How Realistic Is Your Inventory Replenishment Process?

An often-ignored aspect of inventory management is how realistic drivers such as safety stock and lead-time are, or should be. Here, Howard Coleman advises how to determine if your inventory drivers are appropriately set.

Dollars may literally be walking out your door; may even be fueling competitors. And this isn’t a problem for just small to mid-size distributors. Did you know that in one recent year Walmart missed out on an estimated $3 billion of sales due to stock-outs? That’s probably more than the GNP of some small countries!

How they ultimately re-thought their inventory replenishment processes to correct these challenges is important to understand. You likely need to move the needle too, and move inventory management to a function that is understood to be critical within your organization.

Traditional inventory management systems have long sought to solve the inventory management and service level dilemma through better forecasting, improvements in the order point/order quantity or min/max calculation processes, or by adjusting safety stock levels. Many of the enterprise systems used by wholesale distributors employ just those options — providing some parameter and management control selection options.

One often-ignored aspect is how realistic inventory drivers such as safety stock and lead-time are, or should be. In fact, in many companies there is often little, if any, “root-cause analysis” performed. We must determine whether these drivers are appropriately set and reviewed — or were they set once and never looked at again?

If you fall into the latter category, don’t despair. I am going to propose a pragmatic approach that can be accomplished with your current systems, as long as you add a sufficient dose of good decision making and execution and are willing to think differently. Ready?

What Do You Have to Do?

At a minimum, to implement this new approach and improve your decision making and execution, the following is required:

  • Alerting inventory planners to what needs attention and enabling quick resolution
  • A method to reduce the whiplash effect in how we respond to demand variance
  • Learn and understand the advantages of “pull replenishment” and implement it as a substitute for “push replenishment” (what I suspect you currently employ).

It’s likely this will require a fundamental change in thinking

The Foundation:
Inventory replenishment in a wholesale distribution environment can be bewildering. There are products, technology, and people skills involved. Each of these can actually obscure some of the obvious simplicity of inventory replenishment as a process.

Why? It’s all about the flow! This has become my mantra. It’s developing an understanding of the rules of flow; what rules need to stay, to go, to change…and which rules need to be added.

When I talk about “flow,” what I really mean is the flow of materials from suppliers, into, through, and out of your stocking locations. I also include in that definition what is planned and required, what is happening, what has happened, and what should happen next. As I frequently advise my clients, it’s not just about the procurement of product and the launch of purchase orders. That’s not flow! 

Howard Coleman is principal of MCA Associates, a Derby, CT-based management consulting firm. MCA implements continuous improvement solutions focused on business process re-engineering, inventory and supply chain management, sales development and revenue generation, information systems and technology, organizational assessment and development and succession planning. Contact him by phone at (203) 732-0603 or by e-mail at[email protected].

This blog was originally posted by NetPlus Alliance as part 1 of its "Lean Thinking in Wholesale Distribution" series.

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