Companies have been reeling the past few years with supply and demand fluctuations.
The patterns that supported inventory prior to the pandemic have been disrupted significantly and require an enhanced degree of supply chain management strategies.
One of the first areas of focus should be the planning and communication processes within your company to determine inventory safety stocks. Companies should have a robust Sales, Inventory and Operations Planning (SIOP) process, a dynamic process in which the company’s operating plan is updated on a monthly or more frequent basis. This includes stakeholders from supply chain, operations, engineering, sales / marketing, and finance at a minimum.
Safety stock inventory strategies can be composed in a number of ways, but two of the more common approaches this past few years are (Just-In-Time and Just-In-Case). Just-In-Time inventory relied on a predictable consumption of finished goods and a stable supply line, leading to small amounts of safety stock to balance output with financial performance. Lower safety stock levels led to increased gross profits as Cost of Goods Sold (COGS) were more controlled.
But as supply chain disruptions became the norm, companies shifted focus to more of a Just-In-Case inventory strategy, thus increasing safety stocks. This was intended to preserve revenue with production output remaining constant, but COGS went up and gross profits went down.
Stakeholders of the SIOP process can help determine safety stock inventory strategies. They must look at data and assumptions from three key areas:
- Customer demand fluctuations look at historical trends (past 3-12 months) and judged demand forecasts over the horizon (3-12 months).
- Supplier delivery fluctuations look at historical order lead times by volume (3-12 months) and supplier input on anticipated delays.
- Service levels for confidence intervals determine the statistical confidence intervals (Z-score tables) your organization is willing to accept and perform analysis on inventory values based on differing confidence intervals.
Supply chain professionals can then establish how much inventory should be carried, what order frequencies or quantities should be setup with suppliers, and where inventory should be staged.
While the original intention to shift toward a Just-In-Case inventory strategy may have been clear, it can be overshadowed and forgotten about when signs of normality start to come back. A robust SIOP process will ensure routine reviews of supply and demand signals occur with the various stakeholder groups. This can drive alignment and adjustments to inventory and production schedules. Decisions to adjust inventory levels can be data driven and supported by the various stakeholders. While it may be difficult to get an optimized outcome in short term increments, it is much better than being blindsided on profit margins at the end of a fiscal quarter.
Need help managing your inventory or creating an SIOP? We have proven processes that can help. Schedule a call with us to learn how we can help you eliminate supply chain bottlenecks or send us an email at info@vereoimpact.com.
