generate/setuptip.jpg Distribution & Inventory Management Concepts

 

Automated Distribution Management

Until the advent of computerisation the success of a distributor depended on experience and a high degree of educated guesswork. An Automated Distribution Management System focuses on formalising distribution procedures and processes to improve customer service, by reducing human error and compensating for human limitations. Other important benefits include decreasing fixed costs by making administration and handling tasks more efficient, and reducing unnecessary stock holding levels. Improved customer service can help to build sales, and greater efficiencies and lower inventory can help to reduce overheads.

Distribution companies have a number of unique requirements that distinguish them from other types of businesses (such as manufacturing, retail or service). The major goal of a distribution business is to have the right stock available at the right time to effectively service the needs of its clientele. Unfortunately, the needs of the business's clientele will change in the future and this change will occur in unpredictable ways. Since no mathematical calculation exists that can predict the future, there are limitations to what a computerised distribution system can deliver in terms of client service and cost savings. Fortunately, however, at least most of the time, the imminent future is very similar to the immediate past. This observation does make it possible for an Automated Distribution Management System to provide greater potential accuracy than a manual system managed by a human employing educated guesswork.

Distribution Paradigms

Using CAPITAL's terminology, a "business paradigm" is a particular model or framework for running a business. It employs what engineers call a "top down" approach, or in other words, a big picture view of a business's operations. A business paradigm is a map used to reach a destination that is known in advance. Once the goal is determined, the detailed implementation issues are then considered.

Don't all distribution businesses perform essentially the same tasks and therefore operate their businesses the same way? The answer to this question is a very definite NO. The way a company operates its business is to a major extent determined by its market niche, or in other words, the type of clientele that the business seeks out or that it attracts. (This is why businesses that do not focus on attracting a specific type of customer, e.g., do not specialise in some way, seldom stay in business for very long.) Two businesses may consider themselves to be "distributors" and based on the broad definition of that word, this may be true. Yet both businesses may need to run their operations in very different ways.

Clients in different market niches tend to have different requirements and expectations. The purpose of a business paradigm is to describe a set of business processes designed to let the business operate successfully in that niche. These processes should represent best practice activities that have been developed and refined by other businesses, that can be successfully duplicated in your own business.

The major distribution paradigms supported by CAPITAL Series 7 include these models:

Definitions for the above terminology will be provided below. However, before doing this it is worth keeping in mind that to a certain extent all business paradigms are idealized models. Your business may encompass aspects of more than one paradigm. This may be due to the demands of your niche market or because your business addresses more than a single niche. Certain aspects of your business may not yet be covered by any formal paradigm.

As updates and new versions of CAPITAL Series 7 appear, support for additional business paradigms will be added over time. Check with CAPITAL Office Business Software for the latest information on available paradigms.

Ship Or Miss

In the Ship or Miss paradigm customers will seldom accept back orders as they require immediate delivery and can shop among distributors. Alternatively, back ordering may be impractical because of extensive lead times (typically from overseas or because the products are highly customised), or because of the seasonal nature of the goods being distributed. For example, the next shipment from a manufacturer may be a different model or style.

Since clients will generally not accept back orders, a major priority is to minimise lost sales. This involves providing a high service level, ideally 90% or better of requested items to be shipped ex stock. This is often possible for low cost items with high turn around but may not be achievable for expensive items with low turn around due to a business's capitalisation and storage costs.

Even though a Ship Or Miss distributor may not be able to add value by directly ordering goods from manufacturers to fulfill a client's needs, there are several opportunities to add value and increase sales using this paradigm. All ordered goods, for example, should be entered on sales orders, whether the computer indicates that those goods are available ex stock or not. Goods that can be picked and packed are shipped immediately. Missed items are kept on file for two reasons. Firstly, to build a history of lost sales that can better guide future purchasing decisions, and for sales staff to be able to review items that could not be previously shipped to clients. This gives the sales person an opportunity to suggest that the client make additional purchases, the next time around.

For example, a salesperson might suggest that an XYZ-BC was not available last time the client tried to order it, but that they are now in stock. The client might then decide to re-order the XYZ-BC since if he needed it in the past (so the logic goes) he may be able to profit from purchasing it now. A value add opportunity such as this requires a system that can review back orders (missed items) and suggest further purchases, while over the telephone or over the net, while the salesperson or the client is in the process of entering the order.

Order Control

In a distribution Order Control environment many items can be shipped ex stock, but because of the nature of the inventory being handled (generally its size and complexity), typically anywhere from 20-80% of stock items ordered will have to be back ordered and reordered from manufacturers. Satisfying such client requirements while minimising overhead requires extensive dependence on automated purchasing and automated stock allocations of deliveries. For example, the computer software must be able to generate purchase orders automatically as there is no time available to compile them by hand. The quantities on these purchase orders may need to take into account such factors as current physical stock, total back orders, purchase orders as yet undelivered, supplier lead times, minimum supplier reorder quantities, average monthly usage (sales) and other possible conditions.

A second critical factor in the Order Control paradigm is the ability to alert warehouse staff to the availability of new stock as it arrives and direct them to fulfill pending back orders. Typically, it may be possible to ship some goods right away, or an order may have a "hold until complete" status. As goods arrive, stock is put aside in a reserved holding area until the order can be shipped. As goods arrive in the warehouse the system must automatically allocate these quantities to pending orders. The warehouse must be automatically directed to pick the necessary items and quantities for specific customer back orders without the need for tedious manual allocation procedures.

Made To Order

In the Made To Order paradigm the distributor is to a large extent focused on providing value add services in addition to dispatching goods. This may involve repackaging, assembling, treating or in some other way changing the nature of the goods received from the manufacturer. As this process is more involved than in the Order Control paradigm, Made To Order is often associated with customer lead times that give the business enough leeway to provide the goods in the altered form required by the client. Since customer lead times may extend for a considerable period of time into the future, it is critical that in this type of business that goods are ordered such that they will arrive before they are expected by the client, but not so early that capital is tied up needlessly in inventory that will have no use for many weeks or months.

In Made To Order the more critical factor to control is often not the ex stock service level (how much can be shipped immediately), but ensuring that required products are ordered at an optimum time. The definition of "optimum time" obviously covers the need to have the goods in the warehouse when the client expects them to be shipped, but may also cover purchasing in optimum quantities to take advantage of supplier quantity breaks and minimising freight costs. This is referred to as "Resolving The Line Buying Problem."

Critical Issues an Automated System Should Help Resolve

This checklist does not cover every issue that may be critical to the successful operation of a distribution business, but it does cover the most common requirements raised:


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