Is there light at the end of the tunnel?
Apr 21, 2010 Comments (0)
There is no question that companies have suffered during the current economic climate but there appears to be light at the end of the tunnel. With business starting to pick up, now is the time that companies actually need to be more cautious. History shows that businesses are at considerable danger coming out of a recession, trying to satisfy new levels of demand when the supply tap has been turned down. Businesses can be so focused on securing new orders, that they do so at a price they can't sustain. This puts a strain on their cash flow which kills off some organisations.
Demand in a recession
Running a lean organisation means you have to be smart about how you manage your planning. Businesses need resources at their fingertips to allow them to predict the volume and cost of required stock to guarantee customer service levels as they grow, without exposing their bottom line to unnecessary risks.
During a downturn the whole supply chain will have changed and a common mistake businesses make is to rely on historic assumptions when looking at stock control. What they need to do is analyse new situations and scenarios completely to check if new decisions are the right ones. However with little resource left (many companies may have reduced head counts) they dont have time to do this and begin to base all decisions on old assumptions which are not necessarily valid.
It is also not unusual to see a company lower its supply quantities so that it doesnt have a build-up of stock. Looking shorter term, this leads some companies to place a cap on ordering more stock based upon a maximum value, which doesnt take into consideration the mix of components a business needs. This can leave a business with the correct stock level on paper but when demand increases, leave it without the vital components to fulfil orders.
Typical problems faced
Companies are obviously desperate to accommodate any renewed interest from a sales perspective but dont necessarily understand the risk to the supply chain of committing to each sale. For example, stock levels may not be at a luxuriously high level, so any slight variation in demand that isnt expected, may prevent orders from being fulfilled.
This presents problems from a service level perspective but more importantly can put the business at risk financially. The most dangerous part of an upturn is any sudden rise in demand that puts pressure on a business to pay suppliers and other creditors for additional stock before customer invoices have been paid which can have a disastrous effect on cash flow. These scenarios prove that it is fundamental to the survival of the business that there is visibility of the extent of this problem to ensure that the company can actually afford to supply the order. If it cant do this, the cash flow of the business is in real danger.
Having the ability to understand current order requirements at a glance and make accurate re-adjustments to the plan quickly, is increasingly becoming as important as being able to get to the best answer (where best is usually the lowest possible cost to the business). If a business combines this ability with more accurate forecasting, the opportunity to measure and ultimately reduce risk of any given scenario presents itself.
Businesses need to prepare for an increase in demand by spotting the demand signals before they happen and plan more proactively than reactively. If a business can better manage inventory it will be able to understand the right position for each and every item with a bottom up view rather than a top down imposed limit.
Effective inventory planning can save the day
This may mean planning on a daily basis rather than a monthly one so that the business can react more quickly. To achieve this, a business will require the use of an advanced planning system to help efficiently manage the complexity of refinements to the replenishment plan so that the limited resources can manage by exception.
Ultimately, by using such tools businesses can begin to work smarter rather than harder. Organisations can ensure that decisions are made regarding timing and quantities of replenishments based upon informed decisions, especially when considering risk and cost. It is about having visibility of the potential critical problem areas and being able to respond with calculated decisions where the risk is measured and understood.
About the author
Cathy has an academic background in Operations Research and has been at Inform, provider of advanced planning software solutions, for 3 years. She was previously a director in the aftermarket services division of the rolling stock manufacturer Bombardier Transportation. In addition she has held positions in the past for other ERP and Supply chain software providers.