Optimizing Inventory with XpertMartTM

Using Maximums to Control Your Supply Chain

So far we have argued that Minimums are a powerful tool to control distribution of merchandise from your warehouse to your stores, and that Minimums are still a useful tool, even when ordering unique styles or when there is no sales history. Now let’s turn to a case where the style is not unique, i.e. the retailer can reorder that style from the vendor, and there is an established sales history for that style. Minimums are all a retailer really needs to control inventory if vendors are delivering merchandise in relatively short periods of time. However, if there are long delivery times involved,  and you are expecting to place repeat orders with that vendor, then you should consider setting up a tiered distribution system using Maximums in order to create a smooth supply chain.

Suppose there is a popular moccasin that sells quite well in your stores. The only problem is, from the time you place an order, it takes three months to get delivery on any order you place from your vendor. Now three months is an eternity in retail, and sales trends can differ widely during that time. Any attempt to manage distribution of this moccasin using only Minimums would necessarily be too imprecise given the time frames involved, so we need to separate our distribution system into two tiers. We use Minimums to control all distribution in the first tier which covers all shipments of merchandise from a central warehouse to our stores and includes initial distribution and restocking. We use Maximums to control all distribution from our vendors to our warehouse, the second tier.

Use the amount of time it takes your vendor to ship to your warehouse, as your Maximum. In the case of our moccasin vendor, we would use 120 days of sales (4 months) as our parameter. When using a two-tiered distribution system, all Purchase Orders are calculated using the following formula for each individual item:

     Purchase Order = Maximum – (Stock + Outstanding Purchase Orders)

Using this formula XpertMartTM will order the number of items it needs to reach its Maximum, taking into account stock on hand and stock that has already been ordered. Maximums provide a crucial feedback mechanism that increase or decrease orders depending on how sales are trending. If sales have been declining in the last couple of weeks, then the Maximum will decline and you will order fewer items from you vendor.

We highly recommend placing smaller, more frequent orders with your vendor than large and infrequent orders. For example, it is far better to apply the formula above and place a weekly order with your vendor, than to place orders once a month. Weekly orders allow you to respond more quickly to changes in sales pattern. And since they are every week, there is less cash tied up with each order, meaning you stand to lose less money as you fine-tune your orders. 

The proper use of  Minimums and Maximums in a two-tiered distribution system can smooth out an otherwise unpredictable supply chain, meaning there is always enough stock in your store until the next delivery from the warehouse, and there is always enough stock in your warehouse to cover your needs until the next shipment arrives.

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