Jun
2
Managing the supply chain is not an easy process. There are all kinds of inherent risks to ensuring that the supply chain flows and is not interrupted. So keeping a L:ean supply chain, where stock levels are kept very low, can often be seen as a real challenge.
But there is a way of determining safety stock levels with relative ease and that is by using service levels to make this determination! All you need to do is to quantify what levels of service you want to offer your customers and then ensure, through analysis, that you retain enough stock to achieve this level of service.
Safety Stock
Safety stock can sometimes be referred to as ‘buffer’ stock, simply because it is the extra stock that will be kept to act as a buffer against a stock out occurring. If a company retains an extra level of stock then it can meet changes in demand without too many problems. It is in a sense an insurance policy that offers protection from a customer suddenly increasing demand and the supplier having no stock to supply.
The level of safety stock is difficult to accurately predict. The whole thinking behind Lean is to ensure that stock levels are kept low and that there is no waste incurred through keeping too much stock. But if the supplier is meeting the needs of a customer who has a new product that theya re manufacturing, how can anyone know how much stock to keep as safety stock? Well that is where service levels can come into play.
Service Levels
A service level is a tool that is used within stock management systems and supply chain management to assess the performance of the supply chain and stock systems. The service level is used to express the chances of certain levels of safety stock not leading to a stock-out. So when the safety stock is kept quite high, then the chances of a stock-out will be low. Conversely when there is a very low level of safety stock, then the risk of the stock out is high.
So the company needs to decide what is an acceptable service level; it would be foolhardy to set a service level of 100%, since this is too high, but within certain industries, the service level is set at 95%, allowing the opportunity for a stock out, but keeping the risk of this low.
Sometimes setting the customer service level can be an uncomfortable experience, similar to being between a rock and a very hard place. If you do set the customer service level at 95% you are effectively saying that for 5% of the time, the customer’s needs may not be met.
Conversely if you strive for 100% then you will find that there is stock sitting in a warehouse, needing to be managed, controlled, kept secure etc and sometimes it is never used at all; so you lose out as the stock deteriorates, but the customer is kept very happy!
Fixed Time Safety Stock
Historically most businesses have used methods relating to fixed time schedules to ascertain how much safety stock they should keep. So they may retain 4 weeks of safety stock at any given point. When the stock levels get below 4 weeks, stock is replenished. However, this approach is not related in any way to service levels and as a result cannot be as flexible as using service levels to determine safety stock. In addition there is a real danger of stockpiling stock using this method, which in itself can increase costs.
Jun
2
Why evaluate supplier performance?
Filed Under Blog | 3 Comments
Given the number of tasks that any business has to undertake, simply to survive, it can be tempting to take short cuts and cut down on the number of issues that have to be dealt with. In fact some businesses are tempted to either not evaluate their suppliers or are tempted to cut down on the follow up activity when performance is known.
Managing supplier risks
Perhaps the most single compelling reason for evaluating your suppliers is because to do so helps to manage your risks. Like it or not, the majority of businesses are dependent on the continuous and smooth flow of supplies and if this flow is interrupted, problems will soon appear.
Suppliers all face risks, with environmental problems, defects or lack of materials, lack of cash flow etc all threats to the flow of supplies. It is impossible to reduce the risks to zero, but through continuously evaluating the performance of the supplier you can take sufficient action to keep the risks at bay.
The evaluation process gives you dialogue with the suppliers, to that you can be aware of the potential risks and then manage them. If you do not evaluate, it is probable that you will only know the full extent of risks after a major problem has occurred!
Fewer Defects
Increasingly customers who do evaluate their suppliers indicate that the process leads to fewer defects within the supply chain. This is due to the fact that the increased communication with the customer helps the supplier understand exactly what the customer needs and what does and does not work in practice, so that processes can be improved to reduce the potential for defects.
Better Co-ordination
Although managing risks is important, there are more positive benefits to be had from supplier evaluation. One of these is that evaluations help bring about better co-ordination between the supplier and the customer. Thus the customer is able to give the supplier an indication of when extra supplies may be required, well in advance and the supplier can learn just how the customer operates and any issues that may not be serious, but could be eliminated to improve efficiency.
This co-ordination also leads to the supplier being better placed to meet the business objectives of its customer.
So instead of working separately, the evaluation process enables suppliers and customers to work together and in tandem.
The supplier and the customer will also learn how to align and then integrate practices, processes and procedures to enable joint working to be even more consolidated. Thus it is an important tool to assist in creating a joint working relationship.
Evaluations As Incentives
Although the days of the supplier being very much dominated by the customer have long gone, the evaluations can act as an incentive for the supplier to implement new procedures or tasks that they can then present at the evaluation, It is not a stick to beat the supplier with, more a way of galvanising the supplier into action, keeping it constantly focussed on the need to ensure that its data and information are all current and updated and so on.
Improved Paperwork
Supplier evaluations also seem to iron out any problems with the administration involved, such as invoices or delivery notes etc. This reduces the cost of administering the supply of goods and therefore makes it more efficient.
Retaining The Competitive Edge
Evaluating suppliers’ performance can therefore be a very useful tool that leads to a better working relationship, fewer defects and problems with regard to the supply chain, as well as overall efficiency savings and cost reductions.