Improving OTIF and Reducing Cost and Inventory
Every client wants to support growth goals while improving service levels (OTIF, on-time-in-full), operational efficiencies and inventory turns. These are timeless objectives for every planner. During the pandemic, the priorities shifted to service levels because clients struggled to keep up with dramatic increases in demand and extreme volatility. There has been an all hands on deck focus to improving OTIF (on-time-in-full), OTD (on-time-delivery), and fill rates.
As we did whatever it took to service customers, logistics costs started to skyrocket, even before the dramatic increases in oil and gas prices. Thus, logistics costs also came into closer focus. Depending on the supply chain network, logistics costs could relate to container costs (which have gone up four-fold since pre-pandemic levels), drayage costs, storage costs, freight costs, e-commerce fulfillment costs, and more. For example, a consumer products manufacturer supplied outside distribution centers across the U.S. and Canada to support short lead time customer requirements. As volatility increased, freight and logistics costs went up accordingly. Thus, additional focus was put on how to optimize logistics costs.
As the pandemic unfolded, consumers switched from services to products, thereby increasing demand. Similarly, as stimulus packages were passed, consumers gained cash, further increasing demand. Finally, as lockdowns ended, demand has stayed at high levels even though services are skyrocketing, driving inflation. As supply chain disruptions abound, product availability is limited, thereby driving prices higher. There is a combination of inflationary and deflationary pressures going on simultaneously which is further exacerbated by the Russia-Ukraine war. These incidents have led to a return of focus on managing inventory to free up cash.
Utilizing Planning Best Practices to Optimize Service, Cost & Inventory Objectives
From a best practice point-of-view, in order to optimize service, cost, and inventory objectives, you’ll want to upgrade the appropriate planning processes. No matter your business type and complexity, demand planning will be a priority. From a supply planning perspective, the priorities will depend on your specific situation. If you produce internally, production planning, material planning and supplier management will be a priority. On the other hand, capacity planning, purchasing, and logistics planning will be important regardless of your supply chain network although to varying degrees. Replenishment will be more relevant if you have a more complex distribution environment or if you replenish your customer’s network for them (also known as vendor managed inventory or VMI).
If you have a more complex distribution network, replenishment planning (also known as distribution planning or DRP) will be a critical component to achieving your objectives. Replenishment planning should consider the following factors:
- Order frequency – are you receiving orders on a daily, weekly, monthly, seasonally, or sporadic basis?
- Order size – when you receive orders, are you receiving several small orders over a period of time, one large order covering the same period of time, or another option?
- Order volatility – how predictable are your customer’s ordering patterns?
- Lead time requirements – how much time do you have to react to customer orders vs. the lead time to replenish?
- Replenishment lead time flexibility – do you have options to decrease your replenishment lead time by shipping via a different mode of transportation (such as rail vs. truck)?
- Replenishment cost with various modes of transportation
- Replenishment frequency – how often do you replenish the distribution center.
- Service policies – can your customers change their orders after placed? Can they change it until the last minute prior to shipping?
- Network flexibility and stocking patterns – if you have a stockout in a distribution center, are you stocking that same product in another distribution center that could supply the customer within standard lead time?
- Safety stocks – how have you set safety stocks to cover for variability in demand and supply?
- Forecasts and/or consumption information – do you receive collaborative forecasts from customers, or, better yet, consumption information real-time? For example, when working with an absorbent product manufacturer, our key customer Allegiance Healthcare provided us with our consumption data from their distribution centers so we could sell real-time consumption. Additionally, when consulting with an aerospace firm, we received consumption information from Boeing so we could see when they used our parts in production of the plane.
- ABC value – are your items set as A B or C based on volumes, value or another method to designate frequency and importance?
- Storage constraints and warehousing costs
- Inventory objectives
- Sales orders, transfer orders, and purchase orders
Replenishment Planning Strategies
A replenishment plan should take the factors described above into account when building a plan. Typically, you’ll start with demand and determine your replenishment plan based on what’s needed to serve the customer with the agreed upon service policy, and then evaluate replenishment strategies, logistics options, and resulting inventory levels to determine the optimal schedule.
Depending on your network complexity, product and customer mix, your tools (ERP and related technologies), and your objectives, there are multiple replenishment strategies you could follow. Conceptually, consider the following options:
- Reorder point / Kanban strategies – in essence, you replenish the reorder quantity when you hit the reorder point inventory level
- MRP/ DRP strategies – in essence, you replenish to sales orders, transfer orders, and forecasts as needed when reviewing your inventory and orders in process.
- DDMRP strategies – demand-driven material requirements planning (MRP) which is more sensitive to variations in demand and supply.
- Advanced planning – these systems take what if scenarios, capacity, capabilities and costs across sites into account in replenishing
There are tradeoffs, benefits and costs to each approach depending on your demand, supply, factors, and objectives.
Incorporate Replenishment Planning into a Monthly Review Cadence
Review your replenishment plan summary information and related impacts as a part of your monthly SIOP/ S&OP process. Gather inputs from appropriate parties, compile and synthesize data, and design a monthly review of the replenishment plans required to support customer orders. This will result in transportation volumes by mode of operation (truck, rail, air), storage requirements by distribution center, distribution / supply chain network changes and stocking strategies (and resulting inventory levels) required to support service policies, and appropriate resources and system capabilities to support the plans.
Refer to our blog for many articles on planning, capacity and related systems. . Also, read more about these types of strategies in our eBooks, Thriving in 2022: Learning from Supply Chain Chaos and Future-Proofing Manufacturing & Supply Chain Post COVID-19. If you are interested in talking about what it would take to purse the replenishment planning and SIOP journey in your business, contact us.
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Recovering Capacity with Production Planning Best Practices