When placing optimal orders, you need to factor in external challenges that can affect your supply and demand.
Have you found yourself in either of these situations: you need to sell excess stock at reduced prices, or you lose a sale because you didn’t have the right inventory in stock to meet demand? You may have factored in all the right steps to placing optimal orders, and yet, you have an unbalanced inventory holding that is not going to make your business any profit.
Supply & Demand Chain describes inventory management as a balancing act and states;
Today, inventory management is like walking a high-wire tightrope in a hurricane. Supply chain professionals are buffeted by gale-force winds of global complexity, rising customer expectations, vast volumes of fast-changing data, and fierce competition from digital-native companies. And, now the Coronavirus disease (COVID-19) crisis has only raised the stakes.’ Out-of-balance inventory that might have amounted to a minor stumble back in the 20th century could now be catastrophic, if not fatal. And, we’re already seeing the fallout in consumers hoarding in the face of perceived scarcity and companies in financial peril from uncertain projected recovery.
What does ‘optimal order quantity’ mean in terms of managing your inventory?
Optimal order quantity aims to ensure you have the right amount of stock to meet demand without holding excess stock. Every order you place should align with your inventory goals to achieve your optimal fill rate and reduce the amount of capital invested in your inventory.
While the economic order quantity formula (EOQ) may present as the ‘ideal ordering guide,’ according to the financial website Investopedia, “the EOQ formula is best applied in situations where demand, ordering, and holding costs remain constant over time.”
Given the volatile nature of supply chains, we know demand is erratic, which can hinder your ordering process. Using an inventory management solution draws on intelligent data from your ERP system to help optimize your inventory and create optimal order recommendations.
37% of Netstock customers rate excess stock as their number one inventory challenge.
The financial impact of excess stock
Holding excess stock can become an expensive exercise for your business. For example, the money you have tied up in excess inventory means you can’t invest in the products you are stocking out on. The excess stock then impacts your ability to stock appropriately for other products, therefore impacting the sale of those products.
You also incur additional costs when holding excess inventory in your warehouse, such as:
- storage costs,
- the cost of personnel to manage the stock,
- and stock insurance.
Why is placing optimal orders important?
Placing optimal orders is one of six crucial steps in optimizing your inventory and helps you to achieve:
- The optimal stock levels you need to meet current and future demand.
- Ongoing high level of customer service.
- Increased gross profits.
You may have followed the nine steps to placing optimal replenishment orders yet, how many times have you had to adjust your purchase orders recently? You also may be wondering; if I apply the proper steps to ordering, surely I will achieve the perfect inventory balance, high customer service levels, and minimum inventory investment levels? The quick answer is no!
When planning your replenishment orders, you need to review factors that influence your supply and demand. These factors are often difficult to predict and out of your control.
Two factors influence your inventory replenishment:
- When you don’t have control over your customer’s order.
- The effects of disruption in your supplier’s supply chain.
Factor One: Managing your forecast.
You don’t have control over what your customers will order, but you have access to historical data that can help you better understand the demand to create an accurate forecast.
- Your forecasts won’t always be accurate. Adjust forecasts as soon as you know they are either too high or low. You will be able to accurately identify potential stock-outs, emergency orders, surplus orders, and excess stock.
- You may have longer lead times. The longer the lead time, the more dire the consequences of forecast errors will be. You will wait longer to resolve stock-outs, and you will start to incur excess stock.
- You may need to dispose of excess stock. This will increase your sales and impact higher computer-generated forecasts, which can trigger higher order quantities, resulting in excess stock. The forecasts from sales history due to the disposal of excess stock will require manual intervention to exclude the sale of excess stock.
Factor two: Managing your suppliers.
You can’t control the challenges your suppliers experience in their operations. Disruptions across supply chains mean your suppliers won’t consistently deliver your stock on time and in full.
- Late deliveries result in stock-outs. Is the supplier at fault, or did you not plan a long enough lead time?
- Early deliveries create excess inventory. These will have an impact on your cash flow.
- Managing suppliers is complex when purchasing from a different supplier. You have less supplier delivery performance data to work with for future forecasts.
- Utilize the same supplier. Develop a good working relationship with the same supplier to increase the supplier’s delivery performance.
- Adjust lead times as soon as you know they are incorrect. You will have more accurate ordering, avoiding potential stock out, surplus order, and excess stock management.
Three tips to help place optimal inventory orders:
One: Focus your time on an 80% solution. In inventory management, the law of diminishing returns applies. The financial website, Investopedia, provides a practical example of the law of diminishing return, “for example, a factory employs workers to manufacture its products, and, at some point, the company operates at an optimal level. With all other production factors constant, adding additional workers beyond this optimal level will result in less efficient operations.” Almost without exception, an 80% solution in inventory is the perfect solution. Instead of spending time trying to achieve a more accurate calculation, focus your attention elsewhere on more profit-generating activities.
Two: A dashboard will give you complete visibility of your inventory holding and help you track your key performance indicators. The dashboard will instantly show you what ‘went wrong’ so you can quickly focus on items that need your attention immediately. For the dashboard to be effective, stock items must display by descending importance. The team members using the dashboard must clearly understand what they are required to do and when they need to update the dashboard. One of the best ways to ensure this is to identify and document the processes required and then train and monitor the relevant team members to use the dashboards to produce the required results.
Three: Work with accurate inventory data to help you formulate the right amount of stock to order with a preferred supplier. This is a complex information-gathering process where you need to factor in all of the following:
- Accurate stock on hand information; all open purchase orders must be accurate with the correct supplier assignment to each stock item. The purchase orders need to have the expected arrival date (EAD). This will help you know if you will experience potential stock-outs before the order arrives.
- Stocking policy for each item, what do you keep in stock, what not to order or what to order only when a customer requests the product.
- Lead times, so you know when to order which item.
- Review order cycles, and weekly and monthly suppliers.
- Supplier constraints, the minimum order quantities, and order multiples.
- Amount of safety stock you are holding.
- New line items and add in the data manually if you don’t have historical data to work from.
Connect with your sales team to provide valuable market intel that you may need to factor in when planning your stock orders. Once you have taken the historical (at least the last three months’ worth of data) and current data into account, you should always review the final orders and make adjustments where necessary.
You will always need to consider external factors when placing optimal orders. Working through spreadsheets manually to place optimal orders is a complex process prone to human error and can cost your business more money. A demand planning solution uses intelligent data that does the ‘grunt work’ for you.
Learn how Netstock can help you quickly and accurately create ideal order recommendations that:
- Prioritize your supplier orders to address urgent requests.
- Helps you plan when suppliers shut down for annual holidays.
- Factor in your supplier-imposed minimum quantity orders.