Today, in my second blog on supply chain best practices, we'll examine the order cycle, which is the amount of time necessary for your company to sell or use enough of the vendor's products to meet the target order requirement.
The formula used to calculate the order point for an item is:
(Demand/Day * Anticipated Lead Time) + Safety Stock
You cannot always expect to order a product when its net available quantity (i.e., On Hand Quantity – Quantity Committed on Outgoing Orders + Quantity on Order with Suppliers) falls to order below the order point. Why? Because often vendors will have a target order requirement. This is the order size that will provide you with the terms or discounts that allow you to profitably sell or use the vendor's products. Often this requirement is expressed as:
- A number of pieces or cartons
- A monetary amount
- Total weight or cubic volume
When you place an order with the vendor you must not only order those products that are at or below the order point, you must include items that will probably fall below the order point before you can place the next target order with the vendor.
For example, if a vendor has a 30 day order cycle and you are placing an order with the vendor today, you must include any product that has less than a 30 day supply above the order point. You are being forced to order those products whose net available quantity is above the order point before you really need to. It is easy to see how lengthy order cycles (which result from large target order requirements) will increase your inventory.
Long order cycles will also increase your inventory in another way. If you can only meet a vendor's target requirement every 30 days, you must order at least a 30 day supply of each item you obtain from that vendor. After all, buying a one to two week supply of an item every 30 days will not result in great customer service.
If you experience extended order cycles, work with your suppliers to see if you can receive smaller shipments more often. Perhaps some of your vendors don't realize that filling occasional large customer orders does not maximize the use of their machinery, manpower and material. Machinery that remains idle for long periods of time, large inventories of raw materials and finished goods and personnel that are not totally productive increase any supplier's costs.
By working with the best practices for demand forecasts, anticipated lead times, safety stock quantities and harnessing technology, you will be able to form a strong supply chain that maximizes everyone's profitability. Obtaining and sharing information is usually much less expensive than maintaining unneeded inventory!
Be sure to read my previous blog, Supply Chain Best Practices: Demand Forecasts, Anticipated Lead Time and Safety Stock, for additional tips on how supply chain cooperation can be successfully accomplished by sharing information.