manually maintain anticipated lead times for each stock product.
In determining the anticipated lead time be sure to consider all four key elements:
The time it will take you to place the order with the supplier
The time it takes the vendor to fill the order
Travel time to your facility
The time, after receipt it takes to prepare the product for sale or use
Purchasing must notify the appropriate buyer when the lead time associated with the latest stock receipt significantly differs from the existing anticipated lead time:
The lead time arrived more than 50% later or earlier than the existing anticipated lead time (e.g., a shipment arrives in more than 21 days or less than 7 days while the anticipated lead time is 14 days).
The shipment is more than a week early or late
The buyer should contact the supplier to determine if the existing anticipated lead time should be modified. Accurate anticipated lead times result in buyers issuing purchase orders at the right time, a key element in your quest to achieve effective inventory management.