Effective inventory planning is crucial for businesses to optimize costs, improve customer satisfaction, and increase profitability. One of the key factors that affect inventory planning is lead time variability.
In any manufacturing or supply chain setting, lead time variability poses a challenge. The concept of just-in-time supplies can prove ineffective as there are instances where the order is placed too early or excessively, leading to inventory buildup and the risk of products becoming obsolete. Conversely, if the order is placed too late, even a minor delay in shipping can cause a complete halt in production. Additionally, fluctuations in demand can also cause disruptions in the production cycle.
The objective is to procure supplies precisely when they are required for production to cater to the fluctuating needs of customers. Variability is an inherent characteristic of every facet of the supply chain, ranging from customer demand and supply to production and shipping. Due to this, lead times can undergo abrupt changes, and the focus is to minimize such fluctuations.
What is Lead Time Variability?
Lead time is the time taken between placing an order and receiving the goods. Lead time variability refers to the extent to which the actual lead time varies from the expected lead time. In other words, it is the degree of uncertainty in the delivery time of goods.
Reasons for Lead Time Variability
Your lead time may be skewed for a variety of reasons, including:
- Issues with schedule and transportation delays
- Delays at customs for shipments
- Labor-related issues, such as strikes, etc.
- Supplier level stockouts
- Errors in security stock routing at the supplier level or in data entry or processing
The challenge lies in relying on past demands for forecasting, which is often inaccurate and cannot account for the various sources of variability mentioned earlier. To address this, it is crucial to attaining a level of predictability in estimating both the production requirements and potential disruptions in the supply chain.
Impact on Inventory Planning
Lead time variability has a significant impact on inventory planning. Let’s look at some of the ways in which it affects inventory planning:
Safety stock is the extra inventory held to mitigate the risk of stockouts due to unexpected demand or lead time variability. The higher the lead time variability, the higher the safety stock required. This leads to higher inventory holding costs and reduces the efficiency of inventory planning.
Order quantity is the amount of inventory ordered in a single order. Lead time variability affects the order quantity by influencing the reorder point. Reorder point is the inventory level at which an order is placed. If the lead time variability is high, the reorder point needs to be set at a higher level to account for the uncertainty in the lead time. This results in larger order quantities, which can lead to excess inventory and higher holding costs.
Service level is the probability of meeting customer demand without stockouts. Lead time variability affects the service level by increasing the risk of stockouts. The higher the lead time variability, the lower the service level, as it becomes more challenging to predict and manage inventory levels accurately.
Lead time variability affects the lead time itself. Longer lead times due to variability can cause delays in order processing and delivery, leading to stockouts and customer dissatisfaction. It also leads to higher transportation costs and increases the risk of supplier non-compliance.
Strategies to Manage Lead Time Variability
Managing lead time variability is important for effective inventory planning. Here are some steps that businesses can adopt to manage lead time variability:
Effective supplier management is crucial to managing lead time variability. Businesses need to work closely with their suppliers to improve lead times and reduce variability. They can use tools such as supplier scorecards, performance metrics, and frequent communication to monitor and improve supplier performance.
Safety Stock Optimization
Optimizing safety stock levels can help businesses reduce the impact of lead time variability on inventory planning. Advanced inventory planning tools, such as inventory forecasting software, can help businesses calculate the optimal safety stock levels based on demand variability and lead time variability.
Order Frequency Optimization
Optimizing order frequency can help businesses reduce lead time variability by ordering smaller quantities more frequently. This reduces the lead time and allows businesses to adjust inventory levels more quickly to meet changing demand patterns.
Accurate demand forecasting is essential to managing lead time variability. Businesses can use advanced forecasting methods such as time-series analysis, machine learning, and predictive analytics to forecast demand more accurately. This helps them adjust inventory levels and order quantities proactively, reducing the impact of lead time variability.
About the Company
Fountain9 offers a solution for businesses to maintain optimal inventory levels through their AI-driven inventory forecasting software, Kronoscope. This technology takes into account several factors that influence demand, allowing companies to efficiently meet customer needs with timeliness. As a result, stock waste is minimized while preventing the problems of overstocking and understocking.
The inventory forecasting software combines various aspects such as predicted quantities, inventory levels, vendor limitations (e.g., lead times, fill rates, MOQs), and dynamically adapting safety stock levels to recommend purchase order quantities. This enables businesses to manage their ordering process effectively, and with just two clicks, the software handles everything. Additionally, it can seamlessly integrate with any existing ordering system.