In our third article of this resilient planning series, we’ve exposed the limits of the deterministic model and supported the need to move to a more resilient approach. This paradigm drift is crucial to mitigate this uncertainty in this VUCA world properly. How exactly will this approach be beneficial to mitigate volatility?
As a reminder
Resilient Planning implies developing mid-and long-term plans while taking the necessary steps to adjust and respond effectively to sudden changes and uncertainty in the market scheme. It ensures the right degree of resilience so to execute short-term plans. Volatility is then reduced at every stage of your supply chain with the employment of safety stocks.
The importance of safety stocks
What are they?
Safety stocks, also called buffer stocks, are the level of additional stock held to cope with contingencies. The objective is to mitigate the risk of running out of raw materials or finished goods due to uncertainties in supply or demand. Adequate safety stock levels give business operations the green light to move forward with their plans.
Why do I need them?
Saftey stocks come with several benefits! They can protect you against unforeseen variation in supply or demand spides. They compensate for forecast inaccuracies, prevent price fluctuations and disruptions in manufacturing or deliveries… But one of the most creditable qualities of safety stocks is their ability to prevent you from losing money!
According to Gartner, the average cost of downtime is $5,600 per minute. As there are many differences in how businesses operate, In some industries, stopping production unexpectedly due to material shortage can have serious financial repercussions. In the automotive industry, the average cost of downtime is $22,000 per minute.
Having a safety stock will provide you with a buffer to keep up with production and mitigate the losses that might occur.
Isn’t the deterministic model using safety stocks already?
The deterministic model is driven by MRP. It is true that to cope with uncertainty, MRP determines fixed safety stocks. But because of the fixed nature of these buffers, the volatility of demand and supply is not mitigated but propagated along the supply chain.
Where is the difference with a resilient approach?
In a resilient model, a couple of decoupling points are determined. Hence, the inventory buffers are placed accordingly. For each of these buffers, a forecast of consumptions and uncertainties is made. Here is a quick glimpse of how volatility is mitigated at every stage of your supply chain.
ROAD TO RESILIENCY
The way you determine your safety stocks is essential for managing unpredictability. At Flowlity, we make risk-based decisions when determining buffer stocks by providing a complete analysis of the variabilities.
Also, by providing appropriate stock recommendations and continuously improving forecasts using AI, we achieve an average stock reduction of 30 % and a decrease in the risk of shortages by 20 % on average. We provide responsiveness and agility to clients like Danone, Saint Gobain, Miba pr La redoute.
In order to complete your investigation on resilient planning and volatility mitigation, download our latest white paper >.