WHAT’S THE BEST FORMULA TO ACHIEVE OPTIMAL STOCK LEVELS?
Supply Chain Expert
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All companies work hard to achieve optimal stock. But the practise and methods of achieving differs from one sector to another. Three industries are analyzed in this article: retail, pharmaceutical distribution and wholesalers of automotive spare parts. In the following article, let’s discuss the optimization of stock from an inventory management perspective, their common points and their particular characteristics.
STOCK OPTIMIZATION: WHAT IS THE GOAL?
Stock optimization is a process to achieve the maximum availability of our inventory with a minimum investment in stock. In other words, it is about being able to have the right inventory to offer the desired level of service at all times for all our customers. A short definition, but in practice, the optimal stock according to the industry, requires various approaches depending on the type of company and sector in question. So, we can ask ourselves: Who or what is the need to optimize their inventory?
Initially, to optimize their inventory; any company that works references against stock and with independent demand; that is, they do not know what reference or how much is asked for at any given time. Otherwise, a non-optimal inventory causes serious difficulties from an operational and financial point of view. Failures produce a loss of sales and even customers, while the stock immobilizes our capital.
Also, excess stock generates obsolescence, which destroys the profitability of the company. If we add to these factors the current economic situation, global health crisis, optimization becomes essential. However, it is usual for companies to manage their inventories, taking into account the demand forecasts generated by their ERP systems and/or by their commercial teams.
Unfortunately, this way of working does not have the appropriate forecasting and safety stock calculation models, which allows them to manage the behaviour of each of their references. Result: countless hours of work that, in the end, gives a poor result.
OPTIMAL STOCK ACCORDING TO THE INDUSTRY: RETAIL, PHARMACY AND AUTOMOTIVE
What do a retail chain, a pharmaceutical distributor and an automotive parts wholesaler have in common? Apparently, little, however, it is clear that everyone shares a need: to work with an optimal stock.
For all of them, a lack is a lack, the excess stock is excess, and an obsolete is obsolete. However, each of them has particularities that must be taken into account to achieve a stock optimization according to your business. Both the number of references we manage and the number of stock points we work with make proper inventory management difficult as they increase.
Each reference has a specific behaviour in each location and, therefore, its forecast and the optimal stock must be calculated according to the industry. The companies that encounter the most difficulties are those that manage thousands and even millions of SKUs (location-item combination).
Now, both retailers and distributors of pharmaceuticals and automotive parts manage a large number of references and multiple points of sale, which can mean millions of SKUs in some cases. Therefore, the more references, the more complexity, the more complexity, and the more need for information, the more time we will need to invest in managing references.
The next question is: How do we reduce complexity, increase available information, and improve return on time investment?
DEMAND AND PRODUCT LIFE CYCLE
Everyone wants to work only with high-turnover, high-margin referrals; however, the very nature of the business and the life cycle of their products compel companies to maintain different high, medium, and low-turnover referrals compositions.
In the case of retailers, the dynamics of their business implies that their tendency is to maintain items with high turnover, which they usually achieve in their distribution centres. However, we find erratic and irregular behaviours at their points of sale. Not to mention exhibition items such as glasses, perfumes, etc.
In pharmaceutical distribution, we found a combination of articles with high, medium and low turnover. Although theoretically, there is clear potential to improve the assortment composition, the limitations imposed by the market are usually decisive.
The most complicated scenario, are the wholesalers of spare parts? The nature of the replacement means that the distributors in this sector work with many references of slow or irregular demand, with the aggravating factor of working with very long product life cycles favouring the famous Long Tail effect. In this case, it is essential to closely monitor the (negative) trend of these items by discontinuing them in time and thus avoid them becoming obsolete.
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