Traditional parts inventory is a kind of "wait and see" supply chain model, according to the inventory plan may need parts into the warehouse in advance, when the customer needs can provide spot. However, inventory planning is based on demand forecasts, which are subject to errors and demand is also changing. For example, with the implementation of Phase 4 emission standards for non-road machinery in December 2022, demand for some parts with older diesel engines will gradually disappear. It is impossible to completely avoid inventory mismatches.
So, can you reduce the loss of inventory mismatch? In "Can Inventory Mismatches be Avoided? (1)", I pointed out that a company must ensure that the benefits from parts outweigh the losses from mismatches, or it will struggle to generate free cash flow. In 2022 many dealers and parts stores will find it harder and harder to make money because they are still planning their inventory by thumb, and inventory mismatches will get worse and worse and eventually ineffective inventory will bring down the business.
Both dealers and parts stores must recognize one point: the previous extensive parts business model is out of date, from a seller's market to a buyer's market, parts margins are lower, customers have more choices, the competitive environment has changed, if still by experience inventory planning, will only lead to more and more mismatches.
How to reduce inventory mismatch? Here are my three suggestions.
First, the concept of inventory planning must change.
Many enterprises are still using the linear thinking mode, thinking that the more inventory, the greater the chance to meet customer needs, but do not know that this is completely wrong, because only turnover inventory can improve the parts spot rate and customer satisfaction, ineffective inventory can not bring value to customers, the more inventory the greater the loss.
Enterprises invest in spare parts inventory, inventory can be sold to obtain profits, to meet customer needs; But once the inventory is overstocked, it will cause losses. After the market is the most valuable parts, the least valuable is inventory, inventory can be sold, completely depends on the level of enterprise inventory plan.
Inventory planning by experience is too unreliable. It is like gambling with luck and will only create more inventory overhangs. In the era of big data, inventory planning needs to rely on data, and no one knows more than data. Never underestimate the repeatability of parts business. According to mathematical models, algorithms and inventory data, we can find out the DNA of parts demand, and more accurately determine what parts need to be stored and how many parts need to be stored.
Secondly, inventory mismatch is avoided by adjusting inventory strategy.
Enterprises worry about shortages, every kind of accessories want to save some, think "rain and dew dip" spot rate is higher, but the result is half the effort. Companies must abandon the notion of "getting what they want" in inventory, which leads to more misallocation of inventory and possible shortages, no matter how large their inventory is.
Parts are classified into fast, medium and slow turnover parts according to their frequency of demand. Fast turnover parts demand is the most, the fastest turnover, dealers and parts stores must ensure adequate inventory, avoid out of stock, at the same time according to the need for appropriate storage of medium-speed turnover parts, and slow turnover parts demand frequency is very low, easy to become dull inventory, dealers and parts stores should not store.
On the contrary, the Oems should focus their inventory on medium-speed and slow turnover parts. Slow turnover parts are of great risk to dealers, but the risk is low for oems, because they have dozens of dealers. A dealer's frequency of parts demand is 1 times/year, and the oems may be 30 times/year.
Similarly, suppliers are also responsible for the inventory of slow or zero turnover parts such as assembly parts. When dealers, parts stores, Oomworks and suppliers cooperate in inventory, they can give full play to the maximum benefit of inventory and better meet the needs of customers.
Finally, change the supply chain model of parts.
The construction machinery industry has been accustomed to the traditional F2B (Factory to Business) parts supply chain model, parts from the supplier to the main engine factory, then to the dealer/parts store, and then distributed to the user, every increase in the link, need to increase the logistics and storage, increase the cost, increase the price. The cost would increase if the dealer moved the parts inventory to a branch or service station closer to the user.
The more layers there are, the more serious the waste will be and the lower the inventory efficiency will be. As a result, the inventory of parts at each layer will increase, but the shortage will not improve, the price of parts will become higher and higher, and the competitiveness of the supply chain will continue to decline. If we change the traditional parts supply chain model to B2F(Business to Factory) reverse supply chain model, it is possible to reduce logistics costs and inventory risks, and improve inventory turnover.
The function of the parts supply chain was redefined. Dealers were mainly responsible for the fast turnover and part of the medium-speed turnover parts inventory, which were sent directly by the supplier without the need to store the slow turnover parts. The Oems are responsible for the inventory of slow-turnover parts, which are stored in oems with lower risk. Four regional centers can be set up in the country to improve the supply chain by shortening the delivery time. Storage of very slow and zero turn parts is the responsibility of the supplier to reduce logistics costs and inventory risk.
Shorten the replenishment cycle to reduce dealers' spare parts inventory, so as to ensure quick turnover of spare parts inventory and improve customer satisfaction. Oems do not keep fast turnover inventory, and concentrate their funds to guarantee repair parts and customer satisfaction, while suppliers focus on ensuring zero turnover inventory. In this way, parts inventory coordination is realized, supply chain efficiency is improved, and inventory mismatching risks are reduced.
Low levels of repetition are lazy! The competitive environment of parts market has changed. If it does not keep pace with The Times, even the parts business of "buying low and selling high" may also suffer losses.
With inventory mismatches costing the global retail industry nearly $2 trillion in 2022, proactive mitigation makes a lot of sense. This article is adapted from Beware of the Inventory Mismatch Trap! The book will be published in the third quarter of 2023.
