Insurance stock in crisis conditions: deciding on the need and scope. How not to keep extra and provide the necessary?
The main task of SCM is to ensure the stability and viability of the supply chain, which is expressed in risk management. Let’s understand the terminology:
The sustainability of the supply chain is a complex property of the supply chain, which characterizes the ability to preserve, implement and restore the target capabilities inherent in supply chains under the influence of activating factors (crisis) of a targeted and non–targeted nature.
Survivability of supply chains is the ability to maintain normal functioning under the influence of destabilizing factors. Survivability excludes the possibility of transition of the regular regime into a situation of plan disruption or catastrophe under the influence of previously foreseen and/or previously unforeseen destabilizing risk factors.
In the context of the crisis in which we are now, the CPU is affected by both predicted and unforeseeable risks, and we are faced with the task of adapting the CPU in the most effective way. “Enter” with the least expenses into the new reality.
An effective and widespread method of risk management is an insurance reserve. It is a way of creating some redundancy where risk and uncertainty are involved. The action of the insurance reserve is aimed at the section of the system in which:
- Violations occur especially often;
- Which are critical to ensure system throughput;
- Minor changes that lead to significant deviations in the values of economic efficiency indicators;
- Sections of the supply chain, the elimination of violations of which is associated with significant financial or time costs.
Sources of uncertainty:
- fluctuations in demand;
- deviation of delivery terms;
- forecast errors;
- failure of resources;
- inaccuracy of data;
- wrong decisions at all levels;
- inaccurate transmission of information;
- communication failure;
- targeted actions to disrupt the supply chain (terrorism, theft, etc.);
- changes in the political and economic situation;
- natural disasters.
The insurance reserve is designed to stabilize the system and smooth out the negative effects of such factors as demand fluctuations and deviations in delivery times.
In practice, many methods of calculating the insurance reserve are used:
- percentage of demand;
- based on daily consumption;
- manually;
- average demand deviation;
- average deviation of delivery terms;
- probabilistic approach.
The classic formula for calculating the insurance reserve:
where:
k – corresponds to the given level of service (see the table of the Standard Normal Distribution);
mq – average sales;
σ(L) – deviation of delivery terms (root mean square);
ml – order fulfillment period;
σ(q) – deviation of the average consumption (root mean square);
This approach is widely known in various interpretations and is used to calculate the amount of insurance stock within the framework of the stock management system.
However, in times of crisis, we are faced with an acute shortage of funds and we have to respond in a timely manner and change the usual approaches to inventory management and supply chain management that have been developed over the years.
Reaction to challenges destabilizing LP:
- Transition from Push to Pull strategy. Avoidance of sales plans, the main reference point is actual consumption (secondary sales);
- Reduction in the volume of supply;
- Increasing the frequency of supply. These measures affect turnover and allow funds to be released;
- Focus on turnover without compromising cost (Change of KPI);
- We reduce the requirements to the level of satisfaction of demand (Service Level 90–95%). This indicator directly affects the amount of the insurance reserve, as can be seen from the formula above (k) has the greatest impact on the amount of the insurance reserve;
- We increase the accuracy of forecasting. We replace the insurance reserve with an accurate forecast based on actual consumption;
- Focus on delivery times. Accuracy of functional cycle planning;
- We cut the “fat” – we kill insurance reserves by category:
These actions allow to:
– reduce the level of inventory (up to 20%);
– as a result, improvement of turnover and release of funds.
