Effective Inventory Management Requires Short and Long-Term Attack Plans
By John Gunderson, Senior Consultant
This article was originally published by Modern Distribution Management (MDM) and is used here with permission. For more than 50 years MDM has provided industry leading content for B2B Manufacturers and Distributors. We highly recommend becoming an MDM Premium subscriber.
At the MDM Shift 2022 conference, I led a session that took a deep dive into supply chain and inventory availability issues and how that has upset many distributors and manufacturers’ inventory cycles.
The combination of inflation, availability, labor shortages and a possible economic slowdown in 2023 are four macro forces that have not been all going on at the same time in B2B distribution. Your lead times are still long, some key products are hard to find, prices are still climbing, and you may have an economic slowdown that decreases demand. Those are some formidable challenges and headwinds for your business if you don’t take some unique approaches to address them.
Our session went in-depth on a number of key analysis approaches and steps you should consider taking now to be prepared from whatever challenges that may await.
1. Analyze your stock and flow inventory, and take deep dives into the data.
Availability and inflation have caused your purchasing and field teams to make on-the-fly purchasing choices to get your customer what they need now. That has caused SKU and supplier preference movement that you need to uncover with a combination of data analytics that are overseen by experienced personnel who know your business.
For example: You may have had in 2021 an SKU from a preferred manufacturer that was an “A” SKU, but it now shows up in your system as a “C” SKU. The supplier may have had availability issues, and your team may have had to move to an alternate source. The alternate source SKU from the other manufacturer SKU was a “C” SKU in 2021 but now has moved to a “B” SKU in your system. Your product depth for each SKU now in normal circumstances is off, and it is likely that your philosophy of the depth of each of your SKUs A-D you stock is creating system-suggested reorder points that are off.
Analyzing your SKU movement data is critical to uncover the SKUs that need an experienced team member to dive further into the data. This first one will help, but it will not be enough to uncover the full picture without additional data overlays.
2. Overlay your customer sales data on top of your inventory analysis.
This is as crucial a step as overlaying your top customers’ sales data at the SKU level. This top customer sales data overlay will highlight additional SKU movement. For example: ABC Electric may be historically one of your top and most loyal customers that prefers a particular brand for an “A” SKU. In March you were not able to get that brand — or another supplier had it in stock at a cost that was significantly lower, as they had bought it in large lower-priced quantities before prices went up). So, ABC Electric went to another supplier to fill the order. This caused that former “A” SKU to move to “C.” What happens when the customer comes back for another order and needs 50 of them, and you only have 25 on hand because your system only said to have 25 of that “C” SKU on-hand? The customer again goes down the street and orders that SKU from the competition. Without deep dive on SKUs that have moved in importance (“A” through “D”) with your top customers, you might just get caught in a “we-don’t-have-it inventory hamster wheel” that hurts top-line sales and customer relationships.
3. If you have lost order data at the SKU level, compile it and analyze it closely.
Some distributors and manufacturers capture lost orders. If you do, it’s time for a daily line-by-line review of orders you lost because of stock-out issues. Use that data to adjust system re-order point changes and make smart manual buying decisions.
4. If demand slows, make quick adjustments to your inventory cost basis as needed.
If demand slows and you anticipate deflation, you can get caught with inventory that has a higher cost basis than the competition. This normally happens most commonly with commodity products for distributors as the price of steel and copper is an immediate driver of first-cost prices, but in this environment, you can get upside down on non-commodity products. The old adage of you can’t sell from an empty wagon is true, but selling from a full wagon with higher-priced inventory than your competition during a slowdown is also difficult.
The Final Word
Now is the time to be ready to make sound inventory and purchasing adjustments by looking at SKU movement and overlaying your top customers’ past and current purchasing data. With all the ongoing supply chain issues, you need to analyze SKU movement using supplier and top customer data to provide your team with the “why.” Out-of-stocks have wreaked havoc on inventory planning and metrics, and it requires your team to bring a bit of experienced art to the science of the numbers.
Effective inventory management today is a data project that requires your experienced personnel to make the right manual adjustments to craft an effective inventory plan.
John Gunderson is a senior leader at Dorn Group with more than 20+ years experience leading category management, sales, marketing, pricing, analytics, and ebusiness with companies such as Crescent Electric Supply Company, HD Supply Power Solutions, White Cap Construction Supply, Anixter/WESCO, Modern Distribution Management, and EIS-INC. You can reach John at john.gunderson@dorngroup.com