Accountants may argue that inventory is an asset, but successful distributors know, the larger inventory grows the more difficult it gets to store it, count it and pick it. They view inventory as cash waiting to happen, and actively work to accelerate that transformation. And they depend on Warehouse Management Systems (WMS) to provide the visibility and functionality needed to actively manage inventory. Here are six ways your distribution business can move towards leaner inventory, freeing up capital, improving margins and improving customer fulfillment rates.

Wholesale distribution software

Is inventory an asset or liability for wholesale distributors? (Part 1)

Synchronize supply with demand. The only good inventory is the inventory customers want today. It’s essential that distributors understand their inventory in the dimension of time, not just space.  So where do you get the crystal ball that let’s you see the future?  WMS provide powerful forecasting tools based on actual demand. This can be augmented by actual customer input as they electronically share their own forecasts to make yours better. A secure Web portal giving customers access to your WMS can automate this process.  

It’s also important to understand the forecast from the perspective of what products fall into a predictable demand pattern and which products have a more random demand profile. The predictable products represent the opportunity to reduce inventory to the leanest, just-in-time levels. The more random products are where safety stock is required in relation to the randomness.  All this data is in your WMS and a standardized, regularly drawn report on demand predictability should be a core component of your forecasting process.

Fight the urge to never allow a stock-out situation. It’s human nature for purchasing agents within wholesale distributors. A sale lost, or just delayed, by a stock-out situation is anathema. This emotion is probably the number one cause of excess inventory.  They need to internalize the forecast and believe in it deeply. And they need to understand the relationship of inventory carrying costs to volume price breaks and shipping costs. Understanding the cost of inventory, and the ramifications of trying to manage too much inventory, informs their decision- making. It’s tough, but a purchasing agent needs to understand that not purchasing can be as valuable an action as placing an order. Suppliers play a role in inventory management. Use your WMS to track supplier performance and regularly report to them how they rank compare to other suppliers.  That should be all the incentive they need to tighten up their own organizations.    

Use the 80/20 rule. It was the Italian economist Vilfredo Pareto who in 1906 observed that 20% of the pea pods in his garden yielded 80% of the peas and, thus enlightened, stumbled upon the fact that 80% of the land in Italy was owned by 20% of the population. Thus was born the Pareto principal and it has special significance for wholesale distributors. That’s because it’s almost certain that you have 80% of your inventory items represent just 20% of your sales. Obviously, more than 80% of your inventory management activity should be focused on that 20%. Use your WMS system to discover the 20% factor in multiple perspectives, by customer, by season, by margin and by hit frequency. The insights this gives you should help you push the 80/20 rule to something closer to 90/10, increasing turns in the bargain.

Continued in Part 2

Written by :

pamelarichards