No matter how well you run your company, supplier performance can have a major impact on your business success. A manufacturer’s attitudes to promotions, orders, shipping practices and even their product development plans all affect profitability and are important considerations when establishing inventory stocking practices.
Frequent product enhancements or upgrades, for example, can play havoc when establishing inventory levels. You don’t want to be caught with an oversupply of soon-to-be-outdated product. Careful planning needs to go into decisions relating to existing stock levels and even more thought must be applied to orders for new releases, as historical sales figures aren’t always a reliable indicator of demand for newer models.
Some suppliers stipulate minimum order quantities – a move that makes enormous sense for the vendor and which may lead to lower shipping costs. But it can become an issue, especially when complicated by factors such as fluctuating seasonal demand or limited term promotions. (Nothing dates a product quite so obviously as packaging with an out-of-date sales promotion). In addition, you need to weigh up the cost advantages of larger orders versus their impact on cash flow and
Perhaps the biggest supplier impacts however, are those involving product lead time:
- Do your vendors stick to consistent lead times?
- How long does it take from order to receipt of goods?
- Can you place an order with a vendor and rely on them to ship within a specified time-frame?
If you or any of your staff ever find yourselves at the end of a telephone calling suppliers to ask “Where’s my stuff?” it’s a sure sign of a mismatch between their lead times and your stocking rates.
WHY CONSISTENCY IS GOOD
Supplier lead time is the time between ordering and receiving a shipment of goods. Knowing your supplier’s lead time is the essential starting point when considering how often to reorder goods, and in determining what level of inventory you need to keep on hand.
For example, if your hardware business sells five sets of the Brand X Screwdriver range every day, and if it takes ten days from placing an order to replenishment, you are going to need at least 50 sets of the Brand X Screwdriver range in your inventory to avoid a potential stock-out. If the ten day supplier lead time is consistent, you will need to place a reorder whenever the stock level reaches 50.
10 days supply x 5 sets per day = 50 sets required in stock
However, if the lead time is not always reliable, you’ll need to consider the worst possible case. If replenishment sometimes blows out to twenty days, the calculation to avoid stock-outs changes to:
20 days supply x 5 sets per day = 100 sets required in stock
This is fine and solves the issue of keeping a steadily moving item on the shelves but it does raise a new problem: that of more cash being tied up in your inventory.
If each set of Brand X Screwdrivers costs $7, the cost to the business of keeping 50 items in inventory used to be $7 x 50 = $350.
With the increase to 100 sets in stock, warehouse space is squeezed and the money tied up in inventory doubles to $7 x 100 = $700.
Remember, this is just one item in the warehouse. The same issues – cost and warehouse space – are likely to be experienced across all other items ordered from the same supplier.
Moreover, we’ve already established that this particular supplier’s lead time is inconsistent. So sometimes you’re going to reach the twenty days supply level, place a reorder and receive replenishment stock within ten days. All of a sudden, your stock levels are on the increase because you still have 50 sets of the previous order in your inventory.
Add in the annual cost of carrying inventory and it’s clear that inconsistency in lead times can cost your business significant amounts of money.
HOW DOES YOUR SUPPLIER RATE?
If any of the above sounds familiar, perhaps it’s time to review your supplier’s performance. Work out what it’s costing your business then talk to your supplier and negotiate more reliable terms. The odds are that they have no idea of the real cost of their unreliability. If they’re interested in keeping your business, they should be willing to work with you to identify ways to improve the replenishment cycle.
Supplier consistency in product delivery lead times is important. It makes it possible to anticipate and plan. It means that you can talk to customers about likely order fulfilment times during your sales pitch. If you are a manufacturer, certainty of product delivery may be essential for the next step in a much larger process. Most critically, lead time consistency makes it possible to work out the most efficient and effective inventory levels and replenishment practices.