Inventory Replenishment Challenges in the Distribution Industry

Supply chain management is the attempt to optimize the entire process of manufacturing the product, right down to the point of its consumption, and all the stages in-between. In fact, the central theme of supply chain management is looking at the entire sequence as an integrated function, rather than looking at each link as if it is unrelated to the other. Moreover, each link in the chain has to be analyzed to insure that it is providing sufficient value added to compensate for its position in the chain and the resources it consumes.

This concept makes eminent sense for the very largest companies that have highly vertical integrated manufacturing and distribution functions. Many of the top Fortune 200 companies fit this description very nicely. Moreover, these companies have tremendous resources at their disposal and relatively sophisticated personnel managing their functions to accomplish this task.

The top ERP systems address the concept of supply chain management with add-on modules. The cost of these modules, however, is quite significant running from the hundreds of thousands of dollars per installation. Additionally, the installation of these systems may require radical changes in a company’s structure and can take a year or more to install. Finally, they tend to require an entire makeover of the operations in one shot, rather than allowing for a staged, methodical roll-out over time. In short, this is fine for the “big boys”, but what about the rest of us–particularly as distributors?

What About The Rest Of Us?

First of all, the rest of us have one advantage. We do not have fully integrated operations that start at manufacturing through final consumption. As distributors we are one link in the supply chain. Even if we do some in-house assembly, or value added function, it is a far cry from a fully integrated raw material to consumer type operation. Accordingly, the scope of what we can optimize is more limited. Nevertheless, as we will discuss more fully later, we can optimize our own operations with more sophisticated recognition of the constraints that are imposed on us by elements that are up, within, and also down, the supply chain.

Finally, we generally cannot afford the levels of expenditures that are required for these “big ticket” solutions, and even more importantly, cannot take the risk of a “one shot” radical overhaul of the operations. An early pay back is also usually needed to justify the investment. So, why can’t we just use our existing systems to approximate the benefits of the supply chain management concepts?

In some ways we can, but in some other ways your existing software systems won’t cut it. Before we talk about software systems, however, let’s talk about things you can do immediately.

Things We Can Do Without New Systems

We can analyze our functions with a more critical outlook on their contribution to the ultimate mission:

  • Are we re-handling the product with no appreciable offsetting benefit?
  • Are we going through jobbers, or other added levels of distribution that do not contribute, and are just a carry over from the past?
  • Are we perpetuating old traditional marketing policies that have a negative impact on the smooth flow of material, but are no longer pertinent in today’s market environment?
  • Are we working with our suppliers and customers to see if there are even simple procedural changes that can optimize the flow of materials?

I am sure that if you step back with an objective fresh outlook, you may find a series of practices that are counter-productive, and which can be changed without any new systems requirements.

Beyond this point, your existing software system most likely falls far short of the power and features needed in the inventory management area. This where the Mars Inventory Workstation from NBDS can open up an entire new level of potential in optimizing your supply chain.

The Impact that Mars Inventory Workstation Can Have

First, in order to enjoy the benefits of these concepts, you need a powerful constraint oriented “engine” to drive your part of the Supply Chain. Mars is such an engine, insofar that it recognizes a wide series of constraints that you must work within, and it optimizes the various competing factors such as carrying costs, handling costs, freight costs, etc. Second, it is powerful in its reordering logic and features, as contrasted to the more simplistic systems that are typically in use today.

Let’s look at some of these areas:

Basic Reordering Logic–Mars incorporates very strong sophisticated statistical concepts that have been modified so that they work in the real world, and are nevertheless easy to use by conventional inventory managers. These concepts, in contrast to the more simplistic systems that are in typical use, insure that amount of product being ordered is optimally balanced to the objectives of high fill rates and low inventory investment.

Mars uses stronger forecasting formulas and a reorder point logic that customizes the safety stock to each unique SKU to insure that the quantity being ordered is more finely tuned. These techniques also make the system easier to use, since it doesn’t require the user to compensate for the systems weaknesses.

Mars considers the entire supply chain in determining a reorder, particularly the product that is currently on order and in the pipeline. Consequently, it makes significant use of this “free product” in the pipeline to maximize turns, without jeopardizing fill rates.

Optimizing Forward And Backwards In The Supply Chain–Mars allows you to optimize your relationship with elements of the supply chain both ahead of you and after you.

As a distributor, Mars gives you the ability to match your reorders with the vendors various constrains, such as the minimum total order size, or minimum order size by item. It can determine the optimum quantity to purchase if price breaks exist by quantity of a specific item, and again for the entire order, or part thereof. And finally, it can round to pallet or lot quantities, or even do so only if it is an option, and is in your best interest to do so.

Looking forward in the supply chain, you can manage your customer’s inventories for them, using Mars to drive their replenishment quantities. This action, in addition to locking the customer in, eliminates paper work at a number of levels (we’ll post later more later in, “Manage Your Customer’s Inventory For Them”).

