Thursday, August 21, 2008

Inventory problems solving

Many companies suffer from several, apparently conflicting, inventory problems:

* Frequent stockouts of critical products.
* Large quantities (and value) of excess inventory and dead stock.
* Inaccurate product availability information in the computer system.
The underlying cause of these problems are the strategy companies hope would enhance their ability to effectively serve customers. Let's look at some of the reasons why their branch replenishment policies were doing more harm than good:
1. Any available stock could be transferred out of any other branch at any time if it was needed to fulfill an immediate customer need. On the surface this policy may make sense. Why keep four units of a product on the shelf in one location if it can be sold by another branch? Isn't that what inventory turnover and customer service is all about?
2. Salespeople buy because they know what customers really need.
3. Branches may overbuy in order to place vendor "target" purchase orders on a regular basis. A target order meets a vendor's requirements that enable a company to receive the discounts or terms that allow them to competitively sell the vendor's products. If each branch has to meet the vendor's target requirement when placing a replenishment order, they may have to purchase more of a popular item than they would if they could split shipments with other branches. They also might have to buy full package quantities of slow-moving products as opposed to "sharing" a package with other company locations.
At these companies, these problems and others could be solved by putting specific buyers in charge of replenishing inventory of specific product lines in all customer locations. These individuals had both customer service and inventory turnover goals they were expected to meet or exceed. This could be done through:
* Ensured that replenishment orders were issued as soon as the replenishment position of a product fell below its order point (lead time usage + safety stock or reserve inventory)
* Split replenishment orders between branches and centrally-warehoused slower-moving items.
* Possible unusual usage is identified and analyzed.
* Buyers approve all inter-branch transfers. After all, they are responsible for maximizing both customer service (i.e., minimizing stockouts) and inventory turnover.

All buyers were not necessarily physically located in the same office, but each was responsible for specific product lines throughout their company. As a result we achieved the results that every company desires: a maximization of both customer service and corporate profitability through effective inventory management.

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