Written by Bev Chretien. Edited by Judi Zietsman
Importing purchase order history into the App enables us to:
Calculate the time that lapsed between the date that a purchase order was created in the ERP, and the date that a receipt was generated for that Inventory.
This is normally referred to as the ‘Lead time’ in the App or an indication of how long stock takes to arrive from the supplier once an order is placed.Analyse the variability of this Lead time, or how much risk there is around this Lead time, and how reliable the supplier is at achieving this lead time.
This is a measurement of Supplier reliability or the Supplier risk, and indicates the need for safety stock, so it is important that this is measured.
The App can calculate this lead time, if you don't have it stored in your ERP system, and can measure how often that Lead time is the same, or how often your supplier deviates from that lead time.
Please refer to the article: Correcting imported data - purchase order history for an explanation of the exclusions made to the data set received before it is imported into the App and to article: Available options for setting lead time for an explanation on options to set the item lead time.
So what is the difference between the Supplier Risk, and the Supplier Offset?
The App takes into account 3 measurements on the inbound side of the supply chain when planning how much safety stock to keep.
1. The first and most straightforward one is the length of the Lead time.
Once the length of the lead time is known (either stated by item, stated by supplier or calculated using the history), the App can use the lead time as one of the inputs into the safety stock calculation.
- If the lead time is short, and you can respond quickly, then less safety stock is required.
- If the lead time is long, and your response time slow, then you probably need more safety stock.
2. The second thing the App considers is the risk of the supplier delivering late or short-supplying.
If the supplier delivers late or delivers less than the quantity ordered, you run the risk of stocking out, which the App aims to protect you from doing.
Therefore, the App measures the spread of late deliveries and short supplies, and assigns the correct amount of safety stock to ensure that if a future delivery is late or short-supplied, you will still have enough stock to achieve your desired service level.
Remember: Risk is used to calculate the "initial" amount of safety stock required to prevent a stockout, and now we know that based on how long the lead time is, and how much risk there is of the supplier being late or short-supplying. To calculate the "final" amount of safety stock required, we have to consider the last measurement: Offset days.
3. Where the Risk calculation only considers late or under deliveries, both late and early deliveries are taken into account in the offset calculation, as are over and under deliveries. We refer to this as the bias and use this to calculate a negative or positive offset in the number of days safety stock allocated to an item.
Considering the historical purchase order data, the App calculates the average actual lead time achieved by the supplier and compares that to the planning lead time. It then makes a positive or negative adjustment to the number of days safety stock, depending on if the actual was longer than or shorter than the planning lead time.
- If your supplier tends to deliver late, you require more safety stock to mitigate the risk of stock-outs and thus a positive days offset.
- If your supplier tends to deliver early, you require less safety stock to mitigate the risk of excess and thus a negative days offset.
The historical purchase order data contains the original quantity that was ordered and the quantity received. This is used to track how often the supplier short supplied, over supplied, or supplied what you actually ordered.
- If your supplier tends to under supply, you require more safety stock to mitigate the risk of stock-outs and thus a positive days offset.
- If your supplier tends to oversupply, you require less safety stock to mitigate the risk of excess and thus a negative days offset.
As you can see, despite using the Planning lead time to plan against, and tell you WHEN to raise your purchase orders, the App has now adjusted your level of safety stock based on the analysis done on the historical data that we have imported.
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