Lesson 3: The speed of the shelf

Back at Kestrel’s office. On the whiteboard, Anil has written one line: “Fast, reliable supply → less stock in the shop.”

Anil: “I believe it. But my distributors will say: you want us to deliver every day to twenty thousand shops? Impossible.”

Ruth: “Nobody said every day yet. Let’s first understand why a shop needs stock at all.”

Inventory is a must

A shop must hold inventory because the customer won’t wait. How much it needs depends on four factors:

the level of demand;
the variability of demand;
the replenishment time: from the moment something is sold until its replacement is on the shelf;
the variability of the replenishment time.

Pause and think: which of the four factors is the most crucial, the one that affects the others?

Level of demand
Variability of demand
Replenishment time

Replenishment time sets how far ahead the shop must guess. The longer the horizon, the less accurate the guess, so the variability of demand it must cover grows. And long supply chains are the unreliable ones, so the variability of supply grows too.

Replenishment time is the key

Replenishment time has a direct effect: the longer it is, the more stock is needed to cover it. It also has two indirect effects. The longer the horizon, the more variable demand looks over it, and the less reliable the supply.

And there is an even worse ramification. How well can the system react to what the market actually buys, when the replenishment time is long? Hardly at all. By the time the shop learns that the white fans are selling and the brown ones aren’t, it has already bought the next month’s brown ones.

Ruth: “You drive to Pune. How full do you keep the tank?”

Anil: “Full. The ghat road has no petrol pump for long stretches.”

Ruth: “And in the city, with a pump at every corner?”

Anil: “A quarter tank. I never think about it.”

Ruth: “Same car, same driving. The only thing that changed is how soon you can refill.”

Why does everyone order monthly?

If frequent replenishment is so powerful, why do most chains work on monthly orders, “min-max” or reorder points? Kestrel’s distributors gave Ruth the usual reasons:

“Volume discounts: buy more at a time, pay less.”
“Small orders will inflate transport costs.”
“What’s the point? The branch doesn’t have the full range anyway, and supplies at the end of the month.”
“Making orders takes a lot of time and attention.”

Each one is about the supply point, not about the shop’s customer. And each one has an answer: one truck carries the whole range of products to a route, so the per-product order can be small while the truckload isn’t; and the orders can be generated from what was sold. (The Distribution course, as taught by Eli, takes these objections one by one.)

What frequency does to the shelf

Take one item that sells 100 a month.

Ordered and supplied once a month, the shelf swings from 100 down to 0, and then it waits.
Ordered and supplied once a week, the shelf swings from 25 down to 0.

Now add the delivery time. If the distributor’s salesperson collects orders weekly and the goods arrive within 24 hours, the total replenishment time becomes 8 days: 7 days until the next order, plus 1 day of transport. Batching and paperwork, which used to take weeks, disappear because the order is simply what was sold.

Stock needed = rate of demand × replenishment time × a factor of safety for variability.

Cut the replenishment time and every term shrinks: the time itself, and the variability the safety must cover.

From push to pull

Today, stock is pushed: the company forecasts, makes, and fills the distributors before month-end; the distributors fill the shops. With short replenishment, the chain can pull:

Replenish means supplying to the next link only what has been sold, not what was forecast.

Order = target level − stock on hand.

The shop reports what it sold; the distributor’s salesperson visits weekly and replenishes it.
The distributor sends its daily consumption to the company; the company’s branch warehouse replenishes it frequently.
The branch sends its consumption daily to the central warehouse, which replenishes it.

Each link holds a target that covers its own replenishment time, and each link refills what was consumed. Stock in the chain falls, while availability at the shelf rises.

Exercise: push or pull?

The distributor receives the month’s allocation in the last week to meet the company’s billing target.
The salesperson counts the shelf, compares it with the target, and orders the difference.
A shop takes 50 fans to earn a 4% quarterly scheme.
The branch warehouse ships to each distributor the items it sold yesterday.

Check your understanding

Answer all five. Get four right to complete the lesson.

1. The factor that drives the other factors of inventory is…

The level of demand
Replenishment time
The price of the product
The size of the shop

It also increases the variability of demand and of supply that must be covered.

2. An item sells 100 a month. Supplied weekly instead of monthly, the shelf swings…

From 100 to 0
From 200 to 100
It doesn’t change
From 25 to 0

A quarter of the cycle stock, for the same sales.

3. Weekly order collection with delivery in 24 hours gives a replenishment time of about…

8 days
1 day
30 days
15 days

Up to 7 days until the next order, plus 1 day of transport.

4. In a pull system, the order is…

The monthly forecast
Whatever earns the scheme
Target level minus stock on hand
The minimum order quantity

Only what was consumed is replaced.

5. The worst effect of a long replenishment time is…

Higher transport cost per unit for every delivery
The system can’t react to what the market actually buys
More paperwork
Lower prices

Surpluses of what doesn’t sell and shortages of what does.