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Where You Place Automotive Inventory Is a Strategic Decision

Analyst Insight: Customers want orders faster and without additional shipping cost. And that's impacting how companies deploy inventory across their networks. In addition to defining the parts (SKU) mix and inventory levels needed to support service goals, you must consider how many distribution nodes you'll need and where to locate them. You must balance cost and service across several variables. And the decisions have ripple effects throughout your operations. - John Giangrande, Automotive Industry Leader, Fortna Inc.

Where You Place Automotive Inventory Is a Strategic Decision

The need to get orders in the hands of customers faster, and with lower transportation costs, is driving changes in inventory strategy.  Same-day fulfillment is the new normal. Because the goal is to balance service and efficiency, where you place inventory becomes a more strategic decision.

If you get it wrong and end up with inventory in the wrong place, you risk higher costs, lower margins, lost sales, diminished customer service, increased transportation cost, and languishing inventory that clogs your DC and lowers overall productivity. And the pain of all of this is often felt for more than just a season.

But you can't put every part in every DC, especially considering the proliferation of SKUs common to the automotive industry. So you need to decide the right mix of parts for each location in your network (central/forward DC, stores/hubs, 3PL).  For this, you have to change the way you think about SKU velocity, inventory allocation and network design.

The future is uncertain.  So you must work toward the right answer using the information you have today, while building in flexibility to adjust as conditions change. You need an inventory strategy that's in alignment with your distribution and overall business goals.  And for that, you have to align stakeholders from across the organization on key drivers such as capital investment, service expectations, flexibility, capacity, efficiency, complexity, risk and financial impact.  Because where you place inventory impacts DC design, systems, customer service, merchandising, transportation and store operations.

The right answer is unique for each company.  To find it, you need to go beyond SKU volume and affinity to look across a number of variables, including cut-off time, service level commitments, split-order rules, transportation, liquidation strategy and capital.  But a change in one variable has a ripple effect across the others.  For example, if you choose a later cut-off time you may have to forfeit something in fill rate and transportation cost.

This type of planning draws on traditional network modeling.  But that doesn't offer automotive aftermarket companies enough SKU level detail to drive decisions.  So you have to incorporate operations design strategies to get to the next level of understanding your order profiles.  In some cases, the answer may be to move slow-moving parts (SKUs) to a central DC.  In other cases you may want to group specific categories in a forward DC.  To meet your service promise, you may need to keep several months of slow-moving SKUs on hand, but that's expensive to store.  Or you might choose to minimize your inventory investment, at the risk of losing potential sales to out-of-stocks. The key is to understand which groupings of SKUs fulfill a majority of your orders.

                                                      The Outlook

Expect companies to draw from a blend of operations design and network modeling to develop strategies regarding inventory deployment.  Best-in-class automotive aftermarket companies will work to understand how different SKU classes, categories and characteristics flow through the order fulfillment process, and change how they think about SKU velocity and supplier relationships.  Because the future is uncertain, they will work toward a migration plan instead of a specific model, remaining flexible to change as customer expectations evolve.

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