In order to meet or exceed your customer service goals, you must reorder a product when you have enough left in your warehouse to meet customer demand during the time it takes you to obtain a replenishment shipment. For example, if you sell 2 pieces per day, and it takes 7 days to receive a replenishment shipment, you must we reorder the product when there are no less than 14 pieces in inventory.
Important points about the anticipated lead time:
• It is the length of time you estimate is necessary to order and receive a replenishment shipment of an item.
• It should be separately maintained for each product, in each warehouse, and from each source of supply.
• The anticipated lead time from the primary source of supply is normally used in calculating the “order point” or minimum quantity.
Note that the order point or minimum quantity, in most systems, is not the smallest amount of a product you will have on hand, but is that amount of inventory that will prompt you to reorder the item.
Many systems calculate an anticipated lead time by averaging the actual lead times associated with the last several stock receipts. This technique may give you misleading results. For example, if one shipment arrives in 14 days and another shipment arrives in 42 days, the average lead time would be 28 days. But, what if 42 days was the normal anticipated lead time for the item?
Many distributors have found that replenishment is better managed by setting anticipated lead times equal to the longest typical lead time for each item. For example, if actual lead times for an item range from two to four weeks, they will maintain a four week (i.e., 28 day) anticipated lead time for the product. This will help ensure that adequate inventory is available to cover customer demand during the time it takes to replenish stock. After all, half of the lead times associated with stock receipts will be greater than the “average” lead time (and half will be less than the average lead time).
Be sure when determining the anticipated lead time for a vendor or particular product, you take into account all four of these factors:
• the time it takes you to place a replenishment order once you know that more stock is needed
• the time it takes your supplier to fill your order and ship it to you
• transit time to your warehouse
• the time it takes you to unpack and prepare the stock received for sale or use (including inspection and repackaging, if necessary)
Accurate lead times are critical in achieving effective inventory management. Next month we will look at when and how you need to revise anticipated lead times.
