An important component of the suggested order is the vendor Lead Time. If you don’t know how long it takes you on average to receive your products from your vendors, how can you possibly order the correct amount? It is imperative to account for the time it takes to receive the order.
Lead Time: The total amount of time between the date there is a need to reorder a product and the date the product is on the shelf and available for sale.
Lead Time Variance: The calculation of how much the lead time varies from the average lead time. The Lead Time Variance is calculated on the supplier and product levels. A higher variance means less certainty and will lead to more safety stock.
Tracking every Lead Time receipt and knowing the Lead Time Variance are both essential in determining the forecasted average Lead Time for vendors and products.
Questions you must answer in order to Properly Forecast Supplier Lead Times
“Prediction is very difficult, especially if it’s about the future.” ~Nils Bohr
The main concern when considering Supplier Lead Time is “How long does it take you to get the products from your suppliers?” Knowing the answer to this question is very important. If you don’t know how long it will take for you to receive your orders, how can you possibly create an accurate order for your products? There are three questions to consider that will help you better understand your Supplier Lead Times.
How well do you know your Suppliers?
When placing an order from your supplier or vendor, the time it takes from when you place the order to when you receive the order and when those goods are available for sale — is the Lead Time. For some, this could also include the time required to “put away” or store the items when they are received. Lead Time varies among different suppliers and can change depending upon your relationship with the supplier.
Your Lead Time consistency will have a direct impact on your inventory levels and fill rates. It is imperative to determine the right amount of inventory to carry during your supplier Lead Time. There may be unexpected delays from your supplier or even spikes in demand that you must consider. Understanding your suppliers and how they work is going to be important in order to ensure your lead-time consistency.
How well do you know your Inventory?
Part of proper inventory planning and control is having a vast knowledge of your inventory. Why is it so important to truly know your inventory?
When looking at the range of products you order from a specific supplier, you likely have some products that move fast, some that move normal, and some that move slow. This means you will not be ordering every product for every purchase order you make to a single supplier. The two main ordering decisions include when to order and how much to order. Knowing how your product lines move and how long it will take to receive your orders will help you determine when to order and how much to order.
Have you chosen the correct amount of Safety Stock for your Products?
It is essential to determine the correct amount of Safety Stock in order to avoid potential stock-outs. Safety stock is important because there are times when expected inventory use exceeds what was forecasted, or there may be possible shipment delays from suppliers. The higher the level of service a company wants to achieve, the larger the monetary investment of safety stock will be necessary. Lacking an understanding of your supplier’s Lead Time can cause you to carry too much inventory. When you have more certainty of when you will receive your order, you can choose an optimal level of safety stock that can improve the bottom line.
“The most reliable way to forecast the future is to try to understand the present.” ~John Naisbitt
When forecasting Supplier Lead Times, it will be important to determine what information is needed to help you make the best possible prediction. The better you know your suppliers and inventory, the easier it will be to forecast what you will need. Knowing your suppliers, properly planning and controlling your inventory, and choosing your safety stock will be helpful to your company’s inventory levels. These 3 factors will help you make better ordering decisions.