Words: Nicholas Pavitt & Cesare Baratto
When all you have is a hammer, every problem is a nail
There is a definite appeal in bringing certainty and simplicity to the replenishment process through a ‘one size fits all’ strategy. This approach may be successful in preventing stockouts across mainstream products and customers, however, the strategy is often inadequate when applied to a diverse portfolio with lower velocity items. Organizations run the risk of creating a bulky and lethargic supply chain that ties up cash in inventory without any making any impact on the bottom line
Here, we will assess whether the one size fits all replenishment strategy is overburdening your supply chain and review best practices to uncover and capitalize on underlying opportunities.
Recognizing the signs
Symptoms of an ineffective, one size fits all replenishment strategy include:
- Finding yourself struggling to prioritize replenishment activities to maximize business outcomes
- Revenue and margin erosion by expending equal effort and cost on both high and low profitability products
- Excess inventory resulting in cash tied up from applying the same inventory policy across all products and customer segments
Understanding the causes
From our experience, there are three main causes that prevent businesses from capitalizing on their replenishment strategy:
- Insufficient or inaccurate data: Developing reliable data sources is a key enabler for planning teams to make high quality replenishment decisions. These sources can include historical inventory levels, materials consumption, market demand, supplier constraints and lead times
- Inability to define and implement a segmented supply chain: Having the right knowledge and tools is a pre-requisite for planning teams to be able to use data effectively to derive insights and opportunities in the supply chain. Two key areas include:
- A cross department product segmentation analysis which can be used to enable cross business prioritization
- An inventory optimization tool which enable calculation of target stock levels for different service levels, identification of deviations against current stocks, and valuation of resulting financial impact
- Organizational misalignment: Great business strategies need to be both clearly defined and effectively communicated throughout their lifecycle – i.e. implementation, sustainment and review. Often, strategies are implemented under a ’set and forget’ mentality leading the supply chain planning process to fall into a perpetual cycle of tackling short term issues, instead of translating the business strategy into an operational plan.
Addressing the problem
Organizations have a lot to gain from moving away from a one size fits all replenishment strategy to one that facilitates a leaner, more agile, and resilient supply chain while freeing up cash flow. To capture the most value, organizations should:
Tools such as statistical forecasting models can provide visibility of the variability affecting the supply chain while improving operational responsiveness to planning updates.
- Create a segmented supply chain strategy: Ensure clear and demonstrated alignment between the business strategy and the supply chain planning policies. Make sure this is clearly communicated across all involved areas
- Select and establish the right planning tools and processes: There are a variety of analytical tools that an organization can choose from to determine the specific replenishing needs for a product. In this instance, we recommend developing tools and processes to enable cross department product segmentation and target inventory calculation. This entails:
- Defining the appropriate product segmentation
- Defining service levels, product strategy and an inventory policy for each product segment
- Adjusting master data fields according to inputs required to implement the agreed replenishment strategy
- Communicate, communicate, communicate: Effective buy-in and communication throughout the whole supply chain are key enablers for successful implementation and sustainment of diversified replenishment strategies. Ensuring that the right communication tools and processes are in place can reduce organizational inertia and wastage in the supply chain. Typical examples encountered have included:
- Marketing departments running their own promotion cycles without consulting the planning teams leading to unanticipated product demand spikes and consequent stockouts
- Routine planning parameter updates not being communicated to customers resulting in potential relationship damage and missed revenue opportunities
The one size fits all replenishment strategy can be self-limiting for organizations that are trying to realize the maximum potential of their supply chain. Optimizing the replenishment strategy through using diversified tools and processes are key for organizations who are looking to improve costs, cash flow and relationships with their customers and suppliers.
For more information on how Efficio can help your supply chain organization excel and deliver superior results, click here.