Optimizing Internal Competing Considerations–Mars will optimize the various internal competing considerations, such as the economic order quantity (EOQ), where a larger order size may be called for to eliminate more frequent handling within the warehouse. More effective tracking and handling of new products and substitutions further refine the internal inventory efficiency.

If some value-added function exists in your operations, Mars can drive the production or assembly operations to integrate it into the distribution needs, while recognizing issues unique to the production process.

In multi-warehouse operations, the entire issue of transfers and material flow can be handled in a more effective way. This action can even encompass the determination of what warehouses should act as the central receiving point for what products, and determine which other locations should order on these warehouses.

Cost, Level Of Internal Change Required, and Disruption

The actual cost of the Mars system is, despite its range of features, a small fraction of the “big ticket” systems. Secondly, since it is Windows based, it will connect to, and function with, your existing host system, in which you have a significant investment. This investment is not only in dollars, but also in training, familiarity, and in features that you have painfully incorporated into the system over time.

The nature of Mars is that while it is complex internally, it is designed for easy use by the typical inventory or production manager. The current hi-tech automobile is a good analogy. It is very complex internally, but the engineers have made it so that the general consumer can use it effectively.

You can implement Mars in very discreet stages, since it does not disrupt your existing system, or its inventory management module. Accordingly, you can stage the conversion for one product line at a time, or one location at a time. Finally, the actual period from the start of implementation to measurable results can be in weeks.

If you want to obtain some idea of the potential impact that this new look at your supply chain management can have, NBDS has a spreadsheet you can use to model your specific benefits.

Taking action on this subject is not really an option. When the very large companies have embraced a technology such as supply chain management, it is just a matter of time before the consequences of their actions flow down to the rest of us. It may be in the form of lower prices due to their lower cost structure, or it may be some other competitive advantage. Whatever form it takes, you can’t wait for the impact to hit before you respond.

One More Point

Theorists expound a concept that can be truly frightening to the even the most sophisticated distributor. The idea is that the old model of distribution must change, so, not only are you supposed to radically modify your software systems, but also radically change the entire way you operate.

I strongly disagree with their ideas in this area but let’s first state their point. They claim that the old model of distribution has been Buy–Hold–Sell or BHS. In other words, the distributor has traditionally bought product, placed it into inventory, and then sold it. The problem as they see it is that this model consumes too much capital and is made obsolete by new technology.

They propose that distributors use a “S3” concept of “Sell-Source-Ship”. In this model the distributors develop relationships with their customers and vendors so that they are aware of the customers’ needs well in advance of the actual ship date, arrange for vendors to ship in advance (maybe even on consignment) and then ship “just-in-time” to the customer. All of this to be aided by technology such as email, EDI, totally new software systems, etc.

This concept has its origins in what is happening in manufacturing where the traditional model of operations is giving away to concepts such as S3. Manufacturing, however, has always had lead times for delivery, and even schedule constraints, that were very customer unfriendly.

The very essence of the distributors function, however, is to provide small amounts of product, immediately off the shelf, and when the customer needs it with no prior warning. The idea that the typical distributor can “manage” their customer base to provide advance warning and then couple it with an entirely new model of operations, fails to appreciate a key point. The distributor operates well “down the food chain” and has customers that are totally unsympathetic to anything less than immediate availability of product regardless of the situation.

Moreover, once product can be sourced and sent directly to the customer without any time spent in inventory, the roll of the distributor is virtually eliminated. Where is the value added? Actually, one of the challenges of the distributor in the future will be to insure that they continue to give value added, because the S3 model does have meaning in manufacturing, thereby eliminating the distributors traditional function. But why accelerate and aid the process?

There is an answer to the challenge proposed by the theorists, however, which does not require changing the entire way you do business.

The key is to optimize the elements in your part of the supply chain over which you have control as discussed earlier. Within that effort, we talked about the ability of Mars to drive more of the product into the pipeline, and thereby radically reduce the actual inventory on-hand. The reorder calculations of Mars inherently drive inventory back into the pipeline. The length of the reorder frequency, however, is extremely critical in how effectively Mars can accomplish this function.

If you can drive the reorder frequency down to a week or even less, the number of turns you will get with Mars will be an astonishing 24 or even as high as 36. Consequently, the actual amount of the product in your inventory will drop to levels that approximate the utopia that the theorists discuss, without radically changing the model of your business operations.

In order to get the reorder frequency down to a week or less does require some change in your business practices however. First, the speed and ease of reordering with Mars eliminates the time and drudgery problem so frequent reordering is not manually prohibitive. Secondly, you have to make some changes to insure that you meet the vendors minimum shipment quantities for each reorder. This will require consolidation of vendors, negotiation with vendors on the size of their minimum shipment quantities, joint shipping programs, and restructuring of shipment patterns where multiple locations are involved. All these actions have off-setting financial implications that must be considered, but often it is just a case of cleaning up practices that have evolved over time with little rational.

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