What Does Changing Suppliers do to my Inventory?
Supply chain managers are often changing suppliers in order to increase quality, reduce lead times, and increase profit. However, these decisions can sometimes be made without all of the relevant impact to inventory. To answer the questions, what does changing suppliers do to my inventory, we’re going to look at from a perspective of moving a part to an LCR (Low Cost Region) supplier.
What is an LCR Supplier?
This sources from countries where the cost of labor and materials is lower. Please note that outsourcing material in your supply chain can support local economies and increase the quality of life for workers all over the world!
Does an LCR Supplier make sense??
With global supply chain challenges in construction grade lumber, semiconductors, gas, metals, metals, and chlorine among other challenges, your team may be considering changing to a new supplier. RSI provides solutions to supplier management! You can take your current parts and input a new supplier’s inputs to compare the before and after.
Notable comparisons to make, you can model how much more/less inventory space is going to be required to maintain a particular service level. You can also measure the change in inventory capital by inputting a new price. We are going to answer whether an LCR supplier makes sense!
Let’s Simulate it!
Consider the following situation through Right Sized Inventory’s simulation engine.What if we took the part from a short lead time of 5 days with a worst case 9 day lead time at a cost of $201 a source that takes 95 days with a worst case of 130 days? With an increase in lead time, we’d hopefully have a reduction of cost from $201 to $95 per unit. Right now, RSI is expecting at any given time to have $31,195 on hand.
We run this particular part through the Right Sized Inventory simulation 2000 times. In this hypothetical situation RSI would have an additional $28,000 worth of inventory on hand up to $58,000 average total inventory value.
However, the main comparison is not inventory, but inventory carrying costs. Theoretically, the additional inventory is worth it. We cut $105 out of every single transaction. With an inventory carrying cost of 10% the additional carrying cost would be $2800. In this case, with a huge price reduction, the company would save that in a single day if they had an average daily usage of 26 units/day.
In reality, the supplies may not take as long to arrive and the savings may be less which is why it’s important to model your inventory over time as well.
Evaluate the Outputs to Enable Optimal Decision Making
The problems come in when we look at the real life inventory costs associated with increased inventory. Does our warehouse have enough space to keep an additional 594 units on hand? Each of those units have a real actual footprint, and realize that this is an average, so we’d need a warehouse that is flexible enough to deal with amounts above and below the average for every single item you stock!
If every part is moving to long lead time suppliers, you may have to invest in more space to carry the inventory. If it’s a single part, then you can probably take the hit. RSI gives you the power to take strategy, find the ROI, and move to action with the best way forward. We simulate the results for you in under an hour for any What-If situation.
We aren’t just a calculation, but a simulation that takes all of the real world supply chain factors into account. We can model what a supplier change WILL do to your inventory, whether that’s an increase, a decrease, or the exact same result.
