Why Do We Keep Executing Bad Inventory Management Practices?
Wholesale distribution is an industry that has been around for a long time. That means a lot of the “best practices” reflect a less technology-filled era. Wholesale distributors face more innovation than ever, and the future favors those who embrace new tools, techniques, and technologies. Those who don’t will likely become obsolete, like some of the out-of-season inventory sitting in their warehouses.
However, we can’t talk about improving your inventory management processes yet. That’s another article. First, we must identify pain points and bad practices that you (or your company) implement now.
Bad Inventory Control
Just how vital is inventory control? Well, if you’re a wholesale distributor, you should be wondering if that was a serious question. Are you aware of just how many places bad inventory control processes and practices can impact your other departments? Do your employees draw a direct correlation between lost inventory and their paychecks?
When you don’t know how much inventory you have, its precise location, and the incoming and outgoing amounts, you open the door to slow order fulfillment, climbing costs, and theft and fraud.
Inventory is the lifeblood of a wholesale distribution company. Poor inventory management processes could impact your bottom line.
Overstocks and Out-of-Stocks
Inventory control is a dance, and everyone in your supply chain needs to have the rhythm. If you have too much of a product, it takes up space where you could be storing something else. Overstocked inventory increases the likelihood that an item will expire or incur damage before you can get it into your customer’s hands.
Conversely, out-of-stock items increase backorders. Let’s be honest: When you do your own shopping, have you ever canceled an entire order from one store because they didn’t have one item you wanted? Only to move on and place an order with another retailer? When your customer is ready to order, don’t give them a reason to visit your competitor when they have already decided on your company.
Inventory Costs and Depreciation
You don’t stop paying for inventory when you purchase it. You continue to pay for it with warehouse space and related warehousing costs (like insurance and taxes). Your inventory continues to consume monetary and physical resources while depreciating in value. The sooner you get it to your customer, the better. However, if you don’t know what you have, how can you do anything with it?
You should view your inventory as an investment. However, it’s not like investing in a home purchase, where you benefit from the home while paying for it.
Your inventory is more like a retirement account. You don’t reap the benefits until you meet certain criteria. In this case, the only criteria are that you must sell the item. Until you do, your inventory only represents tied-up capital. You incur more costs the longer you hold onto an item, and you run the risk of it going out-of-season or becoming obsolete.
The day DVDs busted onto the market was a bad day for whichever distributors stocked up on laserdiscs,
instead of staying up-to-date on market changes and innovations.
Decentralized vs. Centralized Inventory Systems
A decentralized inventory system favors local decision making based on local market factors and regionally unique events. When you have multiple warehouses, this sounds like a good thing. However, you must ask yourself: do all of my warehouse management personnel have the inventory management skills required to make inventory replenishment decisions? If your answer is no or maybe, then you may end up with replenishment orders or new orders that don’t have strong, quantifiable reasoning behind them.
A centralized inventory system allows upper-level managers to issue inventory orders with little to no input from local managers. Your experienced inventory managers can exercise control over replenishment and new order decisions, and align them with company best practices. The disadvantage to the centralized system is the advantage of the decentralized system. An off-site manager won’t have insight into the local community, and how those events may impact inventory requirements.
At the end of the day, you must decide which inventory management system will work best for your company. Maybe a hybrid system will solve your problems.
Expediting is a time-intensive strategy used to ensure the supplier delivers the goods promptly and that they are up to quality standards. As is often the case, time-intensive = expensive. However, for most wholesale distributors, the costs of expediting are still less than the penalties for late delivery stipulated in their customer contracts.
Industry Directions surveyed more than 190 manufacturers, distributors, and retailers. “73% of respondents said expediting was common. Additionally, 40% said this problem was getting worse.”
Around 60% of respondents to the Industry Directions survey said that their inventory forecasting accuracy was below 80%. Such a low forecasting accuracy negatively impacts your company’s ability to plan efficiently for customer demand. Then you’ll find yourself facing some of the inventory control issues mentioned above.
Many companies still use the traditional forecasting method of averaging product usage for the last several months. This practice helps them estimate how much of a product to order for the upcoming month.
However, this method doesn’t take into account unusual usage. If there was a one-time community event, unusual weather, or even a natural disaster, your average wouldn’t be a true reflection of future product consumption. So above-average usage will drive your forecast high, and below-average usage will drive it low.
Accurate forecasting requires that you look at all of the factors that impact product usage. If you don’t, you turn a valuable analytic measurement into a gamble.
Does it feel like technology has developed at a faster rate in the last 20 to 30 years? That’s because it has. Technology develops exponentially faster, and if you don’t make an effort to keep up, you’ll be left behind. Not all solutions are technologically driven, but technology has allowed us to look at the world differently than ever.
Technology is intricately intertwined with our day-to-day lives.
It has changed the way we communicate, work, and think. It has changed the way we live.
With that new outlook comes new ideas, techniques, and solutions to problems we used to accept as part of wholesale distribution. Are there problems in your inventory management chain that you’ve just overlooked in the past? Have you revamped any portion of your inventory management process recently? What changes did you make?