Inventory management can be like walking a tightrope between supplier relations and customer needs, and nowhere is it more apparent than in the automotive aftermarket industry.
In Asia-Pacific, many auto-parts distributors are small or medium family-run businesses, often with legacy technology systems to track their inventory. A lot of manual processes are involved in their inventory management workflow, which results in specific but common inefficiencies across the board.
Because of so much opacity in the delicate balance between supply and demand, inventory management in the automotive aftermarket industry can resemble a sophisticated gambling game, with the odds stacked against the distributor in a play of dozens of variables. Distributors gamble on how much they’re going to sell and they plan purchasing based on that gamble.
Accounting for the Long Tail
For example, some distributors accumulate their orders for one month before contacting their supplier for batch orders. Most of them do it intuitively and through experience, and because oftentimes they lack a system to help them plan, they focus largely on the items that they remember – the fast-moving stock.
In doing so, they often forget part of the long tail. When it comes to automotive spare parts, there are hundreds of thousands of different items to account for. So when the time comes that they need these long-tail items, they sometimes run out of stock because they were not ordered. A new order needs to be created just for this, resulting in additional costs.
Clinging to Hope
Furthermore, they get stuck with items they don’t need. Working with the ‘trader’ model, stockists get attracted by supplier discounts on certain items that end up with a low per-unit price, and end up buying more than they need, often ending up storing years of supply at one go. By doing so, they not only risk the part becoming obsolete due to changes in the market, but also tie up capital that can be better utilised to improve availability of other parts, space in the warehouse that is already full, and thus block possible expansion of the portfolio if an opportunity comes along.
In today’s model, the risk surrounding inventory mismanagement is borne almost entirely by distributors – not by their suppliers, and certainly not by consumers. Bad inventory is seldom written off by stockists, because of the hope that even if a vehicle model is no longer in production, there might still be some demand in the near future before owners upgrade or scrap.
Another reasoning they have is, “If it’s an old model it might become an antique”, and they might be able to sell it for a higher price in the distant future. But if you think about it, there’s a cost of holding the items – the cost of inventory that eats up the space in the warehouse, as well as losses due to damage or exposure to the elements. Ultimately, it might actually cost them more to keep the product than to write it off!
Technology: Part of the Solution
Planning needs to be automated: the auto spare parts industry deals with hundreds of thousands of individual items, and software like Slim4, for example, will gather data on all these items, regardless of whether they are slow-moving or fast-moving. They need to be treated equally at first, while all the relevant information is gathered to classify these items according to fast-moving, regular-moving, irregular-moving items, or slow moving, maybe not moving at all, depending on their history and previous projections.
All these different categories need to be assigned a statistical model that fits their sales patterns. In a normal ERP system, the user chooses the model, but specialised inventory management software like Slim4 and others will automatically choose the correct statistical model for the right profile. Based on that model, Slim4 will take into consideration factors like lead time, deviation, minimum order quantity, product life cycle status and other specific parameters, and then create demand planning based on that.
Slimstock’s system will tell the stockists or the distributors what they need to order, when, how many items, and they can use this information to order from the suppliers.
An auto spare parts company we are regularly in touch with reports that their top management, weekly, will look at managing the inventory in batches of about 4000 items. But they have hundreds of thousands of items – it will take them several months just to do one complete planning cycle for all the items. Slim4 does this in one night. Some of Slimstock’s clients only spend two hours a day planning for their entire range of inventory – the rest is automated by Slim4.
Usually, companies will have their data in their basic ERP system. Slim4 will get the data – the historical data, inventory data, purchase orders, sales orders, etc – every night from the ERP system, analyse it, and send a recommendation on what to order on that day.
Of course, this workflow has certain prerequisites: if the warehouse processes are not fully aligned with IT systems like the warehouse management system, or if physical inventory is not recorded accurately, if proper protocols are not in place, planning is impossible. Cleaning up data in the ERP system is also critical.
There are several technologies on the horizon that will automate many of the needlessly complex manual tasks when it comes to inventory management; however, the basics of the discipline will always rest with inventory and demand planning – it is imperative to make sure they are as lean as possible. Inventory management need not be a gamble for the automotive aftermarket industry – looked at with the correct perspective, it is a scientific problem to be solved.