Top 10 Reasons Why Distributors Carry Too Much Inventory
Few businesses can claim they carry the right amount of inventory – but what is the right amount? Depending who the question is posed to, the answers will vary from no on-hand inventory to overloaded shelves at every location. In a perfect world businesses would have just enough inventory on hand to meet customer demand each day, with no lost sales and nothing left on the shelves. Inventory Optimization is all about getting as close as possible to this ideal balance of too much versus not enough.
Ask various stakeholders why too much inventory is being stocked and here are the likely responses:
• Fear of customer dissatisfaction
• “Empty shelf syndrome” – empty shelves can make management nervous
• Lack of concern on part of management – not a priority
• Lack of appreciation for the cost to hold excess and non-performing inventory
• Lack of understanding of what is “excess”
• Lack of control on what is being bought
• Lack of skills and/or effective tools to manage inventories – systems, data, reporting, etc.
• Suppliers dictating what must be stocked
• Purchasing incentives such as lower price or better terms – to buy more stock than needed
Many of these are legitimate, appropriate, and necessary considerations for a business, but they must be balanced with financial and operational concerns. Like any financial investment, you want your investment in inventory to be directed to where it will generate the greatest return. This is the essence of inventory management. It sounds simple, but it is anything but.
The challenge becomes even greater in a multi-warehouse environment or in service trucks where the same SKU may be in heavy demand in one location, yet virtually unwanted in another. Lacking tools to identify “which is which”, a common distributor strategy is to stock all warehouses identically in the hope that each will have the necessary SKU when it is requested.
This ‘redundant inventory’ strategy places a heavy financial burden on the company. Too often it is regarded as the only solution to meeting customer demands. The fact is it need not be if the distributor has the tools to ascertain the unique SKU needs for each location and stock that location accordingly.
The best Inventory Optimization Software solutions solve this problem by classifying every SKU, by location, into a range that clearly identifies the relative importance of the SKU to the user’s customers. This means that a given SKU can and will have different Min/Max values at different locations, each reflecting its relative importance at the specific location.
REACS Software has a unique approach for identifying where each SKU lies in that overall ‘performance spectrum’ and it is this feature that enables REACS to determine appropriate safety stock levels for the winners and shrink or eliminate stocks of the losers.