An honest, objective analysis of stock-outs and items in excess will generally lead to the conclusion that the orders placed were not correct. Whilst there are indeed many other factors that also contribute to these two critical problems, the best chance you have of keeping your inventory in balance is placing the best possible replenishment order every time.
Every order placed ties up critical working capital. You make your margin every time the stock in the warehouse is sold or “turned around”. The more often in a year you do that, the greater your gross profit will be.
If too much stock is ordered it will not be turned around in a reasonable period. The cash tied up in stock is giving you a very poor or absolutely no return each year.
If too little is ordered, stock-outs will result. Customers will be unhappy and you may lose some who will not easily return. You will be wasting time dealing with the crisis.
It is obvious therefore that the orders placed are absolutely critical for achieving optimal stock levels, customer service and gross profit.
How do you currently place orders?
- Do you take the Classification status into consideration?
- How do you factor in the sales forecast?
- Are you using the latest stock on hand figure and how accurate is it?
- Are you considering all existing open purchase orders already placed on your supplier when ordering?
- Are you factoring in the risk profile of the specific item, the target fill rate and the safety stock for the specific Classification status?
- Are you being influenced by the opinions of others when determining the order quantity?
- Are you determining the quantity to be ordered simply to get a good price?
- Do you know whether the order quantity will take you one step closer to achieving your model inventory level?
- Is the total value of orders being placed within with the agreed cash flow budget for the month?
The facts will speak for themselves. The facts of course being the days of cover or stock turns, sales lost due to stock-outs and the value of excess and obsolete stock and the number of unhappy customers.
So, how should you be placing replenishment orders?
The optimal replenishment order quantity is the end result of the following steps that must be completed in the sequence shown:
- Use accurate, up to date inventory data:
- Stock on hand in your system must be accurate
- Open purchase orders must be accurate
- The correct supplier must be assigned to each item
- Accurate Classification of inventory is the foundation for the ordering calculation
- Obsolete items will not be re-ordered
- Non—stocked items will only be ordered if a customer places a firm sales order first and you do not already have sufficient stock in the warehouse
- A, B and C category items will only be ordered when the reorder point is reached
- Accurate Forecasts are a critical part of the process
- Supplier lead times must be current and accurate
- Correct Policy parameters such as Target Fill Rates, Replenishment Cycles and Safety Stock are essential to achieving the correct balance between the investment in inventory and customers who are happy with your fill rates
- The reorder and order up to points are then calculated
- The unconstrained recommended order is then easily calculated from these ordering points
- The unconstrained recommended order quantity is then modified by applying the Minimum Order Quantity where relevant.
- A review of these final orders may lead to some adjustments being required and the orders are then sent to the relevant suppliers
A good inventory management system performs many of the above steps in the background so that you need the minimum of time to review the largest recommended orders to ensure they are optimal before committing valuable working capital to purchasing inventory.
Life teaches us that no matter how well we complete the above process, customer order more or less than we forecast and suppliers deliver earlier sometime but often later than planned. An effective Exceptions Dashboard will identify problem areas so you can respond timeously.