White Paper on Distributor Inventory Why distributors have too much Inventory
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- Cecily Rosanna Horn
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1 2014 White Paper n Distributr Inventry Why distributrs have t much Inventry Since 2007 the United States has been In and wrking its way ut f a recessin In Whlesalers are finding that THINGS are different in the Distributin Industry. Custmers will leave a 20 year relatinship fr 5%. Custmers wh whlesalers say Cannt nr Ever Wuld use the WEB t buy their prducts purchased ver $300 millin dllars in Internet sales in 2013 With new custmers at a premium, whlesalers had t depend n current custmers fr their margins and suddenly needed t knw: What are they buying What have they quit buying frm us What are like custmers buying Are we making a prfit frm their sales? Whlesalers have t knw mre abut their inventry than at any time in the past 40 years. Use this White Paper t put a Magnifying Glass n yur: Buy, Stre, Sell, Pick, Invice, and Re-rder cycle Mel Carney Prfessinal Data Systems, Inc Prfessinal Data Systems, Inc Page 1 2/27/2014
2 White Paper n Distributr Inventry Why Distributrs Have T Much Inventry Distributrs that stay n tp f their inventry, have a cmpetitive advantage. They have mre cash available t supprt sales, marketing, and ther prgrams that will build the business fr the future. Here are sme f reasns why distributrs have t much inventry: Padded lead times: Purchasing peple wh d nt trust their cmputer s replenishment lgic, will add a SAFETY FACTOR t their lead time. Eliminating the "pad" is t challenge peple t prvide realistic lead time estimates. If a custmer wants t d business with yu, they will find a way t wrk arund yur ineffective replenishment system. When a custmer identifies that yu cannt keep stck n yur shelves because f an antiquated replenishment system, IF THEY WANT TO CONTINUE DOING BUSINESS WITH YOU, they will find a way arund yur ineffective replenishment prcess. They will tell yur sales persn that they have a big jb cming up and they are ging t need a lt f the A 100 s and whatever ther items they want yu t have n hand. Custmers Over cmmit n future plans and under cmmit with Purchase Orders. The sales peple, because the system des nt give them any infrmatin either, brw beats purchasing t buy this prduct. Purchasing finally agrees with the sales persn and increases their nrmal 10 % ver buy t 20% and yur inventry builds. This puts a burden n the distributr that is difficult t vercme. Is the quantity frecasted crrect r has it been padded by yur wn sales department? Are yur buyers adding 2 weeks t lead time t make sure that they d nt run ut f prduct? It is time t ask what causes yur purchasing peple t buy mre prducts. Prfessinal Data Systems, Inc Page 2
3 White Paper n Distributr Inventry Explre new ways t lk at yur vendrs and at yur sales and purchasing plicies. Ask yur principle suppliers hw yu can wrk tgether with them t reduce lead times? When pssible yu need t Use Technlgy t deliver yur PO s t yur vendr. This reduces the cst fr bth yu and yur vendr. EDI (Electrnic Data Interface/Interchange) reduces the cst f PO prcessing Each manual Purchase Order csts yu and yur vendr $50.00 t prcess. If yu are nt using electrnic price updating then PO s are being sent with the wrng pricing. This increases the cst f yur purchase rder. Each time yu and yur vendr have t cmmunicate ne n ne because f wrng pricing - yu add anther $50 dllars t the cst f a purchase rder. CUSTOMERS BUYING NON-STOCK PRODUCTS If a custmer rders a prduct that is a slw r a n seller, they shuld have t buy the whle case. If they d nt and yu have t sit n the inventry, yu need t knw that INVENTORY SETTING - COSTS YOU 20% PLUS PRIME, PER ANUM. Each time a PO ges ut that is belw the vendr s minimum dllar r weight the cst f inventry pker ges up. A mdern system maintains the weight and dllar levels and gives a warning t purchasing that this PO des nt meet minimum. Reviewing these issues with yur sales and purchasing staff n a regular basis will lead t a reductin in inventry withut impacting yur fill rates. Ignring slw mving, excess, r bslete inventry When we first started t wrk with ne f ur clients they tld us, "We d nt have much bslete inventry. Within 3 mnths f the initial installatin it was determined that 22% f the inventry was nt mving r was mving extremely slw. We have a reprt that captures bslete and/r slw mving inventry. When we install a new custmer wh is wrking with a mstly manual replenishment system r has t manually adjust their Min and Max field we find that they will have between 15 and 20% bslete and slw mving (r nt mving) inventry. Prfessinal Data Systems, Inc Page 3
