The ability to predict demand is complex right now. Ongoing disruptions to a fragile global supply chain will make it difficult for inventory holding companies to model and predict future demand.
The latest event to rock the supply chain was the Suez Canal blockage in March. While the cargo ship, Ever Given, is now unstuck and the canal is open for business, Lora Cecere, Founder of Supply Chain Insights, rightfully stated in Forbes online, “Yes, the Ever Given got stuck and is now moving. The removal of the blockage in the Suez Canal is not the news. The future headlines will be on the implications for the global supply chain that are just beginning.”
The COVID-19 pandemic has agitated supply chains to a large extent. Further disruptions will affect supply availability and reliability, resulting in longer lead times and factories or companies shutting down completely. Companies will need to factor longer lead times into their inventory planning and calculate how it might affect their balance sheets.
I am now hearing clients talking about lead times moving from six months to almost a year. Adding to this, many larger enterprises are purchasing large volumes of stock from China, stockpiling their warehouses, adding to the lack of availability and reliability of supply.
According to McKinsey & Company’s latest COVID-19 report, “Companies should start planning how to manage supply for products that may, as supply comes back online, see unusual spikes in demand due to hoarding.”
So, where to from here?
It’s vital for companies to:
- Review their core offerings
- Plan for more than one supply scenario case
- Be agile to adapt to change
Let’s explore these three key insights while you plan and forecast your inventory
- Re-engineer your core business offering
- Scenario planning is vital to flex your supply chain
- Consider the role of safety stock and “Just in Time (JIT) Inventory.”
Re-engineer your core business offering
You need to review your core offering and re-engineer a new way forward for your company to remain relevant and make a profit.
According to Forbes, “While technology can greatly aid businesses of all kinds that are not prepared for an increasingly digital future, not all transformations right now depend entirely on technology. Many companies have responded with innovative pivots that push them into new markets. Instead of shutting down or taking a break, these large companies are making big transformations to stay alive and stay relevant.” Companies have been successful at achieving this. Hotels started offering daily rates to remote employees, local restaurants stocked essential food supplies, and even karate lessons took place online.
The problem is prolific, and not all companies can adapt their core offering. This brings me to my second insight.
Scenario planning is vital to flex your supply chain
Scenario planning is making assumptions on what the future holds and planning accordingly. Still, it needs to be a collective process where you include your sales, marketing, finance, and inventory teams to:
- Model a few different scenarios tailored to your company’s KPIs
- Work with your team to carefully plan out each scenario
- Change and adapt your scenario accordingly
For companies to remain relevant today, they need to model different scenarios and explore the full implications, resources, and capital required for each scenario.
Working with Netstock’s stock projection feature will give you visibility of what is likely to happen with your inventory based on data and the company’s inventory policy settings. If you use this module, it will tell you what your closing stock will be based on your current policy, fill rate, and lead times. If you can flex that information, you can determine the level of closing inventory you’re likely to have for different scenarios.
Using a powerful forecasting engine will allow you to change forecasts to see the outcome and filter through to the product. If you want to plan out a scenario and double or cut your lead time in half, you can view the outcome and change your forecast back again.
Building into your scenario planning is also reviewing how you can flex your supply chain. Supply chains today need to be versatile, multi-sourced, and flexible. You have to examine your supply chain closely and plan accordingly. If you are unsure of what your holding stock will look like in three to six months from now, you have to invest in a good inventory management solution for your business.
Consider the role of safety stock and “Just in Time Inventory.”
The volatility of demand creates so much “noise” that it is becoming challenging to forecast.
How can you ensure you have the right amount of stock on hand?
Not knowing what the actual demand will be, safety stock acts as a buffer to accommodate the volatility in demand and supply. If you had a perfect idea of who was going to buy what from you – and you had a reliable supplier- you’d be just in time.
The whole concept of Just In Time Inventory is now severely challenged. Just In Time factories in Japan, for example, have created chaos because they don’t have stock to accommodate orders. Therein lies the importance of safety stock, and this creates a Bullwhip Effect where demand swells and gets out of control.
According to Supply Chain Academy, a professional education and supply chain training institute, “The negative impact of the bullwhip effect can prove costly to any company. To maintain a manageable and useful inventory, businesses usually work very hard. However, the variables that cause the bullwhip effect can lead companies to have either an excess or lack of inventory which can both be unfavorable for different reasons. Overstated orders based on misguided forecasts lead to incorrect inventory levels. A surplus of inventory could prove costly to the company and if consumer demand does not increase, it could result in wasted resources.”
Building an agile contingency plan for your inventory replenishment will help you adapt quickly to future disruptions and ensure you remain profitable.