Beware of the "Terminator"

Effective inventory management iskey to improving a distributor's customer service, cash flow, and ultimately, profitability. In this process, replenishment forecasting is crucial for effectively managing inventory. Fortunately, modern database technology has enabled a host of inventory management

Distributors today implement a variety of software that allows them to achieve the highest customer service levels with the lowest possible investment in inventory. New technology provides an automatic inventory forecasting capability that makes economic replenishment data easily accessible, without having to be a statistician. But implementing the right software can mean the difference between profit and pervasive problems.

In Terminator 3: Rise of the Machines , the latest release in the Terminator movie franchise, "Skynet" — the highly developed network of machines that wage war on humanity — is once again out to eliminate John Connor. The plot line is the same: machines created to help humans in their daily endeavors instead turn on them.

Unfortunately, choosing the wrong inventory management software has the same plot twist.

When evaluating software, distributors need not be concerned with a Skynet Terminator showing up at their doorstep. They should, however, be wary of systems that utilize outdated or restrictive replenishment logic. Some systems on the market today have had a major facelift, but the underlying business logic still relies on formulas developed in the early 1980s. The information looks good, but with obsolete algorithms that don't accurately consider accounting and cost factors, inefficient order quantities may result.

Other systems utilize more current replenishment logic, but fail to consider that not all distributors are alike. The underlying business logic may use exponential smoothing, for instance, as a way of determining future usage. However, if the distributor's business is prone to seasonality or exaggerated line trends, inefficient order quantities may result.

Once a distributor implements a system that is not optimized for their business, they have a pervasive problem. Profitability suffers, and inefficient order quantities state: "I'll be back" … every time a replenishment report is run.

The key to choosing the right software is to identify packages with flexible and robust replenishment features that allow the logic to be adjusted based on the distributor's business. Regardless of whether the package uses a moving average or exponential smoothing, make sure of its ability to implement weighting, trending and seasonality refinements in its forecasting calculation.

Another vital feature to look for is the software's ability to recognize "true business days" in its lead-time computations. Most distributors don't work both days of the weekend and the majority have company-slated holidays that fall during the normal work week. Truly effective inventory management packages will allow a distributor to set up their "workday schedule" and "holiday schedule" to define their total number of true business days throughout a given period. This leads to the most accurate reorder point calculations available.

Without externally valid replenishment forecasts, distributors may still have big problems. The very technology they implement to make their business more effective may terminate profits by generating EOQs that ultimately result in higher carrying and replenishment costs.

However, by ensuring that replenishment logic is a key area of assessment when evaluating inventory management software, distributors can take advantage of technology — instead of the reverse.