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Did Sharknado1 Chew Up All Your Lead Time?
Stuart Dunkin, Data Profits Inc.
Lead Time is a large factor in your supply chain performance. Like a shark chewing voraciously, Lead Time variability chews up profits in multiple ways. A shorter than expected lead time causes overstocks with additional carrying costs, theft, and potential damage issues. A longer than expected lead time creates out of stock service issues or additional product and freight costs and devours customer opinions and bottom line profits.
Poor lead time performance also "chums" your supply chain with a barrage of activity; e-mails, phone calls, and impromptu meetings drain organizational energy and productivity while increasing stress levels.
Planning and Analysis: Before You "Enter the Water"
Perception is reality for many companies or where you sit depends on where you stand. If you know lead time issues exist you may believe you know the cause before you assemble the data and analysis to support your conclusions. The opposite is also true; you may believe lead time is not a problem. Some companies believe their short lead times and weekly orders reduce their service risk; often, they don't even plan or track lead time. Statistically and figuratively companies in this latter group are frequently wrong.
|"If you can't measure it, you can't improve it" - Peter Drucker
Many companies don't track or include lead time analysis in their planning process. Instead, they manage lead time issues like a shark sighting – at the last possible moment. Working at the individual PO level, when service issues pop-up like a shark fin on the water surface, it is too late to plan! Studies show that companies, that manage their supply chains holistically, tracking and forecasting each step, are significantly more profitable than their competitors.
There ARE sharks in the water, so plan carefully before entering.
How to Lead Time Plan
You place a purchase order with an expected date for the product to be available. The (Purchase Date + Lead Time Days) = your Expected Date Available for product use in manufacturing, to ship (wholesale), or to sell (retail). Lead Time Days is an aggregation of individual supply chain elements. You need to plan your lead time days by reviewing results from past orders or use a Lead Time Forecasting Program.
Inventory Order Point (IOP):
When Available Units <= (Lead Time Units + Safety Stock Units*)
*Presentation stock units replace safety stock units if presentation units are larger.
Example: Grocery Feeding Frenzy
Our Product Demand Forecast = 10 units/day and Lead Time Days (LT) = 10, meaning product is available for use/sale/ship 10 LT days after the order date. Calculating the number of units to support sales without losing sales is simple: multiply the daily forecast by the expected Lead Time Days, example:
10 unit sales a day X 10 days lead time = 100 available units are needed.
You must place the fulfillment or replenishment order when you have 100 units available. Ordering after this point risks out of stock or rush shipping charges, while ordering before this point risks overstock.
How we determined Lead Time Days = 10:
Vendor Lead Time Days = 7, number of days from PO creation until receipt into DC.
DC Wait Time Days = 0, number of days waiting at DC until next planned DC shipment to store.
The Grocery DC ships every day to all stores - otherwise you would add wait days.
DC to Store Lead Time Days = 3, Transport Days from DC to Store fulfillment
Thus the sum of these three numbers is total Lead Time Days = 10.
Your supply chain complexity varies by supplier and is location specific. Lead Time Days can also include many other factors: external - transit days, customs, waiting for approvals, and internal - QA inspections, DC to DC transfers, DC processing time, or product processing time to get them ready to use/ship/sell.
Tip: Write down your expected days from PO creation to PO receipt for a sample of supplier/ locations. Then, TEST what is really happening, track PO's in a spreadsheet with PO create date and PO receipt date for each line receipt. Some lines may have multiple receipt dates. Measure the values for at least 3-5 PO receipts for each supplier/location. Do the days have any consistency? Do the totals line up with the expectations you wrote down? Over the course of your testing, did you find special considerations for your test suppliers that may have skewed the results?
Your results may suggest you review using a Lead Time Forecasting Program. A Lead Time Forecasting Program will track all of your supplier, location, product combinations and tell you the correct lead time. Effective solutions will have tools to identify seasonality and other LT influences. Lead Time Forecasting software should also create exception management and allow you to tell the system when long lead times are to be ignored in special cases like placing seasonal orders months ahead of normal operations.
Hungry Sharks Around: You Must Plan or Lost Sales Are Ahead
Just like a shark sighting ruins an unprepared swimmer's day, old IT systems and lack of lead time planning causes lost sales and unhappy customers. Using our example, if you wait to place an order when have 70 units on the shelf, you will be out of stock and accumulate lost sales. If it takes 10 LT days to resupply and 3 of the 10 days are for shipping from your DC, you will run out. You also will accumulate 30 lost sales units: example:
If you order with only 70 units on hand and you sell 10 units a day, in 7 days you will run out. For three days you will create 30 lost sales: 3 days X Demand Forecast 10 units/day.
