Smarter, Low-Risk Commodity Buying
By FinStock South Africa
The importance of having the right inventory at the right price to service customer demand is crucial. Nowhere is this truer than on commoditized products. With commodity buying, customers have a wide range of vendors to buy from and switch often to protect their margins.
Calculating and maintaining optimal levels of inventory is increasingly complex in this market as a result of long lead times, exchange rate volatility, economic factors, tariffs, political unrest, pricing trends, etc. A lot can change between placing and receiving an order, resulting in either over-stock or under-stock situations. This means high service levels can come at a high price, forcing buyers to take the conservative approach.
The trade-off between low cost, long lead time inventory and higher priced short lead time inventory is a daily decision to balance the risk of unsellable stock versus stock outs.
Evaluating stock-out versus long lead times
One of our customers sources materials from a global network with long lead times. The need arose to provide planners with data to support the decision of when to buy the product locally at a higher price versus the cost of lost sales during a potential stock-out.
Utilising the ToolsGroup Service Optimizer 99+ (SO99+) replenishment software model, future inventory positions are shown considering all the supply chain parameters. Predicted stock-outs can be seen in the example in Figure 1 below.
Figure 1: The stock projection of an item with a 100-day lead time showing multiple stock-outs before more inventory can be procured.
Using the above projection, which is based on the current plan and all supply chain constraints, FinStock, together with the customer, developed a gap-buying report as seen in Figure 2 below.
Figure 2. The report detailing the start and end dates of each projected stock-out along with the associated lost sales projection.
Benefits of low-risk commodity buying to our customer
Over time, market demand for the commodity in this customer example has increased, but the supply of the commodity is very disruptive due to the long lead times. The gap-buying report is able to predict when the customer will run out of stock in the future, as well as the potential financial costs of that stock. This allows the customer to buy up the stock that is available from suppliers to fill the gap, before their competitors realise that they will be running out of stock. Utilising the information provided by ToolsGroup SO99+, the customer has a substantial competitive edge over its competitors.