The 2nd quarter of 2020 has seen unparalleled impacts on the worldwide economy as the COVID-19 crisis struck.
This has created compound effects on supply-chain businesses:
- Erratic patterns of demand (and supply) as economies entered into lockdown and then gradually released regulations as local conditions allowed
- Changes in consumer behaviour – initially in reaction to new necessities, but increasingly evidence is pointing to lasting shifts
Organisations whose existence depends on getting the right products to the right place at the right time via the most cost- effective method have had to rapidly adapt.
Evidence emerging from insights into consumer behaviour suggests that this ability to adapt swiftly will become a permanent theme.
As 40% of consumers intend to continue shopping online more regularly, even after lockdown is removed, there will be a lasting impact on retail. This will inevitably create knock-on impacts for wholesalers.
As retailers figure out how to deal with their bricks and mortar stores – with many considering their short-term use as localised online fulfilment – wholesalers must prepare to meet their needs.
Sustainable recovery will require both agility and the resources to achieve it.
Considerations for post-crisis recovery
Mckinsey & Co recently published a paper “Supply chain recovery in coronavirus times – plan for now and the future”. In it they identify six areas for consideration in response to COVID-19.
- Identifying critical inventory items, understanding which of those are most at risk of supply disruption and finding alternative sources of supply.
- Locating and utilising spare inventory capacity in the supply chain.
- Identifying realistic demand signals hidden behind erratic customer behaviour and ensuring stock levels reflect this.
- Adjusting production and distribution operations based on new capacity limits, whilst ensuring employee and customer safety.
- Securing logistics capacity whilst being flexible on transportation modes.
- Managing cash and net working capital by running stress tests to understand where supply chain issues could impact finances.
Insight across the supply chain, agility and maximising working capital will be fundamental to sustaining recovery.
Inventory optimisation is not an option. It is essential.
Inventory Optimisation 101
Optimising inventory is about getting the right products, in the right place, at the right time – as efficiently as possible.
It’s the concept of achieving high levels of stock availability with the lowest possible inventory investment. It’s good business.
The process of inventory optimisation should drive better decision making on:
- What stock to order
- When to order
- How much stock to carry
- Where it should be placed
It requires insight across the supply chain and, done in the right way, gives wholesalers the agility they need to respond in turbulent times.
However, it’s a challenge even in the good times. Why?
ERPs are great for tracking SKUs and managing financials among other things. But... ERPs have no capability for optimising inventory.
It often comes down to the skills and efforts of the purchasing and supply-chain function, using homemade spreadsheets to forecast demand.
This is time-consuming, limited and prone to problems, particularly when erratic patterns of demand which the spreadsheet model cannot cope with crop up.
The net result is either missing service level targets or overstocking (tying up valuable cash) – or worse, a combination of both. 04
Beyond Spreadsheets: Creating Insight, Agility and Improved Results
If the ERP system can’t deliver, then the team has to do it themselves. The tool of choice for most becomes spreadsheet models built in Excel.
Wholesalers and retailers estimate their stock cover in various ways. Methods range from simple min–max settings or calculating demand based on average sales to relying on the gut feelings of the purchasing department.
In most cases, these methods do not take into account demand fluctuations such as seasonality, or increasing or decreasing demand patterns. This results in the business having an imbalanced inventory level and thus being overstocked for certain items but understocked on others.
Increasingly, businesses are turning toward inventory optimisation software to take away the pain.
As an add-on to existing ERP systems, it doesn’t require changes to existing software. Instead, it takes the information directly from the ERP system and turns the raw data into actionable information.
Identifying patterns of demand and calculating demand forecasts that are fine-tuned to all of the variables of your specific business is a key element.
The AGR software applies multiple forecasting methodologies and automatically selects the most appropriate approach for the existing patterns. This is particularly important in times of volatility when patterns are changing constantly as it means that the forecast is always the best estimate.
Optimise for Agility
Making recommendations for optimal stocking levels requires more than just understanding demand.
It also requires:
- An understanding of both the sales volume and sales value
- Knowledge of the order frequencies and lead times
- Understanding the supply and demand volatility for the product
Unlike than the linear, rules-based spreadsheet model, inventory optimisation software from AGR Dynamics uses these multiple dimensions to create stocking policies based on the attributes of each product.
AGR enables users to set their target service levels according to the corresponding ABC classifications. These settings are then fed back to the forecasting engine to estimate the appropriate safety stock calculations for every item in each location.
Stock replenishment and inventory replenishment parameters are then created; the software not only provides alerts when stock needs to be reordered, but also recommends order quantities.
Software like AGR will continuously analyse your stock to ensure policies are set and applied correctly – all without the headaches of maintaining spreadsheets – freeing up the team to spend more time achieving target service levels.
AGR Dynamics clients typically experience the following benefits:
- More strategic decision making – modelling the impact of inventory optimisation decisions to guide stocking and replenishment policies
- Reduced stock levels and reduced excess stock – often by 30% or more
- Improved service levels
AGR is a demand and supply chain planning specialist with Wholesale Dynamics and Retail Dynamics as its main solutions. We have 170 clients worldwide, specifically in North America, Scandinavia, UK and France. We have an excellent track record in delivering reduced stock levels, improved service levels and effective processes to minimise time and costs.