Smart ordering – Going beyond smart inventory management

Optimizing your replenishment isn’t just about keeping the right items in stock. It’s also about perfecting your buying...

Optimizing your replenishment isn’t just about keeping the right items in stock. It’s also about perfecting your buying. While picking the right suppliers and negotiating the best deals have a central role in good procurement, great savings can also be made day-to-day, long after the suppliers have been chosen and terms agreed on.

One of the most critical elements in optimizing your buying is taking full advantage of freight-free deliveries or price discounts that suppliers offer to customers when ordering larger amounts at a time.

For example, moving goods in full truck loads makes both environmental and economic sense, since it wastes energy driving a big truck around that’s mostly full of air. That’s why logistics service providers and suppliers offer better terms when you order full truck loads, as it increases their operational efficiency. It makes sense, but what if the products you actually need to order today don’t fill a truck?

Well, then you order more.

When doing so manually, there is a great temptation to add a few extra pallets of your best selling items, since these won’t stay in stock very long and you would anyhow sooner or later need to order more of those, right? While this is correct, there is a danger you may end up neglecting your slow-movers.

What’s likely to happen then is that, over the following days, one of those slower moving items also reaches its re-order point, and that means placing another order at the same supplier you just sent an order to. So, you’re back at square one, asking yourself what additional items should you order to fill this second truck?

Optimize your orders – step by step

A much better way to approach this situation is to add items that have the lowest inventory levels measured in terms of forecasted supply days – taking into account those items and quantities that you already have in your current order. This means that you effectively ask yourself ‘what items would I be ordering next?’ and add those to today’s order. If this additional batch wasn’t enough to meet the order requirements, then you ask yourself the same question again – ‘what next?’, and again add that batch of items that is next in line. This is repeated until you have filled your truck.

This way you end up not only having a truck optimally filled with those items that will go out of stock first, but if your algorithm also takes into account the item value, you end up having the smallest possible inventory cost as well. And it gets even better – if you have checked every possible item, your next order with this supplier will be pushed as far into the future as possible, thus reducing the need to place another order with them any time soon.

Take advantage of automated replenishment

With good forecasts and a single ordering constraint it is essentially a trivial task. But doing this manually is a hassle for a replenishment planner, not to mention repetitive and deadly dull – which makes it the perfect task to be automated with your replenishment software.

When there are multiple conditions to be met at the same time, the complexity increases beyond the point of mere frustration for planners: The supplier conditions may encourage orders of a particular minimum value, while the freight forwarder provides discounts for full truck loads, and at the same time it makes sense to consolidate demand from several of your stock locations in order to meet those targets more easily. With proper maintenance of these conditions and rules, finding the optimal order quantities in this sort of situation is still a trivial task for software, however much less trivial than for a person with exactly the same information.

Good replenishment software can also identify situations where it makes more sense to order only what is actually needed: for example, where the warehousing costs of additional items may exceed the cost benefit of placing an expanded order. In those circumstances you don’t order more.

Reclaim your negotiation power

Not long after one of our customers had introduced this method of optimised ordering, they got a complaint from one of their suppliers: “How come all of a sudden you’re always placing mixed orders that only go a few cents over the agreed minimum order value? Our picking and packing overhead is now much greater than it used to be!”

What a great opportunity to use this when you sit down to negotiate your supply deal: “Listen guys, we are fully complying with your own conditions in our agreement. After all they were the conditions you chose. What would it then be worth for us, if we agree to revise those conditions?”

And hey, now that you’ve automated all those mind-numbing, time-consuming, order optimisation calculations, you’ve got way more time for those negotiations. And after all, isn’t that where you can really shine as a supply chain executive?

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