February 1, 2021 Growing & Complex Businesses en_US Available-to-Promise (ATP) is an essential concept for almost any business with inventory. Learn how ATP calculations can be used to maximize profit. https://quickbooks.intuit.com/cas/dam/IMAGE/A5oafIFDk/96dd177717b73a5c28f0619b64028ab4.jpg https://quickbooks.intuit.com/r/growing-complex-businesses/available-to-promise-inventory-calculations-for-supply-chains/ What is Available to Promise (ATP) inventory? 2021 Definition, Examples & Formula
Growing & Complex Businesses

What is Available to Promise (ATP) inventory? 2021 Definition, Examples & Formula

By Dominic Vaiana February 1, 2021

Available to promise (ATP) is the projected amount of inventory a business has in stock, ready to sell and not allocated for existing customer orders. Using ATP, companies can keep the minimum amount of a specific item, which maximizes warehouse space and reduces customers’ chances of seeing items as “backordered.”

This article will explore examples of ATP in action and how you can use it to maximize profits.

What is available to promise inventory?

As its name implies, available to promise refers to the available quantity of inventory a business can commit to selling in the near future. It does not include purchase order allocation. For example, ecommerce retailers use the ATP calculation to determine your delivery due date.

Calculating your ATP quantity is simple:

ATP = Quantity On Hand + Supply – Demand

ATP is a type of inventory analysis that enables businesses with complex operations to keep a lean inventory while not overextending their capabilities. It also empowers salespeople to instantly find out when they can deliver a potential customer’s order. Without ATP, salespeople often have to talk to multiple departments to confirm the inventory is available and can be delivered by the requested date.

Businesses never want to miss out on a sale or cast a skeptical eye on rosy forecasts, but overestimating demand can backfire terribly. It can lead to write-offs, flawed products, and angry investors that come as a consequence of overcommitting that is far worse for a business than higher stockout rates or lower service levels.

Why ATP is key for multichannel businesses optimization

Companies are increasingly competing in multiple channels, like wholesale, e-commerce, and brick and mortar. ATP supply chains are becoming necessary in order to meet customer expectations and make sure complex inventory management runs smoothly.

There are two ways ATP can be implemented, based on what is called push-pull strategy. With a push strategy, ATP inventory analysis can help forecast future demand. Past sales, combined with growth expectations, dictate what is held in inventory.

Pull-based ATP is responsive to actual orders placed, so inventory is allocated as each order comes into the system. In this situation, ATP is performed in real-time so that resource availability can be checked immediately, or in batches, when inventory is checked at certain intervals.

Available to promise vs. capable to promise

In addition to ATP, there are capable to promise (CTP) supply chains that look at product demand and match it to the company’s peak operations capabilities. Unlike ATP, CTP is benchmarked to a company’s peak production, while when ATP is triggered, it looks to inventory forecasts and availability.

While ATP considers available inventory on hand for purchased and manufactured items, CTP inventory also accounts for inbound purchase receipts, supplier lead times, alternative sourcing options, and availability of raw materials and labor. During an order entry, a CTP supply chain factors in all of these items to estimate a customer delivery date.

How is available to promise different from safety stock?

ATP is often confused with safety stock, a common classification in inventory management, but there are key differences between these two. Safety stock indicates the amount of inventory a business should keep to avoid the risk of shortages or stockouts. Think of it as insurance for demand spikes or material shortages. This number usually never fluctuates.

On the other hand, available to promise inventory can change daily. It can even be negative, which would indicate that your inventory is lower than your safety stock amount.

In short: safety stock indicates how much inventory you should keep, while the ATP calculation indicates how much inventory you can sell at any given time.

Example of available to promise in action

For an idea of how ATP works, let’s say we own a widget factory that just implemented an ATP supply chain. For the second quarter of the year, our hypothetical warehouse starts with 10 widgets on hand.

Our system has created a sales forecast for each month this quarter, and we have a Master Production Schedule of 100 widgets per month. At the end of each month, sales orders are tallied up, and the difference between that total and the Master Production Schedule is how many widgets we have available to promise for the following month.

Back to our widget factory—let’s say we had 30 widgets available to promise at the end of April. In May, we had 110 orders, but only produced 100 widgets, which would have been a problem if not for the 10 we had started with on hand.

At the end of the quarter, we had 230 orders compared to 300 that were forecasted and on the Master Production Schedule, leaving us a total of 80 widgets available to promise for the third quarter. Based on quarter two and previous year’s sales, we might adjust our forecasts and Master Production Schedule accordingly to create a leaner, more efficient inventory operation.

Of course, inventory management software that uses ATP is much more complex than this, but the same principles apply. With time, there is more data to work with, allowing businesses to accurately forecast production schedules and inventory for the next month, quarter, or year.

ATP inventory management and analysis

ATP supply chains give businesses a competitive edge over slower, less advanced inventory management systems. This advantage is hard to create otherwise, giving customers flexible delivery options in a narrow time window and a high rate of customer satisfaction. It sounds like a simple difference but can have a huge effect.

For example, salespeople often don’t trust what is listed in inventory because their inventory management software isn’t accurate or responsive to what is actually happening in the warehouse. This lack of trust can lead to employees going rogue, looking out for their own numbers, and causing problems in the supply chain. This can cause backordered items due to overzealousness — or the opposite — overly conservative delivery dates to avoid upsetting customers, both of which often mean lost sales.

With ATP forecasting, your supply chain can be one step ahead of the curve, anticipating your sales staff’s needs, creating a level of buy-in and trust that wasn’t possible before. An ATP supply chain offers the opportunity to stay in the sweet spot between in-stock and backordered, with items always available just in time for customers.

This also creates more happy customers—less venting privately and publicly about unkept promises or unresolved issues—and lower customer service costs.

By having leaner inventory management operations, businesses can reduce their markdowns and increase stock turnover rate, which improves not only overall revenue but also gross margins.

ATP inventory best practices

With any new process, ATP might seem intimidating to implement. To ensure a smooth transition and make the most of ATP, here are three best practices to keep in mind:

1. Include all relevant personnel during ATP onboarding

Supply chain leaders, salespeople, inventory planners, and customer service reps, and warehouse managers must all have a chance to offer input during the ATP onboarding process. Be sure to communicate the value of ATP and how it directly impacts all team members. The better everyone understands the system, the fewer obstacles you’ll experience down the road.

2. Use a best in class inventory management system

ATP makes sense in theory, but without an efficient inventory management software, you’ll find it hard to compete in a marketplace that’s becoming more competitive and complex by the day. QuickBooks Enterprise can generate ATP reports, enabling you to maintain lean inventory and forecast production schedules.

3. Start with a test cycle

It’s important not to overwhelm staff and leadership off the bat so that you can lower the stakes with a test cycle. Taking the time to walk through the process will instill confidence at all levels of your team and let you iron out any wrinkles before going live.

Final Thoughts

With each passing day, customer expectations are harder to meet. For businesses that sell physical inventory, fast and free shipping has become the norm, raising the bar for inventory and supply chain management.

If your business is exploring ways to improve your inventory management operations, consider upgrading your business management software to more accurately track your stock.

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Dominic Vaiana is a writer and bibliophile based in St. Louis. In addition to writing for QuickBooks, Dominic has developed content and campaigns for global brands such as Mastercard, GoDaddy, and InVision. Read more