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What if you Supply Chain could achieve zero stockouts and zero obsolescence?
Supply Chain teams often grapple with designing an optimal level of stockouts and obsolescence. Their design options can improve one, only at the cost of the other metric. If they improve stockouts, obsolescence levels go up, and vice versa.
Why do they get into this dilemma?
The reason is the objective function they are trying to optimize, keeping everything else constant. The objective is often ‘Total cost of operations’, that too as measured by their books of accounts.
This approach is fundamentally flawed on many counts. Let me explain a couple of significant ones.
Cost capture in books of accounts is only partial. For example, the opportunity cost of reducing stockouts is often left out of calculations. The impact of improving ‘new triers’ and ‘repeat purchases’ through availability improvement is also ignored.
The assumption of keeping everything else constant also shuts many other opportunities. In fact, we must work on improving the fundamental supply chain capabilities of demand sensing, flexibility and responsiveness, instead of assuming that they have to stay at the current levels.
If we take the capability improvement route instead of conventional cost optimisation route, both the metrics of stockouts and obsolescence can be improved simultaneously, instead of struggling with the presumed trade-off.
Zero stockouts and zero obsolescence is then in sight through capability improvement.