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Replenishment orders are often understated.
A typical multi-echelon supply chain has material flowing from vendors to consumers through various nodes. In a typical forecast-driven supply chain, the material flow through various nodes is based on the monthly demand forecast.
However, in a replenishment supply chain, the quantities are more dynamic, where a downstream node ‘orders’ its requirements to the upstream node every day. The method of calculating this order quantity holds the key to improving responsiveness.
Many companies calculate order quantity as the difference between inventory norm and the actual stocks available at that node. This method ignores if any downstream orders are still pending for dispatch due to execution issues. For example, if a truck doesn’t show up, the stocks meant for downstream node remain with the supply node, affecting further orders from that node.
Instead of using physical stocks in the order calculation, we should use ‘free stocks available’ at the node, which means that stocks allocated for dispatch to downstream nodes should be reduced from physical stock.
The seemingly small change in the order calculation methodology has a huge impact on improving responsiveness.