Inventory Management for Distribution Companies
Effective inventory management is the backbone of any successful distribution company. It involves more than keeping stock in a warehouse; it’s about having the right items in the right quantities at the right locations.
As a distribution company, this includes managing inventory both in your own facility and at your customers’ locations. As the complexity of supply chains grows, inventory software platforms like our own are transforming the way distributors manage inventory.
From automating replenishment to providing real-time visibility, eTurns helps our distributors reduce costs, streamline operations, and improve service levels. Read now to see exactly how this works.
The Basics of Distribution Inventory Management
Distribution inventory management refers to the collection of activities necessary to track, replenish, and optimize stock levels to meet customer demand efficiently. Unlike retailers or manufacturers, distributors face the unique challenge of managing inventory at multiple levels, including their warehouses, customers’ stockrooms, trucks, and points-of-use (POU). Success in this space relies on impeccable visibility, automation, and software like eTurns that integrate these functions seamlessly.
3 Key Principles of Inventory Management in Distribution
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Visibility into Remote Inventory: Real-time tracking of inventory and usage at customer sites and within distribution facilities ensures replenishment accuracy and prevents stockouts.
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Optimized Auto-Replenishment: Using software like eTurns TrackStock, you can automate replenishment based on data-driven min/max settings and eliminate manual ordering inefficiencies.
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Efficient VMI and CMI Systems: Vendor managed inventory (VMI) and customer managed inventory (CMI) models let you streamline operations, reduce costs, and offer self-service solutions for your customers.
2 Types of Inventory Managed by Distribution Companies
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Warehouse Inventory: As a distributor, you must all but guarantee your own warehouses operate efficiently, using features like demand planning and predictive analytics to minimize carrying costs.
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POU Inventory: For your customers’ stockrooms or trucks, rely on eTurns to track usage, optimize your min/max levels, and auto-reorder for seamless service.
Vendor Vs. Customer Inventory Management
Definitions and Key Differences
Vendor managed inventory (VMI) involves the distributor managing their customer’s inventory, while customer managed inventory (CMI) empowers customers to manage their own inventory using tools provided by the distributor.
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VMI Pros: Reduces customer workload, fosters stronger relationships, and improves order accuracy.
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CMI Pros: Gives customers control over their stock levels, reduces service costs for distributor teams, and offers transparency through tools like QR code scanning or SensorBins.
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Cons for Both Models: VMI may increase distributor workload, while CMI often requires greater customer training and involvement.
When Should I Choose VMI Vs. CMI?
We recommend you use VMI for your customers who prefer full-service solutions and CMI for those customers comfortable with and prepared for self-service. A hybrid approach works well when customers need flexibility, supported by eTurns TrackStock which accommodates both models effortlessly.
6 Challenges of Managing Customer Inventory for Distribution Companies
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Managing Consigned Inventory
Keeping track of consignment inventory—stock owned by you, the distributor, but stored at your customer’s site(s)—is often a logistical challenge. Hundreds of distributors have taken up eTurns TrackStock to optimize quantities, track consumption, and automate their billing.
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Managing Remote Inventory
Remote inventory management adds complexity to what’s normally an already challenging workflow. IoT-enabled tools like SensorBins and radio frequency identification (RFID) tech ensure real-time visibility and accurate replenishment, even for stockrooms miles away. One eTurns’ customer, a distributor, supplied wind turbine parts to an outdoor inventory storage facility on a snowy tundra in South Dakota using RFID readers to track pallets of parts.
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Handling Large VMI Inventories Across Multiple Locations
Distributors often manage VMI inventory across warehouses, customer sites, and service trucks. This requires precise tracking, efficient transfers, and scalable tech like eTurns to centralize data and streamline VMI replenishment processes.
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Addressing Supply Chain Disruptions
Supply chain issues, such as delays and shortages, directly impact inventory availability. Mitigate these risks by maintaining safety stock, using predictive analytics, and adjusting min/max levels based on real-time data.
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Inefficiencies Due to Manual Processes
Manual inventory tracking slows operations and produces errors. Using QR code scans to automate cycle counts, pull items from inventory, and trigger auto-replenishment eliminates these inefficiencies and improves accuracy.
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Balancing Cost Control and Service Levels
As a distributor, you face the constant challenge of reducing costs while maintaining fantastic customer service. Automated inventory replenishment and optimized min/max stock settings balance inventory carrying costs and customer satisfaction.
Implementing Distributed Inventory Management
Setting minimum stock levels prevents stockouts, while safety stock accounts for variability in demand and lead times. eTurns TrackStock uses consumption data and lead time analysis to calculate optimal min/max settings, ensuring efficient replenishment.
The Role of Tech in Distribution Inventory Management
Tracking Inventory Usage at Customer Sites
Real-time data ensures distributors always know what’s available at customer locations. eTurns TrackStock integrates seamlessly with RFID, SensorBins, and QR code scanning for precise usage tracking.
Automation and Auto-Replenishment
Auto-replenishment with min/max settings removes human error and ensures inventory is replenished at the right time and in the right quantities. TrackStock’s Min/Max Tuning Dashboard optimizes stock levels based on historical and real-time usage.
Using IoT and Smart Devices in Inventory Management
IoT devices like smart shelves, electronic labels, and SensorBins simplify inventory tracking. These tools integrate with eTurns TrackStock to enable efficient, automated replenishment for both distributors and customers.
Data Analytics and Predictive Forecasting of Customer Usage
Predictive analytics help distributors anticipate demand and avoid overstock or stockouts. TrackStock leverages data to generate actionable insights, improving decision-making and operational efficiency.
