What led to the downfall of Kmart, the rise of Walmart, and brought the iconic Ralph Lauren brand to its knees?
Poor inventory management.
Inventory management is tricky for any business. Most companies fear losing customers if they fail to have an item in stock. You may even be tempted to over-stock to “be prepared” for any size order. But storing too much inventory can eat into your profits.
How can you maintain a balance between keeping your customers happy and getting the most profit out of your product?
Enter Available to Promise, or ATP.
Our ultimate guide to available to promise covers the following topics:
BONUS: Before you read further on ATP, download our Inventory Management Software Whitepaper to see how Logiwa uses real-time tracking to help customers get up to 100% inventory accuracy and improve forecasting.
What is Available to Promise (ATP)?
ATP allows businesses to keep the minimum amount of a given product within their warehouses so that they use their inventory space efficiently. It uses data to match supply as close to demand as possible so that your customers never experience “backorder” status.
While available to promise inventory might sound complicated, it’s actually simpler than you think. Available to Promise is an essential piece for managing your supply chain.
Available to promise is the projected amount of inventory you have left available to sell, not including allocated inventory. It allows businesses to control distribution to their customers and predict inventory.
Push-based ATP predicts demand based by including forecasting. This calculation takes into account the anticipated demand in order to predict how much needs to be ordered.
Although the push-based model makes sure that any future increase in demand accounted for, it does run a significant risk for most businesses. If your demand forecasting is off, you will have an inventory ill-prepared to meet your customer demand.
However, the push model can be useful when suppliers expect an increase in sales, such as during the holiday season.
Your push-based available to promise formula may include these elements:
- Quantity On-hand: the amount of product you currently have
- Supply: planned orders, purchase orders, purchase requisitions, etc.
- Demand: sales orders + forecasted demand
Push-based ATP = On-Hand Inventory + Supply - Demand
Pull-Based Available to Promise
The pull-based model, on the other hand, is based on current supply demand. It doesn’t include any forecasting predictions. New businesses who can’t afford to have more inventory than they sell find this method useful.
Available to promise is yet another calculation that depends on a number of factors such as the amount of inventory you currently have, the amount of sales orders you have per day, and whether a purchase order is coming in or not. The rules for calculating pull-based available to promise inventory are pretty simple. They only differ slightly from push-based available to promise:
Your pull-based available to promise formula includes these elements:
- On-hand: the amount of product you currently have
- Supply: planned orders, purchase orders, purchase requisitions, etc.
- Demand: sales orders
+ forecasted demand
Pull-based ATP = On-Hand Inventory + Supply - Demand*
*where demand does not include forecasted demand
Available to Promise or Safety Stock?
Some businesses mistake available to promise for safety stock, but there are key differences between the two. Safety stock refers to keeping a certain amount of additional inventory above the necessary stock in case of an unexpectedly large order or delay in shipment. It’s typically a set buffer amount with little or no fluctuations.
Unlike safety stock, which is typically a set number, your ATP number can change. It’s even possible for your ATP number to be negative!
While a positive value indicates that you have inventory available to sell, a negative value indicates that your inventory is below your safety stock quantity.
As you can see in the tables above, available to promise value is determined by a variety of factors, including:
Current inventory levels: this inventory is what you have on hand for immediate shipping. Anything that isn’t allocated can be promised to a customer.
Sales orders: sales orders are documents that confirm a sale. A supplier will issue them to buyers prior to delivery. Inventory in a sales order is committed to a customer even though it’s still in your warehouse.
Purchase orders: these documents originate with the buyer, and are used to order products. Once accepted, it becomes a binding agreement between the buyer and supplier.
Safety stock: as stated above, safety stock is the buffer amount of stock you keep in case new inventory is delayed or a large order comes in.
How Does a Warehouse Management Software Calculate Available to Promise?
Before tools like warehouse management systems (WMS) were available, available to promise calculations didn’t exist.
When businesses received a purchase order, the sales rep had to call around to the various warehouses to check inventory levels and reorder points and calculate the date they could fulfill the order. Then they would inform the customer.
