Over the past two years, supply chain disruptions have been a hot topic of discussion for many companies. While macro events such as Covid-19, hurricanes, earthquakes, and the recent Suez Canal blockage grab the headlines, even everyday disruptions—like suppliers going out of business, transportation bottlenecks, and labor strikes—have become more common. These events often take companies by surprise and force them to rethink their whole supply chain model. As a result, supply chain professionals may be unable to rely on their time-tested models at the core of their planning systems. Instead, they’re forced to make real-time adjustments as they react to new disruptions while trying to keep their business on track.
Supply side disruptions can have broader consequences, as demanding customers have little tolerance for delayed orders. Both individual consumers and companies have become more demanding in terms of expected delivery times and order accuracy. On the production end, many manufacturing firms operate just-in-time production and have very little tolerance for late supply deliveries to their production lines. Wholesalers and retailers face demanding consumers who have more buying choices and higher expectations. According to McKinsey & Company, there is around a 15-30% growth in consumers who purchase online.
As many companies wrestle with supply chain vulnerabilities and the need to satisfy demanding consumers, they rely on extra inventory (referred to as safety stock) to absorb the effects of supply shocks. However, holding more inventory always involves tradeoffs and doesn’t always yield return as sales. On one hand, sales and marketing want to ensure that they have enough stock on hand to satisfy demand, avoid stockouts and lost revenue. On the other hand, Finance seeks to minimize the company’s inventory investments; inventory not only consumes cash, it involves holding, labor, and capital costs.
The inherent uncertainties in supply chains and ongoing disruptions will always be an issue. The question is how companies manage the tradeoff between high inventory investment and controlling costs.
You can ask yourself a few questions to ensure that you’re making the right decisions:
Disruption is Inevitable- Preparation is a Must
As your company wrestles with these questions, there are steps you can take to mitigate the effects of disruptions across your supply chain.
Across all industries, having real-time visibility over your inventory is more crucial than ever. A robust inventory management solution can provide visibility across your facilities and goods in transit, giving you a clear picture of how much stock you have and where it’s located; this can help you make decisions around material movements to meet demand. Combined with demand and supply planning systems, you can get better insight into spikes in demand and your ability to fill orders. Analytics that provide visibility into inbound inventory shipments and customer order status can help manufacturers gain visibility into supplier orders. This can allow you to have visibility on the goods in transit and whether they can meet their production schedules. Disruptions, supplier shutdowns, or transportation bottlenecks may require sourcing materials from a different supplier or rerouting a shipment to keep production lines running. Wholesalers and retailers have a slightly different problem: disruptions will likely result in stockouts, which translate into lost orders.
If there’s one thing we’ve all learned in the last 18 months, it’s that demand of certain items can change drastically with a snap of a finger. To combat this uncertainty, safety stock management is more important than ever. Safety stock management is a proactive approach to inventory management that establishes a minimum amount of inventory to keep on hand as a buffer to compensate for demand surges or supply shortages. Supply chain professionals should think about ways to buffer the effect of disruptions using safety stock. However, just as much as the finance individuals are worried about having obsolete inventory, the sales and marketing people are worried about orders not being filled. A simple way to prevent loss orders is having safety stock. Safety stock reduces the risk of stock-outs and guarantees order fulfillment, however holding too much can be a risk for the company. Uncertainties in the supply side have often caused supply chain teams wondering what is next. Reducing inventory is extremely tricky as it often requires understanding of which drivers are affecting your supply chain the most and eliminating them to improve overall efficiency. The tradeoff of having enough stock for order is crucial and establishing levels for automated reordering points becomes more important than ever.
According to industry analyst Joshua Greenbaum, “All customer experiences live and die in the supply chain.” From raw materials, to manufacturing goods, to finished products, all must be coordinated to get a given item to the customer within a reasonable timeframe. Customers are becoming so demanding that they want to know how many stops away the item is from its destination. On the flip side, what if there is no stock in the first place? How upset would the customer be to learn that the item is out of stock? A stockout happens when inventory is exhausted. Having a stockout is not only detrimental to that specific sales order, but also to potential future sales, as customers look for items on a competitor’s website. The opportunity cost is too big to be lost. Having an inventory management system that prevents stockouts can minimize the uncertainty of inventory planning. It can help you maintain a healthier cash flow by ensuring that you carry products with high customer demand.
Managing inventory can be challenging; setting appropriate levels to absorb disruptions involves tradeoffs. Decision makers need an inventory management system that can grow with the company. With a strong set of applications on the ERP side as well as supply chain management, Oracle provides cloud-based inventory management solutions that are the perfect fit for companies of any size.
Danny Wu is a product marketing manager focused on supply chain management. He most recently worked as part of the Oracle sales team in Boston and Los Angeles. Born in the United States, Danny was raised in Taipei, Taiwan and received his bachelor’s degree in economics and philosophy from Boston College and masters in marketing at University of Southern California.