This past year has no doubt been a challenge for inventory planners: customer demand surging or evaporating seemingly overnight, shortages of critical supplies, and global shipping congestion, delays and skyrocketing rates isn’t business as usual. For many companies, particularly those with global supply chains, the scope and depth of these pandemic-driven supply and demand shocks have upended key planning data embedded in their inventory management systems. If this data has been unduly impacted and is not corrected, even the most sophisticated, best-of-breed forecasting and inventory management systems will provide sub-optimal results – poor OTIF, the wrong inventories in the wrong locations, and higher costs.
Based on our client work, certain planning data requires periodic maintenance even in normal times: historical sales data, replenishment lead times, lead time variability, target service levels, and costings. If you have experienced demand and supply shocks or reconfigured your supply chain during the pandemic, these data elements require urgent attention. Even auto-tuning capabilities in sophisticated inventory systems may not have been up to the extraordinary challenges faced by your company.
In this Brief we highlight five situations that can overturn your inventory system, suggesting the need for a tune-up. Our call to action applies to advanced systems as well as spreadsheet-based tools used at smaller companies.
Five pandemic-related inventory system disruptors
1. Demand spiked or plummeted and now has settled into a new pattern
Demand forecasting techniques across many industries vary from simple moving average calculations to machine learning systems. What they have in common is that historical sales patterns typically serve as a significant predictor of future demand. But when disrupted by severe pandemic-related demand shocks, sales history has limited, if any, value in predicting future sales. We recommend in these cases a deep-dive analysis and scrubbing of the historical data so as to screen out “outlier” events uniquely tied to the pandemic – events that may not be relevant to future sales.
2. True customer demand is obscured by substitutions and out-of-stocks
For companies in sectors that suddenly found their products flying off the shelf, consumers were forced to pick a substitute (if anything was available at all) – perhaps purchasing chunky rather than smooth peanut butter or making do with a 12-oz jar rather than the economy size. The crucial challenge for most companies is to track and forecast true customer demand rather than what was actually shipped to customers. In this way, you will plan inventories based on what customers want (even if it is out of stock) rather than what they actually were able to buy.
3. Suppliers have changed, as have replenishment lead times and reliability
We have seen companies onboard new suppliers in record time to keep factories humming and products moving through the supply chain. With more order history now available for these suppliers, the initial replenishment lead time assumptions are likely due for a refresh. At the same time, end-to-end replenishment lead times for existing suppliers have probably increased, at a minimum due to global shipping delays, as has the lead time uncertainty. Both are crucial inputs to reorder points and safety stock calculations.
Recently we have seen huge swings in Asia to US transit times: for example, Yantian to the US West Coast taking as long as 40 or more days, port to door, over the past six months. This importer found it needed to add 15 days to the standard transit lead time in the company’s inventory planning system and nearly double the lead time standard deviation.
4. Transportation and logistics costs have increased
Ocean shipping rates have increased dramatically over the past year. Spot rates are up more than 200%, for example, on the China/East Asia to North America West Coast route, according to the Freightos index. With the shortage of containers and vessel slots from Asia to the US, some importers have paid premium rates – as much as five times contract rates – to keep freight moving. Domestic transportation rates are also up – by 12% year-over-year reflecting strong demand and shortages of drivers and trucks. Shippers have also seen warehousing cost increases due to pandemic-related labor shortages, higher absenteeism and turnover rates, and the introduction of CDC-informed safety protocols.
Rising landed product and outbound logistics costs could drive changes in how inventory should be deployed and managed. Strategies could include, for example, shifting from make-to-stock to make-to-order, adopting Ex Works Incoterms, and centralizing or delisting slow-moving SKUs.
5. Customer expectations are heightened
While retailers have waived OTIF-related chargebacks during the pandemic, this will likely end soon. Expectations for higher OTIF performance will intensify. The service level targets embedded in the inventory management system likely need to be refreshed. For some slow-moving, hard-to-forecast items, achieving 95%+ in-stock may dictate centralizing inventories lest they become OTIF ‘killers’ when ordered together with core products. At the same time, we recommend re-examining your customers’ logistics-related service needs. You may be able to identify new opportunities to manage cost-to-serve with segmented programs that incentivize ordering patterns yielding cost and service benefits to both parties.
With the prospects of a post-pandemic normalization rising with each vaccine shot, now is a great time to refresh and future-proof your inventory system.
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David Frentzel is a Partner at New Harbor Consultants. Dave brings 30 years of management consulting and hands-on executive leadership experience to improve business outcomes. Prior to joining New Harbor, he held various senior positions at 3PL and supply chain technology companies. Dave has extensive global management expertise having spent more than ten years living and working internationally helping companies with their global go-to-market, organizational, sourcing, manufacturing, and supply chain strategies and operations.