Inventory Management with the COVID-19 Part 4
Lead Times
In the last several newsletters, we have been discussing ways to best manage your inventory while dealing with the effects of the COVID-19 virus. Topics have included adjusting forecasts and modifying safety stock quantities. In this issue we will continue our discussion by looking at lead times for replenishing your stock.
It is vital to know how long it will take to replenish your inventory of a stocked item. If it takes seven days to receive a replenishment shipment from your primary source of supply, and you sell or use two pieces per day, you’d better issue a replenishment order when you have no less than 14 pieces in stock (2 pc./day * 7 days = 14 pieces).
But how reliable are your lead times? In the past several weeks we have experienced many disruptions in the supply chain. Vendors have experienced challenges such as:
• Unusually high demand for certain products resulting shortages of stock available to send to customers
• Problems obtaining raw material and component parts (especially those imported from overseas)
• Staffing problems due to employees having to be quarantined
• Slower production as production lines have to be reconfigured to accommodate social distancing
Many ERP (enterprise resource planning) systems utilize a mean average lead time of the last several stock receipts in planning replenishment. Do you know how your system handles lead times? If not, you should. This method works well if lead times are consistent. But if lead times suddenly change, it produces inaccurate results. Consider the last three stock receipts for this item:
• Jan 14 – 14 days
• Feb 28 – 16 days
• April 18 – 42 days
The mean average lead time would be 24 days [(14 + 16 + 42) ÷ 3 = 24]. But is 24 days a good estimate of the time necessary to replenish stock in the future? What if the vendor can only supply the product in 42 days in the foreseeable future? Using a 24 average lead time in replenishment planning will probably result in a stock out. When you try to explain to your customers that you have an unreliable supplier, they may respond that they have one too. And you are their unreliable vendor.
Best practice is to manually maintain replenishment lead times based on the longest normally anticipated lead time.
For example, if lead times range from two to three weeks:
1) Set the lead time to 21 days.
2) Examine unusual lead times associated with recent stock receipts. For example:
a. If the lead time associated with the stock receipt is less than 50%, or greater than 150% of your current anticipated lead time
b. If the shipment as more than a week early or week late
If your ERP system does not already have an unusual lead time report or inquiry, you probably can create one with a report writer. It will quickly identify the unusual lead times and their vendors for you. Once you have the list of unusual lead times:
3) Contact the vendor.
4) Ask if this recent lead time represents a good estimate of how long it will take to receive replenishment shipments in the future.
5) If it is “the new norm”, adjust the anticipated lead time for the product or vendor line in your system.
6) REPEAT steps 2-5
To survive and prosper in these challenging times, you have to adjust to changing circumstances. In the next newsletter we will discuss managing large vendor purchase requirements. In the meantime let us know if you have any questions or would like assistance in achieving effective inventory management.