Distributors’ single biggest investment is in their inventory. So, making your investment in inventory work more efficiently can have a huge impact on your bottom line. You can optimize your inventory purchasing and automatically update your inventory reorder parameters based on actual results with the right purchasing management software. Inventory and purchasing software can also help you reduce your PO Cycle Time and better manage your Supply Chain.
How Inventory Replenishment Works
In good purchasing management software, replenishment generally follows this kind of flow. When the inventory quantity of a particular product falls to its minimum level (referred to as the Min Qty or the Reorder Point) it’s time to reorder. The Min Qty represents the quantity of that product expected to be sold during the Lead Time (which is the time it takes the vendor to deliver the replacement stock once a PO is submitted), plus Safety Stock. Safety Stock represents the distributor’s buffer quantity that ensures against stock-outs and is usually expressed as a percentage of the Lead Time Quantity. The reorder quantity is the amount needed to get back to the Max Qty. The Max Qty is the Min Qty plus the quantity expected to be sold during the PO Cycle Time.
Optimizing Replenishment
To optimize your replenishment, you need inventory and purchasing software that (1) compares the inputs for your reorder parameters: Lead Time, Use Rate (the sales of the product per day), and Safety Stock against actual results, (2) automatically updates out-of-date or incorrect reorder parameters, and (3) helps you reduce PO Cycle Time.
Automating Reorder Parameters
For any given date range, your purchasing management software needs to be able to report on Product Sales and Safety Stock. This should let you see what the Use Rate is based on actual sales compared to estimated values. If you are overestimating your sales rate, either because your estimates are out-of-date or are not reflecting seasonal variations correctly, the effect will be to increase both your Lead Time Qty and your Safety Stock which will increase your Min Qty and will also increase your Max Qty. This will lead you to reorder sooner and you will also order more quantity than you actually need. The effect on your inventory levels could be considerable.
Similarly, over any date range, the inventory and purchasing software should be able to run a Vendor Analysis report to give you actual Lead Times and fill percentages. If you are overestimating Lead Time, for whatever reason, you are purchasing sooner than you need to and keeping too much Safety Stock. Safety Stock is just a buffer to prevent stock-outs and doesn’t move. So, too much Safety Stock can really hurt your inventory efficiency.
Based on the Product Sales, Safety Stock and Vendor Analysis reports your purchasing management software should give the option of automatically updating reorder parameters. You should also be able to run these to properly reflect seasonal variations in your inventory reordering.
Purchase Order Cycle Time
In a typical purchasing process, PO Cycle Time is the time it takes you to get from a purchase requisition through internal approval to a PO submitted to your Vendor. If you can get your PO Cycle Time down, you can reorder more frequently for less quantity. This will lower your investment in inventory and increase the efficiency of your inventory. The higher your inventory turns, the harder your inventory is working for you, and the greater your profitability.
How to Reduce PO Cycle Time
How do you reduce your PO Cycle Time? Ask yourself these questions:
- How quickly can you get a PO requisition approved?
- Once approved how long does it take to generate the list of vendors you want to send an RFQ to?
- How quickly can you get the RFQ out?
- How quickly can you turn around RFQ responses?
- Then how quickly can you get the PO out?
Once you know where the bottlenecks are, you can work on streamlining these processes. The internal approval process is something you can look at and improve. The other 4 items can all be addressed by having the right purchasing management software. The best inventory and purchasing software can (i) allow you to build PO requisitions for approval that can automatically be turned into POs when ready to submit, (ii) keep the history of every vendor that you purchased a product from, (iii) automate the sending of RFQs to a list of vendors, (iv) automate the selection of the “winners” from the RFQ responses and (v) automatically create the POs for the winners.
Supply Chain Management
There are several steps that can be taken in your supply chain that will also help reduce your PO Cycle Time. Some proactive supply chain management steps that can be taken include:
- Implementing the right purchasing management software
- Improving vendor networks
- Diversifying vendor relationships
- Controlling Costs
- Getting a better handle on demand
- Managing inventory better
- Making Supply Chain Management a priority
See this blog: How to cope with Supply Chain Disruptions which explains some of the proactive steps distributors can take to improve their supply chain management.
Summary
Distributors can greatly improve their inventory efficiency with the right purchasing management software. Inventory and purchasing software can also help mitigate the challenges of today’s Coronavirus-induced supply chain meltdown. Contact us to see what Accolent ERP Cloud-based purchasing management software can do for your distribution business.