Despite significant technological advancements, supply chains still face long-standing challenges which have persisted for decades. Chronic issues such as excess inventory, obsolescence, lost sales, and subpar On-Time In-Full (OTIF) performance continue to undermine a company's profitability.  Many organisations recognise that these challenges largely stem from the uncertainty and variability of demand forecasting. Substantial time and resources have been invested to eliminate this uncertainty by improving prediction accuracy. However, despite so many efforts and technological advancements, most companies still need to achieve accurate forecasts and grapple with the same chronic issues stated above.  This leads us to question, "How can we effectively address these issues? Regardless of technological progress, are we destined to grapple with these challenges indefinitely?" The answer is no.  The key is accepting that variabilities in demand and supply are inherent and can not be eliminated or even predicted with accuracy but can be effectively managed by protecting the customer and supply chain with 'shock absorbers'. <h5>Shock Absorbers and Replenishment Time </h5>‘Shock Absorbers’ refer to buffers regarding stock levels for each SKU at any given node or point within the supply chain. These buffers are designed to safeguard the node from uncertainties, whether from variability in demand or fluctuations in supply or delivery of materials from production facilities. These buffers aim to ensure that the system maintains the appropriate inventory at the right location (node) and at the right time.  Buffers offer organisations several key advantages: <ul><li>They ensure that lead times for each SKU, from order placement to delivery, consistently fall within the customer's tolerance levels, thereby directly improving OTIF and service level metrics.</li><li>They enhance cost-effectiveness by reducing overall inventory levels across the system, maintaining optimal stock at each node, and minimizing transit costs associated with stock unavailability.</li><li>They boost profitability by facilitating higher inventory turnover.</li></ul> The next logical question is, "How are these buffers calculated?" The buffers at each node are determined by taking into account four key parameters:<ol><li>Level of Consumption</li><li>Variability in Consumption</li><li>Replenishment Time</li><li>Variability in Replenishment</li></ol> It is crucial to realise that Replenishment Lead Time (RLT) is the most critical parameter out of all these four factors as it impacts all other three. The more the Replenishment Lead Time, the higher the level of consumption and the more variability in demand and supply chain interruptions the system is exposed to.  The other way around, while demand is largely beyond a company's control, shorter supply lead times reduce the exposure of nodes to absolute demand, minimise demand variation, and lower the variability in supply time. Therefore, the shorter the lead time, the smaller the buffers required at each node. This ensured that inventory in the system remained in control.  How to manage buffers: Replenishment<ol><li>Decide buffers for each node and SKUs</li><li>The consumption of the buffer will fluctuate</li><li>Replenish the buffers to ensure availability</li></ol><figure class="image"><img style="aspect-ratio:904/276;" src="https://web-assets.vectorconsulting.in/storage/editor_uploads//image-1725275782_1776855899.png" width="904" height="276"></figure> The goal should be to prevent any node from falling below a predetermined threshold, beyond which the risk of experiencing a loss of sales increases significantly.<h5>Replenishment priority :</h5><h6>Stock buffers for different SKUs are divided into 5 distinct zones:</h6>1. Black: complete stockout; buffer is 100% penetrated/depleted2. Red: close to stockout; buffer is 67% penetrated/depleted3. Yellow: buffer is 33% penetrated/depleted4. Green: recently replenished; buffer is 0% penetrated/depleted5. White: stock level above the required buffer Based on the penetration levels of buffers for any SKU at a given node, the organisation can prioritise replenishment dispatches, ensuring that materials are dispatched appropriately without diverting to nodes where there is no immediate requirement. This approach allows the organisation to send the correct items to the suitable locations or nodes in the right quantities, thereby minimising the risk of sales loss at any node for a particular SKU. <h6>Once we have decided each SKU-node combination into different colour bands, prioritising is simple: use the sequence: Black – Red – Yellow – Green. </h6><h6> </h6><h6>Stop additional despatches to SKU – the white band node and prepare a liquidation plan as we have excess 'buffers' for this SKU – node combination. </h6> <h5>Dynamic Buffer Management (DBM)</h5>However, we know that actual consumption and penetration levels fluctuate over time, necessitating dynamic adjustments to buffers in response to changes in demand. Operating without these dynamic adjustments would result in the chronic issues mentioned in this article. This process is known as Dynamic Buffer Management (DBM), ensuring dynamic adjustment to buffer levels at each location. This leads us to the question: "How do we dynamically adjust the buffers?" Buffer levels are adjusted based on the SKUs' buffer penetration levels at any node over time:<ol><li>If it is in the red zone for more than 1 RLT period, increase the buffer level by 33%.</li><li>If it is in the green zone for more than 2 RLT periods, decrease the buffer level by 33%. </li></ol> Implementation steps<figure class="image"><img style="aspect-ratio:904/276;" src="https://web-assets.vectorconsulting.in/storage/editor_uploads//image-1725275910_1776855865.png" width="904" height="276"></figure><ol><li>Define inventory buffers at nodes: Set inventory buffer levels based on maximum consumption within the replenishment lead time, accounting for variability.</li><li>Reduce Replenishment Lead Time (RLT): Aim to reduce replenishment lead time to lower inventory buffer requirements.</li><li>Supply only what is consumed: Ensure that nodes receive only the quantities consumed and no more.</li><li>Prevent stockouts at warehouses: Implement a colour priority system (Black/Red/ Yellow/Green) to manage stock levels and prevent stockouts.</li><li>Order Daily Replenish Frequently (ODRF): Adopt a daily ordering and frequent replenishment strategy to maintain optimal inventory levels.</li><li>Dynamic buffer management: Ensure buffers are adjusted periodically to align with the changing patterns of supply and demand </li></ol> <h5>Summary</h5>In conclusion, avoid forecast-driven inventory creation and movement to optimize your supply chain. Instead, embrace end-to-end pull replenishment enabled by intelligent decoupling using dynamic buffers. This shift can lead to greater flexibility and enhanced responsiveness to customer needs while keeping the inventory optimum based on actual consumption.

