Purchasing raw materials to keep a stable inventory is like driving a car: if you want stability you better look ahead at the current demand in your end markets and not at the recent orders from your immediate customers. Your immediate customers may respond to each small bump in the road with an increase or a decrease of their purchasing. If you respond to those customer adaptations in the chain you multiply the volatility. If you would do that in a car you would crash soon.

 If you relax in your ordering process, you will automatically avoid peaks and dips, and you will prevent that you order too much and create an overshoot that you’ll have to reduce again later. Many business cycles are initiated by too eager stock adaptations.

Re-active stocking works as a multiplier when end market volatility travels in upstream direction. So if you want to know whether your supplier will be able to ramp up fast enough you will need to include the Reactive stocking in the test conditions. In this way you’ll know whether your supplier can handle true demand plus inventory building in the chain. 

Capacity investments usually have rather long lead-times, and are therefore susceptible to oscillations. If you understand the volatility of the industry you’re in, you will be able to forecast it to a certain extent and then take advantage of this by anti-cyclic investments, so you will benefit from lower prices and you will have capacity available when demand picks up. If you want to know how your business cycle works, contact us.

Your pipeline can be defined as: what has been ordered minus what has been delivered. You should constantly measure your pipeline, so at any moment you will be able to see how much is coming your way, and you can take that into account when ordering new replenishments. This seems trivial, but research shows that most companies underestimate their pipeline. 

 Deep sea supply (or any other slow, long distance delivery) increases the lead-time in the replenishment loop in which it is used. Longer lead-time means a bigger pipeline, and since the pipeline is always underestimated, this creates overshoots and other volatility. Imagine a green grocer at the corner of the street trying to maintain a constant inventory of green apples , who switches supplier from a local farm to a farm in Chili. It is clear that it will be very challenging to keep the stocks full, even if lot sizes would stay the same.

Financial people, and especially CFO’s in stock-listed companies, like to report an efficient use of working capital in the annual results, and thus ask the organization to reduce the inventory in December. Some people even have this in their targets. Such companies purchase less for delivery in December, and compensate that by purchasing more in January. Due to batching and other logistic phenomena, this de- and restocking can create volatility that lasts for several months.