What is distribution inventory management?
Distribution inventory management is the process of overseeing, controlling, and optimising a distribution company’s inventory. It incorporates various aspects of managing distribution inventory, including purchasing, stock control, order fulfilment and shipping.
Done right, distribution inventory management helps a business improve bottom-line performance. It aims to balance on-hand stock levels, ensuring there are sufficient quantities of inventory available to meet customer demand while minimising the costs and risks associated with carrying excess inventory.
However, there’s more to managing a distributor's inventory.
Good inventory management supports a healthy supply chain. It can prevent stockouts and overstocking while saving time and reducing operational costs through more streamlined processes.
Why good inventory management is essential for distribution companies
Oversight of inventory processes can cost you a lot of money. Distribution businesses spend up to 25% of inventory value on carrying costs. Yet 43% of small businesses don’t track their inventory.
If you’re one of them, and don’t actively manage inventory, you’re leaving money on the table.
Distributors have a unique role in the supply chain that presents specific challenges and opportunities, making effective inventory management mission-critical. Here’s why:
Balancing supply and demand across diverse customers
Distributors typically serve a diverse customer base that includes small retailers and large enterprises. All of these customers have unique order patterns, preferences, and seasonal demands.
Unlike manufacturers, you rely on forecasts to manage inventory. This means you might end up with excess inventory or stockouts if your forecasts are wildly inaccurate.
Distribution inventory management software can help you analyse historical sales data, monitor market trends, and predict demand with greater accuracy. With real-time insights into inventory needs, you can hit that sweet spot between having enough inventory and not overstocking.
Managing multiple warehouses and hubs
Distribution companies often operate across multiple warehouses or regional hubs.
Each location has unique demand patterns influenced by local markets, which means there’s no one-size-fits-all inventory management technique that works for all inventory locations.
With the right inventory system in place, however, you'll have real-time visibility over inventory. This allows you to coordinate stock transfers between locations and address imbalances more effectively. It also helps identify optimal stocking locations for each site based on lead times, transportation costs, and demand.
Minimising inventory carrying costs
Just having inventory in the warehouse costs you money – it’s like paying for a software subscription you don’t plan to use.
Suppose you’ve stocked 10,000 units (costing £50/unit) of green sneakers, but your economic order quantity is only 5,000 units and your safety stock level is 1,000 units.
You placed a larger order this season because you didn’t want to risk running out of stock.
Three months later, you check the inventory, and you still have 4,000 pairs left unsold.
Unfortunately, those green sneakers are no longer trending. They’ll cost you money as long as they’re in your warehouse because you’ll need to pay for storage space (the proportional rent), insurance, and depreciation.
If we go by the benchmark, this dead stock might be costing you about £50,000 a year (£50 x 4,000 units x 25%) – our own research found that UK businesses hold an average of £102,000 of excess inventory.
Monitoring inventory turnover rates and preventing excess inventory is critical to minimising your carrying costs.
Ensuring supply chain coordination
As a distribution company, you’re an intermediary between manufacturers and retailers or end customers.
This means you need to proactively communicate and coordinate with suppliers and warehouses, and that’s quite complicated without an inventory system that offers real-time visibility over inventory.
Communication failure or sharing inaccurate information can turn into a logistical nightmare.
When that happens, you don’t just spend on damage control. You might also lose revenue and repeat business from loyal customers, which is bad news for your topline in the long term.
Proactive inventory management can mitigate these risks and allow you to navigate supply chain challenges with confidence.
Distribution inventory management challenges
Since distributors act as intermediaries and often manage multiple warehouses, they face unique inventory-related challenges.
Here are some of the most pressing challenges you might face when managing distribution inventory levels:
Inaccurate forecasts
It’s nearly impossible to get your forecasts 100% right, but with enough data and the right tools, you can get close to actual figures.
For distributors, inventory forecasts need to factor in several variables, including seasonality, promotional campaigns, and market shifts.
Software that can use past data is a great way to reduce the margin of error in your forecasts.
However, you also need a person experienced with interpreting forecasts and capable of factoring in the potential impact of other variables that you may not necessarily be able to quantify.
Multiple warehouse inventory synchronisation
A centralised view of inventory across warehouses makes it easier to manage orders and order quantities.
Suppose you operate five warehouses across the country. You ordered 10,000 units of a popular hoodie last winter at one of your locations and you still have 7,000 left.
