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It’s always wise to have a contingency plan. Keeping stock at optimum levels is both a balancing act and something of an art form.
Keep too little and you risk delays in the fulfillment process. Keep too much and before you know it you’ve cut into profit margins and increased holding costs.
A cushion inventory acts as a buffer to mitigate potential problems. The trick is to calculate the ‘right’ buffer inventory level or ‘above the cycle stock.’
Read on to find out how this will help bring greater certainty of supply from your fulfillment center.
What is Cushion Inventory in Your Fulfillment Center?
Cushion or buffer inventory relates to a surplus of stock that’s kept in a fulfillment warehouse or fulfillment center. It’s there to deal with things like emergencies, supply chain problems, transportation issues or an unexpected rise in demand.
It’s also known as contingency stock, safety stock or supply chain safety net. How much cushion inventory you keep at your fulfillment center will depend on these factors:
- The kinds of products you sell
- The average production lead times
- Your company’s inventory history
- The predictability of order trends
It may be you don’t know if you’ll be receiving a higher than usual volume of orders in the short term. A cushion or buffer in the quantity of stock you’re holding in your fulfillment warehouse is there for your peace of mind.
The Advantages of Keeping a Cushion Inventory
Better than expected sales are a good thing but running out of supplies is not great for business. One of the difficulties is that inventory forecasting is never 100 percent accurate.
Keeping cushion or buffer inventory is a good way to keep stockout costs low and reduce delays in shipping and order fulfillment.
To work out the amount of cushion stock to have available, you’ll need to put in place an inventory management system that tracks stock and demand. This will allow you to select reorder dates so that you know when it’s the right time to restock.
How to Calculate the Best Cushion Inventory Levels
It’s all about the math. There is no one-size-fits all way to work out how much cushion inventory to store. There are several methods you can use to make your calculation. You will need analytics and reporting tools to carry it out effectively.
Quick Cushion Stock Calculator
Once you have the right data available, you’re all set to work out your optimum cushion inventory levels in your fulfillment center. This is what you’ll need:
- Maximum number of units you expect to sell in a day
- Maximum lead times
- The average number of units sold in a day
- Average lead times
Once you’ve collected this data, use this simple formula:
Maximum daily units x Maximum lead time minus Average daily units x Average lead times
The Heizer and Render Buffer Inventory Method
These two educators came up with a cushion inventory method that comes into its own when there are significant inventory variations. These could be because of disparities related to a supplier or manufacturer.
The Heizer and Render cushion inventory method relies on the standard deviation of the lead time distribution and desired service factor. This paints a more accurate picture of how much cushion you need based on any previous supply chain holdups.
Multiply the desired service factor (Z) by the standard variation in lead time (𝜎LT) ie: the level and recurrence by which the average lead time is different from the actual lead time.
Here is the formula: Z x 𝜎LT
Bear in mind that the higher your service factor level, the more cushion inventory you’re going to need. This can greatly hike up carrying costs.
Andrew Greasley’s method of inventory calculation takes into consideration the standard deviation of lead time, desired service factor and also average demand.
Here is the formula:
𝜎LT x average demand x Z
The standard deviation in lead times relates to the volatility or variability in lead times, over a length of time. Average demand refers to the number of goods required to meet customer demand within a set period.
This method is often used when the demand and the lead time typically vary a lot. Having said that, it does not take into consideration the amount of stock that’s still in production and not yet ready for sale.
The Benefits of Historical Data
Whichever way you choose to work out cushion inventory, it’s always wise to have historical order and inventory data at your fingertips.
Inventory forecasting needs extensive planning. This helps to make sure a business is always ready to meet demand while being mindful to not order too much.
With demand forecasting tools, you can quickly integrate all supply chain data from multiple channels. This will give an overview of actual product demand and insight into sales forecasts.
Partner up with a Logistics Specialist
Dealing with logistics is time-consuming. Any decision can have a massive impact on a company’s capacity to offer reliable fulfillment and shipping to its customers.
Teaming up with a third-party logistics partner (3PL) like Shipfusion has a wealth of benefits. These include:
- Optimizing your supply chain
- The provision of expertise, technology and extra resources
- Freeing you up from dealing with logistical issues
A 3PL partner like Shipfusion can provide the technology to bring up historical order data. This will help you to work out your ideal reorder quantity and the amount of cushion inventory you need to stop any stockouts.
As a business grows, it’s worth thinking about ways to make the inventory management process easier. This could be by investing in technology and partnering with logistics experts.
Outsourcing Logistics for More Efficient Fulfillment
Managing the logistics of a fulfillment center or fulfillment warehouse takes time, money and energy. Inventories are often moving targets.
A tech-savvy 3PL like Shipfusion will give you all the tools you need to build a successful eCommerce operation.
You’ll always have expert inventory management and powerful real-time technology available. That means you can concentrate on growth without all the pressure. Shipfusion sets your business on autopilot and combines flexible, reliable fulfillment with powerful, real-time technology. Shipfusion has multiple fulfillment centers across the US and Canada– making it easy to manage your eCommerce business. For more information on how to set your business on autopilot, contact one of our fulfillment specialists today.