4 White Paper n Distributr Inventry There are tw recmmendatins t help this situatin. Use technlgy t be yur eyes n every piece f inventry, large r small Put smene in charge f excess r slw mving inventry. Withut an "wner" it is t easy fr everyne, management included, t avid the issue. Revisit yur Inventry Management prcess n a regular basis. Smene in yur cmpany is making decisins daily, n hw much prduct t rder frm suppliers wh may be half a wrld away. When was the last time that yu sat dwn with purchasing t find ut what they use t make a buying decisin? If they are still using the lgic that they used in 2006, yu have a bigger inventry prblem than yu knw. On a regular basis, decisins are made n what was rdered last time, trying t make vendr minimums, trying t make dllar minimums. If yur sales reps and purchasing reps are buying prducts based n requirements (that did nt cme frm yur replenishment system) yu need t cnsider hw much yur setting inventry is ging t grw. Take 25% f yur inventry X s 29% = (20% plus prime) that is the per anum cst f inventry that is nt mving. If yu buy a prduct fr a dllar and it sets fr a year, the cst f that item is nw $1.29. Of curse yu cannt use that figure t calculate yur cst. Yu have t eat the additinal.29 cents. In tday s ecnmy what yu d nt knw abut inventry can hurt yu and yur cmpany. If yu have t much cash cmmitted t inventry that is nt carrying its weight in inventry turns - it is time t rethink yur prcess. We recmmend that yu establish a mnthly Sales and Operatins Prcess including a management review t lk at current and prjected inventry levels. It's a lt easier t nt purchase inventry Than it is t wrk it ff - after the fact Antiquated VS Mdern Purchasing Prcesses If yu r purchasing peple are walking the stacks t write dwn what inventry t buy, then 25% in slw r nt mving inventry is t lw a figure t use. Prfessinal Data Systems, Inc Page 4
5 White Paper n Distributr Inventry When yu walk the stacks t create a purchase rder: All that is being dne is that yu are simply replacing what has been sld. Withut a gd replenishment system, it is impssible t knw if an item is at the beginning f it BELL CURVE and starting t sell, has flatten ut, r it is at the end f its BELL CURVE and has stpped selling. WHAT IS A BELL CURVE? The graphic explains a Bell Curve. Sales f an Item are: Ging up and the Bell Curve is mving up the left side f the bell Ging flat, which means that the sales f this item have reached the tp f the bell curve and the next mve fr this item is that it will be ging int sales slide that may be gradual r precipitus. This depends n seasnality f an item. If sales are in decline the curve is ging dwn the right side f the Bell Curve- When a prduct is in decline, PrTrac will recmmend that yu reduce buying this item. The Bell Curve Cycle shws n r few sales f an item. If yu cntinue t buy at the ld rate yu will increase yur SETTING INVENTORY ttals. When custmers start t buy this item again, the Bell Sales Curve will tell PrTrac that it needs t increase the amunt that is being purchased because there are wrking rders fr the item. PrTrac watches the Bell Curve fr every item in yur inventry and makes recmmendatins t Purchasing n ptimal buying f an item. Withut a gd cmputer based replenishment system Yu will buy n hw well the prduct used t sell (six mnths ag) If yu walk up t a shelf and see that yu have 10 items f this ne prduct, withut a slid replenishment system, yu have n way t knw if 10 items is gd r bad. Is the prduct n the frnt r back side f the Inventry Bell Curve? What is the demand fr this prduct? What is the lead time fr this prduct? Hw much safety stck d we really need n the shelf? Hw many are wrking, n a sales rder but nt yet picked? Hw many are n an incming purchase rder? PrTrac knws all f these details abut every prduct small r large that is setting n yur shelves tday! Inventry usage is never Static At any pint in time, a prduct is either mving up r dwn the Sales - Bell Curve. PrTrac watches each prduct s Bell Curve and it will make a recmmendatin that yu let the sftware reset Min, Max, and Order Guide t reflect the current sales psitin f every prduct in yur inventry. Prfessinal Data Systems, Inc Page 5
