Written by Ruvisha Pillay. Contributors Mark Whiteacre and Daniel Gilmore.

Careful consideration of our marketing objectives, finances, logistics and warehouse capacity, among other things, goes into the planning and buying of stock to achieve common goals. No matter how proactive and precise one might be, there are always external factors that influence the smooth running of the supply chain. For that reason, risk management becomes important for our business. This article aims to help you understand what is meant by Supply risk within the App, how it is calculated and how the App assists to minimize the risk to reduce negative impact (such as stock out or overstocks) on your business.

Supply risk is a measure of supplier stability based on the supplier’s delivery performance in both lead time and order fill. It is the risk calculated due to a supplier delivering early or late, based on historic deliveries.

The Supply risk information can be found in the Safety stock panel, on the Inquiry screen of the App. Shown below, is the Safety stock panel of an individual item. In this image, we see that the item has a Supply risk percentage of 51.6% with a 30 day

Supply risk offset.

Risk percentage refers to the variability of supplier deliveries. Risk offset indicates the additional days that need to be added to or subtracted from the calculated Safety stock days.

To determine how risky a supplier is considered to be, we need to look at the performance of the supplier. Do they deliver on time and in full? Or do they frequently deliver late and in short supply? We can get this information from historical data. Let’s first head over to the Supplier performance tab.

On the left side of the image below, under the heading Lead Time performance, we see that the supplier has varying lead times. They have delivered early (depicted by the blue bars) and late (depicted by the olive bars). In this case, there are no green bars, which means no deliveries were made within the exact planning lead time of 14 days. There is a bias toward late deliveries. This bias has led to the calculated lead time of 56 days.

On the right side of the image below, under the heading Supply performance, we see that the orders have generally been delivered in full (depicted by the green bars), with some orders being short-delivered. There is a bias toward deliveries being made in full, however, the overall data points for this supplier can still be seen as erratic. The App offsets this inconsistency to mitigate risk by adding days to the Safety stock figure. Supply bias can work the opposite way as well. If a supplier consistently delivers early, days will be removed from the Safety stock figure.

Clicking on the table button in the Supplier performance tab offers information regarding the historical purchase orders that have been used in determining the Supply risk.

Some exclusions:

In this example, the orders that are grayed out were not included in the calculation. This is because their measured lead times of 9, 1 and 100 days respectively are considered outliers to the calculated lead time of 56 days.

The below image refers to the configuration that impacts the Supplier Risk calculation. This can be found under Settings (on the left pane of your App) → Configuration → Supplier tab. Below is a brief description of the use of each element on the panels.

Default risk: When the Supply risk for an item cannot be determined, it will receive this default risk percentage. This value influences Safety Stock, so increasing it, will increase Safety Stock for those items. In this case, the default risk % is 10%.

Default offset: When the Supply risk for an item cannot be determined, it will receive these offset days. This value influences Safety Stock, so increasing it, will increase Safety Stock for those items. Making it negative will decrease Safety Stock for those items. In this case, the default offset days is 0 days.

Minimum: The minimum amount of risk that will be assigned to an item. This ensures that all items get some Safety Stock, even if it seems like they have no Supply risk. In this case, the minimum is 10%.

Maximum: The maximum amount of risk that will be assigned to an item. This ensures that all items have their Safety Stock capped, even if they have a lot of Supply risk. In this case, the maximum is 80%.

Minimum offset: This minimum amount of offset days that will be assigned to an item. This ensures that all items have their minimum offset to their stated Lead Time capped, even if the Calculated Lead Time is much lower. In this case, the minimum offset is -30 days.

Maximum offset: This maximum amount of offset days that will be assigned to an item. This ensures that all items have their maximum offset to their stated Lead Time capped, even if the Calculated Lead Time is much higher. In this case, the maximum offset is 30 days.

Lead time cut-off (deviation): This setting specifies by how many standard deviations a purchase order lead time may deviate from the average in order to be excluded from the Supply Risk Calculation. In this case, the lead time cut-off is 3 standard deviations. Further early or late deliveries may be reduced from the calculation if this number is reduced.

Lead time cut-off (%): This setting specifies by what percentage a purchase order lead time may deviate from the average in order to be excluded from the Lead Time Calculation. In this case, the lead time cut-off is 75%. Further early or late deliveries may be reduced from the calculation if this percentage is reduced. The two cut-off parameters are used in combination i.e. both thresholds (standard deviation and percentage) must be breached for a delivery to be excluded.

Under the configuration settings, you may also change the fields in the Calculation section. This allows you to exclude historical purchase orders that were received a specified amount of months ago. In this example, any purchase order received further than 36 months ago would not be included in the lead time and safety stock calculation. You may also exclude orders with a measured lead time greater than a specified amount from the calculation. In this case, any orders that have a measured lead time that is greater than 365 days would not be considered. Similar to the lead time cut-off risk limits, as you decrease this number, the more limited the data being included in the calculation. This may be useful if you would like to use the most recent purchase orders which are a more accurate reflection of the supplier’s performance. In that case, you may want to decrease the field from 36 months to 24 or 12 months.

The below factors are used in the calculation of Supply risk:

In summary, supplier performance in terms of delivery lead times and order fill, as well as the parameters set up in your configuration settings, influence the Supply risk value you see on your Inquiry screen. If the Supply risk value seems too high, you can 1) have a discussion with your supplier around their measured performance and 2) check the data integrity i.e. is the lead time in the system correct as per the agreement between your business and the supplier? If not, you can change the lead time at the source. If the lead time is correct, action should be taken to encourage the supplier to deliver against the agreed upon lead time. That way, the Supply risk value can decrease, which in turn will reduce the level of safety stock you are required to keep. The other option available is to limit the risk % and offset days in your configuration settings. This solution may help, but getting to the root cause of the high Supply risk will go a long way in achieving your inventory management goals.