Do we over-think replenishment? It’s really a simple formula to keep in stock.
Need = (weekly demand X (weeks to cover + lead time) + safety stock) – OH-On Order
Where OH is current position, on order is stock that will arrive in the demand period. (less than the lead time of next order, I assume. If not, the prior order already left us in a bad position)
Is it the ‘demand’ that trips us up? The ‘Art’ or the science? If you sell 10 a week now, will you sell 13 in the future? Or 8? Which is better, too little stock or too much? So many questions to this simple piece of the equation. And there are lots of factors. And lead time is all to often ignored or under calculated. Lead time is not the “vendor says 4 weeks”; it is how long from the point of PO writing to store shelf.
Safety stock? That’s your insurance against miscalculation or ROS changes.
Lets do some math!
I have 1000 units currently in inventory, and I sell 200/week, and have 500 already on order (again, due in time), and a 6 week lead time. I would like to cover sales for next 12 weeks… my math is:
Demand = (200x(12+6)), 3600 Units.
Need = 3600-1500. Order 2100 to cover. OH of 1000 will last 5 weeks. On order of 500 is 2.5 more weeks. So on week 6 when the new order is due, position is still 300, so 1.5 WOS, a little close.
My feel is safety stock should be demand X 1/2 lead time, but only on initial replenishment order. Factoring this in, the above order would go to 2700.
Going forward, assuming no change to ROS, all future orders = # weeks in replenishment cycle X demand, in perpetuity. Run replenishment every 4 weeks? Order = 4 X 200, order 800. That has a carry of below table:
Owning 11-14 Weeks on hand for an item with a 6 week true lead time is about as close as I want to be, with 4 more weeks always on order. That should cover any minor supply-chain issues.
Simple? So why do so many retailers struggle with this? Which variable are we getting wrong, lead time or demand?
Lets make stock outs a thing of the past.
– THAT Planning Guy