In my nearly 30 years of helping make supply chains more profitable, one of the toughest challenges has always been how to set stock levels for items with sporadic demand. And, of course, we must remember that the most sporadic of sporadic demand occurs at the retail site level.
Sporadic demand at the retail outlet has additional challenges accompanying it:
- Usually a relatively small stock on the shop floor for such items
- Frequently no back-stock on site
- No future demand visibility (sales are off-the-shelf, not ordered ahead for pick-up days later)
What is sporadic demand?
Sporadic demand goes by other names, as well. Sometimes known as intermittent demand, sporadic demand might be exemplified by an item that fits one of the following scenarios:
- Average Daily Utilization (ADU) is about 2 units; however, it sold only 41 times over the last year
- ADU is about 1.15 units, but variability is very high (perhaps selling large quantities one day, then not selling any for several days in succession); with a very short lead-time
In such cases, traditional methods for calculating stock levels and safety stock have never yielded good results in terms of ROI (return on investment) for the supply chains involved. Either customer service levels were high, but relative stock levels were so high that profits were consumed by the costs of carrying the required inventories; or customer service levels were quite low, and profits were low due to lost sales, lost customers, or expediting and excess shipping costs trying to satisfy the sporadic demand.
Demand driven supply chain thinkers to the rescue
The first method was developed by Demand Driven – Mexico and proposed for regular POS (point of sale) buffers (stocks) in a retail environment.
As shown in the accompanying figure, the parameters surrounding the SKU (stock-keeping unit) are as follows:
- Lead-time: 2 days
- DDMRP Lead-time factor applied: 50%
- DDMRP Variability factor applied: 250%
- Replenishment Cycle: 3 days
- Minimum Order Quantity (MoQ): 2 units
- Visibility: None (no spike level or spike horizon available)
- Average Daily Usage (ADU): 1.15 units
Using these factors and the DDMRP standard of creating three standard zones (RED, YELLOW and GREEN), the factors are applied in the following manner:
- RED ZONE: Maximum Pick Demand minus ADU minus (Green Zone divided by 2), where Maximum Pick Demand is the largest single daily demand quantity over the look-back period (say, one year)
- YELLOW ZONE: ADU times Lead-time
- GREEN ZONE: the maximum of
- Lead-time times ADU times Lead-time factor
- Replenishment Cycle times ADU
The results of these calculations (as shown in the figure above) are:
- RED ZONE = 9.1 units
- YELLOW ZONE = 2.3 units
- GREEN ZONE = 3.5 units
This results in an average on-hand quantity, calculated as RED ZONE plus (GREEN ZONE divided by 2) of about 8 units (or about 7 days’ on-hand). However, these calculations, when run against historical actuals produce 100 percent customer service levels.
One hundred percent customer service levels on such a small stocking level is quite amazing to me. It certainly demonstrates the value of such an innovative approach in calculating stocking levels on SKUs with sporadic demand.
In our next post, we will provide a second innovative method for calculating DDMRP buffer sizes for SKUs with sporadic demand.