Most North American and European brands use their Asian vendors to manufacture their products. Companies place large purchase orders months prior to the requested delivery. These long lead times enable Asian manufacturers to acquire the necessary raw material from their vendors, manufacture the products in their Asian factories and ship them to the brand owners’ distribution centers across the ocean. Since the consumer demand can fluctuate so much during this long lead time, brand owners must carefully place their purchase orders and adjust them as they gather more market intelligence. This process is referred as global purchase order splitting.
A good process should minimize brand owner’s risk of inventory shortage or overage. The products need to be delivered with the right variants (colors and sizes), at the right time (delivery window within a season), and at the right location (distribution centers or 3PLs around the world). This requires close coordination between the brand owner and the vendor. Rough commitments must be made early and details must be shared at critical times along the way. This commitment can be thought in terms of variant, location and time.
Vendors require a rough commitment upfront to acquire the raw material they need for manufacturing the goods. At this point, brand owner can place a purchase order for the total quantity across all variants, all locations needed for the whole season. Let’s assume brand owner orders 6,000 pieces of a black jacket without providing size, location or delivery schedule details. With this rough cut information, vendor can order the required fabric from its vendor.
After the fabric is received by the vendor, the manufacturing process needs the next level of details – the variants. At this time, brand owner needs to provide size breakdown of the initial order for all locations for the whole season. Following our example, above, let’s assume the brand owner splits the total quantity into 1,000 small, 3,000 medium and 2 ,000 large black jackets. With this information, vendor can manufacture the finished goods.
After the products are manufactured, the distribution process needs the next level of details – the location and delivery time. At this point, brand owners need to provide the location and time break down of the order. Continuing on our example, let’s assume the brand owner splits the order between Europe and North America 40/60. This will result in 400 small, 1,200 medium, 800 large for Europe and 600 small, 1,800 medium and 1,200 large for North America. The next split is based on delivery time. Brand owner may like 70% of the orders to be shipped upfront leaving the rest for replenishment. Thus, in our example, the purchase order may be further split into 280 small, 840 medium and 640 large for Europe and 420 small, 1,260 medium and 840 large for North America for the first delivery period of the season.
As explained above, the initial purchase commitment has been split into many lines as more details are introduced to the process. Some companies keep a single purchase order and replace its lines, while others create new child purchase orders from the parent purchase order. Whatever the mechanism, having a well thought out process and systems to support it will help you minimize your inventory risk.