Read more on the Coronavirus and how it is affecting suppliers here.
by John Pitman, krunchbox CEO
February 17, 2020
With all the uncertainty surrounding when Chinese manufacturing will be back up to full capacity, and how much physical supply chains will be disrupted, it is worth keeping a close eye on inventory levels in all segments of your supply chain, so you can anticipate where you are going to face potential stock outs first.
Under normal circumstances, you would look at your weeks of stock using the simple metric of inventory divided by average weekly sales. However, not only do you need to adjust for seasonality, promotional activity and competitive tactics etc., but you also need to consider how sales – your denominator – will be affected.
For example, let’s assume you have 10,000 units of inventory of a given item, in your warehouse. Your average weekly sales over the last 12 weeks has been 850. However, that period included Christmas and NY, which is traditionally a peak season for that range. You might also then look at the average rate of sale of that item in the next 12 weeks, last year. In other words, what was the average rate of sale of that item in the months of March, April and May in 2019. You would then decide on a weighted average of those two figures, based on your knowledge of seasonality.
Next, you would apply some relevant adjustments to cater for other factors such as new packaging, competitive offerings, catalogues, promotions and so on, to arrive at an estimated future rate of sale. Depending on your geographical location, you may even need to consider the negative effect of the outbreak on sales.
Let’s say for the sake of argument that your adjusted projected average weekly sales rate is 910 units/week. Your 10,000 units of inventory in your warehouse therefore represents 10,000/910 = 11 weeks. So, you have enough inventory in your warehouse to cover sales for the next 11 weeks.
Typically you are going to have inventory at stores, in transit to stores, in retailer DCs , on order, in your warehouse, and on purchase order from your suppliers. Using your newly calculated rate of sale, you can quickly calculate how many weeks of inventory you have in each of those locations.
Sorting lowest to highest will then provide you with a prioritized list of products, based on when each is going to run out of stock in the various different parts of your supply chain.
- Create a table showing by product, how much physical inventory is currently:
- On hand in store
- In transit to store
- In the retailer’s DC
- On order to the retailer’s DC
- In your warehouse(s)
- On Purchase Order from your suppliers
- Use recent rate of sale and future sales from last year to calculate a weighted forecast of sales
- Apply adjustments to that rate of sales based on your knowledge of all the variables that might impact on that sales rate, both positive and negative
- Divide the inventory units by your adjusted sale rate, to quantify how many weeks of inventory you have in each segment of your supply chain
- Use that number of weeks to project when you will run out of stock
Armed with the knowledge of what is going to run out first, you can then consider some of the below options:
- Seek alternative sources of those products, or the raw materials required to manufacture your products
- Consider what product substitutions you could make to keep stock on shelves
- Consider alternative transport methods once supply starts eg air freight
- If some store locations appear to have excess inventory based on rate of sale, consider relocating stock from some stores to others
- Re-grade stores and allocate the stock you do have to the stores that have a greater propensity to sell that product (ie don’t send further stock to stores that have the lowest rate of sales)
- If the product has high elasticity, consider increasing prices to improve margin and slow sales rate
- Look at how products are merchandised in store in terms of giving more prominence to products for which you have better stock cover
- If you supply different retail channels with the same product, work out which gives you a higher margin, and allocate the remaining stock accordingly
- Make sure you communicate production priorities back to your production facilities, so that when production starts, the products most in need are the first to be shipped
- Communicate early and often with your supply chain partners, especially your retail partners. Bad news about stock running out is best brought to the table early, so buyers can make necessary adjustments to assortments, until you are back in a full supply position.
For more information, or to have a chat with one of our consultants about your Supply Chain, Contact Sales