As a supply chain professional, you already know that supply chain planning and inventory optimization requires a complex and sophisticated blend of art and science. That’s no secret – the challenge lies in the simplification and streamlining of the process so you can maintain optimal inventory levels that are sure to satisfy your customers while also maximizing cash flow and profitability. At Blue Ridge, we have designed a purpose-built solution that is process-driven to align with our users’ daily tasks and priorities. We call this framework the 7 Essential Elements, and it plays a critical role in our customers’ supply chain success.
Blue Ridge recently published an eBook about the 7 Essential Elements of Supply Chain Planning. It explores our AI-driven solution, designed by buyers for buyers, and provides best practices to masterfully execute each element, as well as the results you can expect from executing each step successfully. Click here to read the full eBook.
What you will not read in the eBook… is what NOT to do. In this blog, you will learn the basics about each of the 7 Essential Elements, with a focus on the common missteps organizations tend to make that can be costly, time-consuming, and ultimately just bad business decisions. Do you think your inventory management process has room for improvement? Continue reading on as we dive into each of the 7 Essential Elements, and the pitfalls you must avoid to achieve success and Be Supply Chain Invincible.
Element 1 | Demand Forecasting: The foundation of successful logistics lies in demand forecasting accuracy and demand planning. Utilizing a variety of forecasting models, the solution selects the most suitable model and employs an AI-powered framework to continually enhance precision and adaptability.
There are a variety of factors that can negatively impact your demand forecasting accuracy. Do you and your team fall into any of these demand forecasting traps?
- Using one single demand forecasting calculation on all items
- Overreacting to high demand spikes, or period-to-date movement, by increasing the forecast and buying more
- Not taking seasonal patterns into account, which will lead to out-of-stocks during the up season, and overstock in the down season.
- Not tracking each item’s deviation tendencies for calculating safety stock and the proper analysis of each item’s true profit picture.
- Not adjusting the demand forecast or other factors properly as sizeable accounts are gained or lost in the customer mix.
- Not managing the transition of replacement items to avoid double inventory and the smooth changeover to the new items.
- Not filtering promotional movement, which will inflate the forecast as well as the inventory and often make the buying tools unusable.
Element 2 | Lead Time Forecasting: Disruptions are inevitable in supply chains. Companies require a solution that incorporates disruptions to create lead time forecasts and assess their variations. Factoring these disruptions into safety stock calculations offers significant advantages and insight into supplier-related challenges.
Many lead time forecasting habits have become common practice, but cause excess time and expense. As you move from good to great in lead time forecasting, work to remove these common lead time pitfalls:
- Buying with a cushioned lead time that describes a worst-case scenario & keeps unnecessary just-in-case inventory dollars.
- Not actually forecasting a lead time from receipt history, but buying with a static number based on vendor promises or gut feel.
- Using one vendor-level lead time number for all of the line’s items, even though some items have experienced occasional short-ships or other mishaps & require a unique item lead time.
- Not tracking or utilizing the historical deviation information of the item’s receipt history for proper safety stock building.
- When forecasting vendor/item lead times, using one single forecasting calculation, even though each item has unique receipt history characteristics.
- Overreacting to individual long lead time spikes & reacting by building up unneeded inventory.
- Not filtering promotional, or other special-order receipts, out of the lead time calculations, which could inflate the inventory.
- Not taking seasonal lead time patterns into account when buying.
Element 3 | Order Cycle Optimization: As the order approaches, determining the optimal order frequency becomes critical for inventory optimization. This is a complex mathematical calculation that juggles variables, commercial dynamics, and logistical constraints. A robust Supply Chain Planning solution is adept at orchestrating this intricate symphony, equipping buyers with the insight to make astute and profit-maximizing decisions.
Many companies operate without a buying multiples strategy and use a “loaded and lazy” approach. Here are some common pitfalls that may indicate your organization has room for improvement:
- Buying Multiple = Order Cycle: Supplier order cycles drive replenishment resulting in the buying multiple becoming the true order cycle for many items, when the buying multiple is much higher, driving inventory up.
- Inconsistent Buying Multiple Days: When an item is replenished, and the strategy is to buy everything to the same order-up-to-level (OUTL), it will fail. The items are guided by high buying multiples, and all end up at different levels. They are high on depletion and out of balance.
- Topping Off High-Inventory Items: When high inventory items are ‘topped off’ to reach a desired OUTL, even when the demand for those items does not consistently meet or exceed the items in-stock, those items never deplete to the lower level, where they could remain, resulting in excess cash tied up in inventory.
