Understanding the Buying Process is the key to taming the beast!
Inventory is the single largest asset and investment for a wholesale distributor. The success and failure of a company may ultimately depend on how their inventory is managed. In turn, there are many different facets of managing this investment. One important area that can often be neglected is the Buying Process.
The Buying Process is a method by which the distributor’s buyers evaluate customer demand and thus purchase the appropriate level of inventory. This straightforward description, however, does not begin to indicate how complex the Buying Process can be. The resources, time, and expertise required to excel at buying are not as intuitive as one might think. It can be so difficult that the Buying Process can seem like an unwieldy beast with which a business must deal. Every single distribution business engages in the Buying Process whether they choose to apply advanced strategies — or not. The good news is, the science of forecasting, replenishment, and buying have advanced to a point where we can now ‘tame the beast’.
The Buying Process consists of two phases which include Determining Order Components and Building the Suggested Order. In order to navigate through the phases of the Buying Process effectively, it will be helpful to follow the methodology of Inventory SOOP. The stages of SOOP include Survival, Organization, Optimization, and Prosperity.
Survival: Companies that lack a steady strategy behind their replenishment process likely contain inventory that is in disarray. Some indications a company may be in “Survival Mode” include uncertainty of lead times, too much or not enough inventory leading to undesirable service levels, paying high carrying costs which hurt overall profits, and excessive amounts of time spent creating and processing orders.
Organization: If inventory management remains in the “Survival” state, the organizational leaders will realize that their business can no longer continue to grow. The company will attempt to give products a more accurate and dependable forecast (adjusting for seasonality where needed), supplier lead-times will become more dynamic and accurate, brackets levels will be set and implemented, and service targets will become factored into all orders. The company heads into a transitional state called “Organization.” This is a temporary state where, if done correctly, the business will move on to the next stage. If done incorrectly, despite their best efforts, the company will fall back into survival mode.
Optimization: If the company has the proper strategies and tools, if they are successfully able to organize, then they will have done what is necessary to enter Optimization. The results will be balanced inventory, higher service levels, and reduced carrying costs.
Prosperity: Once the inventory management strategy for a particular supplier has been successfully “Optimized,” companies will have the ability to use their inventory as a tool to increase profits. A company may then take advantage of forward buying into deals or ahead of price increases. This will improve the number of orders placed so as to reduce receiving cost/order costs. Or, a company may purchase certain products from alternate sources (aka diverters) for increased savings from inventory that they might have required anyhow. Without an advanced buying strategy such as SOOP, most buyers will attempt to do both phases at the same time when creating and placing purchase orders. This can lead to “Survival Mode.” With SOOP, however, buyers may focus on Phase 1 through the “Organization” process. Once properly “Organized”, when it comes time to place purchase orders the system will have already created “Optimized” orders; buyers can, therefore, focus on Phase 2 in placing the orders.
Using the proper tools and methods provided by K3S and its methodology of Inventory SOOP will allow you to competently examine your current methods of engaging the Buying Process and to search for areas of improvement. K3S has 25 years of experience working with the Buying Process in a number of companies throughout multiple industries. K3S has successfully applied the tools and strategies of Inventory SOOP to help companies around the world gain a more effective and optimized Buying Process.