Optimizing Your Inventory Management Strategy
Historical data and seasonal trends are necessary to prevent forecasting errors and optimize demand planning. eTurns simplifies your data analysis and inventory strategy efforts.
5 Inventory Management KPIs to Track
Tracking the right KPIs unlocks valuable insights into your inventory’s performance and overall health, enabling you to make smarter, more informed decisions. Here are five key metrics to focus on and how they can drive improvement in your distribution operations:
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Inventory Turnover Ratio: This formula measures how often your inventory is sold and replaced within a specific period. A high turnover ratio indicates that stock is moving efficiently, while a low ratio suggests overstocking or poor demand forecasting. For example, a distributor supplying medical consumables might track this KPI to ensure they aren’t holding excess inventory of perishable items like sterile dressings or medications that expire quickly. Actionable Insight: Set benchmarks for turnover based on your industry. For fast-moving consumer goods, a high turnover is ideal, while for maintenance, repair, and operations (MRO) inventory, a moderate turnover rate keeps inventory available without tying up capital.
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Average Daily Usage (ADU): ADU provides insight into how much of a specific item is consumed daily. Use this metric to determine your reorder points and adjust safety stock levels. For instance, an EMS distributor supplying ambulances with critical medical supplies can rely on ADU to ensure restocking aligns with consumption rates for items like syringes or saline solution. Actionable Insight: Use ADU to fine-tune your min/max settings in our platform, ensuring optimal inventory levels without excess.
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Order Accuracy: Order accuracy reflects the percentage of orders fulfilled correctly and on time. For example, if you are an electrical distributor managing VMI for construction contractors, you may lose business if orders frequently include the wrong fasteners or are delayed, disrupting your contractor customer’s schedule. Actionable Insight: Aim for an order accuracy rate above 95% by integrating automation tools, such as RFID or QR code scanning, to ensure correct inventory picks and real-time updates to stock levels.
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Stock-to-Sales Ratio: This KPI compares inventory levels to sales figures, helping distributors understand if they’re overstocked relative to demand. For instance, a distributor of seasonal HVAC parts might use this metric to assess whether post-season stock levels align with end-of-season sales trends. Actionable Insight: Use historical sales data to identify seasonal trends and adjust stock levels proactively to avoid tying up capital in inventory that won’t move.
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Carrying Cost Percentage: This measures the cost of holding inventory, including warehousing, depreciation, and insurance. If you distribute electronic components, you may see carrying costs skyrocket if products like microchips become obsolete before they can be used. Actionable Insight: Reduce your carrying costs by identifying slow-moving inventory through data analysis and offloading it via promotions, discounts, or alternative sales channels.
3 Best Practices for Minimizing Inventory Costs
Inventory costs can quickly spiral out of control if left unchecked, impacting profitability and cash flow. The following three best practices help you control costs without compromising service levels or customer satisfaction:
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Reduce Carrying Costs
Excess inventory eats into your profitability through storage costs, depreciation, and potential obsolescence. Min/max settings, calculated using real-time usage data, prevent overstocking while ensuring critical items remain available.
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Use Case: A distributor managing medical supplies in multiple stockrooms uses eTurns TrackStock's Min/Max Tuning Dashboard to identify items with excessive quantities. By adjusting min/max settings for slower-moving items like splints and prioritizing faster-moving products like gloves and syringes, they reduce storage costs and free up warehouse space.
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Actionable Insight: Regularly review your min/max levels every quarter or after significant changes in demand to ensure they align with actual consumption patterns.
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Balance Inventory Levels
Overloading your customer’s stockroom may seem like a precautionary measure to prevent stockouts, but it ties up either your customer’s or your capital as well as their limited space. Instead, aim for balanced inventory levels that provide just enough buffer without overstocking.
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Use Case: A distributor supplying HVAC contractors in a VMI or a CMI model can use eTurns TrackStock’s inventory optimization analytics to adjust stock levels using their usage data to align with seasonal trends. They ensure high-demand items, such as air filters in the summer, are replenished just before the peak season while keeping other products, like thermostat controls, at lower levels during off-peak months.
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Actionable Insight: Use demand forecasting tools to align inventory levels with expected usage and communicate regularly with your customers to ensure you don’t overload their storage capacity.
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Implement Safety Stock
Supply chain disruptions, whether from global shortages or weather events, can leave you and your customers in a bind. Safety stock acts as a buffer to ensure operations continue uninterrupted, especially for critical items.
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Use Case: A distributor providing consignment inventory for manufacturing customers sets safety stock levels based on lead times and historical consumption data. They maintain a 20% safety stock for high-priority items like machine lubricants, making sure production lines remain operational even if resupply is delayed.
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Actionable Insight: Base safety stock levels on the variability of demand and supplier lead times. Use predictive analytics from platforms like TrackStock to identify items that require higher safety stock versus those with stable supply chains.
4 Trends in Distribution Inventory Management
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Increased Adoption of AI and ML
Artificial intelligence (AI) improves demand forecasting and inventory optimization. Machine learning (ML) algorithms continue predicting future needs with increasing accuracy, making inventory management smoother and simpler for human staff.
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Expansion of IoT and Smart Devices
IoT technology continues driving efficiency in warehouses and stockrooms, with devices like SensorBins providing real-time visibility and automation.
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Sustainability in Inventory Management Sustainability
Distributed inventory decreases transportation emissions and supports sustainability initiatives. Optimizing stock placement lowers the environmental impact of logistics operations.
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The Role of Robotics and Automation
Robotics are streamlining inventory handling and fulfillment, paving the way for fully automated distribution centers.
Taking the Next Step
High-performance inventory management is critical for your distribution company to thrive in today’s competitive landscape. Ready to take your inventory management to the next level?
