Maintaining Stock in Branch LocationsBy Jon Schreibfeder

Effective Inventory Management, Inc.EIM

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This report is the fifth in a series of white papers designed to help forward-thinking distributors increase efficiency, customer service, and profitability with smart inventory management strategies based on tried and proven methods and best practices.

Distributors who maintain all of their operations in one location have many advantages:

• Allemployeesworkinthesamebuilding.Theycaneasilycommunicateandavoidalotofmiscommunicationandmanymisunderstandings.

• Upper-levelmanagementison-siteandcandirectlysupervisealldepartmentsandprocesses.

• Onecommoninventoryofstockproductscanservetheneedsofallcustomers.

Considering these advantages, why would a distributor open and maintain multiple locations?

• Customersmayneedmaterialinashorterperiodoftimethanitcanbedeliveredfromacentralwarehouse.

• Thecostofcontinuallyshippingmaterialtocustomersfromacentrallocationisfargreaterthanmaintainingastockofproductsinalocalbranch.

• Alocalstockinglocationshowsacommitmentonthepartofthedistributortoserveaspecificlocalmarket.

Branchlocationsareexpensivetooperate.Andtobesuccessfultheservicetheyprovidemustbeequaltothatprovidedbytheirorganization’shomeoffice.Inthisdocumentwewilldiscusspoliciesandproceduresforsuccessfullymaintainingstockinventoryinbranchlocations.

What Products Should Be Maintained in Each Branch?Thepurposeofabranchlocationistoservetheneedsofalocalmarket.Itsinventorymustreflectthoseneeds.Therearedistributorsthatstockexactlythesameproductsineverywarehouse.This“everyproductineverybranch”policymightseemreasonablebutisonlyeffectiveifallcustomershaveidenticalneedsandpreferences.

Whenadistributorstocksaproducttheymakeacommitmenttohavethatitemavailable,inreasonablequantities,forimmediatedelivery.Buteachcustomerhasauniquesetofinventoryneeds.Aproductthatsellswellinoneareamayhavelimitedorevennousageinanotherregion.Therefore,anapprovedlistofstockproductsshouldbeindependentlymaintainedforeachbranch.Considerthesequestionsindevelopinganapprovedstocklist:

• Whatproductsmustbeavailableforimmediatedelivery?

• Whatproductscanbedeliveredovernightorinthetimenecessarytoobtaintheitemfromacentralwarehouseorvendor?

• Isthecostoftransferringanitemfromacentralwarehouse,asneeded,greaterthanthecostofcarryingtheiteminthebranchlocation?

Indevelopingthestocklistforabranch,analyzethenumberoftimeseachproducthasbeenrequestedorrequiredbycurrentorpotentialcustomersinthepast12months,regardlessofquantity.Ifaproductappearsonaminimumnumberofordersitshouldbeincludedontheapprovedstocklistforthatlocation.Thoughtheminimumnumberof“hits”requiredforanitemtobestockedwillvarybydistributor,manycompaniesfeelthatatleastfourdisbursementseachyearareneededforaproducttobemaintainedinthestockinventoryofabranch.Addtothestocklistany“emergency”repairpartsthatshouldbekeptonhandjustincaseofacrisisatacustomersite.Specificreplenishmentparameters(forexample,minimumandmaximumstocklevels)arediscussedintheEffective Replenishment Parameters whitepaperinthisseries.

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How Should Each Stocked Product Be Replenished?Theinventoryofeachstockediteminabranchcanbereplenishedwitheitheratransferfromacentralwarehouse/distributioncenterorshipmentdirectfromthevendor.Thereareadvantagestoeachreplenishmentmethod.

Transfer from a central warehouse/distribution center:

• Novendorminimumortargettotalorderrequirement.

• Productsdonothavetobeorderedinamultipleofthevendorpackagequantity.

• Novendorinvoicethathastobechecked,approved,andpaid.

Direct vendor replenishment:

• Materialisnotreceivedtwice(onceinthecentralwarehouseandasecondtimeinthebranchlocation).

• Thecentralwarehousedoesnothavetospendtimeprocessingtransfersandcanconcentrateonfillingsalesordersforitscustomers.

• Itisnotnecessarytomaintainatransportationnetworkbetweenbranchesinordertodelivertransferordersinatimelymanner.

