The key to profitability in distribution is being able to fill orders your customer needs while minimizing your stock on-hand. Quite often we see most of the focus placed on the sales side trying to generate orders to match what is in stock. Too much stock, run a promotion, offer a discount, or bundle.
You can also focus on the purchasing side with inventory replenishment policies based upon good data. For example, different classes of items should be ordered differently.
- Obsolete Items – These should never be purchased with the exception of meeting a specific customer order. Obsolete items will only gather dust in your warehouse and tie up your cash until they are written off or down
- Non-Stocked Items – Although it seems intuitive that you would not stock items designated as non-stock, but we see it all the time! Only order these if your customer has ordered them from you and not a single unit more!
- Standard Items – These are items that you stock in anticipation of sale. The question is how many should be stocked and how frequently do you order them.
Having an Inventory Replenishment Policy for Standard Items not only informs purchasing agents how many to order but provides the structure for evaluation of how much you should carry on an ongoing basis.
How much inventory you should stock is based upon a variety of factors:
- What order fill rate is required for your business? The more commoditized your product the higher the fill rate needs to be.
- What is your lead time? The longer the lead time the more safety stock you will need.
- What is your supply risk? Will you be able to get the goods when you need them? Are your suppliers reliable?
- How well can we predict sales? The better we can predict sales, the more precise our stocking policy can be.
By gathering this data, you can set a target fill rate and determine a good “Safety Stock” number where safety stock is defined as:
Safety stock is an additional quantity of an item held in the inventory to reduce the risk that the item will be out of stock.
The problem with how most companies set Safety Stock is that they adopt a set-and-forget mentality. You have to review your Safety Stock levels regularly because your risks change, your forecasts change, or your business conditions change.
With safety stock calculated, most companies then set minimum and maximum stock levels.
- Minimum stock level is your Safety Stock level in days.
- Maximum level is the Safety Stock level + the Replenishment Cycle in days.
Purchasing agents then identify all items that are below the min level and order them given the complication of Lead Time for getting the items from your supplier. You have to find the items that will be below the minimum level after the lead time. That way, if you order those items today, the stock level will be at the minimum level the day the next shipment arrives from your supplier. The safety stock at that point should buffer you from late deliveries, under deliveries or under forecasts.
You will probably want to order all the items from a specific supplier at the same time. You could set up a spreadsheet to calculate the recommended order for all the items supplied by a specific supplier. There may be more calculations that you have to perform such as:
- Then need to order truckload quantities or containers before the supplier will ship anything to you. However, the last thing you want to do is just randomly add items to the order.
- Order in quantities where the supplier will give you a discount.
- Factor in an external event (the Super Bowl, hurricane, supplier disruption, etc.)
This is where SAP Distribution provides you the tools to crunch the numbers and send your purchasing agent a list of recommended orders. SAP Distribution provides you proven tools for best practices for inventory optimization.
The more complex your business becomes as it grows the more you need tools to provide the information, so your team does not have to look through mounds and mounds of data. The more data you have, the more you can use statistical tools like the Intelligent Forecast or cloud-based tools that have more algorithms to find patterns and project sales with greater accuracy.
The best part is that SAP Distribution scales up or down! You can start with basic min, max order recommendations with simple inputs such as orders in house. Then you can add forecasts as you get more sophisticated and graduate to statistical methods as you generate the data and your business grows.
Utilizing best practices can
- reduce your inventory carrying value freeing up cash for your business
- reduce the potential for obsolete inventory which must be written off
- increase your order fill rate through better knowledge of patterns
To find out more about how you can optimize your inventory with SAPDistribution.com and the powerful tools in SAP Business One, contact one of our distribution experts at 678-401-6244 or fill out a Contact Us form.