… and its effects that can be very detrimental to your inventory levels, associated costs, and overall supply chain revenue, don’t do any of the following:
- Second Guess the System and Overcorrect
This typically happens when a buyer orders early, thinks he needs more “just in case” inventory, or believes that the system has under-estimated inventory requirements. When this happens at each stage of the supply chain, the original order requirements end up increasing significantly. For example, if a buyer at a retail store adds 10%, then a buyer at the local warehouse adds 10%, then a buyer at the central warehouse adds 10%, and then the distributor adds 10%, the supplier will get an order for 146.4% of the original order volume and the supply chain will become saturated with excess inventory.
- Last-Minute Unplanned Promotions
This goes for both buyers and sellers. Buyers, don’t allow marketing or sales to do last-minute unplanned promotions that were not taken into consideration during the forecasts. Without re-running all the forecasts, you can’t know how much more inventory you’ll need, and you’ll over-order “to be safe”. Furthermore, this surprise over-order will cause bullwhip second-guesses up the chain. Suppliers, don’t offer last-minute enticements to get a buyer to buy more. The net effect will be that your buyers will have too much stock, and then drastically cut their orders next time around. These unexpected cuts across the board will result in distributors overcorrecting downward, and then there won’t be enough inventory in the system and sales, and revenue, will be lost by all.
- Tweak the Order
If you have a good, modern, forecasting and inventory management system that can make use of all of your historical data, multiple forecasting algorithms, and run multiple what if scenarios that can take into account multiple assumptions, then, as long as the forecast and inventory plan was generated by a seasoned pro, on average, it’s going to be much better than anything your gut tells you. Tweaking just leads to uncontrolled overcorrections throughout the supply chain.
- Increase the Batch Size
Just because you can get an additional volume discount on order volume or shipping doesn’t mean that you can arbitrarily increase the batch size without consequences. Total cost of ownership, which will have been minimized by your inventory management or strategic sourcing decision optimization system, can involve dozens of variables. For example, there’s the inventory storage cost which could exceed the volume discount, especially if your warehousing cost is high. If you’re currently at FTL, it might put you over to FTL and LTL, and the LTL costs could be much higher. And, of course, the over-order will be followed by an under-order, which could lead to two devastating over-corrections by your distributor who was unprepared for the large swings up and down in order sizes.