Manydistributorsfindthatacombinationofthetwomethodsresultsineffectivereplenishmentofstockinbranchlocations.Productswithamoderatetohighvolumeofusagearereplenisheddirectlyfromthevendorwhilethestockofslow-movingproductsisreplenishedwithbranchtransfersfromacentralwarehouse.Herearethe“rules”ofthebranchreplenishmentplanmaintainedbyonedistributor:

1. Theprojectedannualusageofeachitemisdividedbythequantityofthatiteminavendorpackagetodeterminehowmanypackagesoftheitemcouldbesoldinthebranchinayear.Forexample,the#A100widgetmustbepurchasedinaboxof25piecesandtotalusageoftheproductwas100piecesduringthepast12months.Thebranch’sprojectedannualusageisfourboxes.Thisisalsoknownastheannualvendorpackageusage.

2. Comparetheannualvendorpackageusagedeterminedinstep#1tothetargetinventoryturnoverofthebranch.Iftheannualvendorpackageusageisgreaterthanorequaltohalfthetargetinventoryturnover,placetheitemingroup“A.”Iftheannualvendorpackageusageislessthanhalftheannualtargetinventoryturnover,placetheitemingroup“B.”Ifthetargetturnoverofthebranchislessthanorequaltoeightturns,the#A100widgetbelongsingroupA.Ifthetargetturnoverofthebranchismorethaneightturns,theitemwillbeassignedtogroupB.InventoryturnoverisdiscussedindetailintheEffective Inventory Analysiswhitepaperinthisseries.

3. GroupBitemsare“slowmoving”andwillalwaysbereplenishedwithabranchtransfer.

4. Fast-movinggroupAitemswillbereplenisheddirectlyfromthevendorifatargetordercanbeissuedatleastonceamonth.Atargetordermeetstherequirementstogetthetermsordiscountsthatallowyoutocompetitivelysellthevendor’sproducts.Ifthetargetrequirementcannotbemetatleastonceamonth,groupAitemsarereplenishedalongwithgroupBitemswithtransfersfromthecentralwarehouse.

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Replenishingbranches’slow-movinginventorydirectlyfromvendorscandramaticallyincreaseadistributor’scostofcarryinginventory(alsoknownasthe“Kcost”).TheKcostincludesalloftheexpensesyouincurinmaintaininginventoryinyourwarehouse.Supposethedistributorhasanannualcarryingcostof18percent(youcanobtainaquestionnairedevelopedbyEIMforcalculatingyourinventorycarryingcostfromyourMicrosoftdealer).Thismeansthatitcosts18centstomaintainadollar’sworthofinventoryinabranchforanentireyear.Hereistheprojectedannualusageofthe#A100widget(cost=$5perpieceor$125/box)ineachoffivecompanylocations:

Location Annual Usage Monthly UsageCentralWarehouse 125pc. 10.42pc.

Branch#1 15pc. 1.25pc.Branch#2 20pc. 1.67pc.Branch#3 25pc. 2.08pc.Branch#4 15pc. 1.25pc.

Total Usage 200 pc. 16.67 pcHereisasummaryofthedistributor’scostofcarryinginventoryifeachbranchboughtthe#A100widgetinboxesof25piecesdirectlyfromthevendor:

Location Monthly Usage Months of Supply/Box Carrying Cost per BoxCentralWarehouse 10.42pc. 2.4 $2.25

Branch#1 1.25pc. 20.0 $18.75Branch#2 1.67pc. 15.0 $14.06Branch#3 2.08pc. 12.0 $11.25Branch#4 1.25pc. 20.0 $18.75

Total K Cost $ $65.06

Thecarryingcostperboxiscalculatedbymultiplying:

Monthsofsupply/box×Carryingcost/month×Averageinventory$box

Months of supply/box =25piecesperbox÷Monthlyusage

Carrying cost per month =Annualcarryingcostof18percent÷12months=1.5percentpermonth

Average inventory $ box =Valueofinventoryinabox($125)dividedbytwo.Duringthetimeittakestosellanentireboxofthe#A100widget,halfthetimetherewillbemorethan$62.50ininventoryandhalfthetimetherewillbelessthan$62.50ininventory.

