Focus and Leverage Part 336

In Part 4 of my 6-part series on Parts Replenishment Systems, we're going to take a look at the reason why we see the characteristic stock-out problems, even though there appears to be enough inventory in place to prevent this phenomenon.  I would encourage everyone who have not read the first 3 parts of this series, to read them prior to reading this post.  Again I want to thank Bruce Nelson for writing the material in this series of postings.

 

As an example for purposes of discussion, suppose we pick a ran­dom part with a minimum/maximum level already established, and we track this part for a twenty-six week period using the current system rules and follow the flow and cyclical events that take place. What happens at the end of the twenty-six weeks? For this example, we will assume the following:

• The maximum level is ninety items.

• The minimum reorder point is twenty items.

• The lead time to replenish this part from the vendor averag­es four weeks. The average is based on the fact that there are times when this part can deliver faster (three weeks) and other times it delivers slower (five weeks).

• Usage of these parts varies by week, but on average is equal to about ten items per week.

Table 2 shows the reorder trigger happening when current inven­tory drops below the minimum amount of twenty items. The first re­order would trigger between weeks six and seven, and again between weeks seventeen and eighteen, and again between weeks twenty-five and twenty-six. During this twenty-six week period there would be a total of about eight weeks of stock-out time. Remember: There is an average of four weeks of vendor lead time to replenish this part. This norm, and the scenario is repeated time and time again.

Table 2

Simulated data for minimum/maximum supply system

Week	Current Inventory	Actual Items Used	End of week inventory	Items added (Replenish)
1	90	10	80
2	80	15	65
3	65	15	50
4	50	15	35
5	35	5	30
6	30	15	15
7	15	15	0
8	0	0	0
9	0	0	0
10	0	0	0	90
11	90	15	75
12	75	15	60
13	60	8	52
14	52	12	40
15	40	10	30
16	30	10	20
17	20	15	5
18	5	5	0
19	0	0	0
20	0	0	0
21	90	15	75	90
22	75	18	57
23	57	15	42
24	42	12	30
25	30	15	15
26	15	15	0

Figure 3 uses the data from Table 2 to graphically display the results of the minimum/maximum system, and it shows the negative consequences that can occur in this system. If the vendor lead time is not considered as an important reorder variable, then stock-outs will continue to occur. Stock-outs can become a very predictable negative effect in this system.

Figure 3: Consequences of Min/Max Supply System

The graph shows the negative consequences of the supply system and demonstrates why supply-chain systems using the maximum/ minimum concepts will periodically create excessive inventory and stock-out situations. The primary reason this happens is because part lead times are not properly taken into account. In most cases, the most prominent measures for the minimum/ maximum systems are focused in cost world (dollars) thinking, rather than system needs. If the lead times from the vendors are not considered, then there remains a high probability that stock-outs will continue. The stock-out situation exacerbates itself even further when at the POU a user has experienced a stock-out situation in the past. In that situation the users will often try to protect themselves against stock-outs by taking more than is needed. It is also possible that some companies will preorder inventory based on some type of forecast for the coming year.

 

This strategy exacerbates the problem even more. At best, it is extremely difficult to forecast what a consumer may or may not buy. This problem is to forecast what a consumer may or may not buy. This problem is encountered at the manufacturing level and the retail level. Manu­facturers will produce excess finished good inventory that must be stored at a great cost or sold to retailers at a discounted price. Because of the flaws in their forecast methods, some stores are left with large amounts of inventory when new models or products are released. This becomes most visible when stores offer “year-end clearance sales” or “inventory liquidation” events. They guessed wrong with the forecast and have much more inventory than they can sell. In many cases because stores couldn’t get enough of the hot-selling product, they missed out on sales. Now they must sell any remaining inven­tory, sometimes at bargain prices, to generate enough cash to go buy more inventories for the coming year. This cycle of too much and too little repeats itself year after year.

 
In my next posting, we’ll introduce a much more robust part’s replenishment system that will significantly reduce the dollar amount of inventory, while at the same time, virtually eliminating part’s stock-outs.

Bob Sproull