Thorough understanding of days' supply is necessary if a parts inventory is to be both immediately responsive to customer needs and profitable.
To correctly calculate days' supply levels, it's necessary to understand two buying methods, split guide and straight guide. It's also important to recognize the differences between them and when to use them. Failure to do so can mean excess stock or an inability to consistently meet customer demands.
What's the difference between Best Stocking Level (BSL) and Best Reorder Point/Reorder Point (BRP/ROP)?
The BSL is inventory, in days' supply, essential to meet existing demand, without causing excess stock.
The BRP/ROP is the number of days' supply at which point the inventory control system triggers a suggested replenishment order.
If there is a large spread in days between the BRP/ROP and the BSL, inventory is reordered less often but in larger quantities.
If there's a small spread in days between the BRP/ROP and BSL, inventory is ordered more often in smaller quantities. The difference in high level and low level affects inventory investment and inventory performance.
Before choosing a buying method, you must understand what to use in the calculation.
Consideration must be given to marketplace, dealership objectives, and supplier fill rate. Too often, a knee-jerk reaction is applied to days' supply while inventory performance is off causing more problems than the situation you want to correct.
Calculating stock levels depends on the order cycle.
- What is the frequency in days that an order is submitted to your supplier?
- That's called the Order Frequency
- How many additional days are needed to run, edit, review, and submit the stock order to your supplier?
- How much additional time in days are required to receive, check-in, and bin parts at your dealership?
Items 2 and 3 are referred to as Lead Time.
How much additional supply, in days, is needed to insure against unusual and unpredictable demand peaks between replenishment?
Item 4 is referred to as Safety Stock. Safety Stock is a percentage factor .5 or 1.0 of the total of Order Frequency and Lead Time.
Which buying guide is right to use?
If you choose split guide buying (a most popular method), the result of the calculation you performed above is your BRP/ROP. To calculate Best Stocking Level extra Safety Stock in days' supply, either .25 or .50 of the BRP/ROP) is added to the BRP/ROP.
For example, if your BRP/ROP is 28 days and you use .25 for extra Safety Stock the BSL would be 35 days. Are the .25 and .50 for BSL calculation hard and fast rules? No. You'll have to play with the guides and find what best fits your particular operation.
If you choose straight guide buying, the 28 days now becomes the BSL and the BRP/ROP is determined by subtracting one day from the BSL. The BSL and BRP/ROP are 28 days and 27 days respectively.
If you're on a daily stock order, straight guide buying may be the way to go. For a weekly stock order cycle, go with split guide buying. The idea is to achieve the optimum level that decreases excess inventory and acquisition costs, while sustaining high levels of customer service.
Multiple sources allow you to add flexibility to days' supply settings. Think of it this way: Would a home improvement store assign the same source code to nails as it does to table saws? Certainly not. The nails sell in thousands of units per day, whereas only a couple of table saws may be sold during an entire month.
If these two products with significantly different activity have the same source code, how would the store establish stocking criteria? It's the same situation in your parts department. Depending on your circumstances and objectives, fast moving parts with high fill rates from the supplier and high frequency of supply may need a lower BSL with less days supply between BSL and BRP/ROP.
Gary Naples is a parts consultant to dealers and manufacturers. He's authored two books on parts management. He's at 570-824-1528/[email protected].