Reducing inventory costs is becoming more and more critical to industrial distributors for competitiveness. Lower costs translate directly to more competitive pricing and better margins. Market leaders in industrial distribution have gained market share by cutting inventory costs in order to offer customers better prices.

Customers also are becoming increasingly sophisticated and demand the right product in the right place at the right overall price. If you cannot minimize your inventory investment and yet have the right product in the most advantageous location at the proper time, your customers will go elsewhere.

The answer is an integrated Distribution Management System (DMS), which can dramatically cut your inventory costs. The primary goal of any DMS should be to get the right product to the right place, at the right time, at the right price, and at the right cost.

In addition, within the DMS, an advanced inventory planning and replenishment system gives your buyers the tools to make this happen. That enables you to lower inventory costs while maintaining excellent customer service.

Simply cutting inventory costs is not enough either. You need to balance lower inventory costs with better customer service. Haphazardly reducing stock levels might result in lost sales, for example.

A key way to reduce out-of-stocks, and therefore to have higher order fill rates, is to improve the methods by which products are replenished. Distributors should consider an inventory management system that offers powerful management tools, flexibility and in-depth analysis capabilities.

In essence, you need the computer to work for you, by performing replenishment calculations and the appropriate replenishment actions in a timely manner. This is called continuous replenishment — the basis for an advanced planning and replenishment system. It allows inventory replenishment orders to go out to suppliers continuously, instead of waiting for an order period to elapse.

For any firm, future customer demand is today's vendor requirement. An advanced planning and replenishment application allows distributors to effectively track, manage and forecast demand usage patterns and seamlessly integrate those patterns into a flexible and predictable purchasing strategy.

The system efficiently manages these 11 key activities: replenishment grouping; lead time management; demand (usage) management; demand forecasting; inventory level setting; safety stock computation; order quantities; recommended buy orders; analysis capabilities; customer reservations; and inventory redistribution.

Multiple products and multiple distribution points make what-and-when-to-order decisions a difficult procedure. A continuous replenishment system with a common set of data allows the system to do the work, running automatically, planning for those large volumes of inventory items. The planning/purchasing staff should only be required to review exceptions or those items that merit specific attention.

The advanced planning and replenishment system allows the maintenance of assets in a liquid state by postponing purchasing for as long as possible. The focus becomes reducing active inventories while simultaneously realizing increases in fill rates, which proportionately leads to dramatic cost savings, increased profitability and better customer service.