Best practice recommendation by Jon Schreibfeder.
For more information and resources to help you achieve effective inventory management visit Jon at www.EffectiveInventory.com.
Wholesale Distributors tend to have similar inventory related problems:
- They have too much of some products. This excess inventory and dead stock leads to decreased turnover and profitability.
- They experience stock outs of other products. This results in backorders, lost sales and an overall decrease in customer service.
- They don’t know what is in stock. The on-hand quantity in their computer system does not agree with what is actually on the shelf in their warehouse.
- They can’t find material in their warehouse. They know the material is “out there somewhere” but they don’t know exactly where it is located.
As a result, many distributors don’t have control of their inventory. In fact they feel that their inventory is controlling them! If you are in this situation please don’t give up. Achieving effective inventory management requires a systematic plan.
“Effective inventory management allows a distributor to meet or exceed customers’ expectations of product availability with the amount of each item that will maximize their company’s net profit or minimize their total inventory investment.”
When looking for new computer software, here are some capabilities that we have found important in achieving the goal of effective inventory management:
- The ability to identify and correct for unusual sales or usage activity that probably will not reoccur in the future. Future forecasts of product demand are based on this “adjusted” usage.
- Separate items with sporadic sales/usage from those products with recurring sales or usage. Items with sporadic usage should be maintained based on a multiple of the normal quantity sold or used in one transaction.
- The ability to utilize different forecasting methods for items with different patterns of sales/usage automatically selecting the best formula for an individual product’s specific pattern of usage.
- Report the actual forecast error over the past several months using the formula:
Absolute Value of (Forecast – Usage) ÷ Smaller of Forecast or Usage
- If a company has lead times greater than 21 days the ability to calculate forecasts and other replenishment parameters for future months. This is commonly referred to as distribution requirements planning (DRP).
- The ability to incorporate collaborative information from sales, customers and other sources into the demand forecast. Afterward assess the accuracy of the information from each source.
- Maintain safety stock quantities based on the average deviation between the forecast and actual sales/usage recorded over the past several months. Adjust the safety stock quantities to achieve a desired level of customer service.
- Have a comprehensive warehouse management system (WMS) including radio-frequency bar coding, comprehensive cycle counting and the capability to operate a “paperless warehouse”.
- The ability to evaluate vendor price breaks and other considerations to determine “best buy” purchase opportunities.
- The ability to effectively replenish branch warehouse stock from a central warehouse or distribution center.
- Comprehensive inventory analysis including:
- Comprehensive ranking of products in each warehouse based on cost of goods sold, activity (i.e., number of sales) and profitability
- Customer Service Level (percentage of line items on customer orders filled completely in one shipment by the promise date)
- Inventory Turnover
- Gross Margin Return on Investment or the Turn/Earn Index (Gross Margin * Inventory Turnover)
- Percentage of Excess Inventory
Though each company’s needs and challenges vary the above list should get you started looking for software that will best meet your needs.