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Many different schemes exist for managing inventory in a multilocation firm. Most wholesale distributors start with locations that control most of their replenishment needs. Over time, they fall into a model where a few larger sites support and feed inventory to several smaller ones. This is commonly referred to as “hub and spoke.”
The reason for this type of replenishment is that the smaller locations generally do not have adequate sales volume to meet the supplier’s financial requirements. Larger locations feed inventory to the smaller ones through a series of planned transfers via common carrier or company-owned trucks. This can be an effective way to maximize purchasing power, but it also can lead to an escalation of expense and a constant shell game of sellable inventory.
Is your current method satisfying your customer to a high degree, or are you just driving up operating costs and causing discontentment in the branches?
This subject came up twice in the last month, which is usually a good indicator that I should write about it. Trust me, coming up with topics to write about every month isn’t always easy. So, when one slaps you upside the head, you should probably run with it.
The first occurrence was in a pod of purchasing managers that I facilitate. We talked about the challenge of keeping A and B items available for sale in the branch locations. As many of you know, I hate the alphabet designation of ranking because it can be subjective. “A” is in the eye of the beholder.
In this case, we are talking about high-hit items; those in the branch incurring the vast majority of transactions on an annual basis. Generally, these are your top 250 to 300 items. When you run out of them, customers become disenchanted, and branch managers question the inventory management scheme’s intelligence.
In the second occurrence, a new client shared his discontent with his current inventory replenishment scheme. Although the company has had its fair share of stockouts on high-moving items, the real indicator has been the number of transfers rolling around its geographic footprint: too many last-minute transfers and some questions on how to support the firm’s internal replenishment system.
Furthermore, the distributor is pondering a move to a nonselling distribution center. Although this is a common evolutionary step, it does cause some intestinal discomfort to the sales-dominated folks out there. Selling versus nonselling hub locations is an interesting debate. I will take a crack at it later in this column.
Understanding your ERP System
Fortunately, both occurrences have similar considerations and solutions. First and foremost, you need to understand the capabilities and functions of your ERP. If you don’t know how the system handles branch inventory replenishment and how to set it up properly, you are in for a lot of disappointment and a fair amount of manual workarounds. Neither were included in the product literature when you invested in the system, so it’s time to head back to school.
For the most part, good distribution-based ERP system manufacturers have thought through this challenge and provided you a solid solution. It may not be the solution you are used to, but it was probably crafted from the multitude of users over a considerable time. Rather than fighting how the system wants you to move the stuff around the company, perhaps you should give it a chance to work its magic.
When was the last time you had the ERP supplier look at how you are using the software? If you have been on the system for a while, it has probably been a few years. A lot can happen in a few years: software modules are improved, and people on your staff change seats. It’s probably time for a refresher. This is often called a system audit.
These used to be fairly cost-effective, but one of my pod participants indicated that some ERP companies jacked up the pricing on their consulting audits. I will be very clear in my response here: This is a really stupid and short-term direction. By pricing this in a manner that keeps your users happy and curious about the product, your customers will give you glowing testimonials and become your noncommission salesforce.
As an alternative to this foolish trend, you should look to other users for help. Many ERP systems include robust user group platforms for you to join. Members tend to be very generous with their time and experience. They are often far more adept in system functionality than software consultants.
Rethink Inventory Control
One of the biggest killers of a multibranch inventory scheme is control. It is fairly common that distribution firms start with branch managers having the ability to stock their own inventory levels and make most purchasing decisions. Whether they are pulling from the hub or sourcing direct from the supplier, this mentality can lead to poor inventory performance.
I understand the reasoning. Yes, these branch managers are closer to local customers. Unfortunately, this gut instinct and in-the-trenches information-gathering is limited at best. As an individual, you can only mentally process a handful of customers and a small basket of products. Computers are far superior at managing large customer and product data sets.
When this data is analyzed by individuals trained to extract it and manipulate the software, branch inventory management improves. In short, centralizing inventory replenishment removes emotion, optimizes the transfer process and leads to better utilization of the inventory asset.
Moving inventory control out of the hands of the branches can be a challenging process. Taking something away, especially something that may define someone’s role, should be thought out and managed carefully. The best way to help smooth the process is to focus on what makes managers happy — right stuff, right time and right place.
In other words, make sure they will not be riddled with stockouts and backorders right out of the chute. Branch managers will perceive any backorder as one more reason they could have done it better. Jack up the inventory on high-hit items. By eliminating backorders on the most commonly transacted items, the perception will be that central purchasing knows what it’s doing. Don’t expect a perfect transformation here.
Centralizing the control will help curb the number of transfers. The first step to tackling a transfer problem is to recognize there are good and bad transfers. Good transfers are something you plan, such as a hub-to-spoke replenishment. A bad transfer is when a branch grabs inventory from another location to satisfy a sale for stock not on the shelf.
Can you eliminate all bad transfers? Nope. We can, however, greatly reduce them by analyzing the hits ranking of each location. As I mentioned previously, pay attention to the stocking levels of the higher-hit items. I generally divide the stocking SKUs in half. The top half, ranked by hits, are the items I intend to reduce the number of stockouts. The bottom half is where I thin out the inventory to pay for bolstering the top half.
If I can work within this basic philosophy, I will improve the inventory’s overall effectiveness in the branch.
The Distribution Center Debate
The debate between a selling hub, or distribution center, and a nonselling location can cause dissension in the ranks. When I think about a distribution center, I envision a location devoid of customers and salespeople focused purely on the logistical distribution of products.
The real challenge falls between the ears of those who cannot justify an expense without opposing income. There, I said it. This debate is more about tradition, assumption and emotion rather than efficiency and logic. If we look at the wins associated with a large hub location, we might be able to get past the lack of traditional income.
One of the reasons we open up a distribution center is to accommodate larger purchases and shipments from suppliers. Traditionally, these come with financial incentives such as rebates, discounts and freight concessions. All have monetary value. This is your “income.”
Unfortunately, we often allow these discounts to wash down to the selling branches, which, in turn, find their way to the sales pricing. All that investment in buying bigger and redistribution gets washed out in the sales process. Stop doing this. If you are going to get goodies for buying in bulk, let the company keep it. Transfer the products at a reasonable base cost and let them sell at an appropriate margin. Rebates and bulk-buy discounts should never be used to reduce the selling cost of branch inventory.
To bring this opinion piece to a close, I will leave you with this: Branch inventory management is one of the most difficult aspects of distribution. We often get it wrong and wind up driving up expenses. As the entity gets larger, we must let go of our small company scheme. Our methods of redistribution must evolve.
This means we need to get educated on how larger entities function and what tools they use to succeed. Learning how to work with your ERP, rather than trying to beat it into submission, is an exceptionally good step toward making your branch management system effective. Good luck and know that I am here to help.