Key Takeaways

Explore how dynamic buffers and pull replenishment strategies can effectively manage supply chain variabilities, enhancing profitability by reducing inventory costs and improving On-Time-In-Full (OTIF) performance.

Coping with supply chain issues using the Replenishment System (Pull over Push)

Despite significant technological advancements, supply chains still face long-standing challenges which have persisted for decades. Chronic issues such as excess inventory, obsolescence, lost sales, and subpar On-Time In-Full (OTIF) performance continue to undermine a company's profitability.  Many organisations recognise that these challenges largely stem from the uncertainty and variability of demand forecasting. Substantial time and resources have been invested to eliminate this uncertainty by improving prediction accuracy. However, despite so many efforts and technological advancements, most companies still need to achieve accurate forecasts and grapple with the same chronic issues stated above.  This leads us to question, "How can we effectively address these issues? Regardless of technological progress, are we destined to grapple with these challenges indefinitely?" The answer is no.  The key is accepting that variabilities in demand and supply are inherent and can not be eliminated or even predicted with accuracy but can be effectively managed by protecting the customer and supply chain with 'shock absorbers'. <h5>Shock Absorbers and Replenishment Time </h5>‘Shock Absorbers’ refer to buffers regarding stock levels for each SKU at any given node or point within the supply chain. These buffers are designed to safeguard the node from uncertainties, whether from variability in demand or fluctuations in supply or delivery of materials from production facilities. These buffers aim to ensure that the system maintains the appropriate inventory at the right location (node) and at the right time.  Buffers offer organisations several key advantages: <ul><li>They ensure that lead times for each SKU, from order placement to delivery, consistently fall within the customer's tolerance levels, thereby directly improving OTIF and service level metrics.</li><li>They enhance cost-effectiveness by reducing overall inventory levels across the system, maintaining optimal stock at each node, and minimizing transit costs associated with stock unavailability.</li><li>They boost profitability by facilitating higher inventory turnover.</li></ul> The next logical question is, "How are these buffers calculated?" The buffers at each node are determined by taking into account four key parameters:<ol><li>Level of Consumption</li><li>Variability in Consumption</li><li>Replenishment Time</li><li>Variability in Replenishment</li></ol> It is crucial to realise that Replenishment Lead Time (RLT) is the most critical parameter out of all these four factors as it impacts all other three. The more the Replenishment Lead Time, the higher the level of consumption and the more variability in demand and supply chain interruptions the system is exposed to.  The other way around, while demand is largely beyond a company's control, shorter supply lead times reduce the exposure of nodes to absolute demand, minimise demand variation, and lower the variability in supply time. Therefore, the shorter the lead time, the smaller the buffers required at each node. This ensured that inventory in the system remained in control.  How to manage buffers: Replenishment<ol><li>Decide buffers for each node and SKUs</li><li>The consumption of the buffer will fluctuate</li><li>Replenish the buffers to ensure availability</li></ol><figure class="image"><img style="aspect-ratio:904/276;" src="https://web-assets.vectorconsulting.in/storage/editor_uploads//image-1725275782_1776855909.png" width="904" height="276"></figure> The goal should be to prevent any node from falling below a predetermined threshold, beyond which the risk of experiencing a loss of sales increases significantly.