Daniel Fritsch August 20 2015 6 min read What's in this article? Financial Considerations of Inventory Replenishment Operational Considerations of Inventory Replenishment Common Replenishment Challenges for Wholesale Distributors 4 Inventory Replenishment Tactics to Increase Profits Trends In Wholesale Distribution Inventory Replenishment Compliment Your ERP with Optimization Software Any distribution business that carries a range of products or a large quantity of inventory will need to avoid situations where there are items of stock that are unavailable, which is commonly called a stock out or back order. Stock outs can be very costly to an organization in that they result in short term sales losses but can also lead to long-term customer loyalty issues or even attrition. As stock is sold, inventory procurement will need to take place to ensure that items are replenished to meet customer demand. Conversely, distributors cannot afford to carry exorbitant amounts of excess or extra stocked items, as the carrying costs of maintaining that inventory erodes profit margins. This is essentially the arduous balance of maintaining optimized inventory levels. In this blog, we will explore how enhancing inventory replenishment processes and practices can breathe profits back into your supply chain. Financial Considerations of Inventory Replenishment In a wholesale distribution business where profit margins are narrow, inventory optimization is a key part of the business. The businesses financial leader, often times the Chief Financial Officer (CFO) or VP of Finance, will be responsible for ensuring that the business is profitable by adhering to a sound financial strategy, and they will cooperate with the procurement manager to ensure that there is sufficient inventory to meet demand without too much capital being tied up in stock. Most financial leaders lean heavily on their inventory management systems and accounting software to run inventory analysis and financial reports. The inventory buyers are responsible for inventory purchasing, and this will involve negotiating the best price to ensure that the inventory can be sold profitably. It is also important that inventory be acquired by suppliers in a timely manner to ensure distribution is not interrupted. In order to ensure that the inventory is tailored to meet customer needs, demand forecasting will need to take place to predict future sales and ensure that stock levels will be sufficient without interrupting cash flow. Most financial leaders operate with legacy applications that lack demand forecasting functionality or are left to manually calculate demand forecasts in Excel, which increases error margins and can be very time consuming. Operational Considerations of Inventory Replenishment The job of the operations leader, typically the Director of Operations, can occasionally conflict with that of the finance director due to the need to ensure that the operational side of the business meets customer demand. Operations teams are typically held to service delivery target on all orders over measured periods of time called service delivery rates or order fill rates. Most operations teams target a service delivery rate of 95-100% on all orders. This is usually accomplished because the business is spot on with their inventory replenishment and purchasing practices, or more commonly, the business is carrying way too much inventory. While the operations manager will be working to avoid an excess inventory, they will also need to ensure the operations are running smooth, with no rushed orders and mistakes that could lead to complaints and increased costs. The operations manager will also be looking to inventory turnover rates for stocked items to ensure that stock is being rotated to prevent inventory obsolescence. In addition, they will also be looking to minimize the manual aspect of inventory control and reduce the time spent on stocktaking. Common Replenishment Challenges for Wholesale Distributors The wholesale distribution of non-perishable goods operates to tight profit margins, so costs need to be kept minimal and organizational efficiency needs to be maximized to maintain profitability. Certain variables can present challenges that in effect will hurt profits and performance: Variability of supplier lead times: Vendor and supplier lead times can make or break a distributor’s profitability. Even reliable vendors will have unforeseen and unpredictable disruptions in delivery. The interruptions in stock availability can negatively impact customer relations and loyalty over time. Adequate safety stock level management is the most effect means to sustaining vendor variability. Maintenance of safety stock: Customer demand is seldom completely predictable: Just In Time (JIT) supplier delivery for wholesale distributors is often times too risky, so a certain amount of emergency stock needs to be kept for your highest turnover items to ensure customer demand is satisfied. ABC Analysis can help operations managers better understand which items are classified as high or low priority. Minimum/Maximum Order Level Quantities: This has been shown to be an inefficient inventory purchasing practice. A minimum order quantity may take advantage of reduced carriage costs, but it can also result in excess stock. Similarly, a maximum order quantity can result in excess carriage costs and increased lead times. Either way, you are likely ordering not enough stock to meet demand or your supplier is forcing you to buy too much which can lead to excess stock or even obsolete inventory. Excess Stock Levels (Over stock): Having too much stock impedes cash flow and negatively impacts profitability. Also, if demand for those items falls off over time, managers are left with obsolete inventory that has to be written off the books as a loss to the business. Stock Outs (Back Orders): Having insufficient stock can disappoint customers, leading to decreases in customer loyalty, higher customer attrition and new customers for your competition. Stock outs also interrupt cash flow, which can lead to costly backlogs. Stock Obsolescence: Poor stock forecasting leads to an excess of stock with little or no demand. As time passes, the stock becomes obsolete and needs to be sold at heavily discounted prices or even written off as a bad investment in financial statements. This typically reduces the overall profitability of the business and can look very bad to Executive Management or stockholders. 