Your goal is to maximize long-term profitability, but not at the expense of your vendors and customers. Many people feel that you cannot achieve both effective inventory management for your organization while helping your partners (i.e., your customers and vendors) achieve their maximum level of success. With technology, everyone can benefit from cooperation and information sharing.
Even though selling large quantities of products might help a vendor temporarily increase sales, it does not often result in increasing long term profitability. Large, infrequent customer orders do not maximize the use of a manufacturer's machinery, manpower and material. Money is tied up in unneeded inventory, equipment is idle for significant periods of time and staffing needs continually change. It helps to manage all of these processes with technology. Ideally you want to have a process that does not focus on trying to sell more but trying to project what will be needed while ensuring that you are using your inventory in the most efficient way.
There are also lots of business hick-ups to avoid. For example, taking advantage of vendor offers can increase a customer-s costs in the long run because it involves acquiring inventory before it is needed. This ties up both money and valuable warehouse space. Expiration date issues faced by many companies adds even more strain to this problem. Remember, very few organizations are in the antiques business-your inventory probably will not appreciate with age. Everyone benefits when you can allow customers to buy smaller quantities, more often.
Most organizations base forecast of future customer demand on past sales or usage history. They believe that what was sold or used in the past is a good indication of what they will use in the future. But situations change over time:
- You gain and lose customers
- Products increase or decrease in popularity
- New products are introduced to the marketplace
- Promotions and one-time projects will result in a temporary increase in the demand of a product
You can compensate for these changes by connecting the supplier and customer links of the supply chain. A vendor can often better estimate how much of a product needs to be available when its customers share actual or projected sales, production schedules or other estimates of product usage. This process is known as collaborative planning, forecasting and replenishment (CPFR) (also known as derived demand).
A supplier can automatically collect CPFR or derived forecasts by downloading information from their customers' retail point of sales (POS) terminals or their manufacturing production schedules. But even if automated data collection is not practical, a vendor can still implement an effective CPFR system:
- Identify customers that have the ability to predict what they will sell or use in the future (After all, not all customers can predict what consumers will buy)
- Collect forecasts of future demand for specific products from these customers
- At the end of every month compare the customer's estimate of usage for each item to their actual purchases
- Report back the results to the customer to help improve their future predictions of product usage
Often customers will overestimate their future needs of products. To encourage them to give you the most accurate possible forecast, consider offering them a better discount based on the accuracy of their forecast. After all, if they give you an accurate forecast you should be able to stock less while continuing to meet or exceed your customers' expectations of product availability.