There's a saying in purchasing that when the inventory in the warehouse is lean, sales is doing a great job. When the warehouse is overstocked, there must be a problem with purchasing. That's the world we live in.
Running a profitable company in this economy is as much about keeping inventory lean as it is about boosting sales. But as everyone knows, that's easier said than done. With demand fluctuations, supplier issues and tightening wallets, keeping the right balance of inventory is tricky to say the least.
Unfortunately, there is no magic bullet that will keep your inventory perfect all the time. However, the first step in fixing any problem is identifying its causes. In this article, we will talk about five of the most common mistakes buyers make when placing orders. Once identified, we can put a few simple practices in place that will help us become more accurate in our orders, increase our fill rates, and reduce our inventory.
Blinded by Averages
Someone once told me that if you have your head in a freezer and your feet in a fire, on average, your body temperature is about right...but you definitely will not be comfortable. Most buyers have some kind of system that tells them the average movement for their products by the day, week or month. Nearly every order is based off of these averages, and they should be. However, there are a couple reasons why this can be dangerous.
First, we all know that products can experience large unexplained drops or spikes in demand for one period. If your calculations do not have a way to filter those periods, they can cause a large swing in the overall average. A large change in your average would lead to a dramatic change in the future order quantity. If this spike or dip in demand does not continue in the future, you will either have way too much stock or worse...not enough.
In addition, unless buyers know just how much those items fluctuate in demand, there is no way they can possibly place accurate orders when it comes to safety stock. One product could be very stable, requiring very little safety stock, while another is very erratic and requires significantly more. If all your buyers have is a straight average, they will never know this. Their head's in the freezer...feet in the fire.
So you're all set! You've got a good, solid average for your product demand. Now you can place your orders with confidence, right? Well, not quite. You still have the minor issue of the suppliers. How dependable are your suppliers when they tell you they have a 14-day lead-time on orders? If you're like most of our customers, your suppliers are probably not very reliable. Just like your product demand can vary from one period to the next, so too can supplier lead times.
One of our customers on the west coast imports tires from over seas. Their suppliers told them to plan on a 6-month lead-time on all of the tires, and they took the supplier at their word. When they actually started looking at the recorded lead times, however, they found that on one of their lines, the lead time was more like 7 weeks! They had an extra 4 months of safety stock!
Contrast that with another customer where a supplier quoted a 14-day lead-time. When they looked at real POs, the actual lead time averaged 30 days. They could not figure out why they kept running out of stock on their items. If you take your suppliers for their word, it can have a hugely detrimental impact on your inventory levels and fill-rates.
Now that we have uncovered the danger of averages and have a firm grasp on lead-times, your inventory should start to make a lot more sense. But there are still a few more pieces to look at.
Next, it's important for you to identify products that show a seasonal tendency. On the surface, seasonality is a simple concept. It makes sense that you would sell more chicken soup in the winter, and Gatorade in the summer. The challenge comes with those products that are not so obvious. Typically, our customers see about 20% of their products with a seasonal profile (although, like product demand, this can vary greatly from one customer to the next).