Taking Stock of a Runaway Inventory
Guest contributor: Steve Rees
Is there too much excess stock in your inventory? Are obsolete items taking up valuable space in the warehouse? Have contracts and customers been lost because orders cannot be satisfied? If you are working in the supply chain and answering yes to one or more of these questions it is time to ‘take stock’ of the situation. You may not have realised that your business is suffering from a poorly optimised inventory.
Businesses that supply goods often have to balance two conflicting objectives: minimising stock and maximising customer service levels. Inventory ties up cash, incurs storage and management costs and leaves a business open to the possibility of being left with obsolete stock. Insufficient stock increases the possibility that some customer orders will not be satisfied on time or in full, leading to lost contracts and higher rates of customer turnover.
There are many ways to calculate the optimum level of stock for a given product, but stock levels are typically a factor of the customer service level that needs to be achieved; the estimated demand for the product and the accuracy of that estimate; the product lead time and the level of confidence in the ability of the supplier to meet the lead times.
It follows that inventory levels can often be lowered through more accurate forecasting, shorter lead times and increased confidence in a supplier’s ability to deliver. This sounds simple, but demand forecasting can be difficult, particularly for fashion items or new products where there is insufficient buying history.
Similarly, reducing supplier lead times can be a challenge. Other factors come in to play. For example, economic order quantities can cause a business to hold many weeks of inventory. This is particularly relevant when supplies are purchased from the Far East. For some companies customer service levels and revenue growth are more important than reducing inventory costs.
To tackle poor inventory optimisation most effectively an organisation must improve its forecasting and increase confidence in the supply chain. This allows lead times and safety stock to be reduced. There are many tools and applications available to aid these processes and the right investment in something as simple as a managed Electronic Data Interchange (EDI) service can pay real dividends.
Managed EDI solutions can enable genuinely shared environments for collaborative forecasting, integrating tools used throughout the supply chain and making information available through a single browser based application.
Customers can share forecasts with suppliers and point of sale information can be easily distributed back through the supply chain, giving accurate data about what has been sold on a daily basis and knowledge about future demand. This understanding allows organisations to vastly reduce the amounts of safety stock required to maintain customer service.
The visibility and intelligence provided by a managed EDI solution can also lead to buyers gaining greater confidence in suppliers. Automation helps to reduce lead times by placing Purchase Orders directly into a supplier’s system within 30 minutes or less. Automatic order acknowledgements let customers know that the supplier is able to meet the order and advanced shipping notices (ASNs) inform when the goods are on their way, giving advanced warnings of potential shortages so that contingency plans can be put in place.
Organisations can also use the transactions exchanged via EDI to measure the delivery performance of suppliers by looking at whether or not what has been delivered matches what has been promised in the order acknowledgements and ASNs. By supplying this information impartially to both buyers and suppliers, managed EDI removes the possibility for disputes as it is clearly visible where the supply chain has broken down. This allows organisations to work together to rectify problem areas.
There are of course other ways to reduce safety stock, including utilising Vendor Managed Inventory or asking the downstream supplier to deliver directly to the customer. Initiatives such as these need the timely exchange of stock and order information between customers and suppliers. Again, this can be facilitated through a managed EDI service.
Over time, businesses can gain greater confidence in their supply chain. By using metrics such as on time in full (OTIF), buyers can quickly identify underperformers who are unable or unwilling to improve successful delivery rates, and remove them from the process.
Today, there is no excuse not to be working towards a fully optimised inventory. The necessary intelligence to reduce safety stock and lead times is readily available and investment in the correct tools and technology allows this information to be seamlessly communicated and integrated throughout the supply chain.
Biden establishes Supply Chain Disruptions Task Force
The US government is to establish a new body with the express purpose of addressing imbalances and other supply chain concerns highlighted in a review of the sector, ordered by President Joe Biden shortly after his inauguration.
The Supply Chain Disruptions Task Force will “focus on areas where a mismatch between supply and demand has been evident,” the White House said. The division will be headed up by the Secretaries of Commerce, Transportation, and Agriculture, and will focus on housing construction, transportation, agriculture and food, and semiconductors - a drastic shortage of which has hit some of the US economy’s biggest industries in consumer technology and vehicle manufacturing.
“The Task Force will bring the full capacity of the federal government to address near-term supply/demand mismatches. It will convene stakeholders to diagnose problems and surface solutions - large and small, public or private - that could help alleviate bottlenecks and supply constraints,” the White House said.
In late February, President Biden ordered a 100 day review of the supply chain across the key areas of medicine, raw materials and agriculture, the findings of which were released this week. While the COVID-19 health crisis had a deleterious effect on the nation’s supply chain, the published assessment of findings says the root cause runs much deeper. The review concludes that “decades of underinvestment”, alongside public policy choices that favour quarterly results and short-term solutions, have left the system “fragile”.
In response, the administration aims to address four key issues head on, strengthening its position in health and medicine, sustainable and alternative energy, critical mineral mining and processing, and computer chips.
Support domestic production of critical medicines
- A syndicate of public and private entities will jointly work towards manufacturing and onshoring of essential medical suppliers, beginning with a list of 50-100 “critical drugs” defined by the Food and Drug Administration.
- The consortium will be led by the Department of Health and Human Services, which will commit an initial $60m towards the development of a “novel platform technologies to increase domestic manufacturing capacity for API”.
- The aim is to increase domestic production and reduce the reliance upon global supply chains, particularly with regards to medications in short supply.
Secure an end-to-end domestic supply chain for advanced batteries
- The Department of Energy will publish a ‘National Blueprint for Lithium Batteries’, beginning a 10 year plan to "develop a domestic lithium battery supply chain that combats the climate crisis by creating good-paying clean energy jobs across America”.
- The effort will leverage billions in funding “to finance key strategic areas of development and fill deficits in the domestic supply chain capacity”.
Invest in sustainable domestic and international production and processing of critical minerals
- An interdepartmental group will be established by the Department of Interior to identify sites where critical minerals can be produced and processed within US borders. It will collaborate with businesses, states, tribal nations and stockholders to “expand sustainable, responsible critical minerals production and processing in the United States”.
- The group will also identify where regulations may need to be updated to ensure new mining and processing “meets strong standards”.
Partner with industry, allies, and partners to address semiconductor shortages
- The Department of Commerce will increase its partnership with industry to support further investment in R&D and production of semiconductor chips. The White House says its aim will be to “facilitate information flow between semiconductor producers and suppliers and end-users”, improving transparency and data sharing.
- Enhanced relationships with foreign allies, including Japan and South Korea will also be strengthened with the express proposed of increasing chip output, promoting further investment in the sector and “to promote fair semiconductor chip allocations”.