For Distributors, Mitigating Supply Uncertainty Begins with a Better Forecast
Distribution industry supply chains have always been squeezed between manufacturers and their customers; facing increased competitive threats, escalating SKU counts, and expanding ecommerce. Today distributors are navigating increasingly unpredictable supplier lead times and availability.
In a recent digital transformation in supply chain planning study conducted by CSCMP and ToolsGroup, 45% of respondents said the pandemic caused supplier instability/shifts and 30% were struggling with staffing shortages/reduced productivity, while 45% indicated demand for their products and services had increased at the same time. This combination has created a perfect storm for distributors–but also an opportunity to come out ahead in this new post-COVID market.
Smart planning alleviates risk of distribution supply uncertainty
Better planning helps distributors maintain service levels amid supply constraints and mitigate risk of future supply disruptions. Here are four tactics planners can use now to get ahead.
Accurate forecasting of uncertain demand
The first step for maintaining service amid uncertainty is to better understand demand. Demand modeling systems look at the specific factors driving demand at a granular and daily level for individual SKU-Locations. Probabilistic forecasting then produces a range of possible outcomes with probabilities assigned to all values within the range. It goes beyond the “demand forecast number” to the probability of demand in any given time period.
You can take the next step to get an even more immediate picture of demand by using short term forecasting and demand sensing to look into current month behaviors and trends. AI-powered forecasting can identify demand triggers to track to help planners determine when to decrease or increase demand volumes. If you have the data available, you can assess correlation with external causals for an even sharper picture of shifts in demand.
Avoiding inventory overages and shortages begins with a better forecast, but also requires a smarter inventory strategy. Safety stock is used as a buffer to hedge against uncertainty. Differentiated customer service classes enable alignment of order fill rate targets by groups to the organization’s go-to market strategy.
You can also run what-if scenarios to assess the impact of changes in supply parameters (e.g. extended lead times, changes in supplier constraints, and ordering frequencies) on stock targets. Stock-to-service scenarios give visibility to inventory cost associated with different service level targets; i.e. show you the cost of additional inventory required to increase planned customer service levels from 96% to 98% for a certain class of product.
Better visibility of supply requirements
Smart supply chain planning can help your buyers work with suppliers to acquire scarce inbound materials quicker. Visibility to supply requirements over a longer horizon lets you plan further out in advance – reliable because the upstream plan is better. Advanced replenishment engine in combination with the current plan provides visibility on future stock projection. This can be combined with a supplier calendar for full visibility.
Smarter purchasing to outpace competitors
A smart purchasing strategy can help buyers on the replenishment side mitigate risk of supply side disruption for healthy inventory levels. One of our customers sources materials from a global network with long lead times. Planners to be able to make smart commodity buying decisions on when to buy commodity products locally at a higher price versus the cost of lost sales during a potential stock-out. The customer used ToolsGroup’s replenishment software model to view future inventory positions and predict stock-outs, considering all the supply chain constraints.
This “forward buy” capability helps distributors 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 distributor 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–a substantial competitive edge over competitors.
Similarly, another one of our distribution supply chain customers uses ToolsGroup to look at all future orders–those already placed and potential orders outside of lead time–and the system recommends which orders should be expedited or de-expedited. Because they have competitors selling the same products, having the ability to see this future projection helps planners make smart expediting decisions to avoid stock-outs or overstock.