Speed is everything

Nothing makes a company more efficient than short throughput times. The less our markets know where they want to go and the more stochastically demand fluctuates, the more important it is to be able to adapt quickly to developments. Nowhere is the importance of supply chain speed for a company’s success more evident than in the fast fashion sector. No sooner have the models left the catwalks of the fashion fairs than customers can find similarly styled fashion in the stores of the big chains.

The supply chains of most companies, on the other hand, are still like container freighters that take months to turn their course in the direction of changing demand volumes.

Let’s consider an item with an average demand of 1000 pieces and 200 pieces of safety stock per month to ensure 95% availability. Simply by switching a procurement from Asia with a delivery time of 60 working days, for example, to a supplier from Europe with a delivery time of 10 working days, the required statistical safety stock is reduced to 17%. The purchasing department will probably also stock up for a shorter period of time. Let’s say he will also stock up now for the replacement period, so the basic stock drops to one-sixth. In other words: the required average stock is reduced to a fifth in our example!

Let us further assume that we not only buy and resell an item as a commodity, but also assemble an end product from 15 purchased parts. Let us assume that this end product is to be offered with 95% availability from stock. This delivery readiness can only be ensured if all 15 individual components have a delivery readiness of 99.66%. The required safety stock for 99.66% is 1.65 times greater than that for 95%. This already makes it clear how important it is to be able to replenish stocks of an item with a short replenishment time when a high level of availability is required.

Is this discussion still too abstract for you? Would you like a numerical example? By reducing the delivery time from 60 to 10 days, the average stock of our individual item considered above would fall from 1846 units to 391 units.

If 99.48% readiness for delivery were required for our article because it is installed with nine other parts to form the end product, the average stock at 60 days would be 2070 units. With 10 components with corresponding requirement quantities and replenishment times, this makes a total stock of 20,700 units. If we were to reduce the delivery time for all 10 items to 10 working days, we would only need a stock of 4830 items.

Shall we calculate further and assume a 20% imputed inventory cost rate? In this case, the free delivery costs with a 10-day delivery time should be up to 24.5% more expensive than those with a 60-day delivery time, so that the inventory reduction effect pays off. This does not even take into account the economic advantage of greater flexibility, which is difficult to assess.

A study by PwC and BME (albeit from 2008!) calculated the average price advantages of items procured in China across all company sizes and product groups to be only 10% when all costs are taken into account; small companies still achieve an average cost advantage of 20% for various reasons. Some procurement from the Far East would probably no longer be economical when viewed from an overall cost perspective!

Unfortunately, the study also indicates that logistics cost controlling works poorly in many companies and we must take note of the fact that many products can no longer be procured at all in Europe. And so the supply chain continues to rely on large container freighters and thus behaves like them in terms of maneuverability.

Picture of Prof. Dr. Andreas Kemmner

Prof. Dr. Andreas Kemmner

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