Waiting too long to place orders increases lost sales, lowers service attainment levels and creates unhappy customers. While our example is simple, the reality is that trying to manage in-stock service and customer satisfaction without monitoring lead times creates an inventory plan that will not support your business and leave you dead in the water.
Crowded Beaches and Noisy Waters - a Beacon for Sharks
Poor Lead Time planning delivers overstocks that lower your profitability. At the store, overstocks lead to increased inventory holding costs as well as increased opportunities for theft, damage, and messy stores. Overstocks cause lower GMROI, lower turns, and lost opportunity costs due to wasted space. When product arrives before the plan date, you risk overstock.
Using our previous example, if you have 150 units on hand and your company plan says place an order today, the new product will arrive with an excess 5 day supply (50 units) still on the shelf. You will need to find extra space, product may be moved multiple times, and additional issues like theft and damage will begin to occur.
Studies show that crowded beaches have more accidents in and out of the water. Conclusion – slather on the SPF30 and with a little planning you can turn your beach operations into a successful event.
We're Going to Need a Bigger Boat2
Poor Lead Time planning can cause additional freight expense or the purchase of excessive quantities of product to meet your business needs. You might use alternate suppliers with higher logistics or product costs or, worse, air freight! Sometimes you are forced to go big or lose big. Lead Time Forecasting across your supply chain with all your suppliers is an important step in reducing these problems and improving profits!
Lead Time Forecasting Systems are Your Shark Repellant!
A company we worked with was spending almost a million dollars a year to fix out of stock issues due to lead times. At some point they realized they were wasting a lot of resources, time and money, and made it a goal to reduce this. The buying group started reviewing supplier quoted lead times, service goals, and their planning processes.
The key finding was that that they, the distributor, violated the vendor's lead time a significant number of times each year, particularly during promotional events, which were triggering lost sales along with increased freight and product costs.
They realized they needed to be more proactive by adding a Lead Time Forecasting service and revamping their promotional planning process. They began monitoring and adjusting lead times and reorder dates on a regularly basis. The changes triggered a $400,000 savings and a bump in service levels.
Conclusion: Eliminate Inventory Sharks!!!
A clear vision of Lead Time can help you avoid the sharks, whether they're based on land, sea, tornadoes, or even alien planets. Like looking out across a vast ocean, many companies have a large number of product locations. Automated Lead Time Forecasting and exception management tools are a key to success; get your supply chain swimming in profits. There are SaaS solutions on the market now that are easily installed and should pay for themselves with an ROI reached in weeks. Why swim with the sharks if you can sail into success?
Join us each month for our short series on forecasting and replenishment. Articles in our continuing series:
- How often should you reorder - Inventory Optimization, Weeks Supply
- What should be on the PO - Top down based orders (plan), Bottom up based orders (Service Level - Consumer centric)?
CEO © Data Profits, Inc. 2013 All Rights Reserved.
 Sharknado is a 2013 made-for-television disaster film about a waterspout that lifts sharks out of the ocean and deposits them in Los Angeles. http://en.wikipedia.org/wiki/Sharknado
 Quote from the movie "Jaws" https://en.wikipedia.org/wiki/Jaws_(film)
Stuart Dunkin, CEO of Data Profits Inc, is a strategic visionary who leads by calling on his broad range of experience as a former retail executive, consultant for top retailers, and work for E3/JDA software. Data Profits delivers forecasting, replenishment and collaboration supply chain tools to our customers. Data Profits interviewed over 100 retailers who outlined - the disjointed relationship between supply chain data, people and business goals. This influenced our software designs. Data Profits Software connects people, meets service goals, increases profits and provides a highly visible supply chain across a retail network. The user configurable software installs in less than 30 days at more than 50% less than legacy solutions.
Stuart attended Auburn University for a Bachelor of Science degree in Business Administration. He continued his education at Emory University, pursuing a joint Masters of Divinity and Masters of Business Administration. Stuart writes almost weekly for a popular retail supply chain blog found here. Call Data Profits at (770) 574-4100 or visit their website and subscribe to their blog at http://www.data-profits.com and start to "Tighten the Links in Your ChainTM."