Master distributors typically import their product in bulk from overseas vendors. Unless your products are light enough to ship economically via air, you probably get them shipped via boat. This translates into a 3 to 4 month lead time from the time you place a PO until the product is at your warehouse.
Visually, the timing of your lead times looks like this.
As we see in Exhibit A, your buyers are currently placing PO’s for a timeframe 3 to 4 months into the future. How are they determining how much to buy of each SKU that you stock?
In a recent survey conducted by Thrive Technologies of 396 distribution companies:
• 79.3% use their ERP system suggested item order quantities
• 10.4% manually calculate item order quantities
• 5% use a homegrown system
• 5.5% use a best of breed inventory replenishment system
So about 9 out of 10 distributors are relying on the suggested PO quantities from their ERP system, or are manually calculating order quantities (eg. using a spreadsheet).
Since ERP systems often do not create a true forecast (ie prediction of sales for each item / location) but instead do a simplistic calculation (eg moving average) of recent months’ usage, they tend to do a really poor job predicting sales 3 or 4 months out.
In Exhibit B, we can see a forecast accuracy evaluation of a leading ERP system used by distributors. At the end of January, we stored the “usage” number from the ERP system (used to calculate suggested orders) as well as the forecast from Thrive for the month of February. At the beginning of March, we stored the actual sales that occurred in February and compared to the ERP usage number and Thrive’s forecasts.
As you can see, the ERP usage numbers did a poor job predicting the actual sales that occurred in the next month. Can you imagine how poorly the ERP usage number would reflect what you will sell by item 3 to 4 months from now?
And yet, that usage number is the most important input into the order point calculations. The first thing you have to do before you buy inventory to stock for your customers is estimate how much you are going to sell.
As shown in Exhibit C, the Aberdeen Group found that companies with higher forecast accuracy were able to carry fewer days of inventory. This translates into higher turns while maintaining or improving fill rates!
Our first recommendation to companies that are trying to improve their inventory metrics is to improve the demand forecasting process. This is especially critical for master distributors since you have long lead times. The goal is to better predict sales 3 to 4 months in the future for each item that you stock. The first step is to measure how accurate your demand forecasts are now. You can click here for an article in the Supply House Times for instructions on calculating your own forecast accuracy.
By monitoring the accuracy of your demand forecasts, you will improve the process of predicting what you sell during that timeframe. Then ensure your replenishment (ie suggested PO’s) incorporate these improved demand forecasts for each item. This will significantly reduce lost sales and increase turns for master distributors.