2 Ways to Minimize Risk Through Inventory Management in 2023
A perfect storm of negative market factors is brewing. Watch distribution veteran John Gunderson and James Dorn discuss the inventory management metrics that distributors and manufacturers should be watching closely.
Video Transcript:
John Gunderson: Today you’ve got inflation, you’ve got product availability issues, and you’ve got a potential slowdown coming all at the same time. In my distribution career, we’ve never had all three things going on at the same time.
James Dorn: Our analysts are focusing on a lot of the factors in the market right now with inflation, supply chain, even moving into next year where some markets are going to be softening in demand. You know, we’re taking a hard look at some of the leading indicators that are going to help both distributors and manufacturers understand how much risk they have in their business with supply chain or backlog orders. All these factors are coming into play to where distributors and manufacturers have to have a real-time understanding of where all these factors sit, because so much is going to be changing on a constant basis moving into next year.
So John, let’s break down the metrics that we are recommending manufacturers and distributors focus on, moving into next year to minimize some of their risk.
JG: I think that’s a perfect setup to this conversation.
I think you got to start looking at your back orders today, because you’ve had product availability issues. So you have orders in your system that may not be real back orders. You may have an associate who says, “I’m going to order 400 of these and hope they ship me the 200 I actually need.” And you’ve got 200 on back order. At some point the manufacturer’s going to ship those to you. So you may have inventory excess if we run into a slowdown.
What’s really a back order? What’s a true back order? Those of you who have been around a long time in distribution, if you were around in 2008 when we had the financial crisis in October –– I was on a leadership team helping manage inventory for a distributor –– all our back orders evaporated overnight. And we found a lot of the back orders we had were not real back orders.
JD: Scary. Yeah.
JG: So I think you really got to look at your back orders, number one. I think it starts there.
JD: That’s great.
Beyond that John, because I really like the way you frame that is, you just never know when those are going to clear and what’s real and what’s artificial from distributors who are placing multiple orders just simply trying to get the product into inventory, but they don’t actually have the demand with their customers to fulfill all of those orders.
JG: Yep. And James, I think that really leads us into point two.
You’ve got to look at your SKU movement. Most distributors and manufacturers operate on an A, B, C, D level, where your A SKUs are a small number but they make up roughly half of your business or 40% of your business. They sell a lot, they move a lot, they mean a lot to you, they’re big ticket items. And as you go down, your B SKUs and your C SKUs, and your D are your slowest moving SKUs. You have an inventory plan for each one, right? You’re going to have more of your A SKUs on the shelf in inventory than you are your Ds. So if you understand that concept, it’s a traditional way that all manufacturers and distributors manage their inventory.
So what’s changed today? What’s the factor that’s changed that for you? Supply chain issues. You may have had an A SKU from this manufacturer for 15 years. They had supply chain issues. You can’t get it anymore. You’re not selling it anymore. All of a sudden in your system, it’s a slow moving C or D SKU. You’ve got to look at those SKU movements and make good decisions based on that. And the other important point is, James, what’s the other factor that has changed with supply chain issues? Your customers have changed your buying behavior.
JD: Yeah. Big time.
JG: So if they’ve come into you and they’ve said “This is an A SKU for me, this is something I got to have to work on,” and you didn’t have it, let’s say they needed 20 and you couldn’t get the product, they showed up on Monday, they needed 20, you only had five on the shelf. What did that person do? They just moved down the street and bought it from someone else.
JD: Correct.
I think part of this that really, leaders need to consider, is the complexity and the magnitude of this. You gave a great example, John, of there being fluctuation between A, B, and C SKUs. Now, just multiply that across all of your product categories, right? And across your entire business, and all the nuances that you have with custom criteria that you have at a customer level, at a product category level. There’s a lot of complexity with those business rules that were created and the complexity across an operation. To me that boils down to risk, right? And how do you effectively mitigate that risk and make sure that your teams are looking at the right metrics, are looking at the right scenarios here of what could be occurring across some of these, and how do you effectively manage that across your entire operation –– and supply chain for that matter?
JG: I think you said it really well. You know, almost you’re dealing with so many SKUs as a distributor or manufacturer, on the distribution side, you let the system tell you when to order ’em, right? Your system says, I’ve got 25 in stock. When it gets down to 10, on this date you order X to get back to your 25. If you do not bring in those customer elements we talked about and those SKU movement elements, and you let your system reorder, you’re going to have a car wreck of an inventory situation come January 1st.
JD: Scary. Another great example, John.
So let’s break it down. Net net, for distributors and manufacturers, what should they be looking into from a metric standpoint, and a leading indicator to where they can minimize their risk moving into some very interesting times next year, with all the factors across inflation, supply chain, and even softening market demand?
JG: One, look at every back order by size. Your biggest back orders, take a look at them. Almost do a line by line review, both as a manufacturer and a distributor.
Then also look at SKU movement. Especially look at your biggest key SKUs, your A’s and B’s, that make your business go around. Look to see how they moved. And use customer data and your SKU movement data to make better decisions. And make manual decisions on changing the inventory on those instead of letting the system do it.
Those are the two things that you want to monitor right now, today, and time can’t wait.
JD: That’s great, John.
Great insight, great examples.
JG: Thanks James.