This is the first article in a series on setting safety-stock to address supply variation.
Safety Stock for Supply Variation
The proper management of inventory, typically calls for safety-stock to mitigate supply variation. Whether a supplier is an external company or an internal department, supply variation must be identified and properly addressed to prevent production downtime and minimize overstock.
Supply-related safety-stock is abnormal. A reliable supplier should never require safety stock. After all, quantity, quality and lead-times should be accurate. Unfortunately, many inventory managers form the bad habit of seeing buffer inventory as a normal and necessary result of being adequately prepared. In actuality, every supplier shipment should deliver the right quantity of the right part, to the right place, at the right time. Supply-related safety-stock should be rare and only ever used as a temporary bandage.
3 Causes of Supply Variation
The good news is that you can greatly reduce the risk of supply related shortages and overages when you know exactly where and why supply variation occurs. That said, supply variation is the result of any combination of 3 major supply failures.
- Quantity: The supplier sends a quantity less than the entire order; they are “short”.
- Delivery: Shipments are received late because they are either shipped late or delayed in transit.
- Quality: Returns and rejected shipments due to sub-standard quality.
Correcting Quantity Variations
Because incorrect quantities should be very rare, safety-stock should not be needed to address it. If suppliers routinely ship wrong quantities, you should determine why and implement a non-safety-stock solution:
- If a supplier consistently ships short to meet the due date, then lead-time is the culprit not the quantity. If an item’s required due date is sooner than the supplier requirement, simply adjust the supplier’s allowed lead-time to empower the supplier to ship the full-quantity so that it consistently arrives on time.
- If a supplier’s shipments are frequently short due to “odd” quantities that are don’t align with the supplier’s minimum order quantity, maximum order quantity, or standard package quantity, simply adjust order quantity rounding process.
Safety-Stock for Quality and Lead-Time Variations
If quality or lead-time gaps exists, conduct data analysis to determine the operational impact and necessary safety-stock. Keep in mind, any amount of supply-related safety stock reflects substandard processes.
Safety Stock for Supplier Lead-Time
Prior to conducting excessive analysis it’s good to recall the ultimate goal of the inventory manager: Eliminate all safety-stock for lead-time variation. Fortunately, there’s a few ways to do just that.
- Ask the Supplier to Commit to a Consistent Lead Time
Share your goal of zero supply-related safety-stock with your supplier so your supplier understands what you’re trying to achieve. Start by asking your supplier to meet your target lead-time. If not, ask your supplier what lead-time it can confidently meet on a regular basis. This should be something your supplier is glad to provide. While this involves a commitment from the supplier, it should establish a guideline that is easy to adhere to since the supplier is the one setting it. Of course, always be certain that the supplier’s recommended lead time doesn’t exceed the longest one observed in the past three months. This the preferred approach sense it is very collaborative.
- Set a Lead Time That Matches the Longest One You’ve Seen Recently
This method results in automatically doing away with safety stock inventory. However, there is a drawback to this tactic. Since you’re automatically selecting the longest lead-time, you’re also automatically selecting the largest order quantity in order to cover the lead time. That’s not all. To prevent overstock, you must ensure that he supplier does not ship early. Also keep in mind that receiving overly large orders can jeopardize storage space and material handling procedures. Use this approach only as a last resort and only for a limited duration.
That does it for part 1 of this series on supply variation safety-stock. In part 2 we explore how to set safety-stock to mitigate supply variation.