Working around the country, we have found markets where products like Pepto-Bismol, Vienna Sausages, and even condoms had a distinct season. By identifying these items and knowing when they will peak (or experience their off-season), you can account for the increase and decrease in demand when needed.
Order Cycle Analysis
How often you order from a vendor is just as important to you as how much you order. If your minimum order from a vendor is $500, should you order as soon as you can meet the minimum? Maybe, but maybe not.
There is a cost associated with every order. Suppliers may have an order cost or shipping cost. And of course there is some cost associated with receiving a shipment at your dock to unload the truck and put it on your shelves. Ordering too often can end up costing you a significant amount of money in the long run.
On the other hand, if you order too infrequently, there are the carrying costs. Depending on the items in your warehouse, your carrying cost on your inventory is probably about 25% of the total inventory. That means it costs you about $250,000 per year for every $1,000,000 of inventory in your warehouse. Ordering too infrequently means carrying more inventory. More inventory means more carrying costs. What's a buyer to do?
The answer is to find the right balance. There are formulas out there that will give you some guidance on this issue. In general, the best answer is to have a well thought out plan and stick to it.
Time Supply Ordering
In a perfect world, when we sit down to order we would look at our solid, well thought out demand forecasts and based on our order cycles build an order that will meet our minimums every time. The reality is that inventory does not always cooperate. You may build an order and realize that you have not met your minimum order. Then what? Do you just add a little extra on your fastest movers? Or, maybe you have exceeded your maximum order. What do you do? Do you trim your slow movers?
The problem is either of these scenarios is time supply. If you add your fast movers to meet your minimum, what will happen on your next order? You'll have an excess supply of your fast moving products and need some of your slower ones...and still won't meet your minimum. In the second scenario, you will frequently run out of your slower moving products long before you can justify placing another order.
The answer to this dilemma is time supply ordering. When you need to add to an order or trim an order, make sure you do it based on days worth of stock across the entire order. By doing so you will avoid the final major pitfall in inventory replenishment and make your buyers lives a lot easier.
Although inventory replenishment will never be an exact science and demand forecasts will never be perfect, it is important to make sure your buyers have a well thought out plan when they sit down to place their orders. If not, you risk allowing inventory costs to get out of control costing you millions of dollars each year. Getting a handle on product averages, lead times, seasonality, order cycle analysis and time supply ordering will by no means fix every problem you will encounter in inventory replenishment. These five factors will, however, make a huge impact on your order accuracy, inventory levels, your fill rates and consequently your profits.
Dan Kiefer serves as Director of Marketing for K3S. For more information, you can reach him at 877.725.1305 Ext. 503 or by email: firstname.lastname@example.org or go to www.k3s.com.