A national auto parts distributor enlisted the help of Data Driven Supply Chain (DDSC) to optimize their inventory in the light of significant distribution network changes. After analyzing the distributor’s sales data, the DDSC team recommended inventory levels for each SKU and facility that provided the right tradeoff between working capital and customer service level.
Background
The national auto parts distributor prides itself upon fast, reliable service to its customer base of chain-owned and independently-owned auto repair shops. To earn and keep its customer’s trust, the distributor maintains wide SKU breadth at its over 100 local Distribution Centers, which enables delivery within 24 hours of a customer’s order.
Knowing that many of these products sell infrequently, the distributor has decided to set up several Regional Distribution Centers where a large assortment of SKUs, primarily lower-selling C SKUs, could be stocked and delivered overnight to the local Distribution Centers in response to a demand signal. As an additional benefit, vendors would have far fewer ship-tos, delivering products to the several Regional Distribution Centers instead of 100+ local Distribution Centers.
The distributor enlisted the DDSC team to evaluate the Regional Distribution Center concept, recommend the number and locations of these RDCs, and determine which products should be stocked regionally vs. locally, and in what quantity.
Considerations
Factors the auto parts distributor considered when adding regional inventory facilities to their distribution network:
• Where should these regional distribution centers be located and how many are needed? Too few RDCs would mean that some local DCs would not be close enough to the RDC that provides lower-selling C SKUs. Too many RDCs would be an unnecessary CAPEX and OPEX commitment.
• What’s the impact on total inventory? How many SKUs should be available locally vs regionally? How to balance inventory investment with customer service commitments?
• What’s the impact on lost sales? If a product was only stocked in a Regional Distribution Center, there was a slightly higher chance that it would not get to the end customer in time. This would potentially cause both a lost sale and reduced customer trust towards the distributor.
• What’s the impact on overall financials? Keeping too much inventory locally ties up excess capital. Keeping too little inventory may hurt volume discounts from vendors and risk lost sales.
The Data-Driven Supply Chain Approach
The DDSC team confirmed that the distributor’s planned Regional Distribution Centers were in the optimal locations, then went to work developing a new inventory optimization process that would identify the most cost-effective inventory locations for SKUs: Regional versus local DCs, and at the inventory level that best balanced customer service level with working capital investment.
To do this, we chose a fresh approach to evaluating sales data. While the distributor had previously been making inventory decisions based primarily on a product’s average sales per year, our team focused on identifying the frequency of sales of that product throughout the year. For many high selling A SKUs, bar charts (histograms) provided to the distributor revealed daily sales of zero for 300+ days a year. This was an eye-popping revelation!
Calculating the daily sales patterns by SKU/DC combination gave the distributor a new, key metric they could use in determining each product’s optimal inventory location. Allowances were incorporated for Limited Time Offers and promotions planned during the year which would skew otherwise normal daily sales volumes for a particular product.
Outcome
Data Driven Supply Chain confirmed that the distributor’s planned Regional Distribution Centers were in the optimal locations. DDSC was subsequently able to identify a new, more effective, evaluative approach for use in the inventory optimization process. The distributor started incorporating the new approach recommended by DDSC to determine ideal inventory placement. Evaluating each SKU by frequency of sales provided a differential approach to determining its inventory location. Based on this new approach to the data, the distributor realized that more products could (and should) be inventoried regionally instead of locally. Less capital would need to be tied up in local inventories; less space would be needed in those facilities.
Data Driven Supply Chain’s innovative approach towards inventory analysis and optimization proved the secret to a successful way forward.