Optimizing stock is an important skill for every business which sells physical products, and especially for distribution companies. It's a difficult balance to maintain.
If a company produces and stores too much stock, that is a waste of money. Products cost money to make. The company had to pay for the raw materials, the labor and manufacturing utilities. Stock also costs money to store. Whatever products customers are not going to buy right away goes into a warehouse or the back of a retail outlet. Some types of products require refrigeration, which uses costly electrical power. Excess stock represents company capital. It's a wasted carrying cost. Overstock is illiquid. And it's not earning any money for the business.
Many kinds of products have a short cycle. Clothes and shoes go out of style. Furniture and toys don't go out of style, but their popularity quickly peaks, then dies off. Products become obsolescent. New electronic devices come out frequently, superseding the previous models. Many products are seasonal. If they don't sell out this year, they'll never sell. Consumers constantly demand new products, not the old makes and models. They want the latest and the greatest.
However, outages, the failure to make and keep in stock enough products, is also a risk for a company. Customers want what they want, and they want it now, not tomorrow. They don't want to wait. If your business can't keep the stores in stock, the customers will buy something else, and you have lost your opportunity to make a lot of sales.
Just In Time Inventory
As a general rule, if they could afford to, companies adopted the policy of making certain they had enough inventory to meet consumer demand. However, this was when computer systems were a lot less powerful. Sales and inventory reporting was a lot slower. Also, major companies controlled their distribution channel much more.
In the 1960s and 1970s Toyota and other Japanese companies began using just-in-time manufacturing. With JIT, the company waited as long as possible to produce its products. It didn't want to create any shortages, but it also didn't want cars just sitting around either.
With JIT inventory, the company must not just manufacture its products, but get them into the retail outlets as well, so it refers to distribution.
Therefore, Toyota and other Japanese companies used JIT management techniques to reduce the cost of capital required to run their businesses. This allowed them to charge prices for their made their competitive or better with the same Western products.
In the 1980s Western companies investigated Japanese businesses more closely, and soon discovered the JIT techniques, and adapted JIT to their own businesses. Motorola and IBM are just two such examples. It is now standard practice for companies to keep their manufacturing and stock distribution costs as low as possible.
The Role of Enterprise Resource Planning or ERP Software
SocrateCloud ERP for distribution companies tracks products from the final stage of manufacturing to the hands of the final customer. This includes logistics, shipping, orders and billing. It manages warehouses and storage, and to tracking of inventory by serial numbers, bar codes, stock valuation and SKUs. They may also use Radio Frequency Identification (RFID) chips.
SocrateCloud determines optimal stock levels by tracking orders and fulfillment. When inventory gets too low, at the re-order point, the ERP issues a replenishment order. It determines the re-order quantity based on the levels in stock and how much stock is currently under order. It forecasts the lead demand. That is how many more units of products customers will order before the replenishment arrives in stock. And it computes its own expected accuracy of customer demand.
Without the inventory tracking of a modern ERP system, a company loses money by tying up too much capital in excess inventory. Or, if they don't make enough inventory, they have backorders and dissatisfied customers.
Without modern tracking systems, it's easy to lose track of inventory altogether. Products can remain buried in boxes at the back of a warehouse.
Modern inventory management modules of ERP use historical figures, seasonal demand, market trends and other business or economic trends to forecast demand.
There are now many ways for companies to sell their products. Brand name retail stores are still important, but e-commerce websites are a must for many modern businesses. They might also use mail order, telephone, mobile, self-service, off-label or store brand versions to discount chains, wholesalers, or direct to sales agents.
Different channels can reach different customers. Failing to use all profitable channels is failing to maximize sales. However, the distribution and fulfillment of orders becomes complicated.
This article in Retail Touch Point emphasizes the importance in retailers having access to all of their inventory across all the distribution channels. Distributors cannot separate their mobile from their retail from their e-commerce inventories. To the consumer, it's all the same. And they want to buy it the way they wish to buy it.
This illustrates the need for a comprehensive ERP stock optimization solution for the entire company.
ERP Manages the Inventory Turnover Ratio
This figure reflects how fast inventory turns over. This reflects both sales volume and how well the company is optimizing its stock. The higher the turnover ratio, the more efficiently the company is using its capital to maximize revenue.
Modern production systems and distribution for all distribution channels are just far too complex for retail and distribution companies to track and handle the variables manually. They need an ERP system that is mature and stable. One that works with many food, retail, distribution and logistics companies, to handle their stock and other resources. They also need a ERP program with a platform that is extensible, so the provider easily builds unique modifications to suit their businesses. Today's distribution companies must use all possible channels of distribution for their products, and they need to optimize their stock to keep expenses to a minimum. If they don't their competition will sell its products for a lower price.