Have you noticed? Halloween/All Saints Day/Dia de los Muertos is just around the corner! Even if I hadn’t looked at my calendar, it would have been clear due to the countless ads and seasonal store openings for costumes and orange-purple-black decorations. Just like around Christmas and Easter, there are seasonal products in consumer markets that require a specific time to arrive at our doors – not earlier, not later. Just in time. How is this all possible? How can companies calculate the right inventory quantity and send it to the right place at the right time with such seasonality involved?
Don’t be fooled by the scary mask – it is possible through rigorous supply chain planning, a sufficient inbound and outbound logistics network, and a supporting inventory control system.
Here are 3 tips to help you develop an inventory control system based on flow to the customer:
1. Understand the difference between shipping/cycle stock, buffer stock and safety stock.
Ideally a lean fulfillment stream would have no inventory – everything would be produced and consumed at the rate of end-customer demand. Unfortunately, even in the leanest fulfillment streams, inbound (and manufacturing) lead time often exceeds customer order-to-delivery lead time expectations and varies from process to process. This forces some demand forecasting and building inventory to stock. Separating inventory into buffer stock (to absorb customer variation) and safety stock (to absorb supply variation and special cause variation) aids in problem solving by identifying the source of the cause of abnormal inventory (overstock and understock).
2. How much inventory will you keep in your inventory control system?
To determine a lean inventory control system, start by looking at stability of demand. Your measure of stability of demand is the coefficient of variation (COV). For example, a COV of 0.8 equals a dispersion of +-80% around the mean (average). With other words, at any given point in time, your demand can be 80% above or below the average – that is not really stable. If your COV is 0.2, your demand will be only 20% above or over the average at any given time. Much better, right?
Rule of thumb:
COV< 0.2 = stable SKU behavior
COV> 0.2 and <1.0 = moving away from stable SKU behavior
COV > 1.0 + unstable SKU behavior
Now that you separated the stable SKUs from the unstable ones, you can use this measure to determine how much inventory to keep in your buffer and safety stock for each. Remember, that perfect flow strategy with minimum to low inventory is reserved for totally stable products only– where every day is reliably the same. Products like Halloween costumes and decorations fall into the not stable category and require careful planning combined with pull strategy in the regional warehouses.
At the end, the goal is to minimize the overall inventory needed to maintain agreed customer service levels, and then continuously drive inventory levels down to expose system weaknesses. However, don’t drive inventory so low as to create instability in the fulfillment stream.
3. Where will you keep the inventory?
Where to keep inventory and place supermarkets is largely determined by customer-delivery expectations. An increase in inventory stocking locations will result in an overall increase in safety stock to meet customer demand. The law of diminishing returns sets in quickly as you add stocking locations. So be careful when adding new warehouses (stocking locations) to your inventory control system – this move has to be strictly challenged and supported by data; just because you have more inventory, it doesn’t mean it’s the right one in the right place.
Read on! To become an expert in Building the Lean Fulfillment Stream, check out the “Yellow Book!” I promise you will thank me! http://www.leancor.com/product/building-a-lean-fulfillment-stream/
Posted by LeanCor Supply Chain Group
LeanCor Supply Chain Group is a trusted supply chain partner that specializes in lean principles to deliver operational improvement. LeanCor’s three integrated divisions – LeanCor Training and Education, LeanCor Consulting, and LeanCor Logistics – help organizations eliminate waste, drive down costs, and build a culture of continuous improvement.Facebook LinkedIn Twitter Google+