3 Ways to Keep Supply Chain Operations Under Control

5 min read

Tags: Blog, Demand forecasting, Inventory management, Purchasing & replenishment, Technology

Daniel Fritsch   October 9 2015


Index

  1. 1 Inbound – Procurement of new items
  2. 2 Storage – Management of items carried
  3. 3 Outbound – Maintain fill rates and customer satisfaction

The term ‘supply chain operations’ refers to the process of managing inventory efficiency, performance and profitability from the initial procurement of stock through the storage and then finally the fulfillment of orders. Supply chain operations are commonly associated with the term supply chain management (SCM) which is the general management of the flow of goods and services for a business.

The APICS dictionary defines supply chain management as, “the planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand and measuring performance globally.”

In the wholesale distribution of durable goods, this process is usually a fast-moving chain that aims to minimize lead-times between procurement and order fulfillment while maximizing operational efficiency to reduce costs. In the wholesale distribution industry profit margins are the key to staying competitive. Keeping costs low and service level high through effective supply chain operations helps a business keep cash flow healthy for strategic investment into business growth.

Supply chain operations can be highly complex depending on the type of inventory that is being distributed. For instance, businesses that sell and distribute spare parts in the fastener industry can house hundreds of thousands of unique items including nuts, bolts, screws, rivets, washers, etc., across their supply chain. Comparatively, businesses in the wholesale lumber industry might only carry and distribute a few hundred inventory items or stock keeping units (SKU).

While there is a myriad of individual processes, when it comes to inventory management there are really three main components of supply chain operations that need to be monitored closely to avoid letting costs spiral out of control.

1. Inbound – Procurement of new items

For wholesalers and distributors of durable goods, the challenge is to ensure that the correct amount of stock is purchased to ensure that customer demand is satisfied. For planners that manage many different SKU’s this is a real struggle to accurately calculate safety stock levels, supplier lead-times and other key inventory metrics because most supply chains lack sophisticated technology to automate these metrics. Planners sometimes spend weeks crunching numbers in Excel and even then their forecasts and procurement plans are riddled with inaccurate data.

In this particular industry, demand planning is key to ensure that there is a balance between stocking levels and demand. Purchasing more stock than necessary can lead to excess stock or over stock, which ties up working capital and increases carrying costs. Over time if this pattern of over purchasing is not caught, a business can get stuck with obsolete stock, which is stock that has very low or no customer demand. Items that are obsolete often times are written off as an expense hurting the overall profitability of the business.

Both obsolete and excess inventory will have a negative effect on the bottom line, so the challenge is to establish an ideal economic order quantity for every item in stock to ensure lead-times and order quantities are optimized to mitigate the risk of over purchasing.

2. Storage – Management of items carried

Supply chain operations and management becomes exponentially more complex as a business expands and grows into multiple warehouse locations. Most wholesale distributors use enterprise resource planning (ERP) tools to track incoming and outgoing items from their inventory. Unfortunately, most of time warehouses operate on disparate or independent systems which limits supply chain visibility and makes it hard for a business to effectively avoid overstocking items across their multi-echelon supply chain.

warehouse worker counting inbound inventoryEnsuring that sufficient stock is available to meet customer demand is paramount, but it is also important for a business to break down the silos of data between locations. More advanced supply chain operations will utilize redistribution tools to network multiple warehouse systems, which offsets a business’s reliance on suppliers. With redistribution, each warehouse is networked together and stock can be transferred between locations to avoid unnecessary reordering or supplier rush orders when demand for certain items spike.

Good inventory control involves tracking inbound and outbound activity but should also have the ability to ensure inventory stock levels are optimized. Inventory optimization is best described as the process of systematically lowering inventory levels to reduce costs while altering stocking policies for items to ensure service level targets are met to satisfy customer demand. Without the availability of real-time inventory information, inventory control best practices are near impossible to implement and maintain.

Smart planning on the front end will help reduce costs associated with storing items that shouldn’t be in the warehouse in the first place. Service levels can vary; typically high demand items will need to achieve a service level of more than 95 percent, while lower demand items will only need to achieve a level of 85 percent or sometimes it makes sense to not carry items at all as supplier lead-times can support a stock to order purchasing model. Effective supply chain operations and optimization will look to find a balance between cost and inventory availability.

3. Outbound – Maintain fill rates and customer satisfaction

The final part of supply chain operations involves ensuring that the customer is never left with a backorder situation. Missed or delayed orders can result in customer attrition, poor customer reviews or a loss of new business to potentially competing distributors.

ABC analysis is a valuable tool for quantifying the monetary cost of stock and individually stocked items against volumes, but it must be aligned with service targets to ensure that stock levels are kept at optimum levels to meet targeted order fill rates. Stock outages or back orders mean that stock levels are not being accurately forecasted to meet real-time customer demand or sales orders. Dynamic safety stock calculations tied to demand patterns and historical sales data help planners keep a better handle on item availability.

Customer accepting a delivery
It is important to have items in stock when they are needed but it is also equally important to know where the items are when they are needed. Planners that have access to tools that can calculate ABC classification parameters for inventory items can more effectively lay out warehouse operations to reduce time and labor costs associated with picking or fulfilling orders.

Again, most enterprise resource planning tools will track the outbound flow of inventory from the business but they do not support operations with item level intelligence to ensure purchasing is being properly managed to meet demand. Software solutions similar to EazyStock will extend item level forecasts that are mathematically calculated based on historical sales data and orders. Even seasonal trends and demand variances can be factored into account to ensure the highest level of purchasing accuracy.

Conclusion

The three aspects mentioned are for sure one of the key points when it comes to the topic of supply chain operations optimization. Besides that there exist additional ways on how to have a perfect set-up especially for the own inventory operations – more detailed information can be found in this white paper:




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