By Jon Schreibfeder
We are finding that many of our distributors, manufacturers, and retailers are suddenly dealing with longer and unpredictable lead times for many products. Unfortunately, the majority of computer systems are not equipped to deal with this problem. Why?
Most systems calculate an average lead time for shipments from the primary supplier of a product to plan future replenishment. This method works well if lead times are consistent, but what if they are not? Consider a situation where you experience these lead times for the last four shipments of an item: 21 days, 19 days, 23 days and 54 days. The average lead time would be (21 + 19 + 22 + 54) ÷ 4 = 29 Days. If the last lead time of 54 days represents how long it will now take to replenish inventory, a reorder point based on a lead time of 29 days will probably result in a stockout and disappointed customers.
To address this situation, it is imperative that:
- Your system uses anticipated lead times based on the “longest normally anticipated lead time from the primary source of supply”. For example, if lead times for a product range from usually two to three weeks, base replenishment on an anticipated lead time of 21 days.
- You should also have a report or inquiry that brings to the appropriate buyer’s attention significant differences between the lead time for an item currently used to calculate replenishment parameters and the actual lead time associated with the most recent stock receipt.
- Buyers should immediately contact the vendor to determine if this longer than anticipated lead time is unusual or a good prediction of future shipments.
Another problem that has surfaced with most systems is the assumption that if material is placed on a replenishment order, it will consistently arrive in time to prevent a stockout. If the “Net Available Quantity” (i.e., On-Hand minus Total Committed on Outgoing Orders plus Total on Incoming Replenishment Orders) is greater than the Reorder Point, the buyer will not be notified that an item needs attention. But what if a replenishment shipment will arrive too late to satisfy anticipated demand during the lead time? What will your customers say when you explain that you have plenty of an item on order with the supplier, it just won’t arrive in time to meet their needs?
To address this issue, the best designed systems include a “short fall” feature. This tracks future availability of products based on anticipated customer demand and the scheduled receipt date of incoming shipments. If the system detects the possibility of a stockout, it will suggest the quantity necessary that must be acquired from a secondary source to avoid possibly disappointing customers.
Our current “supply chains” often do not appear to be strong, interconnected, series of steel links. They often appear to be chaotic. You must address this confusion before it negatively affects your business. It is imperative that your buyers monitor potential disruptions for the suppliers and products for which they are responsible.