One of your products had two “hits” in 2014. Should you continue stocking it in 2015?
My gut feeling is “no.” But maybe you feel it’s worth keeping in your warehouse because it’s a $200,000 product with a high profit margin.
And that leads me to the point of this article: your company needs a clearly defined stocking policy that guides decisions like these.
The typical company stocking policy goes something like this: “One of our favorite customers said they would continue buying this product if we keep it in stock.”
As the old saying goes, that and 50 cents will get you on a bus. If you’re serious about reducing inventory, you need a stocking policy that you can put down on paper and refer to throughout the year.
Repeat After Me: “I resolve to develop a stocking policy.”
Why is it so important to have a formal stocking policy? Because each stock-keeping unit by location (SKUL) results in a whole host of “extras”:
- Extra forecast review
- Extra replenishment review
- Extra purchase orders and work orders to process
- Extra receiving transactions
- Extra invoices to process
- Extra inventory
To avoid investing in all these “extras” for “C” products that really aren’t worth carrying, you might form a stocking policy that says:
- Each item must have at least three hits per year to justify stocking in our distribution center, AND
- Each item must have at least five hits per year to justify stocking at all.
Now, what happens when an item doesn’t meet your new stocking criteria? Well, that all depends. You could choose to:
- Centralize inventory of the product in a “hub” distribution center.
- Offer the item only as a make-to-order item.
- Make the item as a “special order” distribution item.
- Rationalize the item out of your product line.
The decision will be up to you. But at least you’ll have specific criteria in place to guide you.
Rethink Your Inventory Planning Parameters
As you rethink your stocking policies for 2015, be sure to take a look at your inventory planning parameters, too. Your inventory planning system has parameters that guide how it computes your replenishment quantities. Don’t forget that you have total control over the accuracy of this information. There’s no excuse for not having accurate lead times, safety stock, or order quantities in your software.
Of course, you won’t do yourself any favors by simply putting the same safety time parameter in your system for every item. Manage “A” and “C” items the same way, and you’ll expend far too much time and money stocking some of your lowest-profitability items. That’s a recipe for financial disaster. Instead, implement a safety time strategy that caters to the different demand patterns of your “A,” “B,” and “C” items.
Don’t Just Let Inventory “Happen”
Which would you rather have in 2015: a warehouse full of good intentions, or a warehouse full of products that are going to move, move, move? Obviously, the latter, or you wouldn’t have read this far.
So don’t let your company become one of the thousands that simply let inventory levels “happen,” and then make sudden, knee-jerk corrections when problems arise. The Demand Solutions supply chain planning system lets you reduce inventory the smart way by modeling inventory levels and projecting what they’re likely to do over time. To learn more, download the presentation, “Top Ten Supply Chain Planning New Year’s Resolutions.”