Today, a WMS can do all of the work that sales reps used to do behind the scenes, and calculate ATP numbers in real-time.
A WMS uses this value to create a well-constructed report. WMS can create new purchase orders if the amount is negative to help you avoid overselling. In fact, they can also notify you if your ATP is positive to help your ecommerce sales increase. This, in turn, increases customer satisfaction. It’s a win-win!
Because available to promise gives businesses a more accurate look into their inventory and total product available, they can provide more reliable information to customers about available inventory quantities and expected delivery dates.
Businesses often rely on extremely specific time tables for their product. If a restaurant requires a specific ingredient for their recipe or a farmer needs feed for their livestock, they need an accurate estimation to know when a product is due to arrive. What was once an extra bonus that certain companies offered, available to promise is now essential in modern business.
Competition for customer satisfaction is fierce and expectations are higher than ever. This expectation has been passed on to inventory and supply chain management, so ATP is essential to becoming an efficient and dependable operation.
Don't Let Your Inventory Become a Liability: Poor inventory accuracy leads to a host of issues that cut into your margins. Learn how Logiwa integrates all your sales channels and provides real-time inventory tracking.
Beginning to Use ATP
Although available to promise is essential for any modern business, actually beginning to use available to promise can intimidate some companies. Any new program can be a headache for a business owner and some newcomers to available to promise may be tempted to quit initially.
In order to make sure that your business isn’t affected by the change in process, here are some tips to make transitioning to ATP smoother.
Instruct Supply Chain Leaders on ATP
As your team learns to utilize available to promise initially, there may be an initial dip in service levels. It’s important to explain what ATP is, why it’s important and prepare leaders for this initial dip. The support of supply chain leaders is vital for success in utilizing ATP. Your employees may become disheartened if they find that their initial supply chain KPI’s start to slip.
Assure them that they will stabilize and provide them with the support they need to make it successful.
Involve Operations Personnel
In addition to the leaders, customer service reps, salespeople, inventory planners, and warehouse and inventory control software managers all play an important part in the success of your ATP formula. Educate the personnel on order-taking, inventory management, fulfillment, and warehouse practices to help them understand the process better. The more that they understand and are given the chance to offer input, the smoother the process will go.
Start Slowly and Simply
It can take a while before everyone is comfortable using ATP, so start with the basics. Once everyone is assured that the basics work properly, you can move on to more complicated and sophisticated rules. Don’t overwhelm staff and leadership, and keep it simple in the beginning.
Integrate Your Supply Chain Systems and Partners
If you outsource any part of your process, such as warehousing to a 3PL, make sure that their 3PL Software is integrated with yours. It’s a small step that can be easy to overlook when setting up a new system, but it is vital for getting the most accurate inventory information.
Without the important information that they have, there isn’t enough data on whether orders can be completed on time. Make your information as accurate and up-to-date as possible by making sure that your ATP is linked with any third party.
Lower the Stakes with a Test Cycle
Realistic test scenarios are the best way to prepare everyone for the change that is about to take place. The test cycles provide essential early exposure and training to customer service reps and inventory planners on the types of situations that they may run into and how to use the ATP. Your team needs to be comfortable with the data before it goes live. They will have confidence using ATP, and any mistakes that happen during a test cycle will have minimal ramifications.
With proper briefing and training, the addition of ATP will give your business the edge over competitors. It doesn’t need to be a headache, and by planning ahead you can mitigate the pains that can come from updating technology.
Get Ahead with Available to Promise
In order to stay ahead of the competition and create a profitable business, utilizing the best technology and techniques are no longer an option. Customers have come to expect fast and accurate service and businesses that don’t keep up will find themselves outpaced and left behind.
Logiwa can help you maintain leaner inventory while improving your customer experience by generating ATP reports.
Consider adding Available to Promise to your processes to get your business ahead today with Logiwa. Schedule your free demo by clicking here.
Written by Ruthie Bowles
Ruthie is a content marketing consultant for Logiwa. Her specialties include small business development and inventory management.