Inventory management metrics to handle demand volatility
Due to the current health crisis some wholesalers are experiencing intense demand for certain products such as hand sanitizer, disinfectants, medical supplies, and personal protective equipment. As such, these companies are struggling to meet ongoing demand because of supply chain disruption. Yet wholesalers in industries such as fashion and homewares have an oversupply of goods because customers have paused operations. Maintaining the supply-demand balance is challenging for all at the moment. By putting inventory management metrics to work will help you be more flexible and keep your team focused on customers and suppliers who continue to trade.
As everyone knows, not having sufficient stock on hand leads to lost sales. When customers aren’t able to acquire the products they need, they seek out a competitor who does. Where demand is strong, you might need to pursue alternative sourcing strategies to continue to meet customer demand, or when stock is hard to obtain, as it is now, it is best to prioritize your regular customers. Meanwhile, measuring inventory metrics is an effective way to determine how much stock is on hand and how long you can sustain the increased demand. While inventory management metrics may vary depending on the type of products or warehouse your company has, there are a few key measures that will help managers maintain appropriate stock levels.
Inventory turn and Stock on hand: Knowing how much stock you have on hand and when those items run out will help you to measure how well your company is moving inventory. In terms of inventory turnover, understock represents an excessively high inventory turnover ratio. Under the current circumstances, inventory safety stock levels need to be updated to reflect the volatility of supply and demand. Some supply chain experts suggest businesses need to secure additional stock as a buffer to further disruption. Still if cash flow is tight – you need to be sure you are selecting the products that can sell or you can acquire these products for a reasonable price. With data analytics essentials, you can model the extra cost to buy (factoring in exchange rates, extra transport costs) and hold the stock and determine if it is viable before you make your decision.
Your suppliers’ lead times: This information is critical to stock management. In the current situation, lead times are changing as border control is tight and transportation is limited. If a supplier offers fast delivery, maintaining lots of stock can be an unnecessary expense. In contrast, if you have a supplier with longer lead times, now is the time to order more frequently.
Delivery in full on time (DIFOT): The DIFOT metric is an excellent way to measure your customer service. DIFOT is simply the number of orders that were delivered on time, with the right quantity of the correct products, on the day that the customer required them. During these extreme times, it’s a good idea to review your DIFOT score and communicate with customers and explain why it’s changed.
Most trends don’t emerge overnight, but when a ‘black swan’ event like COVID-19 happens, it can be tricky to manage. For instance, shoppers have been panic-buying items like toilet paper to prepare their homes for lockdown. This surge in demand sends a signal along the supply chain to increase production and demand forward may occur. This is called the bullwhip effect because as the demand wanes, it can lead to an overstock. In addition to lost capital, overstock wastes valuable space that more lucrative stock could occupy.
A grocery retailer and Phocas customer advised that its average daily sales of toilet paper are irrelevant because of the panic buying and stockpiling in recent times. The company has instead changed the way it sells toilet paper. Using its stock on hand, it decided to repackage the paper into lots of four, and limit to one pack per purchase.This change has increased the cost-to-serve but has made toilet paper available to all.
The purchasing department is also aware of the bullwhip effect as people may not buy toilet paper for a delayed period. When they re-order with the wholesaler, they will take into account the risk of deadstock later in the year.
Data analytics provides a 360-degree view of your operations. The ability to see constraints in real-time allows you to develop contingency plans. By extracting information from your disparate data storage silos and funnelling into a centralized repository, managers can keep an eye on metrics related to inventory. Using data analytics to optimize inventory, you can evaluate the viability of buffer stock, keep customers informed and monitor cashflow.
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