Fact: There is a direct relationship between reducing safety stocks and reducing variability in the supply chain.
One of the most lucrative ways to free up working capital and improve operating cash flow is reducing inventory safety stocks. Safety stock levels are often treated as a sacred cow, and don’t get touched for fear of stock-outs. The real issue is that the level of safety stock carried may be more than necessary and may therefore represent an opportunity to free up working capital through improved processes and tactical changes. As transportation managers, is it possible to find ways to reduce safety stocks by reducing variability in the supply chain?
Five Problem Areas
Here is a list of five areas that you might look into to reduce delivery variability.
Each of these problem areas is discussed below in a problem/solution format. As you read this series, consider how you might be able to reduce variability in the supply chain and thereby facilitate a reduction in safety stocks.
Who develops or specifies the inbound carrier selection criteria for your company? Purchasing? Transportation? Warehousing? Trust me, it could be any of those functions, depending upon the generally accepted practices within your industry segment and/or the management philosophy within your own organization. Sales-driven management? Then Purchasing probably specifies the criteria. Operations-driven management? Then Transportation or Operations probably specifies the criteria. Small company? Criteria specification probably defaults to Warehouse.
The point here is that none of these functions really has a handle on inventory safety stocking levels. If a company’s carrier-selection criteria do not include a specific criterion aimed at minimizing or eliminating safety stock(s), then the company is unnecessarily tying up working capital and restricting operating cash flow.
1. Purchasing contracts typically default to inbound freight terms that are “prepaid,” or even worse, “prepay and add.” The Vendor selects and controls the inbound delivery carrier. You are stuck with a) the carrier’s delivery schedule to your geographic location; b) the carrier’s standard transit time; c) the loss of flexibility to take time out of your inbound delivery schedule.
2. Transportation contracts inbound carrier(s) with “prepaid” freight terms. The Buyer now controls carrier selection and delivery scheduling to the DC. However, rather than focusing on ways to help reduce or eliminate safety stock(s), the emphasis is on reducing transportation freight expense. The problem with this approach is that it does not weigh the potential cost savings of reduced inventory safety stock(s) against the potential cost savings of reduced freight expense.
Solution: Use cross-functional team collaboration to develop carrier selection criteria to facilitate the elimination of safety stock.
Create a cross-functional team with a mission to reduce or eliminate excess safety stock levels by developing and specifying Vendor and inbound carrier selection criteria. Change carriers? Use expedited service? Change modes? Find a more reliable carrier? Change network models? Change your inbound strategy? In most instances, the savings to be had as a result of reduced safety stock inventory will far outweigh the cost of using more expensive transportation.
Example 1: Same mode, same origin/destination, but different carriers and different standard transit times
The Vendor’s shipping origin is Miami. The Buyer’s DC ship-to location is Vineland, New Jersey. The Vendor’s freight terms are “prepaid,” so they control the selection and performance of the inbound carrier. Typical inbound orders to the DC are LTL. The current LTL carrier standard transit time from Miami to Vineland is a three day lane.
Upon investigation, you discover a number of LTL carriers that offer a standard transit time of two days in this same origin-destination lane. You then perform an informal rate-quote investigation and discover that the LTL rate for this lane is about the same regardless of whether freight terms are “prepaid” or “collect.” You ask yourself, why the one-day difference in the “standard” transit time for these two LTL carriers?
Example 2: Different modes, same origin/destination, different standard transit times
Same scenario as above, but the Vendor ships based on the order size of the load. One Vendor ships “prepaid” LTL — three day standard transit time; the other vendor ships TL — two day standard transit time. Again you ask yourself why there is a one day extra standard transit time for LTL shipments vs. two day transit time for TL.
Solution: The real solution here is the Buyer’s ability to select and control the inbound carrier.
This provides visibility of the inbound shipment upstream in the supply chain, and thereby greater control over the variability on the inbound supply chain. Additionally, by conducting your own investigation of alternatives, you can identify ways to optimize the standard transit time (here standardized on a two-day inbound lane) by learning that the three day transit time LTL carrier’s network model is a hub-and-spoke network in which shipments between regions are all routed to a regional hub terminal for sortation before they are put on a pedal-run delivery truck, typically for delivery the next business day. This is opposed to LTL carrier #2, which does direct point-to-point moves, thereby reducing the standard transit time by one day. Depending on the priority of the inbound shipment, the use of expedited or guaranteed delivery service could further reduce the inbound standard transit time, particularly in situations where the cost savings in safety stock reduction requirements outweigh the incremental additional freight expense.
The major contributing factors to this problem are:
Example 1: The Vendor does not ship in time to meet the deadline for delivery to the DC, particularly where vendor freight terms are “prepaid,” which means that they control the selection and performance of the delivering carrier.
Example 2: The carrier’s inbound “standard” transit time varies, resulting in inconsistent performance at meeting DC delivery deadlines.
