Manage Your Customers Inventory for Them

Charles J. Bodenstab

In today's highly competitive environment, the distributor can use every advantage possible. In this regard, there is nothing that can compare to the competitive advantage of managing your customers inventory for them.

The advantages from your standpoint are fairly obvious. Once your customer has agreed to this arrangement you have become very “easy to do business with”. Provided you do not abuse this arrangement by price gouging, it is going to be very difficult for the competition to make any inroads into this relationship. After all, you have just eliminated a messy area that is not one of his strengths in the first place. Creation of purchase orders are eliminated, administrative costs in general are reduced, and if you do the job correctly, you will have reduced his inventory investment while simultaneously increasing his fill rate.

First of all let's define what we mean by managing your customers inventory. In this arrangement, you track the sales patterns and inventory status of the customer by some mechanism that we will discuss in greater detail later. Then on some periodic basis you re-supply that inventory from your own stocks, without any purchase order taking place. The customer verifies the receipt of product and that is the basis of your invoice.

Incidentally, when I was the General Manager of the Gould Automotive Battery Division in the early 80's, we performed exactly this function for J.C. Penny's and a few other very large national parts stores. And this was well before some of the more powerful technological advances that we enjoy today. The concept worked beautifully, and we enjoyed all the advantages inherent in this type of arrangement, as did the customers.

What are the problems associated with this concept, however? First, the customer has to be reasonably large. This is not necessarily something that you want to install at all your accounts regardless of size. There is a cost of setting up the system, and a certain reliance on the sophistication and resources of the customer. The old 80/20 rule applies here, since approximately 20% of your customers will account for 80% of your business, and these are the logical candidates for the application.

Secondly, you need to establish an effective low cost system for transmitting the pertinent information that drives the reordering system. The critical data needed is; some basic identification about each item that the customer is going to stock, (e.g. stock number and description), the stock status, (on hand balance, on order, committed, back ordered), and finally the sales history. It helps matters that the data is about products that you retain in your files, since you have a lot of the basic information regarding product characteristics.

With the various EDI (electronic data interchange) systems in force today, this data is often easily obtained. There are many other less advanced solutions that are possible however. For example, back in the 80's when we were doing this function, we relied on FAX transmission of data that was hand transcribed.

The final caution is that to perform this function you need an outstanding inventory management system that assimilates the customers data and makes sound recommendations that will not trigger questionable orders. Most of the software that is currently available in this area is frankly mediocre and will not achieve your purposes. In fact, these systems can trigger reorders that the customer sees are patently wrong, his inventories actually end up increasing, and worst of all, his own customer satisfaction goes down. This is not the basis for enhancing your relationship and eliminating competition. The inventory management system must have some specific characteristics for this concept to work:

• It must have a number of “fail safe” features that insure that the order does not go off in some irrational direction due to sporadic events (e.g. filtering out wild, non-representative demand points.)
• It must have a sound reorder point logic that can deal with slow moving and fast moving product equally effectively without manual intervention. (e.g. it can't use some simplistic formula for safety stock such as 50% of the forecast)
• It must deal with all the issue of EOQ (economic order quantity) that insures that you are not shipping ridiculous small quantities of low cost items.
• It must deal with all the other real issues of; carton restrictions, shelf minimums, shipping minimums, etc.
• Finally, it must be extremely easy to use so that you do not assume an unmanageable and high cost administrative burden.

This set of requirements can now be met with the MARS-IW constraint based Supply Chain Management System, thereby opening up the possibility of securing a significant competitive advantage for you in the marketplace.

One aside item. I normally abhor the idea of giving customers consignment inventories. It creates a tremendous cash burden, and the customer has no incentive to manage the inventories effectively. Nevertheless, granting consignment inventories can be one further technique for locking up the customer solidly. If the profit margins justify the action, then it is still something to consider.

If, however, you combine consignments with the process of managing the inventories for the customer, then you have eliminated one of the key objections. Now you at least have control of the inventories and can insure that your resources are not being squandered.