6 White Paper n Distributr Inventry New prducts are s exciting, until they becme dust cvered. There needs t be a plan t visit new prducts and t wrk ff the inventry that the new prduct was suppsed t replace. This ges back t the idea f a mnthly inventry management meeting t discuss inventry levels and t take an hnest lk at new prduct sales. Are yu really sure that the new clr, size, feature, r package will increase sales? What has the track recrd been n previus prduct changes that were suppsed t increase custmer demand? Everyne wants t respnd t a new custmer r a request frm an existing accunt, and they shuld. Yur cmpany needs a prcess t review the decisin n hw much f the new item t stck. There shuld be fllw up t see if the riginal frecast has been achieved Here's a radical idea: Challenge yur sales and marketing peple Eliminate tw "ld dgs" frm the prduct line fr each new ne that they add. Dealing with yur inventry IN yur inventry review yu need t establish a measurement f yur inventry. Nte: Errrs in an inventry recrd always result in t much f the wrng item and a shrtage f the right ne We recmmend that all new items be entered int the system by ne persn. We als recmmend that yu use the vendr s item number s the prcess f updating pricing can be autmated. Many Legacy systems have t put the vendr s Categry r ID with a - befre the item number. This added character in a mdel number field, eliminates a systems ability t use electrnic price updates, because the item number des nt lk like the vendr s wn number. Mdern Sftware maintains the vendr ID r Prduct Line utside f the item number and that keeps that number pure and easily updated when a new price is released. EXAMPLE: PrTrac has a separate field t identify a Vendr and an item. While the tw are related they are kept separately by ur inventry system. The graphic shws that the Prduct Line (Vendr) and the Item number are in tw separate fields. When yur inventry item file is clean then it is easy t identify an errr. When there are a lt f errrs then yur staff gives up n the task. Prfessinal Data Systems, Inc Page 6
7 White Paper n Distributr Inventry Use technlgy t be yur eyes n yur inventry. Cmputer sftware des nt have favrite prducts r vendr reps. PrTrac will nly recmmend the prducts that are selling. If yu d nt take a physical inventry r nly take a physical inventry n a yearly basis we wuld expect yur inventry t have mre prblems. We recmmend that yu cnsider using a Cycle Cunt and wrk yur way thrugh all f the inventry Yu might cnsider Cycle Cunting yur fast mving prducts n a mre regular basis. Yu might cnsider assigning Inventry Bins. Bins will make a marked difference in yur warehuse peratin. It is easier t take a cycle cunt with bins and it is easier t train new warehuse emplyees. D nt Dismiss Bar Cding frm yur cnsideratin When was the last time that yu de-expedited a prduct? Expediting is the business functin f trying t imprve a prmised delivery date frm a supplier. De-expediting is equally imprtant. A Custmer rder changes, especially in the case f special r custm rders. Thse changes need t be cmmunicated immediately. Inventry perfrmance is measured at a "macr" level nly: Mst distributrs knw the turnver rate fr their business in ttal. Hwever, inventry decisins shuld be made at the item r prduct line level f detail. Measuring turns by categry r fr yur "A B C D" items can give yu great insight int where the investment in inventry is nt paying dividends. Inventry cntrl impacts every facet f yur distributrship. If yu are wrking arund yur system t d yur nrmal day t day prcesses then yu need t evaluate Our PrTrac Sftware. Mel Carney The mre time management spends n Inventry - the mre mney yu will make INVENTORY IS THE ONLY ASSET THAT GENERATES A PROFIT Handle it with care!! Prfessinal Data Systems, Inc Page 7
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