Why Your Lead Time Process Delivers Major Out-of-Stocks and Steps to Fix

Lead Time is increasingly ignored as the culprit responsible for out-of-stock. Today, logistics costs have plummeted while logistics capability has skyrocketed. RFID tags, consolidation of logistic companies, and instant internet information have all contributed to lower costs and better operating efficiencies. This has helped instill a belief that Out-of-Stocks associated with lead time are generally blamed on the supplier, not on logistics or process.

The supplier issues that create out-of-stocks may include:

Late Delivery: not meeting a PO landing date request
Inconsistency in supplier lead time across purchase orders (PO)
Lead time doesn’t match what was initially agreed by supplier and buyer

Lead Time Questions to Drive Changes

While these may or may not be avoidable issues, perhaps the more profitable questions you should ask include:

How much is lead time contributing to out-of-stocks?
What are the best steps to avoid lost sales?
What parts of my replenishment process are contributing to the problem?

Human assumptions result in out-of-stocks! Test the results, is your lead time days in sync with actual receipts? Does a buyer request a receipt date that doesn’t consider days supply available?

Many retail and wholesale businesses fail to identify how often lead time is a key contributor to out-of-stocks. The resulting lost sales due to lead time are probably a substantial dollar amount in your business. Studies show that often the retailer contributes to the problem and has viable options to reduce the lost sales impact. Out-of-stocks occur often due to wrong lead times, an inaccurate replenishment forecast, and waiting too long to place the purchase order.

For our discussion, lead time is the total days from when a PO is accepted by the vendor until the goods are receipted at your location. Our focus is on replenishment lead time, with the assumption that the goal is for goods to arrive ‘just in time’ (JIT). Shelf stock will be the total units needed to support sales (shipments) from today (PO create date) until arrival of goods from supplier.

Our Example:

You have a product that sells 10 units a day (forecast) and the supplier agreement states they ship direct to your location in 14 days (supplier quoted lead time (LT)).
Your Product reorder Point is 140 units (10 unit sales per day * 14 days lead time).
When available inventory + on order <= 140 units (Product reOrder Point ~POP), it is time to place an order.
If you fail to place an order on this date, and your sales forecast and available inventory are correct, then you will run out-of-stock before the replenishment order arrives.

Note that this product order point of 140 units would be higher when safety stock is needed. If we have 3 days safety stock (ss) calculated, then the product order point (POP) would be (3 days ss * 10 units/day) + (140 units for LT) = 170 units (17 days).

Out-of-Stocks Due to Wrong Lead Times

When you create an agreement with a supplier, there is a section in the agreement that effectively says that after the supplier receipts the purchase order, they will have goods ready to ship in X days. The agreement often includes the transport time if the supplier is responsible for shipping the goods. The end result is a total days from PO creation until goods are available to receipt at your location. A potential issue occurs when the supplier lead time changes and you don’t make complementary changes in your POP to reflect the new lead time.

If you are not measuring your company lead times, start doing that now. You will find some supplier lead times are seasonal, some lead times are shorter and some lead times are longer than the supplier lead time quoted. The issue: our supplier is consistently late, getting the product to us in 21 days. You have two choices: continue to reorder when 140 units (POP) are available or start reordering when 210 units are available to support the 21 day lead time. Yes, you may ding the supplier for being late, search for a new supplier, and show the supplier your cost for the additional 7 days inventory. Each of these steps will reduce the long term impact on your bottom line. If you want to stay in stock and meet your service goals, then be aware of the actual lead time and use that to determine the reOrder date.

Out-of-Stocks Due to inaccurate Forecast

Most planning and/or replenishment systems have a place where you input lead time. The system takes the lead time and the forecast in the system to calculate a product order point (POP). Lead Time is measured in days; the forecast is used to determine days’ supply in units. If your system forecast is 5 units a day and the LT is 14 days (5 units/day * 14 days LT), POP = 70 units. If the actual sales rate is 10 units a day, then the shelf stock calculation your system made to maintain inventory is off by 50%. You placed your order when you had 70 units, expecting to sell 5 a day; however, you are selling 10 a day (meaning you will be out of stock in 7 days). This also means you will remain out-of-stock for 7 days. This forecast error will cost 70 lost sales units plus whatever additional sales and customer goodwill are lost due to the out-of-stock.

Out-of-Stock: You waited too long to place Purchase Order

Without supply chain visibility, a buyer reviews available inventory, sales, and budget, and decides they need to wait a week to place the order due to open to buy. Without a product order point that rolls up into an order, most systems today are driven by plan and human exception management. Another similar scenario occurs for a supplier with high minimums. Often high supplier minimums result in a product line getting out of balance in days’ supply across the line. An Out of balance example is when some products from the supplier have 10 days’ supply and other products have a 14 day supply, and you need both groups of products to make minimum. This creates a wait to place purchase order scenario and, again, out of stocks for those products with only 10 days’ supply.

Add Lead Time Track and Respond into Replenishment Processes

There is significant data that supports reviewing lead time processes and practices delivers huge opportunities for the retailer to reduce out-of-stocks and resulting lost sales. Several studies in the past 10 years have consistently shown that on average 80%+ of all out–of-stocks are not the fault of the supplier. A recent install of our lead time forecasting module provided $1M Gross Margin improvements by lowering lost sales that occurred due to improper lead times.

Are you ready to ‘Tighten the Links in Your Supply Chain?™’

Stop accepting Lead Time processes that deliver Out-of-Stocks and expensive operations. Contact us for a free review of your current lead time processes, accuracy, and out-of-stock issues. We have the experience and tools to help you improve your business. Also, request a demo to learn how our software can reduce out-of-stocks and increase sales, installed in 30 days at a fraction of the cost of legacy systems.

About
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Stuart D

Stuart Dunkin is a strategic visionary who leads by calling on his broad range of experience as a former retail executive as well as a consultant for top retailers and for the E3/JDA software company. He founded Data Profits to solve a real-world problem plaguing retailers today – the disjointed relationship between supply chain data, people and business goals. He has experienced first-hand the challenges and frustrations that occur when decisions are made based on wrong data, which often leads to the wrong actions being taken with crippling results like overstock, out-of-stock, and increased working capital.
Stuart graduated from Auburn University, with bachelor of science in business administration.