A small business guide to inventory calculations for supply chains

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For businesses with multiple warehouses, thousands of items in inventory, and complex supply chains, moving to available-to-promise (ATP) supply chain management can transform a company.

In the ’90s, Walmart and Kmart were in a brutal price war, in an attempt to attract cost-conscious consumers. While the battle was being fought on the shelves, Walmart was winning the war by investing billions in big data and available-to-promise inventory management. In the last two years of the decade, Walmarts stock price rose 82%, while Kmart filed for bankruptcy in 2002.

Businesses never want to miss out on a sale or cast a skeptical eye on rosy forecasts, but overestimating demand can backfire terribly. It can lead to write-offs, flawed products, and angry investors that come as a consequence of overcommitting that is much worse for a business than highers stockout rates or lower service levels. Just ask Ralph Lauren, the fashion line whose valuation dropped 50% because of a subpar inventory system with a lack of controls, leaving their clothing wasting away in storerooms and on clearance racks.

ATP is a type of inventory analysis that enables businesses with complex operations to keep a lean inventory while not overextending their capabilities. It also empowers salespeople to instantly find out when they can deliver a potential customer’s order. Without ATP, salespeople often have to talk to multiple departments to confirm the inventory is available and can be delivered by the requested date.

Why ATP is a game changer for multichannel businesses

Companies are increasingly competing in multiple channels, like wholesale, e-commerce, and brick and mortar. ATP supply chains are becoming necessary in order to meet customer expectations, and make sure complex inventory management runs smoothly.

There are two ways ATP can be implemented, based on what is called push-pull strategy. With a push strategy, ATP inventory analysis is based on forecasts of future demand. Past sales, combined with growth expectations dictate what is held in inventory.

Pull-based ATP is responsive to actual orders placed, so inventory is allocated as each order comes into the system. In this situation, ATP is performed in real time, so resource availability can be checked immediately, or in batches, when inventory is checked at certain intervals.

In addition to ATP, there’s capable-to-promise (CTP) supply chains, which looks at product demand and matches it to the company’s peak operations capabilities. This differs from ATP in that CTP is benchmarked to a company’s peak production, while when ATP is triggered, it looks to inventory forecasts and availability.

Once a customer places an order, a company’s ATP software springs into action, scanning several inputs as well as considering factors like order profitability, customer priority, and service level.

After this analysis, which takes place in an instant, the system can spit out a delivery date for the salesperson or customer, telling them if the order can be placed or if other arrangements have to be made, like splitting up the order or extending the delivery date.

For example, every time you browse a product on Amazon, they are using ATP analysis to tell you how soon it can be shipped to you.

This is essentially ATP in action. For every item Amazon sells, their system scans all their warehouses and fulfillment centers to see how fast they can ship an item based on your address.

Essential insights & analysis for supply chains

Available-to-promise supply chains give businesses a competitive advantage over slower, less advanced inventory management. This competitive advantage is hard to create otherwise, giving customers flexible delivery options in a narrow time window and a high rate of customer satisfaction. It sounds like a simple difference, but can have a huge effect…

For example, veteran salespeople often don’t trust what is listed in inventory because their inventory management software isn’t accurate or responsive to what is actually happening in the warehouse. This lack of trust can lead to employees going rogue, looking out for their own numbers and causing problems in the supply chain. This can cause backordered items due to overzealousness — or the opposite — overly conservative delivery dates to avoid upsetting customers, both of which often mean lost sales.

With ATP forecasting, your supply chain can be one step ahead of the curve, anticipating your sales staff’s needs, creating a level of buy-in and trust that wasn’t possible before. An ATP supply chain offers the opportunity to stay in the sweet spot between in stock and backordered, with items always available just in time for customers.

This also creates more happy customers — less venting privately and publicly about unkept promises or unresolved issues — and lower customer service costs.

By having a leaner, meaner inventory management operations, businesses are able to reduce their markdowns and increase stock turnover rate, which improves not only overall revenue, but gross margins as well.

ATP in action

For an idea of how this works in action, let’s say we owned a widget factory that just adopted an ATP supply chain. For the second quarter of the year, our hypothetical warehouse starts with 10 widgets on hand.

Our system has created a sales forecast for each month this quarter, and we have a Master Production Schedule of 100 widgets per month. At the end of each month, customer orders are tallied up and the difference between that total and the Master Production Schedule are how many widgets we have “available-to-promise” for the following month.

Back to our widget factory — let’s say there were 30 widgets available-to-promise at the end of April. In May, the company had 110 orders, but only 100 widgets produced, which would have been a problem if not for the 10 we had started with on hand.

At the end of the quarter we had 230 orders compared to 300 that were forecasted and on the Master Production Schedule, leaving us a total of 80 widgets available-to-promise for the third quarter. Based on quarter two and previous years sales, we might adjust our forecasts and Master Production Schedule accordingly to create a leaner, more efficient inventory operation.

Of course, inventory management software that uses ATP is much more complex than this, but the same principles apply. With time, ATP software has more data to work with, allowing it to accurately forecast production schedules and inventory for the next month, quarter, or year.

Final thoughts

With each passing day, customer expectations are harder to meet. For ecommerce businesses, fast and free shipping has become the norm, raising the bar for inventory and supply chain management.

Without the ability to stock every item at all times, companies must have efficient, sophisticated operations or risk losing customers and being left behind. 

This article originally appeared on the QuickBooks Resource Center and was syndicated by MediaFeed.org.

Featured Image Credit: DepositPhotos.com.

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