Supply planning: how to balance between scarcity and illiquidity

Over the years of working in supply chain management, I have become convinced that the most favorable purchase price loses all meaning if the goods arrive at the wrong time or in the wrong volume. You can build relationships with factories for years, get exclusive terms and deferrals, but the business will lose money because of two main enemies — scarcity and illiquid.

A key tool to avoid them is proper planning of delivery dates and volumes.

Periodicity: frequency is more important than volume

In my early practice, there was a period when we delivered the most popular items in large batches once a quarter, trying to save on logistics and get a volume discount. Formally, the purchase price was lower, but in fact huge stocks were settling in warehouses, and turnover was falling. Switching to monthly deliveries for the same items has reduced inventory balances by a third and freed up working capital. Despite the fact that the price remained the same for us, we simply discussed in advance our volumes for the year ahead and continued to adhere to our shipping plans.

ABC analysis as a basis for prioritization

Not all products require the same approach to planning. The introduction of ABC analysis allowed us to clearly divide the product range: category A items (20% of the nomenclature, accounting for 80% of turnover) require maximum frequency of deliveries and an appropriate insurance reserve, which would allow us not to stop sales when various risks related to production, international logistics and customs are realized. A shortage is unacceptable for category A products. Category B and C allow for rarer shipments, but it is critically important not to accumulate illiquids.

One day we came across a situation where one of our regional warehouses had accumulated goods of category C for about six months in advance, and there was a shortage of goods of category A. The reason was the absense of actual information about the balances in the automation system. After carrying out inventory, setting up reporting and synchronizing supply schedules, the situation in this warehouse was corrected.

Distribution management: not only to import, but also share of stock between warehouses

When a company has several warehouses in different regions or countries, the task becomes more complicated. It is not enough to order the required volume from the factory — it is important to distribute it between warehouses, taking into account local demand dynamics. Otherwise, the goods are stale in one warehouse, and there is not enough in the other.

We have implemented the practice of distributing goods based on consumption statistics, rather than on the principle of “equally distributed to each warehouse.” This made it possible to reduce total inventory by 20% while maintaining the level of service.

So, I think, that supply planning is the art of balance. The high frequency of the order by marketable items, strict prioritization based on ABC analysis and the competent distribution of goods between warehouses allow us to solve two tasks at once: to avoid shortages where it is critical, and to prevent the freezing of capital in illiquids. This approach ensures the stability of operational activities and high profitability of the business.