Example 3: The Buyer fails to specify shipping and delivery performance KPIs for both Vendor and carrier, and fails to enforce same to eliminate variability in the inbound supply chain.
Solution: Create a Transportation Compliance Standard (RSD and RDD), and enforce compliance with a standard chargeback fee related to specific performance KPIs.
Two key transportation compliance KPI standards that will greatly reduce the variability of the inbound delivery schedule, regardless of who controls the inbound carrier:
a) The Buyer’s Required Delivery Date (RDD) is the date replenishment inventory must be received into stock at the DC to avoid adding any additional safety stock. This is a recognized standard that depends on the inbound carrier’s ability to perform consistently. However, the Vendor can introduce variability into the delivery schedule by delaying shipment dispatch. This unexpected lengthening of the replenishment cycle time leads to an increased safety stock buffer to take this variability into account. The key KPI here is measuring the carrier’s standard transit-time consistency.
b) The Vendor’s Required Ship Date (RSD), by definition is the RDD minus the inbound carrier standard transit time. This determines the vendor RSD. This date should be specified upfront on the PO when it is placed with the Vendor. The Vendor’s PO processing lead time must be sufficient to allow for product procurement/manufacturing and shipping preparation to be completed to meet the RSD 100 percent of the time. Compliance with this standard is one of the best KPIs to reduce or even eliminate variability in the inventory replenishment cycle time, thereby reducing or eliminating unnecessary safety stocks.
When it comes to finding ways to reduce safety stock levels, inbound delivery scheduling is often overlooked as a possible contributing cause. Consider the following real-world situation.
Vendor freight terms are “Prepaid” inbound to the DC.
Vendor selects both carrier and delivery schedule to the DC.
Vendor notifies Buyer that scheduled deliveries are Monday and Thursday.
Carrier dispatcher confirms delivery to Buyer location 24 hours in advance.
Buyer’s current dock appointment lead time is 48 hours in advance, in order to allow for efficient labor and equipment scheduling. Vendor dock appointment is pushed back to a Tuesday delivery.
Because of ongoing conflict with Monday dock appointment compliance, Buyer has to carry additional incremental inventory safety stock to avoid Monday stock-out situations.
Solution: Two possible solutions would work to eliminate the need to carry additional inventory safety stock.
a) The Vendor and Buyer mutually agree to shift vendor delivery days to Tuesday and Friday. This eliminates the need to carry any extra safety stock while ensuring compliance with the Buyer’s dock appointment lead time requirements.
b) The Buyer changes purchasing freight terms from “Prepaid” inbound to “Collect” inbound, allowing the Buyer to select and control the carrier delivery to the DC, thereby eliminating the need to carry additional incremental safety stock.
The Buyer is unable to reduce inventory safety stock(s) due to standard transit time for inbound shipments. The use of expedited or premium transportation is not considered a feasible alternative due to transportation budget constraints and/or a management KPI focused on freight expense reduction. Without evaluating possible inbound standard transit time alternatives, it is impossible to calculate the potential cost of a reduction of safety stock(s) and compare those potential costs and benefits to those of a freight expense reduction.
Example 1: Current inbound carrier standard transit time is two days. Expedited service from the same carrier is next day delivery. The increase in freight expense is 10 percent more than standard freight cost. This provides the potential for a one day safety stock reduction for product purchased from this Vendor.
Example 2: The current inbound Vendor ships from Florida via LTL to a DC in Los Angeles, CA. Standard inbound transit time is six days via LTL. The Buyer implements a regional cross-dock LTL to TL location in Atlanta, GA. All Vendors who ship LTL in the Southeast Region now ship to Atlanta cross-dock to meet a specified weekly cutoff date and time. The Buyer’s private TL fleet from its Atlanta DC now adds an Atlanta DC-to-Los-Angeles-DC TL shuttle service, using team drivers who provide a standard three-day transit time between the DCs. The Vendor in Miami now ships LTL to Atlanta (a freight savings for the vendor) with a one day transit time. The shipment is cross-docked in Atlanta the same day it is received, and now makes the three-day TL transit run to the Los Angeles DC (an added freight expense savings vs. the vendor’s LTL freight expense). Now standard transit time is reduced from six to seven days for LTL to four to five days via cross-dock. This allows for a one or two day reduction in multiple SE regional vendor safety stock requirements at the Los Angeles DC.
Example 3: The current inbound shipment arrives via a full-container load from the West Coast port to an inland DC in Chicago. Standard transit time is five days. If we trans load from the container to a full truckload at the port, and use TL team delivery from the West Coast to Chicago, we can reduce inbound standard transit time from five days to four, providing an opportunity for a one day reduction in current safety stock(s).
Solution: Consider changing carrier service level or even mode, to expedited or premium, in order to facilitate a reduction in inventory safety stock levels.