Supply chains are becoming progressively more complex as businesses rely on a large network of manufacturers, wholesalers, retailers and a growing portfolio of inventory stock varieties to meet consumer demand for more choice.
Stocking goods in the right quantities to meet demand maximises inventory turnover rates and will ensure that goods move quickly into and out of the warehouse. Cashflow improves as a result of steady inventory turnover and helps to prevent incidences of excess and obsolete stock.
Product replenishment, therefore, is crucial to optimising inventory turnover by ensuring stock availability while also avoiding over-ordering and holding too much inventory stock.
While many inventory control issues can be attributed to inadequate forecasting or the failure to account for volatility of supply and demand, other challenges in maintaining optimum stock levels may be the result of underperforming suppliers.
That being the case, what is it you need to know to manage underperforming suppliers?
How to identify underperforming suppliers
The impact of underperforming suppliers through failure to meet delivery schedules or quality standards can result in production delays, inventory stockouts and customer dissatisfaction.
Perhaps you have a supplier regularly placing items on backorder, late with deliveries or unwilling to collaborate and share an integrate action plan for performance improvement. By reviewing a supplier’s performance against service agreements, you can identify any problem areas and have a candid conversation to determine where the issues lie.
A high performing supplier will be transparent, committed to consistency of product quality and to the agreed terms of product delivery.
Communication between the buyer and supplier should be straight forward and effective to ensure that any issues are dealt with quickly.
Where a supplier fails to meet expected standards, companies need to have a process in place to quickly remedy the issue. The better and faster this is communicated, the quicker the problem can be solved.
Understand what the problem is
Investigate the cause of inventory control issues to determine if they are the result of an underperforming supplier or due to problems within your own inventory control practices.
If, for example, the supplier is thought to be late with deliveries, it is important to first ensure that this is not the result of poor internal processes. Is your organisation placing orders in a timely manner that takes into consideration the suppliers lead time? Is there any ambiguity or confusion around product delivery dates or are there delays in entering received orders into the system?
Do you have set service levels and agreed stocking policies, such as minimum order quantities and safety stock levels, to reduce on-hand inventory but still ensure availability and when replenishing stock, does the supplier have enough knowledge of the expectations of the organisation?
Whatever the problem is it is important to find out what’s driving it to then understand what solutions need to be put in place to prevent a repeat occurrence. Monitoring your service levels as a KPI for inventory control ensures that every order can be filled completely and inventory stockouts are prevented.
Managing underperforming suppliers
There can be two sides to supplier performance issues. The first may be the result of supplier underperformance by failing to meet defined standards. In this instance, management from both organisations must work together to determine actions to remedy the problem.
Alternately, if the goal of the company is to grow its business, expand its output and increase revenue, the supplier may need to improve its output to meet the buyer organisations requirements. This may require clear incentives for the supplier if you are looking to maximise innovation.
In either case, the performance expectation must be clearly explained to the supplier and they must have a clear reason to support the changes. If the vendor is unable to make improvements or to meet the new requirements, there is potential that their business will be negatively impacted, either through reduced sales or even lose the account entirely.
The key to supplier performance is to undertake regular reviews and to introduce action plans where appropriate. Review supplier performance against service level agreements and give the supplier a few months to demonstrate sustained improvement.
When you have determined the necessary areas for supplier improvement, you need to identify the right KPIs to measure and monitor success. The types of KPIs that can be used here may be increased production output with stated percentages or a reduction in the measured quantity of rejected components.
Both the buyer and the business stakeholders must have visibility of all the relevant data-points to monitor and measure performance. Where any discrepancies do occur, evidence-based discussions can be undertaken with the supplier.
Inventory control isn’t simply about the products on your shelves and inventory turnover rates, it also involves maintaining mutually beneficial relationships throughout the supply chain because good supplier relationships have many benefits.
Article by Melanie Chan in collaboration with our team of Unleashed Software inventory and business specialists. Melanie has been writing about inventory management for the past three years. When not writing about inventory management, you can find her eating her way through Auckland.