A key element to the success of wholesale distributors is to simultaneously manage appropriate inventory levels while maintaining high levels of customer service and satisfaction. Depending on the reliability of the distributor’s supply base, performing these tasks effectively may seem virtually impossible. Achieving desired service and order fill rate goals is based on the successful implementation of an effective inventory replenishment program. While the concepts of inventory replenishment, service levels, and order points have been used for decades, the number of distribution companies who understand and utilize these concepts is significantly lower than one might imagine. The fact of the matter is that most distribution companies struggle with inventory optimization.
While there are complexities in the details, at an overall level, smart distribution companies are focused on delivering the highest possible service levels to their customers while minimizing on-hand inventory. For distributors, long-term profitability is contingent upon having the right products available to meet customer demand at the right time. If this concept is so elementary, why do so many companies struggle with establishing optimal inventory levels, and why do distributors struggle to have adequate product supply to fulfill customer orders?
The two-word answer to this conundrum is “service levels.” Excellence in distribution is synonymous with the ability to supply customers with a high service level that is both consistent and reliable.
What is a service level? Service level refers to an organization’s ability to enter and ship all of the items requested on a given sales order to meet the customer’s desired receipt dates. This means there are no inventory shortages or backorders, and the order is filled within the customer’s requested delivery window.
In TGI’s Enterprise 21 ERP system, a service factor can be defined by item or SKU, which defines the desired line item fill rate for that given item. Service factors can be set on a global basis or can be defined uniquely by location or facility. For some fast-moving items, a service factor of 95 or 99 may be desired, while others may require much lower service levels of 50 or 60.
How does Enterprise 21 use service factors? Once a service factor is defined – by SKU – Enterprise 21 uses the service factor in its time-phased inventory replenishment process. In Enterprise 21, a service factor of 95 implies that 95% of the time a customer places an order for a given item, the item can be shipped out of inventory, while a service factor of 99 means this is to occur 99% of the time.
In Enterprise 21, the inventory replenishment process analyzes supply and demand to help distribution organizations improve order and line item fill rates and optimize their overall inventory management performance. The process considers a variety of criteria such as desired service level and safety stock, minimum and maximum inventory levels on a product-by-product basis, on-hand inventory, forecasts and current customer demand, supplier lead times, minimum order requirements, and order multiples. In organizations with multiple facilities, Enterprise 21 can review requirements for an individual warehouse or distribution center and for the organization as a whole. Once the Enterprise 21 system’s inventory replenishment process calculates the necessary recommended replenishment quantity, the application generates online requisitions for review and conversion into purchase orders and inventory transfer requests.
What further sets Enterprise 21 apart is the continuation of this process to gather transactional data as things occur and to report on that information for analysis purposes. An integral part of Enterprise 21′s distribution software functionality is the ability to monitor service levels automatically and produce suggestions for necessary changes to existing replenishment rules. By interactively collecting and analyzing information such as order and line-item fill rates, Enterprise 21 produces reports and management alerts to notify the organization of any anomalies compared with existing service level metrics.
Successful distributors know the key to ongoing and improved profitability is due in large part to managing the balance between customer service and inventory levels. Enterprise 21′s advanced inventory replenishment capabilities, including the use of service factors, are just one of the reasons leading distributors adopt Enterprise 21 for its complete distribution software capabilities.