Back when computers first arrived on the scene for equipment distributors one of the first applications used was inventory control. In those days a paper parts sales orders document was sent to data processing, keypunched, run through the computer, producing an edit report, the edit report was reviewed in the parts department, corrections sent back, a final run on the computer and the activity was updated on the parts history file. Phew.

Today all of that work is done before a document is printed. Of course some of you wait until the parts have been picked and then release the order for the update of the history files. So why do we still have to use forecasting systems to calculate order points?

We have gone through many differing calculations within inventory systems from the normal statistical calculations through to Poisson statistical calculations. The truth is we can use good old fashioned Kardex rules today. The time delay in updating order points and order quantities no longer exists. This means that all of the fancy statistical methods used are no longer of any benefit.

Go further in the truth of the world today, what about the use of lead times? We started with mailing the stock orders to the suppliers, some of us then went to a telex, now we use satellite connections or high speed internet lines. So the time to submit an order to a supplier is hours no longer days and weeks. And look what has happened with the suppliers. Some suppliers allow daily stock orders, some several times a week and most of the rest allow weekly stock ordering. And then the turnaround from the supplier until the order is received by the dealer is a matter of days for most of the dealers in the country. So what is the net effect? Lead times can be as short as three days but rarely if ever are longer than two weeks.

So what you say?

Well for starters our inventory levels reflect lead times that are altogether too long. That means that we carry too much inventory for the level of service that we provide to our customers. Take a two week lead time as the average in America. The order points should be no more than one month supply. The order quantities we exposed some months back saying that the old “Kerr Norton” Economic Order Quantity calculations were no longer valid. So I would suggest that the order quantity be two weeks supply in our example with the lead time of one months supply.

Some of you are still saying “so what?”

Well your inventory turnover should be no less than 9 times a year with the average being somewhere around 10. That is the so what.

Let’s say you are a high performance dealer and your parts inventory turnover is 5.0 and that you parts gross profit is 25%. That means that you produce a gross profit return on capital employed of 125%. (5 times 25%) Well if your turnover improves to 10 times holding the same gross profit your gross profit return on capital employed is now 250%. Have I got your attention yet?

Of course this is meant to stimulate your thinking and get you “out of your box” regarding the standards for inventory turnover. Oh and by the way, this increase in turnover will cause no change in your “off the shelf fill levels.” No change at all.

Isn’t that worth thinking about? You are darned right it is worth the time.

Will your current system allow you to be able to implement this type of change? Sure it will. Just use a “minimum divisor” or set the lead time to two weeks. Check it out. It works, it doesn't hurt service and it allows a lower investment for the same level of business. This is what we need to be doing. Are you interested? I sure hope so.