The Importance of Replenishment Lead Time Variation in Inventory Planning
Inventory planning is a vital process for companies that want to minimize risk and maximize profit. It can be difficult, however, to create an accurate inventory plan when there are so many variables in the equation. The complexity of inventory planning increases exponentially when replenishment lead time variation is not taken into account. In this blog post, we'll explore why replenishment lead time variation should be included in all inventory plans.
What is replenishment lead time variation? Replenishment lead time can be considered the duration between when a company places an order and when that product arrives in their inventory. Lead times vary from company to company, based on factors like location of supplier, shipping mode (air or ground), etc. Some companies have leads as short as two weeks while others may have them at six months. When this variance isn't taken into account during planning phases, it often causes stock outs before orders are fulfilled--causing customer dissatisfaction and increased costs for both the business and its customers. It's important to consider all possible scenarios so you're able to plan accordingly with your current resources available. This will minimize how much excess inventory needs to be stored, which in turn will reduce overhead costs and help you meet customer demand.
What are the different types of replenishment lead time variations? There are three main types: positive lead times (items arrive sooner than expected), negative lead times (items take longer to be delivered than anticipated) and no variation at all between expectations and reality. Lead time variance is an important factor when it comes to inventory planning because even if your company has a very low order rate on one product, that's not always what customers need-- they might want five or ten items instead of just one. When this happens, companies should have enough stock available for those higher orders so there won't be any delays when fulfilling them. This is why it's important to consider all possible scenarios and what lead times they have for a given product.
How does replenishment lead time variation affect the customer experience? When you're dealing with negative or positive lead times, your customers will be happy because it's easier for them to get products when they need them. When there is no difference between expectations and reality, this can make things difficult as well--especially if companies are unable to fulfill orders due to lack of inventory availability (even though stock was ordered ahead of time). This leads us back into why replenishment lead time should always be included in an inventory plan since not doing so can hurt both business profit margin and customer satisfaction rates. Companies that don't take this factor into account often find themselves in a hole that can be difficult to dig out of.
How does replenishment lead time variation affect overhead costs? When it comes to overhead costs, companies should always consider the total amount they have available for inventory purposes--the more they have, the less likely they are to experience stock outs and other losses. This is why it's important not only to take into account all possible scenarios when planning your next order (even if you don't think there will be any negative or positive variations), but also how much money you're willing to spend on these items. For some businesses this may mean stocking up on products so that no matter what happens with fluctuating lead times, customers will still get their orders fulfilled without delay--but for others, this might not be practical.
How does replenishment lead time variation affect profit margins? When it comes to your company's bottom line, taking into account all possible scenarios with regards to replenishment lead times can have a big impact on profitability. If you're dealing with negative or positive variations in lead times that weren't expected (even if they are rare), then these will inevitably cause increased costs and lower profits--both of which should never happen when creating an inventory plan. When there is no difference between expectations and reality, the only benefit would be less overhead costs since stock won't need to be stored as much; however, this also leads back into why it's so important that companies always take these types of variations into account.
Why is it important to take replenishment lead time variation into consideration? The decision on whether or not to include this type of variance in your inventory plan should be based on the best possible outcome for the company--not what you think will happen, and not a compromise that makes everyone else happy but damages your own bottom line as a result. When companies don't factor in these uncertainties when planning their next order, they're always at risk of running out of stock (which limits customer orders) due to unexpected negative or positive variations. This can also hurt profit margins since extra costs from those unanticipated scenarios are passed onto customers who have already paid for an item that isn't available due to lack of inventory.
How can you reduce the risk of negative or positive replenishment lead time variation? Avoid using standard formulas (i.e. calculations /algorithms) to calculate inventory levels because they can't incorporate replenishment lead time variation and will result in inaccurate results. Use predictive-analytics instead!
