The Bee Hive

The crux of managing inventory effectively is to ensure that our distributor will be able to at least meet or exceed his customers' expectations in order to maximize his profits. Customers' expectations differ - some will demand immediate delivery of an ordered item but some are prepared to wait longer. But what is relevant is to examine if customers are always this demanding. Surely there must be some items demanded that can be delivered in a certain time without negatively jeopardizing the customer service levels?

I have discovered an instance where in some of our 6 branch DCs, each of them sell an average of one SKU # A at a cost of $78 each per year. There is usually one of that SKU on the shelf at every DC. If you ask the branch managers, they'll say maintaining inventory of the item in every location is necessary to provide good customer service. But in reality, customers are usually willing to wait a day or two to get the item after they place an order. As a matter of fact, several customers are shocked to learn that this item is usually available for immediate delivery. So why is the item on everyone's shelf?

The reasons given include:

• It allows the branch managers to have complete control of the order fulfillment process - fill rates will always be met to ensure on-time deliveries to keep perfect order fulfillment rates at an all-time high
• They like to be superheroes being able to deliver a level of unparalleled customer service that would knock the shoes off the competition
• Thy feel a sense of assurance to be able to look at full shelves that they think they will be able to face any kind of emergencies

None of these is a valid reason for stocking the product in all warehouses. If that example of the Branch DCs above stocked two of the SKU # A in a central location and transferred them to other branches as they were ordered, overall company inventory would be reduced by 10 SKUs, or $780. If they could do this with several hundred or even several thousand products, they would enjoy a significant decrease in their cost of maintaining stock inventory.

What about your customers? Will your customer service suffer as a result of a new stocking policy? Let's look at the question from a different angle: Are your customers willing to pay premium prices to help support your bloated inventory? Wouldn't they prefer to pay lower prices and get non-critical items in 24-48 hours?

But keep in mind that for this system to work, the warehouse that stocks the SKU # A has to be a very, very, reliable supplier. It has to treat the receiving branches as preferred customers and provide consistent, accurate delivery of the parts ordered by the receiving warehouses.