You plan to maintain an inventory of 2,500 units of those hoodies this winter. Instead of ordering 12,500 new units for all five locations, you can transfer 4,500 units from existing inventory to other warehouses and order the rest.
Similarly, you can check inventory in real time and make deliveries from the warehouse closest to the customer’s location to save on transportation.
Multi-warehouse inventory management software can give you detailed insights about inventory levels across warehouses – and ensure accurate stock-on-hand data is kept in sync across the entire business.
Warehouse space optimisation
Distributors often redesign layouts to ensure maximum space utilisation both horizontally and vertically. Taller racks or mezzanines are great ways to multiply storage capacity without additional square footage.
When you expand storage capacity, make sure you’re also optimising for flow of goods. Arrange frequently picked items near packing stations to reduce travel time and increase packing efficiency.
Warehouse management systems can help you improve space utilisation, identify top-performing products, and minimise transport time for your warehouse staff.
Compliance
Compliance requirements differ based on the product you deal in. They're common practice in industries like pharmaceuticals, food and beverage, and hazardous materials.
These requirements often involve industry-specific laws and standards around product storage, handling, and traceability.
Here’s why compliance can be tricky, especially for distributors who operate multiple warehouses:
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Diverse regional regulations: Regulations differ between regions and countries. If you’re a global distributor of food products, you’ll need to follow the regulatory framework designed by the Medicines and Healthcare Products Regulatory Agency (MHRA) in the UK and the Food and Drug Administration (FDA) in the US.
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Storage and handling requirements: Certain products require a controlled environment. For example, medications require temperature-controlled environments, while hazardous materials may require specific containment measures. Deviation can lead to legal penalties and safety risks.
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Traceability and record-keeping: Compliance often requires detailed inventory movement records, such as batch numbers and expiration dates. For example, the MHRA provides detailed guidance in documents like the Green Guide for tracking batch numbers and expiration dates to ensure traceability throughout the supply chain.
Understanding the distribution inventory management process
The inventory management process for distributors is more intricate given the business model’s scale, customer diversity, and multi-warehouse operations. Here’s an overview of the step-by-step distribution inventory management process:
Step 1. Forecasting and demand planning
Inventory management starts before the beginning of the next period.
Use inventory management software to analyse historical sales data, market trends, and customer order patterns to predict future demand. This helps minimise the risk of overstocking and stockouts.
As a distributor, you likely have a diverse customer base, including retailers and industrial clients. This means you’ll need to deal with higher demand variability. Keep this in mind when forecasting inventory needs for the next period.
Step 2. Supplier management
Unlike manufacturers, you don’t produce the goods you sell. Your reliance on suppliers makes it critical to manage the supply chain effectively.
This involves building strong relationships with vendors, managing vendor performance, and agreeing on realistic lead times.
- Pro tip: 72% of SMBs report facing unpredictable delivery times. When choosing your vendor, evaluate their reliability and possibly insert a clause to disincentivize delays in deliveries.
Step 3. Receiving
You need a streamlined receiving process since your turnover is likely high, especially if you manage multiple warehouse locations.
Each unit needs to be inspected, recorded, and stored before they’re added to the inventory management system.
There are several ways to streamline the process. RFID scanning and barcoding are the most efficient ones.
Consider setting up a system where the receiving team uses RFID scanners to receive inventory, which is automatically added to the inventory count in the inventory management software after the scan.
Step 4. Categorisation and organisation
Distributors often deal in diverse product ranges. Categorising products makes it easier to retrieve relevant details.
Categorising is also critical to account for regulatory storage needs—for example, you may have to maintain perishable inventory in cold storage and maintain separate zones for hazardous materials.
Once all units are in the inventory management system, categorise them by SKU (stock keeping unit), batch, lot, expiry date, or any other parameter that makes organisation and management easier.
Step 5. Warehouse stock allocation
Appropriately allocating the right products to the right location helps minimise transfer costs and delivery delays.
However, this step only applies to you if you order inventory to a centralised location and then strategically distribute it across multiple locations based on regional demand. This is often the case with goods ordered from outside the country.
If you receive orders directly at the relevant warehouse location, feel free to skip this step. Directly ordering at the correct location is ideal because it reduces transport and handling costs.
Step 6. Inventory tracking and monitoring
Now that inventory is in your warehouse, it’s time to start selling. As your inventory levels deplete, keep a close eye on inventory levels, movement, and location using inventory management software.
