Don't Rob From Branch InventoryWRITTEN BY SCOTT F. STRATMAN
Article Date: 06-01-2007
Copyright (C) 2007 Associated Equipment Distributors. All Rights Reserved.
One of the silent killers in distribution is the carrying cost of inventory.
There are many Do’s and Don’ts when it comes to inventory management, and you can spend an entire career trying to implement them all and still not get the job done. It seems that every new vendor line, every special customer contract, and every new trend brings with it another challenge for inventory control managers, who often have to use every ounce of knowledge and trickery they can muster to keep.
In addition to managing hundreds of thousands, even millions, of dollars of inventory, they often need to handle a myriad of rush orders, backorders and special deals. Their jobs are not easy, and I suggest they need some help to have a chance at success.
One area that causes inventory control managers and business owners fits is the careless and sometimes needless transferring of stock items between branches.
Because all distributors want to provide the best customer service possible, they will go to great lengths to get products into customers’ hands. In multi-branch operations, this might be accomplished by transferring product from one branch to another because a customer has asked for it.
Sounds like a simple solution. You can make another sale and make a customer happy with a simple transfer of product. However, there are some potential problems distributors need to manage.
Often, branch operations get re-supplied from a larger branch or central distribution location. They can also be re-supplied from the manufacturer directly. The branch manager will order what they feel they need to handle customer requests. Based on actual usage rates by product, they can use a variety of methods to help them determine what to stock and how many to purchase.
Since they are a branch location, they cannot stock one of everything the distributor offers; it would be too costly. Rather branches should have only those items that sell and turn frequently. They also should not have much safety stock at the branch, as often they can get re-supplied fairly quickly from the supplier. They should keep smaller quantities on hand and try to keep their inventory investments to a minimum.
But here is what often happens! Slowly and silently, cash begins to leak out of the business. Let’s say a branch in Tucson gets a request from one of their customers for a stocked item. The branch manager looks it up in the system and sees they are out of stock, but notices that Phoenix has a couple on hand.
Because customer service at all cost is a company policy, the Tucson manager requests that the product be transferred and shipped out of the Phoenix location to Tucson for this customer.
So far no real damage has been done, except that I am always curious as to who pays for the cost of that transfer? Some distributors charge the customer, but many more don’t charge anything extra for shipping it from Phoenix.
Some distributors have trained their personnel to say “I’m sorry, we don’t have any of those in stock at this location, but I see there are some in Phoenix, and I will get one transferred over right away for you.” The customer applauds the customer service, and the product is transferred from Phoenix.
However, as this practice continues throughout your multi-branch operation, one thing becomes apparent: Someone (most often the distributor) is absorbing countless freight charges.
Often, there is little regard given by the branch manager in Tucson as to the gross margin dollars made on the item. They are just trying to do anything to make the customer happy.
Now that the product has been requested by the Tucson manager, and is picked, packed and shipped by the Phoenix location, what do you think the Phoenix manager will do to get his inventory back to a comfortable level? Order more than they need!
Why? It’s simple; like Tucson, Phoenix wants to make their customers happy, and they don’t want to be out of stock. Because of the transfer, the Phoenix branch manager no longer knows who their customers are! And each time another branch transfers from their inventory, the picture becomes even more distorted.
Are they ordering to meet the needs of the customers normally served by the Phoenix branch, or are they attempting to meet the needs of the customers at all the branches that call and transfer their inventory whenever they need it? Often, the latter is true. To compensate, most branch managers will order extra stock to cover themselves, also known as CYA (Cover Your Assets) inventory.
Allowing any branch to take another branch’s inventory will lead to inventory creep in all branches. They will stock more than they need to service the customers in their territories.
To help solve this problem, rules need to be in place and followed by everyone in the organization.
One of the silent killers in distribution is the carrying cost of inventory. Expressed as a percentage of the total inventory dollars on an annual basis, it runs at about 30 percent. It’s a huge number, and depending on the number of branches, this number can grow rapidly.
Not only are you paying the vendor more for “just in case” inventory, you’re losing cash by having to store it, move it, keep it safe and pay taxes on it each year.
Instead of allowing the Tucson branch to simply transfer inventory from another branch to make their customer happy, try implementing some guidelines for stock transfers.
For example, never transfer items where the gross margin dollars do not meet your established goals. Or, never transfer items without having the customer pay the freight costs.
Another way might be to only transfer items for Platinum Class customers, defined as those customers who contribute the most dollars to you bottom line profits. This requires a customer profitability analysis. (If you don’t have one, (contact The Distribution Team for a list of software options.)
Finally, you might want to consider never transferring stock items from one branch to another unless the products you are transferring are surplus items for the transferring branch. Instead of allowing Tucson to pull up the product on the computer and see everyone’s on-hand quantities, consider allowing them to see only the surplus stock in other locations.
Seeing which branches have excess or surplus inventory will help you reduce that excess by transferring it and selling it. Use a calculation of a surplus point to help you manage this problem. A surplus point compares the replenishment stock level quantity for an item to a healthy stock level point, so that any quantity above that surplus point could and should be transferred at will to satisfy another branch’s customer order.
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