Inventory management for distribution businesses is a key ingredient for distributors when it comes to business success or failure. To the distributor, ensuring that their inventory levels are optimized is paramount. This then means customer service targets can be confidently met without overburdening the supply chain through overstocked goods and constricted cash flow.
Failing at inventory management for distribution is what turns a distribution business’s greatest asset into its most lethal liability. If inventory levels are allowed to move out of alignment with real-time supply and demand the distributor will have to contend with rising costs, higher finance charges, handling and operational expenses, loss as a result of theft, tampering or obsolescence, as well as having working capital tied up in overstocked inventory.
If levels drop below demand then the business will be unable to meet its customer service targets. This will result in lost revenue through missed sales, damaged reputation and dissatisfied customers, many of whom will invariably switch over to a competitor.
The 4 key elements
In order for a distributor to be able to meet its customer service targets and operate a successful supply chain it needs to bring together the four key elements that are the hallmarks of an optimized and efficient inventory management for distribution operation – demand forecasting, communication, integration and collaboration.
A distribution business must have the resources, technology and logistical capacity to plan and manage all activities involved in the forecasting, sourcing, procuring, storage and distribution of inventory from supply through to customer delivery.
What’s more, in order to ensure the business is able to operate at maximum efficiency and profitability, inventory levels must always be optimized and accurate. The ability to forecast demand accurately, communicate effectively, integrate all systems – logistical and accounting/financial – and engender increased collaboration with suppliers as well as customers, requires choosing the right inventory distribution strategy.
The distributor needs to select the distribution model that will enable them to always have just the right amount of inventory on hand to meet its customer service goals but no more. In layman’s terms a distributor must be able to supply their customers with what they want, when they want it and in the quantity requested without holding on to any surplus stock.
A distribution business can essentially choose to operate one of two distribution strategies. The type of distribution strategy employed will define who controls the replenishment process as well as how that process is managed.
With the push distribution model the factory or manufacturer determines what inventory to produce and ship, when to ship it and in what quantity. This means that the manufacturer is effectively driving or ‘pushing’ the supply of inventory along the supply chain.
With push distribution the manufacturer is responsible for ensuring its factory operates according to the most efficient and effective production schedule to guarantee that enough of the right inventory is available to its distributors without burdening the supply chain and flooding the market with excess inventory.
The major issue with a push distribution model is that the manufacturer is usually the furthest removed node in the supply chain from the end consumer. In a scenario where there is no transparency or effective communication or collaboration down the line from end customer to distributor to the factory, a push distribution model often results in reduced visibility of demand. This then contributes to less efficient service delivery and shortages or surpluses down the distribution chain.
While there is no one solution to all of a supply chain’s challenges, a push distribution model is able to heighten visibility of demand at each endpoint within the supply chain by implementing a powerful and integrated inventory management software system. The top solutions on the market these days offer transparency and integration between manufacturer, distributor and retail outlets.
The pull distribution model operates according to the principle that the lowest node in the supply chain – the retailers or end consumers – order goods from the next node in the supply chain based off their needs. This then ripples up the supply chain towards the factory or manufacturer who execute a production schedule based off the needs of their distributors.
The main challenge of operating a pull distribution chain is rooted in the issue of higher tiers in the supply chain reacting to and relying upon orders from lower tiers. This results in limited planning capability and instead shifts the supply chain from a proactive to a reactive mode of operation. The variability of this demand process can lead to the storage and holding of higher than necessary levels of safety stock to insulate against fluctuations in demand down the line.
The risk of stock shortages is what prompts distributors to take on and carry a significantly higher quantity of safety stock. This ensures that they do not find themselves in a position whereby they are unable to meet customer demand.
The problem here is that if any node in the distribution chain is managing its inventory inefficiently, it can set of a chain reaction leading to higher than necessary stock levels. This thereby raises operating costs and can tie up working capital. What’s more, when too much of a product is manufactured it can flood the market and drive the retail price of the goods down. This in turn results in a loss of revenue and profit throughout the entire distribution chain.
Overall, pull distribution models culminate in better service delivery for the end consumer. But they can cause a bullwhip effect higher up the supply chain, where inventory levels can become bloated and costs due to inefficient inventory management are more pronounced and keenly felt.
The essential element
Regardless of the distribution strategy employed by a business, the implementation of a powerful inventory management for distribution system that offers integration along the entire supply chain, as well as the ability track, trace and account for each item in inventory in real-time is essential. As a result, forecasting, replenishment and shipping will all be driven by reliable and accurate data resulting in optimal inventory levels.