The modern distributor has more (and more varied) inventory than ever before — but it also has access to more advanced tools and more refined techniques for managing inventory. One technique is stratification, a more sophisticated way of categorizing inventory. By breaking out inventory into tiers of importance, distributors can determine where to place most of their business emphasis for greater efficiency and effectiveness.
Here's a quick overview of inventory stratification and how distributors can approach it:
In distribution, the predominant approach to inventory stratification is one-dimensional. It involves dividing inventory into categories — A, B, C, and so on — based on what the distributor feels is most important. Maybe it’s which items customers typically say they want in stock, generate the most revenue, sell in the highest quantities, or have the highest margins.
This is a popular approach in part because it’s so simple. And compared to having a homogenous, non-stratified inventory, it’s a great step in the right direction. Distributors have large SKU counts compared to other types of businesses, which means they need to figure out an efficient system for replenishment. You can’t be all things to all people, and trying to keep every single item replenished at all times will quickly become cost-prohibitive and leave you with extra inventory of lower-value items. By sorting and ranking inventory, you can focus on replenishing high-value items and develop reasonable service-level objectives by category.
However, while the simplicity of this approach makes it relatively easy to implement, it also leaves some efficiency on the table. A newer, more advanced approach to stratification involves incorporating a demand-planning component to make inventory management as efficient as possible.
While traditional inventory stratification categorizes inventory into simple A, B, and C groups, demand planning stratification adds a second dimension, further categorizing inventory into X, Y, and Z.
This approach involves sorting products not just based on basic, relatively static characteristics but also on the behavior of said products. Let’s say you’ve stratified your inventory based on items sold. One item in the A category has recurring demand at around 1,000 units per month. Another item in the same category sells roughly the same quantity per year, but the orders come in at a much different rate. Rather than selling at a steady 1,000 units per month, this item sells in a few bursts of 3,000 or 4,000 units.
Under the one-dimensional approach to stratification, these two products would be flattened into the same category and treated the same way. However, when you go deeper to incorporate the demand-planning element, you can manage these equally important products in specialized ways.
The product that experiences sporadic demand will need a different strategy for replenishment than the product that experiences more consistent, steady demand. The same goes for critical items that customers expect in the mix but tend to experience slower demand overall. Applying one service objective and one replenishment methodology to every SKU in the A group is better than applying them to every SKU in the entire catalog. But when you get another level deeper and more granular, you can really start to find opportunities to reduce costs and boost operational efficiency.
And it’s not just the prized A group items where this level of stratification can pay off. If you also look at something like the dollar level of the value of inventory, you could find a D group item that isn’t particularly critical — maybe it’s more of a specialty item favored by a particular type of customer — but that has cheap enough carrying costs that it’s worth bringing in a lot of inventory. Your handful of customers who regularly demand that item may be pleasantly surprised to find that you always seem to have it in stock, while your competitors (who may be stuck on one-dimensional stratification at best) simply don’t bother. Growing a business means finding every possible edge, and advanced inventory stratification can allow you to do just that.
You may be thinking, “That all sounds great, but things are complicated enough as it is.” At Enavate, we understand the unique and sometimes overwhelming challenges that distributors face — and we know exactly how to use technology to address them.
A modern ERP solution like Xcelerate Distribution uses the Microsoft Dynamics 365 Business Central platform to help distributors reap the rewards of more advanced inventory management practices, and our team of implementation experts can ensure that you get the most out of upgrading. To learn more about what we could help your organization accomplish, reach out today.