Supply challenges have been giving companies a hard time in recent years, disruptions to the supply chains are now well known and occur on a global scale. A consequence of these challenges is a backorder. Backorders are one of the many consequences of the so-called “bullwhip effect” that occurs when demand is misperceived. The impacts are distributed throughout the supply chain like a pebble that creates concentric waves as it falls into a still lake. Backorders can be avoided (or at least minimized) with the help of various strategies suggested by expert Gaetan Gagnon, Supply Chain Director at Merkur.
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1- Communicate with the supplier
First, suppliers must be informed of the various factors that will affect product demand in the coming months (promotions, new products, sales forecasts, general plan, etc.). How can you expect suppliers to be able to meet demand if they are not aware of possible fluctuations? Good communication with suppliers will enable them to forecast future demand so that they can keep up with you.
2- Understanding sales forecasts
It is important to communicate sales forecasts to suppliers on an ongoing basis. Suppliers will want the most accurate forecast possible, but it must be flexible. Forecasts should consider special events in the company (promotions etc.). Forecasts are good indicators, but they are not the absolute truth. After all, it is about anticipating the future, and this will never be an exact science.
3- Implementing a warehouse management system (WMS)
The Warehouse Management System (WMS) is used to manage warehouse activities and to ensure inventory accuracy. Sometimes backorders are created due to a lack of visibility or accuracy of inventory quantities. The best way to have an overview of the inventory is to implement a WMS. However, the system is not infallible and stock quantities may be inaccurate despite the presence of the WMS, so it is important to complement this with a visual management system to carry out a double check, a practice that is very common in lean management.
4- Rationalise SKUs
Increasingly refined consumer tastes are leading to a growing demand for products with more and more options. This great variety subsequently leads to the creation of a large number of SKUs and indirectly overloads the inventory. Standardization of product models reduces the risk of backorders. By having fewer options for a single product, the customer is less likely to face a stockout. In the event that a particular model is out of stock, it is important to have a substitution policy in place to offer the customer an equivalent product.
5- Reorder Point
Reorder points should be changed according to the fluctuating consumption profile. We therefore recommend that reorder points are dynamically re-evaluated instead of the traditional annual review. Ideally, a quarterly review should be implemented. When demand is more stable, this re-evaluation can be done at a larger interval, but when demand is as changeable as it is at the moment, the reorder point must be modified manually according to demand.
Are you looking for concrete solutions to the current supply challenges? Contact our Merkur experts who can help you establish a procurement strategy based on your logistics challenges.