More Inventory or Less?
Presented by: Al Bates, Principal, Distribution Performance Project
Sophisticated customer research has been conducted in distribution for more than fifty years. During that period, in good economic times and bad, in every single line of trade, the same four customer needs rise to the top. They are as close to absolutes as anything in distribution.
These four needs, in order of importance, are listed below. Interestingly, price is not one of them. If these four can be met, price becomes a somewhat secondary factor.
Fill Rate (Service Level)—Overwhelming the most important service to customers is to have product available when needed. Interestingly, this desire for product availability holds true in industries where fill rates are already high as well as those industries in which product availability is an on-going challenge. In the absence of improved inventory control systems, this top-ranked factor suggests the need for an increase in the firm’s investment in inventory.
Depth of Assortment—The second-highest rated factor is the desire for a one-stop shopping experience. This is clearly related to the procurement cost associated with working with numerous suppliers. This finding also suggests that the concept of buyers spending time in front of computers looking from one supplier to another may be somewhat overstated. Meeting this need may also require additional inventory.
Speed of Delivery—This is the one area where most distributors have worked to improve performance. In fact, “order today/receive tomorrow” is a fact of life in most industries. This service requirement reflects the fact that customers very often do not plan ahead in their needs for product. It is a reality that a low service level makes providing next-day delivery nearly impossible.
Order Accuracy—It makes no difference if suppliers have product in stock and deliver quickly if the wrong item is delivered. Clearly, this is an operating systems issue.
It is important to note that none of the factors involve a desire for distributors to have the world’s best web site. Customers continue to value great service more than the vehicle by which that service is provided.
You can learn more about this at my session on Improving the Bottom Line at UID.