It is possible for both distributors and customers to experience greater productivity and profitability. The answer lies in better inventory management.

by Jon Schreibfeder

Competition continues to increase as new distribution channels evolve and existing distribution channels expand. This increased competition leads to decreased profit margins. Unfortunately, this situation also creates more demanding customers that require greater product availability and more value-added services. Because of the lower margins, most distributors have fewer profit dollars to meet these new challenges. The end result: More has to be done with fewer resources.

Most customers have four criteria in their definition of superior customer service: 

• Material ordered is delivered when it is needed or promised.

• The right quantity of the right item received at the right location.

• The material is received in good condition with any necessary documentation.

• The supplier provides quick responses to inquiries.

Proper measurements of superior customer service
Before learning how effective inventory management can lead to superior customer service, you must determine the quality of the service you currently provide. Often, customer service measurements are anecdotal at best:

• A salesperson says, “We don’t have that many backorders.” But how many times does a customer not place an order because he or she was told none were in stock?

• The company president says, “I guess we’re doing OK. I don’t get that many angry phone calls from customers.” But do you always complain when you have received less than satisfactory service from a supplier?

• A warehouse person says, “Most of the orders are shipped out right. We don’t have to send out that many replacement shipments.” But couldn’t a single shipping mistake destroy a customer’s confidence in you as a reliable supplier?

In order to accurately know how well you are servicing customers, and to measure your improvement over time, it is imperative to implement some objective measurements. Here are two measurements you can use:

Aged customer service level. How many line items for stocked products are delivered complete, in one shipment, before the promise date? Here is the formula to calculate the customer service level:

Number of line items for stocked products shipped complete before the promise date divided by number of line items for stocked products ordered

Stocked products are items that you have committed to have on-hand, in reasonable quantities, when your customers want them. The promise date is the specific day you have committed to either ship or deliver the material to the customer. 

Why deliver the material in one shipment? Because your customer may need the entire amount ordered to accomplish what they need to do. Even if they don’t, not sending the entire quantity in one shipment causes your customer to have to process multiple stock receipts. Not to mention the fact that you have the cost of processing multiple shipments.

Aging customer service allows you to measure how late overdue shipments actually are. In most cases, a shipment that is two weeks late causes more customer frustration than a shipment that is two days late. Many successful distributors age late shipments as part of their customer service analysis like this:

Even though both items in the above table have a 90-percent customer service level, doesn’t item A100, with substantially longer backorders, require more immediate attention?

Most successful distributors measure the customer service level at the end of every month. Overall, they try to deliver 95 percent of line items for stock products by the promise date. Can they deliver a higher level of customer service? Sure. But in most cases, increasing the overall customer service level above 95 percent requires a tremendous amount of inventory, more inventory than the average industrial distributor can afford to maintain in their warehouse. A valuable report lists specific items that have a customer service level of less than 75 percent. After all, you’d want to know if you’re failing to deliver one-in-four customer requests for a specific item.

Customer satisfaction analysis. The customer service level is a great tool for determining how well you are servicing your customers. But some companies make it even better. They know that just having a product in stock doesn’t ensure a satisfied customer. They want to be sure that an order completely meets the customer’s expectations. They utilize a tool that is often called the customer satisfaction analysis. This analysis reflects the percentage of line items that are filled correctly and completely, on or before the promise date. In addition to inadequate stock, the customer satisfaction analysis reflects situations where:

• The customer received the wrong item even though the correct item was listed on the packing slip and invoice.

• The wrong quantity was shipped even though the correct quantity was listed on the packing list and invoice.

• The material was delivered to the wrong address.

• Paperwork was incomplete, or necessary documentation, such as Material Safety Data Sheets (MSDS), was not sent with the shipment.

• The customer was charged the incorrect price for the item.

Inside salespeople and customer service representatives carefully record every customer call reporting a problem. Here is a sample incident report:

Like stock line items whose order quantity cannot be completely shipped by the promise date, each problem is considered a missed opportunity to please the customer, or simply a “miss.” Each month, the system reports the percentage of line items without any type of miss for each customer, product line and warehouse. Management carefully reviews each problem sheet to ascertain if action can be taken to prevent the same problem from reoccurring in the future. Not only is this system a great measure of customer satisfaction, but also a fantastic tool for identifying opportunities for improvement.

Tools for achieving superior customer service
In order to provide superior customer service with limited funds provided by today’s lower gross margin, it is necessary to remove as much fat (unneeded stock) from your warehouse. This fat removal process requires:

An approved list of stocked products for each company location. Stocking a product is a commitment to have that product available in reasonable quantities. Can you discontinue some slow-moving items or stock them in just a few locations?

Comprehensive forecasting. More accurate forecasts of what will be used or sold in the future result in less stock inventory. “SWAG” (silly, wild-ass guesses) and simple averages of past usage are no longer adequate to meet the demand forecasting needs of today’s distributor. A good forecasting system has multiple elements including:

• A tool to identify possible unusual usage that compares actual usage to the demand forecast for the month just completed. Any significant discrepancy between the forecast and actual usage should be brought to the attention of the buyer.

• A system that allows multiple forecast formulas, each appropriate for a different pattern of usage history. Note that the most accurate forecasts for some items, especially those with sporadic sales, are based on the average or normal sales quantity as opposed to a factor of monthly usage.

• Tools that teach salespeople how to gather accurate information about what customers will use in the future. This process, along with incentives to customers for accurate estimates of future usage, is the cornerstone of Collaborative Forecasting. Collaborative Forecasting is the process using carefully assembled predictions of future usage to help forecast future demand. This is a relatively new and very valuable inventory management tool.

Measure the “Remnant Inventory” of each product, especially fast-moving products, at the time of stock receipt. By looking at how much is left in stock when replenishment shipments arrive, you can fine-tune replenishment parameters. For example, if there is more than “x” days’ supply for three consecutive stock receipts, you may reduce the minimum stock level or other replenishment parameters. On the other hand, if there is only a couple of days’ supply remaining in stock when a replenishment shipment arrives, it might be a good idea to increase the minimum quantity on hand.

Implement an “Easy Fill” Warehouse. In this warehouse design, all procedures are organized so that order pickers (often the lowest-skilled workers) can consistently fill orders without errors and also can maximize the number of orders filled and shipped each day.

In today’s competitive environment, it is important to meet your customers’ expectations. Superior customer service is possible, in part, through effective inventory management. This can directly lead to a “win-win” situation in which both the distributor and their customers experience greater productivity and profitability.

This article originally appeared in the ISMA/I.D.A. 2001 issue of Progressive Distributor. Copyright 2001.

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