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Trade-off between inventory and service levels can be broken.
We discussed in the last post how the trade-off between inventory and service levels is deep rooted in the mindset of supply chain teams. This trade-off can be broken. Many of you reverted with your ideas on how to do it.
The first idea related to sensing demand at the granular level on a continuous basis, factoring all the demand drivers. This leads to better estimation of demand in near future at the inventory nodes. The prediction errors go down and our estimate of maximum demand during RLT is sharper. It helps in reducing the inventory buffers.
The second idea pertains to the Replenishment Lead Time itself. It can be reduced through smaller replenishment lot sizes and increasing frequency of replenishment. Daily replenishment in CPG companies is quite common now. Quick Commerce has moved to multiple replenishments in a day. Order turnaround time at the dispatching location offers another leverage.
Supply reliability is another lever. Ensuring that upstream locations have full availability is key to this. Flexibility in backend operations and fast response are the two improvement areas. Smaller production batches, flexible schedule, lower MOQ with vendors and faster delivery offer significant advantages.
Supply Chain teams should work on these levers to improve service levels while reducing system inventory, thereby breaking the trade-off.