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Noticethatitwilltakebranches1,2,and4wellmorethanayeartouseafullboxoftheproduct.Oneofthebiggestadvantagesoftransferreplenishmentisthatitisnotnecessarytosendfullboxesofaproductbetweenbranches.Allofthecompany’slocationscanshareeachboxof25widgets.Noticehowthecarryingcostoftheproductdramaticallydecreasesifthecentralwarehousebuysboxesofthe#A100widgetfromthevendorandthenresuppliestheotherbranches,asneeded,withbranchtransfers:

Total Monthly Usage Months Supply/Box Carrying Cost/Box16.67 1.5 $1.41

Noticethedrasticallylowercarryingcostperbox($65.06versus$1.41)ifalllocationsshareboxesofthe#A100widgetratherthanorderingboxesontheirown.Sure,thereistheaddedexpenditureoffillingandshippingtransferordersfrombranchtobranch,butthiscostisprobablyfarlessthanthecostofcarryingtheadditionalinventory.Considerthepotentialsavingsforthetypicaldistributorwhostocksthousandsofslow-movingproducts.

A Branch Inventory of Safety Stock?Oneofourclientscompeteswithanational“catalog”distributorthatguaranteesovernightdeliveryofthousandofproducts.Tocompetewiththisformidablerivaltheymustalsoguaranteeovernightdeliveryofstockitemsfromtheircentralwarehouse.Thecompetitivepricingdictatedbythelargercompetitordoesprovideourcustomerwiththefundsnecessarytomaintaininventoryofstockproductsatlocalbranches.Butthey’veestablishedacompetitiveedgeintheirmarketbymaintainingsmallquantitiesofselectcriticalinventoryitemsatsalesofficesthroughouttheirmarketarea.Ifoneofthedistributor’sregularcustomershasanemergencyandcannotwaittillthefollowingdaytoreceiveapart,theycanpickuptheneededitemfromtheemergency“safetystock”maintainedatthesalesoffices.Itisimportanttoemphasizethatonlyourclient’sregularcustomerscandrawfromthesafetystockandthenonlyinemergencies.Becausetheircustomersknowthepotentialcostofshuttingdownavitalprocessortheirentirecompany,theyremainloyaltoourclienttoretainaccesstothisinsuranceinventoryofemergency-repairparts.

Distributorsrelyonbranchlocationstomaintainahighlevelofcustomerservice.Butprovidingthisserviceisveryexpensive.Itisimperativethatdistributorscarefullyanalyzetheproductsthatshouldbemaintainedineachbranchlocationaswellasthereplenishmentsourceforeachitem.

About the AuthorJon Schreibfeder

JonSchreibfederispresidentofEffectiveInventoryManagement,Inc.,afirmdedicatedtohelpingmanufacturers,distributors,andlargeretailersgetthemostoutoftheirinvestmentinstockinventory.Forover20years,Jonhashelpedovertwothousandfirmsimprovetheirproductivityandprofitabilitythroughbetterinventorymanagement.Jonhasdesignedseveralinventorymanagementcomputersystemsandhasalsoservedasadistributionindustry“troubleshooter”fortwomajorcomputercompanies.Heistheauthorofnumerousarticlesandaseriesofbooksoneffectiveinventorymanagement,includingtherecentlypublishedAchieving Effective Inventory Management (5th edition)andtheNational Association of Wholesale Distributors’ Guess Right – Best Practices in Demand Forecasting for Distributors.

AfeaturedspeakeratseminarsandconventionsthroughoutNorthAmerica,LatinAmerica,Europe,Asia,andthePacificRim,Jonhasbeenawardedthetitle“SubjectMatterExpert”ininventorymanagementbytheAmericanProductivityandQualityCenter.HeisanadvisorandguestlecturerintheIndustrialDistributionProgramatPurdueUniversity.

About Microsoft DynamicsMicrosoftDynamics®isalineofintegrated,adaptablebusinessmanagementsolutionsthatenablesyouandyourpeopletomakebusinessdecisionswithgreaterconfidence.MicrosoftDynamicsworkslikefamiliarMicrosoftsoftware,suchasMicrosoft®Office,whichmeanslessofalearningcurveforyourpeople,sotheycangetupandrunningquicklyandfocusonwhat’smostimportant.BuilttoworkwithMicrosofttechnologies,itworkseasilywiththesystemsyourcompanyalreadyhasimplemented.Byautomatingandstreamliningfinancial,customerrelationship,andsupplychainprocesses,MicrosoftDynamicsbringstogetherpeople,processes,andtechnologies,helpingincreasetheproductivityandeffectivenessofyourbusinessandhelpingyoudrivebusinesssuccess.Visitwww.microsoft.com/dynamicstolearnmore.

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