<h5>Replenishment priority :</h5><h6>Stock buffers for different SKUs are divided into 5 distinct zones:</h6>1. Black: complete stockout; buffer is 100% penetrated/depleted2. Red: close to stockout; buffer is 67% penetrated/depleted3. Yellow: buffer is 33% penetrated/depleted4. Green: recently replenished; buffer is 0% penetrated/depleted5. White: stock level above the required buffer Based on the penetration levels of buffers for any SKU at a given node, the organisation can prioritise replenishment dispatches, ensuring that materials are dispatched appropriately without diverting to nodes where there is no immediate requirement. This approach allows the organisation to send the correct items to the suitable locations or nodes in the right quantities, thereby minimising the risk of sales loss at any node for a particular SKU. <h6>Once we have decided each SKU-node combination into different colour bands, prioritising is simple: use the sequence: Black – Red – Yellow – Green. </h6><h6> </h6><h6>Stop additional despatches to SKU – the white band node and prepare a liquidation plan as we have excess 'buffers' for this SKU – node combination. </h6> <h5>Dynamic Buffer Management (DBM)</h5>However, we know that actual consumption and penetration levels fluctuate over time, necessitating dynamic adjustments to buffers in response to changes in demand. Operating without these dynamic adjustments would result in the chronic issues mentioned in this article. This process is known as Dynamic Buffer Management (DBM), ensuring dynamic adjustment to buffer levels at each location. This leads us to the question: "How do we dynamically adjust the buffers?" Buffer levels are adjusted based on the SKUs' buffer penetration levels at any node over time:<ol><li>If it is in the red zone for more than 1 RLT period, increase the buffer level by 33%.</li><li>If it is in the green zone for more than 2 RLT periods, decrease the buffer level by 33%. </li></ol> Implementation steps<figure class="image"><img style="aspect-ratio:904/276;" src="https://web-assets.vectorconsulting.in/storage/editor_uploads//image-1725275910_1776855823.png" width="904" height="276"></figure><ol><li>Define inventory buffers at nodes: Set inventory buffer levels based on maximum consumption within the replenishment lead time, accounting for variability.</li><li>Reduce Replenishment Lead Time (RLT): Aim to reduce replenishment lead time to lower inventory buffer requirements.</li><li>Supply only what is consumed: Ensure that nodes receive only the quantities consumed and no more.</li><li>Prevent stockouts at warehouses: Implement a colour priority system (Black/Red/ Yellow/Green) to manage stock levels and prevent stockouts.</li><li>Order Daily Replenish Frequently (ODRF): Adopt a daily ordering and frequent replenishment strategy to maintain optimal inventory levels.</li><li>Dynamic buffer management: Ensure buffers are adjusted periodically to align with the changing patterns of supply and demand </li></ol> <h5>Summary</h5>In conclusion, avoid forecast-driven inventory creation and movement to optimize your supply chain. Instead, embrace end-to-end pull replenishment enabled by intelligent decoupling using dynamic buffers. This shift can lead to greater flexibility and enhanced responsiveness to customer needs while keeping the inventory optimum based on actual consumption.

Learn how the replenishment pull system can resolve supply chain challenges, enhance efficiency and reduce disruptions. Read the blog here.

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