An advanced system will help you make smarter decisions, such as redistributing overstocked items or responding to sudden demand spikes, through real-time inventory data.
Step 7. Order processing and fulfilment
Define a streamlined process for picking, packing, and shipping inventory once orders start rolling in.
Your priorities should be accuracy and speed, but you still need to consider other factors such as quality checks and safe packaging.
You might have to define separate processes for bulk and small-scale orders. Bulk orders often require palletised shipments, consistent product specifications, and detailed documentation for invoicing and compliance.
On the other hand, small-scale orders may involve fewer items that require individual picking and packing.
Step 8. Returns management and reverse logistics
Managing reverse logistics and determining the right course of action for returned products – whether that’s restocking, refurbishing, or disposal – can be rather complex, especially in some industries.
For example, returned electronics need to be inspected and either restocked, sent for repair, or disposed of responsibly.
Similarly, distributors who deal in food products may need to refer to the relevant regulation, which may prohibit restocking of certain returns.
This means you need a plan to manage waste or donation channels. Moreover, this process may look different for each warehouse location.
Step 9. Performance analysis
At this point, you’ve designed the entire inventory management framework. Next up, performance measurement.
This is where you review key metrics, including turnover rates, order accuracy, and carrying costs.
Your inventory management software can track these metrics in real time. If you think there’s room to improve any metric, create a strategy and test your thesis by tracking the impact of the change.
Step 10. Regulatory compliance
Be sure to factor in compliance requirements into your process. Maintain records such as batch numbers and expiry dates and ensure storage conditions meet regulatory requirements at all times. Deal with the complexity of adhering to region-specific regulations upfront to avoid costly penalties.
How to manage distribution inventory with cloud software
Cloud-based inventory management software offers various capabilities. Here’s an overview of features and how you can use them to manage inventory effectively:
1. Real-time inventory tracking
Cloud software helps monitor real-time inventory levels, locations, and movement across multiple warehouses.
If you’re a distributor juggling diverse product lines or fulfilling orders from different regions, you’re probably aware of how real-time visibility can be a game-changer.
For example, when one of the warehouse locations experiences low stock, the cloud software can automatically trigger alerts for restocking or redistribution from overstocked locations. It’s like putting your distribution strategy on autopilot.
2. Improved warehouse coordination
Cloud systems centralise data from all warehouse locations into a unified platform. This puts you in a better position to quickly make decisions related to stock allocation and transfers.
Some cloud-based systems also include features like geolocation tracking and dynamic routing to help you source products and ship them to the nearest or most cost-effective warehouse.
Similarly, cloud software often includes automated order routing that assigns fulfilment tasks to the optimal warehouse based on factors like delivery deadlines, transportation costs, and stock availability.
3. Routine task automation
Imagine never having to spend time manually tracking orders, updating stock levels, and generating purchase orders.
That’s what you can achieve with cloud-based inventory software.
Automating repetitive tasks improves operational efficiency and minimises the possibility of human error.
Suppose your inventory reaches a pre-defined threshold where you want to order more inventory. You can configure this threshold into the cloud software and let it take care of placing orders to save time.
Cloud-based software also integrates with other systems in your tech stack, such as enterprise resource planning (ERP) and customer relationship management (CRM) systems.
Integration enables frictionless data exchange between the two systems, allowing you to automate various tasks such as invoicing and updating customer order history.
4. Remote accessibility
Remote accessibility is non-negotiable if your warehouses are geographically dispersed. While traditional on-premise systems are only available on devices they’re installed on, cloud-based systems are available on any device with an internet connection.
You can set access permissions for each account so that only authorised personnel have access to inventory data. This could include inventory managers, sales times, and even suppliers to allow them to view stock levels.
Cloud-based software is also accessible via mobile devices. This allows you to push real-time updates to your team.
At the same time, remote accessibility allows your team to view real-time dashboards while in the field to check stock availability at all warehouse locations.
5. Simplified compliance
Distributors in industries like pharmaceuticals and food and beverage bear the additional burden of complying with regional regulations.
Cloud-based software can automatically log critical data such as batch numbers, lot details, and expiration dates. This helps you meet traceability requirements set by regulations like the UK’s Good Distribution Practice or Food Safety Act 1990.
