As a distributor, you know that inventory control plays a significant role in your business. It represents a large investment since in order to keep enough inventory to satisfy customer demand, you must plan and maintain storage space, acquire inventory management software, take regular inventory and pay staff. Because these are costly processes, companies will often tackle them first.
Yet simply cutting into stocks without having developed a plan can prove disastrous to a distribution company’s financial health. In fact, this can lead to increased shortages, reorders and complaints, and even lead to lost business opportunities.
As a way of avoiding this predicament, it is important to establish effective stock management that takes into account two key processes: inventory tracking, to monitor quantities for each item, and replenishment control, to counter shortages while preventing costly surpluses of stock that is difficult to sell.
To help drive these two processes, companies can benefit from having an ERP (Enterprise Resource Planning) solution. Moreover, cost/benefit analyses on ROI (Return on Investment) demonstrate that inventory reduction is often at the top of the list of arguments in favor of implementing an ERP solution.
As you build your inventory management plan, it is a good idea to leverage some proven strategies. Here are four simple but effective strategies for smart inventory management:
1 – Maintain accurate inventory records
Trying to manage inventory without tracking quantities is nothing short of utopian. If you are not using an inventory tracking system that accurately reflects your merchandise movements, your business is at risk of failing to fulfill orders and disappointing customers.
The accuracy of any inventory tracking system is based on reliable transaction reports. Any inventory movement must be recorded in the tracking system in a timely and accurate manner. This task is not as simple as it appears because human-based procedures are subject to errors, delays and lost transactions. Therefore, employees tasked with transaction reporting must understand the importance of tracking every item they move.
Some data collection can be partially automated, most often through a bar-code scan. This reduces the effort involved in data collection as well as the number of manual collection errors.
Regardless of their nature, inventory records are error-prone. Counts of 100 items frequently produce a less than 50% accuracy rate. Cycle counting inventory is the best solution to improve accuracy and eliminate the cause of errors. Counting a certain number of items each day or week, according to their importance, and logging them into the system, can help you identify how errors occur and fix your procedures so errors are eliminated. This approach has helped certain businesses achieve accuracy levels sometimes reaching over 98%.
2 – Ensure proactive planning
It is essential to have an efficient replenishment strategy that plans for new inventory to arrive just before your current supply runs out. There are different approaches to help you achieving this goal.
In a basic distribution situation, the “order point” management method can be implemented in several ways: walking through the warehouse to identify items that are out of stock or at low levels; drawing on inventory maintained in a reserve supply, then initiating the order process. Computerized order point that provides statistical analyses on item use and replenishment lead times, to calculate best order point for each item.
Distributors can also use a technique called Distribution Requirement Planning (DRP). Using forecasts on demand, and work backward in time through the distribution network to line up replenishment orders to minimize inventory while preventing shortages.
While inventory management can be costly, shortages can be far more damaging to your business. Therefore, it is essential to find a customized proactive inventory management tool such as an ERP system. Of course, no replenishment planning system is perfect, so it’s always wise to carry a little safety stock.
3 – Focus on improvement
There is a direct correlation between reduced stock reduction and an increase in the risk of shortages. But there’s also a third moveable factor involved: Variability. Fluctuations in supply and demand, including inventory accuracy errors, have an impact on this factor. Because it is impossible to cover every variation, we have to live with a level of availability (fill rate) less than100%. However, by reducing variability, you can increase the coverage rate without increasing your inventory. Here’s how:
- Improve inventory accuracy (use cycle count)
- Improve forecast accuracy (work with customers and distributors)
- Reduce lead time (improves forecast accuracy)
- Enhance your reliability (tighten up procedures and controls)
- Consider implementing integrated systems like ERP, warehouse management systems and other technologies that improve accuracy
4 – Reduce supply delays and lot sizes
Companies need to maintain inventory because of lead time. Longer lead times mean longer storage periods for inventory (including the security stock) and bigger orders. The size of replenishment lots can be calculated by balancing the costs of ordering and storage to determine the most economical replenishment quantity. A successful company will minimize expenses by avoiding overstocking while reducing orders.
To decrease order size, it is important to reduce associated fixed costs, including operational cost and increase efficiencies around purchasing, receiving, handling and inspections. Several technologies can streamline the ordering process. It is also possible to expedite receiving and handling by working with pre-selected suppliers and applying quality assurance principles.
Developing and implementing effective inventory management can be burdensome and costly in terms of time, money and effort. But keep in mind that good inventory management pays off in higher customer service and satisfaction, lower overall inventory investment, fewer backorders, reduced disruption and lower cost of expediting. The rewards are well worth the effort!
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