Distribution Inventory Optimization Checklist

Introduction

Inventory represents one of the largest investments for distribution companies. This checklist provides a systematic framework for optimizing inventory levels, improving turns, and reducing carrying costs while maintaining high service levels.

Inventory Metrics and Reporting

Establish key metrics to measure inventory performance and identify improvement opportunities.

Track Inventory Turns

□ Calculate inventory turns by product category and location □ Compare turns to industry benchmarks □ Set improvement targets for low-turn categories □ Track trend over time to measure progress

Monitor Days on Hand

□ Calculate days on hand (DOH) for each SKU □ Identify items with excessive DOH □ Review slow-moving and obsolete inventory monthly □ Establish DOH targets by category

Measure Fill Rates

□ Track fill rate by customer and product category □ Investigate root causes of stockouts □ Balance fill rate targets with inventory investment □ Monitor backorders and lost sales

Analyze Carrying Costs

□ Calculate total inventory carrying cost □ Include capital cost, storage, insurance, obsolescence □ Use carrying cost in inventory optimization decisions □ Track carrying cost as percentage of inventory value

ABC Analysis and Segmentation

Not all inventory items deserve equal attention. Focus resources on high-value items while using simplified approaches for low-value items.

Conduct ABC Analysis

□ Classify items based on annual dollar volume □ A items: top 20% of volume (usually 80% of value) □ B items: next 30% of volume □ C items: bottom 50% of volume □ Update classification quarterly

Differentiate Policies by Class

□ A items: Tight control, frequent review, optimize reorder points □ B items: Moderate control, periodic review □ C items: Simple rules, bulk ordering, minimal review □ Apply different service levels by class

Multi-Dimensional Segmentation

□ Consider additional factors: demand variability, criticality, shelf life □ Flag slow-moving items for potential phase-out □ Identify seasonal items requiring special handling □ Mark customer-specific items with special ordering rules

Reorder Points and Safety Stock

Scientifically calculated reorder points and safety stock balance service levels with inventory investment.

Calculate Reorder Points

□ Reorder point = (demand during lead time) + safety stock □ Use actual lead times from supplier performance data □ Update reorder points when demand patterns change □ Monitor items that frequently trigger reorders

Optimize Safety Stock

□ Use statistical methods, not guesswork □ Calculate based on demand variability and lead time variability □ Set higher safety stock for A items and critical items □ Review safety stock quarterly and adjust as needed

Account for Variability

□ Measure demand variability using standard deviation □ Track supplier lead time consistency □ Increase safety stock for high-variability items □ Consider service level requirements by item

Demand Forecasting

Accurate forecasting drives better inventory decisions and reduces safety stock requirements.

Implement Forecasting Process

□ Use statistical methods for stable demand items □ Collaborate with sales for new items and promotions □ Review forecast accuracy monthly □ Adjust methods based on forecast performance

Measure Forecast Accuracy

□ Calculate MAPE (Mean Absolute Percent Error) □ Identify items with consistently poor forecast accuracy □ Investigate root causes of forecast errors □ Share forecast accuracy metrics with stakeholders

Handle Special Cases

□ Use causal forecasting for promotional items □ Apply seasonality factors to seasonal items □ Collaborate with suppliers on new product introductions □ Phase out items with declining demand

Dead Stock Prevention

Proactive management of slow-moving and obsolete inventory prevents capital from being tied up in unsalable goods.

Identify Dead Stock

□ Define criteria for slow-moving items (e.g., no sales in 6 months) □ Run aged inventory report monthly □ Flag obsolete items for disposition □ Calculate carrying cost of dead stock

Prevention Strategies

□ Review stocking decisions for low-volume items □ Implement minimum order quantities □ Negotiate return rights with suppliers □ Require approval for non-standard items

Disposition Tactics

□ Discount pricing to move slow items □ Return to supplier if possible □ Bundle with fast-moving items □ Donate or scrap if no other option □ Learn from dead stock to prevent future occurrences

Inventory Turn Improvement

Systematic initiatives to improve inventory turns free up working capital and reduce carrying costs.

High-Impact Actions

□ Reduce lead times through supplier partnerships □ Implement vendor managed inventory for key items □ Adopt more frequent, smaller replenishments □ Consolidate locations to reduce safety stock □ Phase out slow-moving SKUs

Policy Adjustments

□ Lower reorder quantities for slow movers □ Reduce safety stock where service levels permit □ Implement stricter approval for new SKUs □ Review economic order quantities quarterly □ Adjust min-max levels based on actual demand

Monitor Progress

□ Track turn improvement by category and location □ Celebrate wins and share best practices □ Quantify working capital freed up □ Ensure service levels remain acceptable □ Adjust targets based on results

Conclusion

Inventory optimization is an ongoing journey, not a one-time project. Use this checklist quarterly to assess your inventory management practices and identify improvement opportunities. Focus on high-impact items first, measure results, and continuously refine your approach.