4 Inventory Replenishment Tactics to Increase Profits Now that we have covered the big issues facing wholesale distributors, let’s take a look at the 4 main components of driving more effective inventory replenishment practices to lower costs and increase profitability. Know when to order more inventory: It is important to know the lead-times between the order being placed and the fulfillment of that order to predict the reorder frequency and prevent excess inventory. Historical sales and inventory seasonality can be used to predict ordering points and ensure that old stock is sold before a new order is placed. However, a certain amount of safety stock will need to be kept to fulfill unexpected orders or to cover your stock balances in the event of an unforeseen supplier delay. Know exactly how much inventory to order: As some items will sell faster than others, past performance can be used as a gauge to order the correct amounts of stock. Historical sales forecasts are a strong indicator of how well a product will preform in the coming months. Seasonality is also a large factor in ensuring stock balances are being adequately maintained to meet customer demand. A common mistake of distributors is not accounting for the product life cycle of stock. Every inventory item will have a birth, growth rate, decline and end of life. Being able to track the product life cycle stages of your inventory results in more effective tracking of potential stock outs or excess stock situations. Monitor and Measure Vendor Performance: Most vendors and suppliers are selected based on their volume discount pricing. Other factors should be considered in a vendor selection including their willingness to be flexible with minimum and maximum order quantity requirements. Vendor lead times and the ability to track their historical on time delivery and projected lead times can also reduce variability and overall costs in your supply chain. The ability to flexibly negotiate price on bulk orders is also a bonus. You should have a system in place that analyzes these vendor performance metrics to ensure you have the right preferred vendor selected for every unique inventory replenishment order. Use Multi-Location Inventory Redistribution: In a multi-warehouse operation, some warehouses may have an excess of stock, while others may struggle to fill orders due to high item turnover ratios. Being able to redistribute stock between warehouses efficiently can keep stock levels at optimum levels whilst maintaining service levels. Redistribution practices also take some of the costs out of your vendor and supplier relationships. Using inventory already in your warehouses and on your books will result in the freeing up of cash flow while mitigating the risk of inventory obsolescence. Trends In Wholesale Distribution Inventory Replenishment Enterprise Resource Planning (ERP) systems help manage the day to day accounting for inventory while keeping a ledger of what inventory has come in and what has gone out to monitor company-wide resources. However, wholesale distribution companies that are looking for a competitive edge require more than what traditional inventory management systems can offer. Financial and operational leaders require inventory optimization solutions to further drive down their costs in the supply chain, while ensuring customer satisfaction is kept high. To more effectively manage stock replenishment and purchasing practices software such as EazyStock can help business leaders monitor stock levels in real-time to maximize the efficiency of operations. Inventory optimization solutions extend multi-location planning and redistribution capabilities to match inventory to customer needs by enabling stock to be moved where it is required, keeping service levels on target. This also ensures that stock is turned over regularly, freeing up working capital to be invested back into other areas of the business. Software, like EazyStock, helps to eliminate excess stock, and this in turn can reduce the carrying costs of the overall inventory. The elimination of excess stock reduces the need for storage space, while the automation of inventory management software helps to reduce back-office staffing and the number of warehouse operatives need to maintain efficient operations. Obsolescence can be managed by monitoring historical sales data and demand patterns as items move through their product life cycles. Optimization solutions can even send system alerts in real-time to mobile devices notifying you when something needs attention. Compliment Your ERP with Optimization Software While ERP is an important part of managing the overall company, a specific inventory management system can be run alongside the ERP software to enhance overall operational efficiency. Inventory levels will affect other factors such as staffing levels and transportation costs, which will in turn affect other operations such as HR. Therefore, owing to the interdependence of inventory levels on the overall operation of a wholesale distribution operation, it is logical to link inventory optimization solutions to support ERP systems. Inventory optimization software should be seen as complementary to ERP systems and integrated into existing operational processes. Learn More: To learn more about boosting inventory profitability while optimizing inventory replenishment, download our free white paper here! 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