If you live in the UK, you will be aware of the recent petrol shortage. Many of us have had to endure large queues to fill up your tank, sit in traffic surrounding petrol stations, or have simply seen it all over the news. The shortage of petrol has stemmed from a reduced amount of HGV drivers able to distribute the fuel. The pandemic is partly to blame for this, as travel became increasingly restricted last year, many European drivers returned home. COVID-19 also created a large backlog in HGV driver tests so new drivers have been prevented from getting up and running. We have also had to contend with Brexit; another driving factor for European drivers returning home or deciding to work elsewhere. The reforms to the IR35 rules have also contributed to fewer HGV drivers wanting to work in the UK. If you are interested in learning more about the reasoning for a HGV driver shortage, visit this article.
Regular drivers became aware of the upcoming petrol shortage when it made national news, so many people took protective actions to fill up their cars and vehicles. The effect of this was that many people who ordinarily wouldn’t have filled up that day or that week, made a special journey to buy half a tank / quarter of a tank etc., to ensure they were in the best position to avoid trouble with the impending shortage. These people wouldn’t have gone to the petrol station that week in normal circumstances. So, this created additional demand during a short-term shortage of petrol, therefore causing more of a shortage; in turn leading to more people worrying and thus it spiralled out of control. This is a great example of how a special cause of consumption can affect a supply chain.
This isn’t the first example of over-reactions to special causes that the British public have had to experience first-hand either. We encountered a similar situation back in the first lockdown when there was a shortage of some goods in the supermarkets: rice, flour, toilet paper… all easily stocked and non-perishable items. The public were made aware they would be locked down and that rules were to be put in place regarding outdoor and supermarket visits. So, people stocked up on things they could store at home; they took as many as they could (just in case…), and the result was that there was none left on the shelves for anybody else. That drove the behaviour in others to pick up those products when they saw them because they weren’t sure when they would be able to get them again. This created more special cause demand which led to more and more stockouts and empty shelves. These shortages lasted for many weeks during lockdown.
Here’s the interesting bit, if you were one of the lucky ones who stocked up at the beginning, over-buying to make sure you would be okay – when you look at your cupboards (at the rice or the flour), how many actually ran out at home as a result? Almost none. But the consequences of everyone buying those additional quantities put unprecedented demand on supermarkets and caused many shortages for people who genuinely needed them. The same is true for petrol – how many times have you been in the queue recently and spotted a driver (it might even have been you! 😉) who felt the pressure to top up £10 or less just to ensure your tank was as full as it could be so that you didn’t run out of petrol later on if the shortage continues? Of those people, did anyone genuinely run out and were not able to get some more, justifying the decision to fill up the tank? Very, very few. However, the consequence of everybody buying that additional load drained the supply chain of the inventory that was needed for the people who genuinely had an empty tank.
So, we all know the story. The question is: how does this relate to the regular business world? Do we see anything like this, common and special cause, in regular business? The answer is yes, we do.
Special and common causes of consumption are very meaningful to anybody who buys and sells, buys, makes and sells, or manages inventory and warehouses. You will appreciate the danger that special causes have on the availability of your Stock Keeping Units (SKUs) and inventory. Inventory levels, whether at the point of sale in retail or in the warehouse in wholesale or raw materials, should be based on regular consumption. If you try to pre-empt special causes and attempt to satisfy them from stock and because those special causes are not predictable, you will be left with months – maybe years – worth of inventory. Your costs will go through the roof and your goods will perish, degrade, or become obsolete, etc. Inventory turns will be low, and all your cash will be tied up in stock – all in all, performance becomes very poor. So, you know that you are supposed to set inventory levels based on regular consumption and adjust them based on increases or decreases to regular consumption and their supply.
But then what do you do with special causes? When you see a special demand, it is good news – it is an additional request or an unusually large quantity of the goods/services you are selling. This is a great opportunity to make more sales revenue. However, you shouldn’t assume that you can, or should, automatically satisfy this order from your stock.
If the special cause is small enough to be absorbed (i.e., you wouldn’t notice it amongst all your regular consumption) then you have no real problem. You can satisfy the order from stock, and you should still have enough inventory to protect yourself, or enough lead-time to re-supply and receive your delivery before you stock out and disappoint your regular customers. On the other hand, if the quantity for the special consumption is large relative to the amount of stock you are holding, you need to take a different approach. It may be that the stock you have available would cover this large, special order but it would empty your shelves and all your regular customers would no longer be able to be satisfied. This would cause a great deal of disruption which would likely outweigh the additional benefit of winning the special order in the first place. So, this leaves us with two questions. The first being: how do we recognise special cause amongst all the common causes? Then, the second being: what we should be doing if a special order is too large to automatically satisfy from stock?
How to Recognise Special Cause Consumption
There is an easy way to determine whether an order is a special cause, especially one that is going to cause you problems; look at the size of the order. If your average inventory holding is, say, 100 items on the shelf and 100 items on order (in transit toward you). So, you have a virtual inventory quantity of 200; 100 on the shelf, and 100 on the way. In this case, typical regular consumption could span from single figure units to twenty’s or even forty’s. Therefore, any customer order that comes in and is significantly greater than about 40-50 is an immediate indicator that you may have a special cause order on your hands. So, the first measure is size.
It is also possible to receive many additional orders of a smaller sizes which you might not immediately recognise as out of the ordinary, but would still result in a stock out. Where you may normally receive four or five orders of ten or twenty, you may receive fifteen to twenty orders of ten or twenty. An increase in order volume in a given period is harder to spot because it looks like regular sales, but it will cause a stockout if you don’t recognise it and adjust accordingly. In this case it is your inventory levels which will tell you how you’re doing. The moment those new orders are received and satisfied; your inventory levels will begin to dip. A decreasing trend of on-hand inventory will therefore give you an early warning that you are experiencing special increases in demand, and they should be investigated immediately.
So, the two ways to recognise special cause consumption are to acknowledge order sizes that are too big, and to notice when your inventory levels are trending downwards when they wouldn’t normally be.
How to Satisfy Special Cause Consumption
As a golden rule, satisfying special cause consumption from stock will only cause you problems. Yes, it would mean you can capitalise on the additional sale right now, but it will consume the inventory that is in place to protect your regular orders and your regular customers. The simple answer is to take special orders and treat them as special orders. That is, where a corresponding additional purchase/manufacturing order is raised to buy/make the quantity required for the special order, in addition to any stock replenishment orders, leaving the existing inventory to satisfy your regular customers.
This requires you to first, recognise the order, then raise the additional non-stock orders from production or suppliers for the additional quantity, on the correct lead-times to satisfy the special orders.
If we link this back to our initial case study of the current petrol crisis, this would mean something like the petrol stations first, putting a maximum quantity in place – which many did. But also, recognising whether customers coming in are regular consumption (i.e., have an almost empty tank) or special consumption (i.e., topping up, only needing £5 or £10’s worth). Then petrol stations would need to decide whether they need to make people wait, but they shouldn’t run out because they already have an almost full tank.
Of course, there is some complexity to making this work for organisations with tens, hundreds or thousands of SKUs. Goldratt UK work with supply chain customers to get these rules right: to recognise and properly satisfy regular orders and special orders without jeopardising cash, space, availability or customer service.
By Phil Snelgrove, Lauren Wiles
© 2021, Goldratt UK