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A long time ago, I started in this industry with a one-year contract to find and fix a problem with an inventory control application. It was exciting work for me as I got to learn at the feet of a very intelligent and experienced man named David Steele. We were using a forecasting model based on exponential smoothing, which was a statistical forecasting model. Robert G. Brown was the author of most of the inventory control theory in those days and was employed by IBM to assist them with their PIC and MAPICS products. Inventory control was, as far as the computer systems were concerned, complicated and heavily laced with mathematics. Contrast that to the Kardex systems that were being replaced. Quite a difference, and as you might have predicted, the computer systems were not well received.

Today, we have achieved some sort of balance between the theory of inventory management and the practical controls established by management. But we have remained stuck in a couple of ruts that I want to discuss.

For many of you the subject of a “Backorder Analysis” is alien. It isn’t complicated, and it is quite important to you. What are the causes of the back orders that you experience today? This analysis reveals interesting truths – like the significance on your service to your customers of the supply chain in which you work. Does your supplier have the part when you don’t? How much of a role does abnormal demand play in your service level? And the one that I want to focus on is: “The stock order was not placed promptly.”

This is a big catchall “reason” for the situation in which the part was not received within the established lead time. The lead time encompasses the time frame from which (1.) a part number reaches an on-hand in the bin to less than the order point, (2.) the part has a new stock order placed, and then (3.) the part is received back in the bin and the computer on-hand status is updated. It covers several discrete events, or activities, each of which must be known.

The discrete time events are:

• Order Process Lag Time
• Order Review Time
• Placing the Order
• Supplier Processing Time
• Shipping/Transportation Time
• Physical Receiving Time
• Record Updating
  

The lead time is embedded in the inventory control module in most Dealer Management Systems (DMS) in use today. It is either calculated by the parts management or influenced by the DMS supplier. I would ask here: How often is it reviewed? For most of you, it has not been changed in many years. True?

This item should be calculated at least four times a year. But how about we challenge the conventional thinking here? Why do we only have one lead time for a vendor? Do all parts arrive at the same time? Of course not! Here is the question: Why don’t we calculate the lead time for each part number? Doesn’t that provide a more accurate reflection of the supply chain efficiency? I submit to you it is because we are stuck in conventional thinking. Perhaps your DMS does not allow a lead time for each part number. That is no excuse. The DMS providers respond to what the dealers want. Have you asked for this type of change? I didn’t think so.

One of the causes of back orders is that the parts are not ordered in a timely manner. This means that the supply chain did not deliver the part in the lead time established for the vendor. Most parts will have periods of shortage. Shouldn’t you adapt your system to the reality of your supply chain and have the system calculate the lead time for each part and recalculate it for each part each time you receive a stock order? I believe this will be one of the most significant changes relative to your capital inventories since the advent of the computer system in assisting in the management of a dealership.

Imagine having an order point for each part based on the delivery cycles for each part. Doesn’t that solve one of the greatest challenges of customer service?

So we would have an order point for each part based on the lead time for each specific part and have the ‘safety stock factor’ apply to each part in this new approach. I am confident that if you think this through you will wonder how we missed such a simple thing for so long. Like most things in life, it is the simple things that we overlook.