New practices revealed to enhance inventory management and reduce product costs
The average distribution firm carries between 10 and 30 percent more inventory than needed. The result? Millions of dollars are wasted that could be reinvested in competitive processes like new services or new product offerings.
Distributors are facing forces of change that range from nontraditional competitors like Amazon who have superior technology, human capital and customer experience. Changing the way one goes to market requires new ways of thinking, innovative business models and creative leadership.
“The challenges are clear,” Dr. Senthil Gunasekaran said. “The solutions are waiting to be explored.”
It is critical for distributors to master inventory management in order to take advantage of the advanced analytics opportunities in today’s digital transformation landscape. Gunasekaran and Dr. Pradip Krishnadevarajan, researchers in the Department of Engineering Technology and Industrial Distribution at Texas A&M University, are offering a solution for business owners to efficiently organize their inventory, which is led by three major forces.
“First is the impact of information management,” Krishnadevarajan said. “Higher efficiency is opening the door to disruptors like online distributors. Second is a large generation, millennials, who will use these technologies to restructure supply chains. Third is an explosion of services in response to product and supply chain services commoditization.”
The heart of distribution is driven by optimizing working capital, while maximizing profitability. This is known as the service versus cost trade-off.
“Managing working capital effectively decides the financial viability of your firm,” Gunasekaran said. “It’s very important to understand the role of working capital, not only for your existing business model, but also for the evolving new models of e-commerce and other digital platforms. Until now, distributors lacked a proven and tested strategy to perform the advanced, must-do inventory analytics on this trade-off.”
Typically, companies rank products based on a single metric or dimension, such as sales or profit. Gunasekaran and Krishnadevarajan’s approach presents a multicriteria approach that incorporates three metrics – stratification, forecasting and replenishment.
“The three-step inventory management model has been in existence for a long time,” Krishnadevarajan said. “Our approach presents a more practical, applied and holistic approach backed by 33 real-world applications that companies can implement within a few months with minimal investment of both time and money.”
Companies also benefit from learning 24 best practices on growth from actual wholesaler distributors and 43 action steps to implement immediately.
Brent Burns, retired CEO of ISC Building Materials, experienced firsthand the benefits of Gunasekaran and Krishnadevarajan’s solution.
“Through knowledge learned from the inventory management program, attended by all our management and key salespersons, we have reduced our total inventory levels by over 20 percent,” Burns said.
Their research was funded by several distributors for more than 15 years through their research engagements, business initiatives and executive education sessions with the Thomas and Joan Read Center for Distribution Research and Education.
As a result of Gunasekaran and Krishnadevarajan’s program, companies will have the ability to better determine what product to stock when, identify pricing opportunities at the product level, reduce stock-outs and increase product availability, and improve customer service.