In an earlier article, we began discussing how to manage stock quantities using “buffers.” These buffers are merely a single quantity of stock at a location or SKUL (SKU-Location combination) designed to cover demand and buffer against variability in both supply and demand.
We unified these “buffer” quantities, if you recall, rather than artificially separating and calculating separately the values for “safety stock” and ordinary or “working stock.”
Recall also that we said that replenishment priorities could be managed by correlating priorities directly with “buffer penetration”—the measure of what percent of the buffer has been consumed at any given time.
In this article, we will describe an “inherent simplicity” approach to dynamically managing buffer sizes as your business changes over time.
In our earlier article, we also described how top one-third of the buffer is described as GREEN portion; the middle one-third of the buffer is referred to as the YELLOW zone, and the bottom one-third is the RED zone. (For further details, see the prior article.)
How to manage the buffer dynamically
Once initial buffer quantities have been established, managing them dynamically may be done with equal simplicity.
NOTE: This is not to imply utter simplicity. The simplicity and effectiveness of buffer management—just like the rest of the supply chain—is dependent upon many factors, including the level of supply chain collaboration, the availability of data on actual demand across the entire supply chain, and the efforts made to minimize sudden demand changes (SDCs) wherever possible.
In order dynamically manage buffer sizes, the first step is simply to record the status of each buffer just prior to each replenishment (or at each replenishment cycle). Once the recording of the buffer status for each SKUL is begun, the following simple actions should be taken in order to dynamically manage buffer sizes:
- TOO MUCH GREEN – IF the buffer is found in the GREEN ZONE at three consecutive replenishment cycles, the size of the buffer should be REDUCED by one-third.
- TOO MUCH RED – IF the buffer is found in the RED ZONE at two consecutive replenishment cycles, the size of the buffer should be INCREASED by one-third.
These two simple rules cover the bulk of what needs to be done. There are some other factors to consider, however. These additional factors are the interventions necessary to manage SDCs (Sudden Demand Changes).
Managing buffers for Sudden Demand Changes
SDCs are introduced into the supply chain from several sources. Some of them are beyond the span of control of the supply chain managers involved. Primary amongst such causes are:
- Seasonality (foreseeable) – One cannot expect demand for snow shovel in the summer months to be the same as the demand during the fall and winter months, for example
- Unforeseen circumstances – Example: when severe weather hits a region, demand for certain commodities is likely to surge well beyond local, or even regional, supplies
When foreseeable, SDCs need to be managed by manually increasing buffer sizes in advance of the expected demand change. When this is done, the automatic process of dynamically managing the buffer size for those SKULs must be suspended until demand stabilizes at the higher level.
Then, as the foreseeable end of the demand increase approaches, the buffer should manually be reduced back to normal levels. When this is done, the processes involved in dynamic buffer management (DBM) must be suspended once again. The suspension of DBM should be held until the buffer is allowed to fall from above (i.e., the quantity on-hand is greater than the new down-sized buffer) into the buffer’s GREEN ZONE for each SKUL involved.
When we speak of “suspending DBM actions,” we mean that, while DBM is suspended, no buffer statuses for the SKULs involved are being recorded (e.g., REDs or GREENs) and no automatic changes to buffer sizes are being made.
Avoiding controllable SDCs
Whether you choose to employ Dynamic Buffer Management or not, your supply chain will be more stable and trouble-free if you take steps to dramatically reduce or eliminate controllable SDCs. Controllable SDCs are those demand fluctuations introduced by:
- PRICING POLICIES that lead to end-of-period “sales” and “promotions”
- SALES INCENTIVES that lead salespeople to increase their sales closing rates during specific periods (like, end-of-quarter, end-of-year)
- PROMOTIONAL PRICING leading to short-term spikes in sales (rather than “everyday low price” approaches)
We are interested in hear your feedback or questions regarding these concepts. Please feel free to leave your comments here, or contact us directly.