Supply Chain leaders recognize that their planning processes need to be tailored to the attributes or characteristics of specific items. However, many manufacturing and distribution companies still use"one-size-fits-all" approaches to Demand and Supply Planning. This often results in too much inventory on some items, and not enough inventory on others which can cause shortages and stock-outs.
A number of years ago, at Arrow Electronics, we implemented a Categorization approach that applied different forecasting and inventory policies to each item based on the item's demand characteristics, e.g., sales volume, variability of demand and risk profile (mainly, how much of the demand was concentrated with one or a few customers). This allowed planners to focus on the right items to ensure we had the right amount of inventory in the right place at the right time. It was a key element of an inventory strategy that improved inventory turns from 3.5 to 6 while improving customer service levels.
Ask yourself these questions:
- Do you use the same forecasting process for all items? Or do you vary the process based on an item's demand characteristics such as volume, variability or risk? How about life-cycle stage, i.e., do you forecast new items differently from mature or end-of-life items?
- Do you set your inventory targets or reorder points based on consistent rules-of-thumb, e.g., 30 days coverage ? Or do you set them based on each item's demand variability, lead time and variability of lead time?
- Do you set lot sizes or MOQ's for production or purchasing based on "gut feel"? Or do you employ some sort of Economic Order Quantity or Total Cost of Ownership approach to minimize total supply chain costs?
For a good example of what I'm talking about, check out this video from SupplyChainBrain, featuring Tim Conrad of Gates Corporation. Gates implemented a process called "Plan for Every Part" or PFEP, which tailors Supply Chain and inventory strategies based on each item's unique DNA. Click here to watch the video.
How well does your company align its Supply Chain Planning processes with the unique characteristics of each item? Have you thought about the inventory, service and cost benefits of a more tailored approach?
Until next time…
Rob Ende is Founder and President of REanalyze Inc., a Supply Chain, Inventory Management and Analytics consultancy based on Long Island, New York. Rob can be reached at 631-807-2339 or email@example.com.
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