By James Cooke
Carrying the right amount of inventory is probably one of the biggest challenges facing electrical distributors these days. If you don’t have the right quantities of a particular product in stock at the correct location, you lose a sale. If you carry too much inventory, which just sits in a warehouse, you tie up precious company money in unsold inventory.
That’s why every distributorship should consider inventory optimization software if it hasn’t done so already. This particular type of software has become one of the hottest supply chain software applications of late simply because it can save a business money by reducing excess stock.
What does inventory optimization software do? It calculates the amount and type of stock that should be held at each location in the supply chain, whether a factory, local distribution center or regional distribution center. That inventory calculation is driven by the parameters set by the user. In most cases, the parameters are the service levels for meeting customer orders.
A few years ago, only leading-edge companies were deploying inventory optimization software. But this kind of software has become more main-stream as the application has matured, becoming easier to use, install and maintain. There are even “cloud-versions” of this application available today; a distributorship could rent an online version of the application and avoid a huge upfront cost of a license fee and the hassle of installing and maintaining the application on in-house computers.
But the key advantage of today’s inventory optimization software is that it can provide an end-to-end view of supply chain inventory. The software can look across the entire supply chain, view all storage locations and treat the inventory as one common pool. In industry jargon this capability is called “multi-echelon.” Because the software looks at the entire set of inventory, no matter the location, the solution makes it possible for a business to carry less overall inventory than it would otherwise. Simply put, the solution tries to minimize the buffer stock across all nodes in the distribution network and not just one location.
Besides a reduction in overall inventory, this software can raise the fill rate on orders, improving customer service. By having the right type of inventory on hand in the warehouse, customer orders are filled promptly. In fact, one vendor of this type of software claims that this application can reduce stock-outs by about half.
This software can also be used in conjunction with a supply chain segmentations strategy, in which more profitable customers get more favorable order treatment and stock allocations. If a distributorship wanted to employ different inventory strategies for different customers, this software could be used for modeling that approach. Such an exercise could help determine whether a segmentation strategy is viable.
The next step in the evolution of inventory optimization software will be the incorporation of demand signals – data on actual sales- into the inventory calculations. When that happens, distributors will be able to even more precisely manage their inventory holdings and maintain even lower amounts of safety stock.
James Cooke is the editor of CSCMP’s Supply Chain Quarterly magazine, the premiere journal of global thought leadership for supply chain professionals. He has been writing and reporting on the best practices in supply chains for more than 30 years.Tagged with tED