Best Practices in Inventory Management

Wholesale distribution is all about inventory management. When your business requires getting your customers the products they need, when they need them, and at the best price, having the best inventory management system to underpin all of this becomes mission-critical. You need to be able to keep the right products in stock, in the right quantities, and deliver the best customer service. You need to run efficiently to keep costs down and minimize errors. You also need to be able to continually adjust your investment in inventory to keep it as lean as possible and to adjust to changes. These are all complex and demanding requirements and failing on any of them could be fatal for your business. Below we discuss some of the best inventory management system needs and best practices for distributors.

Get the Best Inventory Management System

The first and most critical need is to have the best inventory management system you can get. Without this, you will struggle to keep track of everything in and out, and out-of-stocks will quickly lead to lost customers. You need full visibility into your inventory so you can see for each product, what you have on hand, what is on orders, what is being picked, and what is on backorders. You need to be able to see open purchase orders and know when they are expected to come in. You need to be able to buy a product in one unit and sell in another, take an order in one warehouse, and fulfill it from other warehouses, and easily transfer between warehouses. You also need to be able to dynamically assign inventory to backorders based on changing criteria. You need to be able to handle and manage special orders linked to purchase orders. The best inventory management systems can do all this and handle thousands of products, in multiple units of measure, and across multiple warehouses.

Improve Inventory Turns

Inventory turns refer to the number of times inventory is cycled through your business per year or any given measurement period. Inventory turns can be calculated for your entire inventory or just a segment of it, such as a product grouping or a particular SKU family. Inventory turns give you a picture of how hard your inventory is working for you; it correlates closely with the return on your investment in inventory. Successful distribution businesses all make improving inventory turns a constant focus and high priority activity. The best inventory management systems will give you access to all the tools you need to calculate your inventory turns for specific products and/or product lines. Once you know what inventory product lines are working well, re-invest in these to extend and grow them. Consider special discounts and SPIFs to clear out inventory product lines that are not moving.  The target for successful distributors is 5-6 inventory turns per year. The best inventory management systems can help some companies achieve even higher results.

Reduce Investment in inventory

Closely related to inventory turns is reviewing the investment in inventory. High inventory turns and running out of product because sales are too close to the inventory quantity can lose you customers quickly due to out-of-stocks. Similarly having too much inventory tied up in safety stock will have a negative impact on your inventory turns. Successful distributors systematically evaluate and adjust to try to get to the ideal balancing point that yields the highest inventory ROI without losing customers. The best inventory management systems will give you the tools to determine your vendor review cycles, lead times, sales and use rates, and safety stock. Typically, successful distributors target safety stock at about 50% of the lead time sales quantity.

Continually Review Replenishment Settings

If there is one rule that is absolute, it is that things always change. There are always exogenous factors that change in the environment, and successful distributors have to adapt continually. Currently, with the Coronavirus pandemic and lockdowns, the supply chain is hopelessly backlogged, and all processes have to be changed to take this into account. The best inventory management systems allow you to continually assess, re-assess and automatically modify your review cycles, lead times, use rates, and safety stock assumptions. You should do this continuously and automatically update the settings based on the inventory management system’s results or override these based on your insight.

Optimize Warehouse Processes

Managing inventory levels through the placing and receiving of purchase orders, and the picking, packing, and shipping of sales orders involves a number of complex processes. Successful distributors seek to systematize these as much as possible to improve process repeatability, cut down on errors, and improve efficiency. To accomplish this, processes will typically need to be automated - at least for repetitive and simple processes such as picking. The best inventory management systems will provide the ability to track the status of purchase orders by container or vessel, track orders by picking, packing, and shipping statuses, and will allow the use of handheld scanners for most warehouse operations. These kinds of tools will cut down on human errors and typically will allow you to reduce headcount, which can create big cost savings.

Need Help Implementing Best Practices?

Contact ADS Solutions to learn about Accolent ERP one of the best inventory management systems for small and mid-sized wholesale distributors. Accolent ERP is Cloud-based and optimized for wholesale distribution.