Inventory replenishment. Three reasons your numbers might be wrong

You’d think that inventory replenishment for established MTS portfolio items would be a simple enough task. Yet a great many companies find themselves holding too much or too little stock, which respectively drains working capital or results in poor service performance. There’s plenty of readily-available to data to support calculations. So why is it such a struggle to get the numbers right?

We’ve identified three scenarios which could well explain:

1. Sales forecasts – skewed by with human bias
2. Exceptional events – which haven’t been considered
3. Supply reliability – and alignment with it

Sales forecasts
With the best will in the world, it can be hard to accurately forecast sales. Especially at item level. And this gets increasingly difficult the further ahead you’re trying to predict. Because sales forecasts typically originate from sales representatives, the numbers tend to be polluted by human ambition and optimism, driven by the desire to reach bonus targets.

It may surprise you to know that weekly sales data from the last 12 months is a remarkably reliable predictor for the next 12 months. Notwithstanding special circumstances, as described below, this data is your best bet for a close forecast. Otherwise you’re just taking an unnecessary gamble.

Exceptional events
If your salespeople have their eyes on the ball, they’ll be aware of upcoming circumstances which are out of alignment with regular customer demand patterns. Events such as major out-of-the ordinary promotions or big new customers coming on board, which don’t coincide with the previous year’s experience, will create significant increases in demand that won’t be accounted for if you base forecasts on the last 12 months. Similarly a major customer drop-out or failure to do an annual promotion will have the opposite effect.

The question is, do you just wait for this to happen and trust you’re able to accommodate sudden surges in demand, or do you maintain ongoing communications with your sales team and proactively plan ahead?

Supply reliability
If you suddenly have a hankering for a fresh croissant from your local bakery, your ability to get one will very much depend on what time of day it is. Croissant supplies tend to be a lot more reliable in the morning. Failure to purchase during the optimum availability window puts your treat enjoyment at risk. You might find yourself subject to a 19 hour lead time.

Whether it concerns a tasty snack or vital stock for your inventory, awareness and planning are the keys to avoid being caught out. How familiar are you with lead times for obtaining your inventory stock? Do these differ per item and supplier? Are they consistent and reliable? Do you carry out regular checks and keep your knowledge updated? Avoiding understocks can be as simple as keeping track of supply lead times and making sure your order always goes in at the right moment.

Reacting to stock outs
If you unexpectedly run out of milk when you’re at home, you can usually solve things by nipping to a local shop. Replenishment done, no more thought given to the matter. An occasional unplanned surge in milk usage rarely results in adding an extra carton to your weekly shopping list.

However, stock outs in the supply chain seem to trigger major reactions. We often see companies paying a premium to expedite replenishment orders, as well as altering their replenishment parameters to end up holding more stock. These actions address the immediate stock out problem. But they both come at a financial cost which may have been avoidable if better foresight had been applied.

Whenever a stock out occurs, it’s essential to find out why the situation developed in the first place. Why wasn’t it foreseen? Does the root cause lie in any of the other factors described above? Or even elsewhere?

How smooth is your inventory replenishment?
At R&G we’re always curious to find out whether our tips come in useful, and to hear about other challenges companies face. Is there anything you’d like to ask us about inventory replenishment?

You are very welcome to connect!

Jan Martens is Senior Business Process Consultant at R&G Global Consultants in the Netherlands.