In the event of a recall, cloud systems can quickly identify and isolate affected batches. For example, if you deal in pharma or food products, a cloud-based system can trace specific expiration dates across warehouses and inform customers to mitigate safety risks.
Inventory management for distributors: 6 best practices
Here are the best practices to follow when managing your inventory as a distributor:
1. Make data-driven decisions
Let data guide your decisions. While data is typically siloed in traditional organisations, cloud-based inventory management software can pull data from all systems it’s integrated with to help you mark data-backed decisions.
The most effective area to use data for a distributor is demand forecasting. The closer you get to the actual number, the more effectively you’ll be able to manage inventory and improve profitability.
Accurate forecasts minimise inventory carrying costs, which frees up capital to invest elsewhere and generate additional returns, giving your bottom line a bump.
2. Integrate inventory software with other systems
Integrating inventory software with other systems – such as ecommerce platforms, accounting software, and CRM – allows you to centralise data for better insights.
Integration also facilitates automation. It reduces the need for manual data entry: inventory counts, invoices, and shipments are automatically synced across relevant systems and become centrally accessible to team members with the right permissions.
Speaking of automation…
3. Automate repetitive processes
Process automation can reduce costs and help you operate warehouses more efficiently.
Distributors typically deal with complex supply chains, high order volumes, and diverse product lines, which means there’s plenty of room for human error.
Think about your reordering process for example. When the stock of your fast-moving SKU drops below safety level and the person responsible for placing the order fails to notice, you might have to delay deliveries to customers.
Automated reordering eliminates human errors and saves your team plenty of time that can be spent on more strategic areas.
4. Prioritise SKU management
SKU management involves assessing SKU demand and profitability.
Let’s start with demand. You might have dozens, or even thousands, of SKUs. But not all are equally valuable.
According to the Pareto principle, about 20% of inventory items contribute 80% of revenue. These items are like a tail that wags the dog. While there are various methods to prioritise valuable inventory items based on the value they bring, ABC analysis is one of the most versatile.
It essentially involves categorising SKUs into the following:
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A items: High-value, high-demand items that require close monitoring.
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B items: Items with moderate value and demand that require standard attention.
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C items: Low-value or infrequently ordered products managed with minimal effort.
In addition to value, look at SKU profitability. A high-value item might contribute less to your bottom line than a moderate-value item.
Do a cost-benefit analysis to understand what moves the profitability needle more and if possible, see if you can reduce carrying costs and frequent returns to improve an A item’s contribution to the bottom line.
5. Be mindful of supply chain risks
Supply chain risks can disrupt your business no matter how well you plan. Natural disasters, economic shifts, geopolitical instabilities, and supplier failures all impact your business’s profitability and reputation.
It’s impossible to entirely eliminate these risks, but you can reduce them through diversification. Diversify your supplier base across regions to minimise single-supplier dependency.
Diversification is a great starting point, but it’s also important to track supplier performance to ensure they’re sticking to agreed terms and will be able to do so for the foreseeable future.
Develop a contingency plan for outlier events. Ideally, your plan should allow you to quickly source alternative suppliers or adjust inventory levels to meet customer demand.
It’s also critical to test and simulate your contingency plan and adjust based on evolving supply chain conditions.
6. Plan for returns and reverse logistics
Reverse logistics is often a major issue for distributors connected to industries like retail or ecommerce where returns are common.
You need a system to quickly authorise and track returns. Start by establishing clear guidelines for inspecting returned goods.
For example, if you deal in electronics, you might consider refurbishing items that are lightly used or damaged and discarding ones that are beyond repair.
Similarly, you also need clear resale or disposal policies. Define rules for restocking returned goods or deciding whether they can be sold through secondary markets.
For example, if you’re a clothing distributor, you might consider repackaging and discounting returned items if they’re in excellent condition and selling them in the secondary market.
Be more efficient with distribution inventory software from Unleashed
A comprehensive inventory management solution like Unleashed addresses your most pressing inventory challenges. It helps you track inventory, manage the supply chain, and automate various inventory-related processes.
Unleashed offers live inventory tracking, purchase management, cloud integrations, barcode tracking, and built-in B2B ecommerce capabilities that allow you to create customisable online stores for your regular customers.
You can integrate Unleashed with various systems, including Xero and Shopify, to seamlessly sync and centralise inventory data.
If that sounds interesting, sign up for a free trial and experience the power of Unleashed yourself.
