Inventory management impacts almost every level of the distribution industry. The amount of inventory on hand impacts the company in almost every aspect. The amount on hand directly affects the ability to fill orders which in turn has an impact on customer satisfaction and sales.
The amount of inventory on hand also has a huge impact on company finances. Not only does the amount of inventory on hand eat up capital, but the debt service on that capital is also directly related to the quantity on hand.
Warehouse floor/rack space needs to be sufficient to accommodate the quantity on hand and there needs to be sufficient equipment and labor to manage the space. Carrying costs vary greatly but include inventory capital cost, inventory service cost, inventory storage costs and inventory risk costs (obsolescence, spoilage, etc).
Most of these costs begin to accrue the moment the truck hits the dock. Invoices for shipped goods are issued upon delivery and the clock starts ticking.
You can reduce all of these costs by reducing the quantity on hand. But then you risk being unable to fill orders and all of the headaches that brings. So how do you lower your inventory costs while maintaining your desired fill rate? Extend the definition of “on hand” – at least for replenishment purposes.
If you have a demand for 500 units a month on a particular item and you order in everything you need to arrive in the beginning of the month, you’ve tied up a lot of space and capital for the units that won’t sell until week 3 or 4 of the month.
Assume this item has a 14 day lead time (acquisition and shipping time) and you order it once a month. Your exposure period for the order is about 44 days (14 days lead time and 30 days between orders). You have an item exposure of ~720 units to cover that period. If you maintain a 2 week supply of safety stock (to avoid stock outs), you now have to add another 14 days for a total exposure period of 58 days. Which means you have a total exposure of ~950 units.
You’ve got 800 in stock today. You don’t have enough safety stock to meet your standards so you order 1000 units to cover the difference. In six weeks those 1000 units will hit the dock and start racking up charges. If all goes well, you will sell them in the next cycle and recover much of your capital investment.
But what if you increase your Order Frequency to every 2 weeks? Your new exposure period is now 28 days (14 + 14). Your base exposure for the period is down to ~455 units. Plus, since you are getting shipments in every two weeks you decide you can lower your safety stock to one week. Now your total exposure for the period is down to ~570. Based upon what you have on hand, you may only need to order 450 or 460 units.
You can go a step further and increase order frequency to weekly. Now safety stock is negligible because you are receiving a truck every week. Your total exposure covers a 21-24 day period so you are only ordering ~230 units at a time.
An added bonus is that since you are ordering so frequently, your ability to respond to market conditions greatly improves. If items stop selling, you have the ability to respond in a very agile way and the amount of dead stock in the warehouse is diminished.
This scenario is extremely simple: one item, one vendor. But it can be extrapolated to all of your actively stocked items. Inventory costs are greatly reduced, responsiveness is greatly increased. And as a bonus, customer satisfaction will likely increase because you’ll be able to more easily meet (or increase) fill rates without the excessive of safety stock you’ve held in the past.
By increasing your order frequency, you are able to project part of your future demand into the pipeline effectively making that pipeline a “virtual warehouse” that adds no hard costs to your existing infrastructure.
Of course you can’t do any of this running on “gut feeling” or spreadsheets. You need to have a robust forecasting and replenishment system (such as Mars Inventory Workstation from NBDS) to supplement your warehouse management solution.
Find out more about NBDS and the Mars Inventory Workstation.
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