Wednesday, August 13, 2008

Effective inventory management

by Jon Schreibfeder
In deciding what products to stock, remember our goal:

"Effective inventory management allows a distributor to meet or exceed his (or her) customers' expectations of product availability with the amount of each item that will maximize the distributor's net profits."

Sure, there are some items your customers expect you to have on the shelf, in every location, so they can be picked up or delivered within an hour or two. But are customers always this demanding? Are there products now stocked in every branch location that could be delivered within 24 or 48 hours without negatively affecting customer service? Let's look at an example:

Each of ABC Distributor's six branches sells an average of one Hayward 1396 pump (cost = $78.00 each) per year. There is usually one pump on the shelf at every warehouse. If you ask the branch managers, they'll say maintaining inventory of the pump in every location is necessary to provide good customer service. But in reality, customers are usually willing to wait a day or two to get the part after they place an order. As a matter of fact, several customers are shocked to learn that this item is usually available for immediate delivery. So why is the part on everyone's shelf?

*It allows each branch manager to control all phases of the order fulfillment process. They won't be "messed up" by the lack of performance on the part of another company branch.
*Like a squirrel gazing at a hollow tree full of acorns in November, many branch managers feel good looking at full shelves. They're confident that they can handle almost any emergency, except maybe a nuclear attack, if the warehouse shelves are loaded and their delivery trucks have full tanks of gas.
*It's a wonderful sales strategy to be able to say to a customer, "anything you will ever need can be delivered in 30 minutes or less."

None of these is a valid reason for stocking the product in all warehouses. If ABC Distributors stocked two of the pumps in a central location and transferred them to other branches as they were ordered, overall company inventory would be reduced by 10 pumps, or $780. If they could do this with several hundred or even several thousand products, they would enjoy a significant decrease in their cost of maintaining stock inventory.

What about your customers? Will your customer service suffer as a result of a new stocking policy? Let's look at the question from a different angle: Are your customers willing to pay premium prices to help support your bloated inventory? Wouldn't they prefer to pay lower prices and get non-critical parts in 24-48 hours?

But keep in mind that for this system to work, the warehouse that stocks the pump has to be a very, very, reliable supplier. It has to treat the receiving branches as preferred customers and provide consistent, accurate delivery of the parts ordered by the receiving warehouses.

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