Since the economic downturn of 2008, companies determined to remain sustainable have had to embrace a number of innovative strategies to maintain profit margins. Cargo Carriers Divisional Director IT & Supply Chain, Dawid Janse van Rensburg, believes that supply-chain management is an area that ought to receive more attention, because efficient control of stock to avoid both overstocking and stock-outs makes an immediate difference to both the balance sheet and the income statement.
Since the economic downturn of 2008, companies determined to remain sustainable have had to embrace a number of innovative strategies to maintain profit margins. Cargo Carriers Divisional Director IT & Supply Chain, Dawid Janse van Rensburg, believes that supply-chain management is an area that ought to receive more attention, because efficient control of stock to avoid both overstocking and stock-outs makes an immediate difference to both the balance sheet and the income statement.
He has good evidence to back up this belief. Over the past few years, Cargo Carriers has run pilot simulations using the Symphony software system on several companies, in sectors as diverse as minerals, retail clothing, food container manufacturing, hardware, and wine distribution. In all cases, the simulations show that dynamic buffer management of the inventory in supply chains improves profitability – sometimes in ways the client has not even considered.
“We pick a sample selection of their product lines. We then need the stocking and sales data for those lines going back a full year,” says Dawid. “Then we input all that data and run the simulation for a period of one year, tracking the performance of the simulation against actual results achieved by the company running its supply chain as usual.
We recently worked with a large wine distributor, and before we started, their main worry was stock-outs on popular lines; they weren’t really concerned about overstocking. But remember, this is a cash-to-cash business; they only get their money when they sell the wine.
“So having stock in the warehouse that isn’t moving is simply taking up space without making any return. In the meantime, another line is experiencing high demand, but you don’t have enough space to store it – do you hire more warehouse space? It’s much more cost-effective to make sure your warehouse isn’t full of stock you don’t want or need. Apart from anything else, it frees up working capital that would otherwise be locked up in unsold stock.
How the item has been managed over a 12 month period. Note that the inventory levels vary dramatically,
resulting in overstocking at times, but more importantly, in out-of-stocks during other times
This shows how the same product, with the same demand pattern, will be managed if the TOC approach of demand-driven replenishment is used. This graph has been generated by the Symphony simulator. The benefits are very visible: no more excessive overstocking at times, and more importantly, never any stock-outs!
In the wine distributor’s case, they were quite surprised to see that they were losing a lot more sales to stock-outs than they had though
The results of the pilot simulations speak for themselves – in the case of the food-container manufacturer, the stock-out days in the simulation were 84% lower than the company’s actual results using its current system. Across the board, the simulations resulted in lower levels of inventory – a saving on warehousing costs and a boost to working capital – but still showed increased turnover and a reduction in stock-outs.
It’s clear that dynamic buffer management of supply chains is one of the simplest but most effective ways to increase profit margins.
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