Inventory Planning for International Supply Chains
When your products come from overseas, you can't just reorder when you run low. Long lead times require strategic inventory planning to balance stockout risk against carrying costs.
Key Concepts
Lead Time
Total time from order placement to stock availability:
- Production time
- Transit time
- Customs clearance
- Inland delivery
- Receiving and put-away
Safety Stock
Extra inventory held to protect against variability:
- Demand variability (sales fluctuations)
- Supply variability (lead time uncertainty)
- Buffer against the unexpected
Reorder Point
Inventory level that triggers a new order:
- Reorder Point = (Average Daily Demand × Lead Time) + Safety Stock
Calculating Safety Stock
Basic Formula:
Safety Stock = Z × σd × √L
- Z = Service level factor (1.65 for 95%, 2.33 for 99%)
- σd = Standard deviation of daily demand
- L = Lead time in days
When Lead Time Varies:
Include lead time variability in the calculation for more accurate buffer sizing.
Service Level Trade-offs
- 95% service level: 5% chance of stockout per cycle
- 99% service level: Much more inventory required
- Higher service = more safety stock = higher carrying costs
- Balance customer expectations against cost
Carrying Costs
The true cost of holding inventory:
- Capital cost (opportunity cost of tied-up money)
- Storage and handling
- Insurance
- Obsolescence risk
- Typically 20-30% of inventory value per year
Strategies to Reduce Inventory
Reduce Lead Time:
- Air freight for fast-moving items
- Regional sourcing/nearshoring
- Pre-production of components
Improve Forecasting:
- Better demand planning reduces variability
- Collaborative forecasting with customers
- Monitor leading indicators
Increase Visibility:
- Track in-transit inventory
- Include pipeline stock in planning
- Real-time inventory systems
ABC Analysis
Not all products deserve the same inventory investment:
- A items: High volume/value - tight control, frequent review
- B items: Moderate - standard management
- C items: Low volume - less attention, higher safety stock OK
Seasonal Planning
- Build inventory ahead of peak seasons
- Account for supplier closures (Chinese New Year)
- Plan for shipping congestion periods
Key Metrics
- Inventory turnover: How fast you sell through stock
- Days of supply: How long current inventory will last
- Fill rate: Orders shipped complete from stock
- Stockout rate: How often you're out of stock
