Many companies today have multiple stores or branches, each stocking a number of products. When planning replenishment of products to smaller locations, buyers must decide whether to buy products directly from a supplier or to transfer quantities from a central warehouse (also known as a distribution center). This can be a complicated decision. Buyers have to weigh the additional inventory they must carry in a branch location if they buy full vendor package quantities from a vendor against the cost of “double handling” products as they pass through a central warehouse.
We have found through our experience and research some simple steps that often work well in determining the proper replenishment method for each product in a branch location. This month we’re providing you with a brief “outline” of these steps:
- Determine your “target inventory turnover” for your company. For example, you may be trying to turn over your average inventory investment five or six times a year. This should be your goal, not necessarily your current annual inventory turnover.
- Calculate the total annual usage quantity for each item stocked in the branch location. This could be the total sales for the previous 12 months or the sum of the forecast demand quantities for the upcoming 12 months.
- Divide the total annual usage quantity (from step #2 above) by the “vendor package quantity” for each item to determine the projected number of vendor packages of this item that will be sold in this branch each year. The vendor package quantity is the quantity of the product that must be purchased from the vendor. For example, if the vendor will sell you a product only in a case of 48 pieces and your annual usage is 960 pieces, you have the potential to sell 20 vendor packages in this branch (960 ÷ 48 = 20 cases).
- If the number of vendor packages determined in step #3 is greater than or equal to one-half the target inventory turnover, the item will be assigned to group “A.” If the number of vendor packages from step #3 is less than the target inventory turnover, the item will be assigned to group “B.”
- In most cases we are able to transfer less than a vendor package quantity from a central warehouse or distribution center to a branch warehouse. For this reason the lower turnover group “B” items should normally be replenished with a transfer of inventory from a central warehouse or distribution center. This will allow you to avoid surplus stock of these items from accumulating in the branch locations and allow you to maximize your overall inventory turnover of these products.
- Group “A” items should be replenished with a purchase order from a supplier if the branch location on its own can meet the vendor’s requirement for a target order on a regular basis (e.g., at least once a month). The target order is the vendor’s requirement that allows you to buy the vendor’s product and receive the discounts or terms that allow you to competitively sell the vendor’s products.
- If the demand of group “A” items is not adequate to meet the vendor’s requirement for a target order on regular basis, group “A” items along with group “B” products should be replenished with a transfer from a central warehouse or distribution center.
While this set of rules will not work in all circumstances, it may provide you with some guidance in effectively determining the replenishment source for each product stocked in a branch location.