If inventory is the lifeblood of a wholesale distribution company, then the inventory management process is its circulatory system. Inventory management systems pull in products from suppliers and push them out to customers. Benchmarking your inventory process is a bit like a wellness exam. So how would your company do?
Is its circulatory system quickly pumping blood through clean arteries, or is everything sluggish? You can’t achieve the highest levels of success with an inventory management process that is holding you back.
Let’s look at why inventory management is important and the top areas for improvement.
Why is Inventory Management Important?
If you practice bad inventory management processes, it will cost you money. A LOT of money. If you follow best practices, your company will save money. If you fall somewhere in the middle, maybe your inventory management isn’t hurting you, but it certainly isn’t helping you. No matter where you fall in the spectrum, you must always seek to improve your processes.
How Can I Improve My Processes?
Refine Your Inventory Control System
Product Segmentation
This phrase means a few different things across the web. In this case, product segmentation is when you group products based on certain characteristics. You can assign pretty much any characteristic to your products. It could be something like “products that earned more than $5,000 in the last three months.” Or perhaps “products that were out of stock in the last six months.”
Use product segmentation to decide the frequency of inventory replenishment, when you should increase your on-hand stock, or when you should stop carrying a product.
Fast-Moving vs. Slow-Moving Items
Identify which products move quickly and slowly from your shelves. Each product (or product segment) should have different safety stock levels. A product that jumps off your shelves should have a higher safety stock level than one that lingers.
Regularly recalculate your safety stock levels. If a product’s level goes up, then you can help prevent shortages by increasing your on-hand stock. For your low safety level products, should the level drop further, you will be alerted early to obsolescence.
ACCOUNTING RECORDS
Accurate accounting/inventory records simultaneously solve the problems of overstocks and out of stock items. Lowering your risk for inventory overstocks decreases your company’s wasted capital. When you reduce instances of out-of-stock products, you improve customer relations. You know what a happy customer leads to? A good reputation and more business!
ENCOURAGE A ‘LEAN’ MINDSET
Lean inventory management isn’t just an exercise in getting rid of excess inventory. It’s a mindset that businesses in all industries are adopting to keep up with a fast-paced, technology-fueled global market. In inventory control, you keep on hand only the products that will be used in a certain time frame.
More companies are leaning toward a “pull” strategy when fulfilling customer orders, meaning that you pull product only when a customer asks for it. This “just-in-time” strategy helps you save money on all of your warehouse costs, since you aren’t ordering products until after your customer purchases them.
Fair warning, though: This process works only when your entire supply chain is lean and can pivot on a dime. Your whole chain must accommodate a lean mindset.
INVENTORY OPTIMIZATION SOFTWARE
One of the best ways you can manage this delicate inventory control balance is with a great inventory optimization software. This sort of software takes advantage of today’s technology. Instead of tracking inventory levels in a particular warehouse, you can get an overall organizational view.
If a customer orders a product that is out of stock at one warehouse, instead of declining the order, it can be routed from another warehouse. With proper product segmentation, you can easily set safety stock levels and keep accurate accounting records.
Invest in Your Inventory Management People
Best practices indicate that in most cases, a hybrid inventory management system will serve your company best. When implemented properly, it takes the best of both the centralized and decentralized system models.
Whatever system you implement, one of the best ways you can improve it is by investing in the people involved in your inventory management. Well-trained employees increase the impact each individual has on your company. Quality training also allows you to cultivate and retain experienced personnel.
When you provide training to your inventory management personnel, you give them buy-in on the processes you wish to employ.
Even though wholesale distribution companies are more decentralized than ever, technology also makes it easier than ever to train your employees. The virtual training industry has grown exponentially.
Will you be one of the innovators who takes advantage of this tech?
Expediting
Have you ever evaluated your suppliers’ reliability? There are a few metrics to measure that:
- Promise date
- Actual delivery date
- Quantity ordered
- Quantity received
- Receipt condition
Expediting is an increasing problem across the wholesale industry. More and more companies invest resources in this intensive process to track their incoming inventory. It would actually be easier to assess your supplier reliability. Then you could focus on cultivating partnerships with suppliers who consider customer satisfaction a priority.
Increasing Your Forecast Accuracy
We briefly explored this common mistake in forecast accuracy: averaging product usage for the last several months to forecast product requirements.
Dedicate resources to increasing your forecasting accuracy. A low forecasting accuracy impacts your ability to plan for customer demand. Bottom line? You’ll have unhappy customers.
In order to drive your forecast accuracy higher than 80%, you need to take a more comprehensive view of the stats available.
1. Account for unusual usage. If you take the average of a product’s usage for the last six months, a critical factor flies under your radar: unusual usage.
Let’s use an example. If you have a warehouse in Louisiana and it’s almost time for Mardi Gras, you’re going to see a serious spike in the demand for Mardi Gras beads. By including this number in your 6-month average, you’re going to end up with a much higher number for your monthly product forecast.
How do you solve this problem? Set minimum and maximum margins for product sales so you know when to evaluate for unusual usage.
2. Use different forecast formulas for different patterns. You need to take a more comprehensive approach to your forecasting. Effective Inventory Management, Inc. identified five critical elements in forecasting:
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- Weighted average of past usage: Increasing the impact certain months have on your forecasting calculations. You make certain months impact your usage average more heavily than other months.
- Optional trend factor: See a consistent increase or decrease from month to month? You may want to apply a trend percentage to your usage average. Using just the usage average, you’ll never be able to accurately predict a number higher or lower than the quantities used in your calculation.
- Collaborative information from customers or salespeople: Your customers or salespeople may provide usage estimates that you can use in your calculations.
- Effect of promotions or events: When you know an event will impact your usage calculation but it doesn’t happen at the same time each year. You’ll want to remove the promotion’s effect from your usage calculation. However, you can use that information the next time the promotion occurs.
- Identification of the forecast horizon: Let’s say you have a product that has a 120-day lead time. If you placed your order at the beginning of June, your order should reflect November’s anticipated product usage.
3. Invest in determining the best forecasting formula for your company’s products.
This may involve acquiring a better computer program to run the data. Get a program that can crunch numbers by running potential forecasting formulas and comparing the results with the previous month’s usage. Then the program will be able to assign the formula with the lowest forecast error. You’ll help prevent overstock and out-of-stock issues.
How Do I Figure Out My Processes’ Weaknesses?
We explored this idea in depth in “Benchmark Inventory Management for Continued Success,” but primarily you must know where your process currently stands. That is the only way you’ll create an effective plan.
You can always benchmark your own processes, but you may find it beneficial to participate in an industry benchmarking study. Participants of these studies usually receive the results as compensation.
In the end, all of these methods may require you to change company culture. Today’s wholesale distribution market is tough to navigate. Companies have lowered their profit margins in order to stay competitive, and many are using “lean” processes to make up for it. You can’t afford to keep nearly as much excess inventory in your warehouses as in decades past.
The future of the wholesale distribution industry will belong to those who don’t ignore the winds of change. What changes are you making?
