Comment: Build confidence, not inventory
Having the confidence in your supply chain to perform efficiently can pay dividends in reduced inventories. But then, seeing is believing…
By Anthony Payne
In many respects, good inventory management is having the knowledge of what you can do without. At the most basic level, retailers hold more inventory than necessary. And there are two key reasons for this: They lack confidence in supply, either because supply is poor or because they are concerned that it might suddenly get worse or; secondly, they are not confident in demand – in other words they are not sure what customers are going to buy so in order to maintain customer service levels they hedge by carrying more stock than is necessary. In most cases, excess safety stock is a combination of the two. In instances, where lead times are long, such as in sourcing from the Far East, this problem is exacerbated.
On the demand side, much time and effort is spent on forecasting future demand. To some extent this is a black art, but one area where it can be improved is supplier involvement in the forecasting process. A collaborative forecast that generates a consensus of both a retailer and brand owner’s view of demand is far more likely to deliver a higher level of accuracy. This is partly because two heads are better than one, and partly because, unsurprisingly, most manufacturers are more knowledgeable about their own brands than are most of the retail channel owners through which they sell.
However, collaborating on forecasts is not as easy as it sounds. Firstly, there is the human element – trust, ego and the overall power relationship between buyer and supplier which can make this process more challenging than it should be. Secondly, there are practical issues that until recently technology struggled to overcome.
Questions also arise over: Whose forecast should be the starting point? What if both parties have equally sophisticated forecasting tools, but provided by different IT vendors? How do you ‘normalise’ for different product code terminology, product categories and time periods? And from a technical perspective, how does either party get the final consensus forecast out of the system and into their own – and do so on a regular, perhaps weekly or monthly, basis?
These technical limitations have hitherto meant that genuine forecast collaboration has been limited to only the top handful of suppliers, if that, and even then will usually be paper-based and somewhat ad hoc. Internet-based B2B integration and SaaS delivery models now enable genuinely shared environments for collaborative forecasting, and not just with a small number of suppliers. Using a simple web interface, or through direct integration with buyer and/or supplier forecasting software, it is now possible, and practical, to integrate any number of suppliers.
On the supply side, lack of confidence in supplier performance means that a retailer will be inclined to hold more stock to ensure that availability targets are met. Ultimately, building confidence comes down to having visibility – real-time visibility into order status and performance over time.
When an order is placed, confidence in the fulfilment of that order increases if: The acknowledgement explicitly includes quantities and ship-to locations; for long lead-time products manufacturing status updates are provided; for short-lead time products current supplier stock levels of finished goods are indicated; shipping information is sent before delivery and if changes to any of the above are communicated in a timely fashion.
Retailers clearly understand that circumstances change and that suppliers may not always be able to ship in full and on-time, but if this only becomes clear when the wrong product arrives, or the shipment fails to hit its slot, then it is too late to react and more safety stock is required. If a retailer knows that changes will be communicated in good time, then appropriate action can be taken and customer service levels maintained.
Similarly, over time, the performance of a given supplier, overall or by product, store, category or distribution centre, can increase, or reduce, confidence at the retailer. Measuring actual supplier delivery performance is not always as easy as it sounds, and too much time in meetings between retail buyers and supplier salespeople is wasted on arguing over performance data. Readily available, impartial and accurate performance data – based on what actually happened – enables both buyer and supplier to focus on the issues, whether it is future promotions because performance is good, or remedial action if performance is poor.
Supplier of building products and materials, Jewson Ltd, moved to an internet-based B2B solution, delivered on SaaS basis, to transmit orders electronically to its suppliers. In turn, the suppliers use the system to respond with acknowledgements and invoices. Consequently, Jewson knows the status of each order and can tell customers when the materials they are buying will be delivered. The system has resulted in increased sales, better stock turnover and lower inventory. Jewson now has a complete picture as to how well suppliers are meeting their delivery promises and as a result the company has experienced a 23 per cent improvement in supplier performance.
Visibility of supplier performance data not only increases buyer confidence but also provides the mechanism for driving service enhancement. For example, a supplier may deliver five times a week, but on Saturdays performance is markedly lower, this would show up in the data. However, when combined with order lead-time analysis this may well show that the Friday order is always placed at 4.59pm – within the agreed timeframe but leaving no margin for error and so preventing the supplier from consistently delivering on time. A simple fix that hurts neither party might be to order by 4pm on Fridays, the result being, performance improves. Only detailed visibility into actual performance data can highlight such issues.
B2B integration has enabled Screwfix, the tools and hardware retailer, to share a common view of the full purchase order to invoice cycle with its suppliers. Visibility across multiple suppliers has helped the retailer to improve product availability, reduce excess inventory and improve invoice-matching rates, thus increasing overall supply chain performance and flexibility.
Finally, if improved visibility increases a retailer’s confidence, which in turn allows reductions in safety stock, increasing supplier visibility into downstream demand can also help improve performance. By sharing inventory levels, forecasts and point of sale (POS) data with suppliers, retailers can help suppliers plan more efficiently – in other words better manage their own balance between excess safety stock (raw materials, work in progress and finished goods) and customer service. If order history were also to be included in the same system, then suppliers would be even better equipped to accurately predict future demand.
Anthony Payne is Marketing Director at supply chain B2B integration specialists Wesupply
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