[From iSource Business, October 2001] Distributors, faced with the uncertainty that a slowing economy brings, are wrestling with the question of how even a moderate downturn will impact them. From reducing expansion plans and looking for consolidation opportunities to putting off technology investments and generally cutting expenses, many possibilities are being considered as reduced sales and falling profits become a reality in some sectors. However, distributors have a significant and frequently overlooked opportunity to reduce costs and increase working capital without scaling back operations, without making risky capital investments and without even going outside their own four walls. That opportunity is inventory optimization.
While many distributors are aware that they carry too much inventory as much as 10 to 30 percent many are at a loss when it comes to addressing the problem. Every business person knows that what isn't in stock can't be sold. Sloppy, inefficient inventory management can lead to all sorts of headaches for your company, not the least of which include unnecessary carrying costs, lost customers, lost sales and lost profits.
Although technology and other factors have shifted the focus of many distributors to issues related to the entire supply chain, there is still a strong emphasis on the physical aspects of inventory management, such as setting procedures to control physical inventory, determining the true cost of carrying inventory, and running reports from computer systems to measure turns. As undeniably important as these issues are, they are not focused specifically on how to make inventory management a true profit asset for your company.
With the help of technology and strategic inventory planning solutions, distributors can guard against the effects of economic downturns by taking advantage of the cost-reduction and sales-growth opportunities that sit in their own warehouses.
Out With the Old
As we all know, inventory optimization is a process that lets distributors reduce the amount of inventory they carry while improving service levels, ensuring that the right stock is available when and where it's needed, increasing turns, and reducing lost sale opportunities. Inventory optimization is rarely an area that management targets for sustained economic improvement. As long as orders are being filled and operations are running smoothly, companies can be reluctant to fix it. Part of the problem is found in some common misconceptions that many distributors have about inventory management.
One such misconception is that existing enterprise resource planning (ERP) systems can handle inventory management adequately. For small distributors not working in complex environments, this may be true. Most ERP systems do count and track inventory very well, and possibly even provide a basis for replenishment. However, such systems can lack the sophistication required to take inventory management to the next level, as well as the responsiveness necessary to handle rapidly changing market conditions. Nor do they have the depth or strength to evaluate and forecast inventory down to individual products and locations, which is essential if you're going to squeeze out additional costs and increase profits.
A second misconception is that turns are the most important measurement of success. Turns are certainly important, and profitable inventory management can actually increase the number of times distributors turn their inventory. But by focusing on turns exclusively, distributors often forego valuable discount brackets, profitable forward-buying opportunities and economic buying cycles. While capitalizing on these opportunities may appear to have a negative impact on turn rates, it's essential to analyze quickly and consistently the profitability of each buying situation, independent of the impact on turns.