Last week we received an inquiry asking when it makes sense to set up a regional distribution center rather than having suppliers deliver all products directly to the branch or warehouse that will sell them. Distributing products from a central company location generally makes sense when one of the following situations exists:
• Your vendor requires you to place large overall orders for their products. For example, you might have to order full truckloads or containers from the vendor while your individual branches or warehouses don’t sell large volumes of these products.
• A particular item must be ordered in a large case or carton quantity. For example, you might have to order a case of 144 pieces of a #A100 widget while your stores only sell them one at a time.
• You must stock a product due to a long vendor lead time, but it is infrequently sold or used. For many distributors a lot of products are only sold once or twice a year. While a customer might be willing to wait one or two days for a local branch to obtain the product from your company’s distribution center they are unwilling to wait several weeks for you to order and receive the product from the vendor.
In all of these cases, a distribution center (also known as a central warehouse) helps prevent the accumulation of slow or non-moving inventory at lower volume warehouses. When analyzing if distributing a product from a central location is appropriate, you need to compare the cost of double handling the material (i.e., once at the distribution center and once at the local branch, as well as, the cost of transportation between company locations) to the cost of carrying large quantities of material at the branch location. Many organizations perform a complicated analysis in performing this evaluation. But, we have found that by adhering to the following rules, you can arrive at the same end and decide if a product should be centrally warehoused or supplied directly from the vendor to a branch location:
1) Calculate the “potential turnover” of each item stocked in the branch location by dividing anticipated annual usage by the vendor’s package quantity. The vendor’s package quantity is the quantity of an item you must buy from the supplier. For example, if your projected annual usage is 200 pieces and the product is supplied in a 100 piece case, you will sell two cases per year. The potential turnover of the item is two turns per year.
2) Calculate the ideal inventory turnover of the warehouse or branch location in question. We discussed how to calculate your ideal or target inventory turnover in a previous article “Your Ideal Inventory Investment”. (https://effectiveinventory.com/?s=Your+Ideal+Inventory+Investment is the link to the article on our website.
3) Assign the items in the branch location to either “Group “A” or “Group B” as follows:
Group A Items:
the potential inventory turnover of the item is greater than or equal to half the ideal inventory turnover of the branch/warehouse. (i.e., if your ideal turnover of the warehouse is four turns, the example item in step #1 would be assigned to “Group A”. These“Group A” items will normally be supplied directly from a vendor if the branch/warehouse, on its own can meet the vendor’s requirement for a “good” order at least once a month. A “good” order provides you with the terms or discounts that allow you to competitively sell the vendor’s products. If the warehouse cannot place a “good” order with the vendor at least once a month, the “Group A” products associated with that vendor will be supplied from the distribution center.
Group B Items:
the potential inventory turnover of the item is less than half the target inventory turnover for the warehouse. (i.e., if your ideal turnover for the warehouse is more than four turns per year, the example in Step 1 would be assigned to group “B”.
Group “B” items will normally be supplied from a central warehouse/distribution center (unless the cost of handling or transportation is prohibitive).
With a few simple rules you can implement a comprehensive supply chain within your organization. Do you have an inventory-related question? Let us know and we will see if we can answer it in a future newsletter.