Central warehouse in a distribution network may not always have the flexibility of holding and breaking the supply as per individual distribution center’s demand. Complexity increases when central warehouse is capable of only cross-docking the containers received from supplier to distribution centers which may lead to excessive or unwanted Inventory at the distribution centers. The success of company now hinges on devising techniques to maintain optimal inventory levels at the distribution centers by transferring excessive inventory to point of sale using inventory rebalancing principles and policies.
Inventory is expensive to hold. It blocks funds of a company that could be more profitable if used elsewhere. Decision to hold inventory may result in higher customer satisfaction. However, excessive inventory increases carrying cost resulting in higher operating costs impacting profits. Unwanted and unrelated inventory may deteriorate and at times may become obsolete.
Therefore, for a successful value chain, it is essential to have an association between customers and suppliers to exchange key information on material requirements and provide visibility both up and down the value chain. Gradually as the relationship matures, it is essential that an environment of trust is built between the organizations to collaborate in a just-in-time model and build optimal inventory only when it is needed.
Partnering with suppliers is rapidly gaining importance for last few years. Companies no longer keep their suppliers at arm’s length. Rather, they call them business partners now and involve them right from the demand forecasting stage. This allows them to have a win-win situation when total transparency is maintained between them on the demand and supply requirements. Both can work towards optimizing inventory, reducing total cost and sharing the savings.
However, there could be some exceptions to this model. In a typical FMCG business, suppliers are not driven by forecast due to monopoly in the market. Their decision is purely based on market economy and profit margins. They push supply to distribution channels and to point of sale in single shipments. They typically consolidate the supply of different distribution centers in one shipment. Distribution companies, especially in Middle East, may not be able to hold the shipment at the port due to limited ship berth availability. They tend to cross-dock the shipment, carry it to one of the distribution centers, segregate the supply and ship it to multiple distribution centers. Due to the nature of push supply strategy adopted by suppliers, some distribution centers may end up carrying excessive inventory.
Companies now need to develop innovative strategies to accommodate cross docking in ERP and employ multiple inventory policies at distribution centers to reduce excessive stock generated by the push supply. One such principle generally used is inventory rebalancing by creating circular sourcing between the distribution centers.
Inventory Rebalancing is used to resolve an unexpected shortage in one organization by transferring inventory from a related organization and vice versa. Circular sourcing allows the user to create mutual sourcing relationships between the organizations. ERP solution should be capable to balance inventory between the circular sourcing organizations before drawing inventory from central sources.
WiiFlex can help companies by rolling out diverse solutions using TradeBooks based on the customer-supplier relationship and their strategies.
Author Profile – Phani Tamarapalli, SVP & CDO, WiiFlex Software Solutions
Phani has 20+ years of experience in ERP consulting and holds a Certification in Production and Inventory Management from APICS (an American association for supply chain management). He has held senior positions at Infosys and Hitachi Consulting in the past serving marquee customers across various industry segments in US, JAPAC, India and ME. He has been a speaker at the Confederation of Indian Industry where he presented his views on ‘Improved Logistics for rapid urbanization and sustained economic growth’. He has also submitted and presented papers at Oracle Applications User Group on value chain planning in US and UK earlier.