Supply Chain View

This is a question that arises with frightening regularity. Although we generally want both availability and stock turn to continue improving over the long term (and there are various methods of achieving that), nonetheless there are some theoretical limits to those numbers, together with a requirement to decide the availability target for right now.

Let’s start with a definition. The availability from a stocking point (warehouse) is the percentage of customer order lines demanded that are supplied first time from stock during the measurement period. Important points to note are:

• we measure against demand, not sales: sales can be effected by stock availability
• we measure customer order lines, not sales value or items demanded: this is a more representative measure of the customer experience

End customers, or just another link in the chain?

The first question is whether the warehouse is serving end customers or other stocking points within the supply chain. If it is the latter, then setting availability targets is a matter of finding the optimum balance of stock between the two tiers of the supply chain. It is a subtle point, but this might result in the supplying warehouse delivering a lower level of availability than the customer-facing warehouse. This is a typical DRP strategy problem.

If the stocking point is feeding another process (for example a spares store feeding a repair shop), then it may be possible to derive an optimum availability by analysing the costs of a failure to supply (a classic Six Sigma cost-of-poor-quality approach).

If the warehouse serves end customers directly, then we really need to know what the customers want and expect. A good way to do this is to ask them. It’s not too hard to design a survey and get a market research firm to contact your customers on your behalf. The problem lies in interpreting the results and making the judgement about what the market wants in aggregate. Not all customers will want the same thing, and their views on availability may vary over the product range.

The voice of experience

A rather neat alternative was suggested by an experienced Marketing Director. He said: “all I know is that if availability drops below 92%, the phone rings off the hook with complaints – when it’s above 92% the phone is quiet”. This kind of judgement, when trustworthy, has a lot of value.

The other ingredient in the mix is cost: how much will it cost to achieve the availability levels the market desires? In general, this will be the cost of carrying stock to meet this availability level. This may – with the existing supply chain – be more than the enterprise can afford. In which case we need to think about leaving customers dissatisfied, or engage with reconfiguring the supply chain to support the desired availability at lower cost (by, for example, working with suppliers to shorten lead times).

Special ranges

Another point to remember is that there may be certain categories of product that require higher levels of availability than others. Sometimes this is because of contractual arrangements with large customers, sometimes because of marketing considerations (range credibility), sometimes because of the high costs of non-availability.

In retail environments, margin is also an important consideration. The margin effects of a lost sale due to non-availability will tend to suggest higher availability targets should be set for high margin products. But low margin products also contribute to the customer experience – the customer generally has no appreciation of margin. The real costs of customer retention associated with non-availability of low-margin products shouldn’t be underestimated.