I worked with a distributor last week that had over 100 locations selling directly to end users. Despite the fact that over 35% of the distributor’s inventory (based on value) was in excess of a one-year supply and that most locations were experiencing frequent stock outs of popular items, management insisted their policy of each branch having “total control” of inventory and replenishment represented “best practices”. I was told the local people know “what is happening” and “what customers want”. The “total control” of inventory given to the branches by this company includes:
• Dealing directly with vendors
• Deciding what products to stock in their location
• Determining when to reorder each item from the vendor
• Specify how much of each item should be ordered
In most cases, the branch manager personally placed all replenishment orders. I asked how much time the branch manager typically spends on deciding what needs to be ordered and how much to buy. I was told, “whenever he or she is not dealing with customers or human resource issues”. After viewing operations, I found that buying was usually done after business hours, just before the manager went home. As a result:
- There are no established procedures for forecasting of future demand of products. Replenishment decisions are based on “S.W.G.” (i.e., scientific wild guessing)
- Lead times and other replenishment parameters are not actively managed
- Replenishment orders are often issued too late, when there is not enough stock left on the shelf to satisfy customer demand during the lead time (i.e., the amount of time it takes to place and receive a purchase order from the vendor).
- There often is an over-reaction to stock outs and a far larger quantity of a product is ordered from the vendor than what is needed to satisfy customer needs.
To achieve effective inventory management, meeting or exceeding customers’ expectations of product availability with the amount of each item that maximizes profits, replenishment should be managed by buyers whose primary responsibilities include:
- Ensuring that forecasts of future demand are as accurate as possible
- Identifying unusually large and small sale quantities. Discussing with local management whether these situations are atypical, or the start of a new sales trend
- Maintaining accurate anticipated lead times and order cycles (i.e., the frequency of receiving replenishment shipments)
- Issuing replenishment orders when there is adequate stock to meet anticipated customer demand during the lead time
- Buying the quantity of each item that will maximize profitability
Branch managers should be able to question, discuss and suggest modifications to replenishment parameters calculated by the buyer. But, actual replenishment activities managed by people whose primary responsibility is to ensure that your company has the right quantity, of the right item, in the right place, at the right time!