Element 4 | Safety Stock & Service Level Management: Determining the ideal safety stock and service level for the market is a multifaceted endeavor. An ideal Supply Chain Planning solution simplifies this process through an automated inventory optimization tool that optimizes safety stock and service levels with minimal manual intervention.
To avoid stockouts without excessive inventory, watch out for these common mistakes:
- Not classifying or categorizing SKUs precisely with “A”, “B” and “C” designations based on the individual attributes of the SKU in a given location.
- Not assigning individual service goals by SKU and location will result in lower product availability.
- Carrying more days of safety stock on “A” SKUs (with the most predictable demand) or faster movers, dramatically swelling your inventory.
- Having too broad a range of SKUs defined as “A” causing both excessive inventory on the fastest moving “A” items and stockouts on the less rapid and less predictable “A” items.
Element 5 | Automated Ordering: The culmination of meticulous planning and strategizing unfolds in the realm of automated ordering. This feature not only streamlines the process but also introduces a layer of inventory optimization. By intuitively flagging exceptions, this approach significantly reduces planning time while improving accuracy.
There are some poor habits that have become common practice, causing excess time and expense. As you enhance your replenishment process and inventory optimization, work to remove these common pitfalls:
- Not reviewing each item and each supplier each day to ensure in-stock positions and highest-efficient inventory levels
- Determining the item’s component values on the day of buying; those values are needed prior, as they determine the important decision of ‘when’ to buy
- Allowing the days’ emergencies and emotions to play a part in order quantity decisions
- Only replenishing items that are in need, without balancing the line; you must consider buying all items that will hit their low stock positions in the near future
Element 6 | Special Orders: With time savings achieved, planners can devote their energy to strategic planning, such as anticipating changes in demand, promotions, and forward buying.
| Area | Avoid Common Mistakes |
| Events & Promotions | · Inflated demand forecasts: Promotional movement artificially increases demand history and inflates forecasts for upcoming periods. The increase in your inventory balance may result in disruption to replenishment activities if not managed properly.
· Offering promotions based on guesswork: Scheduling promotions based on instinct rather than demand forecasts and data may perform better than expected, but often cause chaos resulting in out-of-stocks and overstocks, emergency orders, and unbalanced lines. · Lack of reporting: After chasing demand, rushing last-minute orders, and experiencing out-of-stocks and overstocks, very little history of the event is collected and used to limit disruptions for future promotions. |
| Deals & Investment Buys | · Skipped opportunities: Missing opportunities is understandable. Even if cash or space is limited, you want to take advantage of every deal.
· Treating all deals the same: Many inventory teams tend to overbuy on extra dating payment terms and underbuy on discounts. Ensure that you have solid investment buying math which helps you and your team make the smartest decisions. · Waiting for the offer: Your suppliers will reach out to you; but you should also reach out to your suppliers to get the wheels spinning for profits. |
| Overstock Transfers and Balancing | · Ignoring location-based overstock: Your DC, store or branch orders and you pay the invoice while another location is overstocked on that same item. Using an integrated business planning solution can help you collaborate and synchronize enterprise-wide execution to bring those two needs together.
· Wrong overstock calculations: Transferring products that show as overstock on a report inaccurately will result in the need for the product to be purchased again. · Doing nothing: The above situations are common, but the worst situation is when you ignore the subject of overstock. Balancing needs to be an ongoing process built into your demand planning process. |
Element 7 | Order Validation: Order validation is a critical final step in the supply chain planning process. With the right Supply Chain Planning tool, orders undergo rapid validation, with options for manual approval or automated acceptance based on predefined criteria.
- Mismatch: If you find that you are continuously adding numerous days’ supply to achieve the minimum or bracket, it is possible that your Order Cycle is not set properly to match the bracket. Once you know minimum or bracket requirements, you must align the days’ supply accordingly.
- Strategy Change: This final step is not the time to determine which bracket is right for you. That decision should have already occurred during step 3 (Order Cycle Optimization). There may be outlier scenarios that require you to make unique decisions, but for most purchases, it is important to rely on the strategy that has already been set intelligently and trust the process, especially when leveraging advanced tools like Blue Ridge.
- Instinct-Based Decisions: Avoid emotional and tactical decisions like the common pitfalls of too many days added to an order or rounding too high on expensive top performing items. Allow your strategy and solution drive success.
IMPORTANT REMINDER: Remember, this is a guide on what NOT to do in your supply chain planning and inventory optimization processes. If you find that you are falling into one or more of these supply chain and inventory faux pas, Blue Ridge has you covered! Check out our 7 Essential Elements eBook for our ‘HOW TO’ guide filled with inventory optimization best practices, tips, tricks, and successes, OR contact us today to speak with one of our supply chain experts and learn how we can help you Be Supply Chain Invincible.
