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Drought Shows Importance of Inventory Systems

The drought continues to plague the United States as July turns to August this summer. According to the US Department of Agriculture, more than half (50.3 %) of all counties in the US  have been declared disaster areas, most due to the ongoing drought. News reports of corn fields being plowed under have become a fixture on daily media reports. 

Along with these reports, is a steady drumbeat of discussion and commentary on what the drought will mean to food prices. Most of this discussion assumes that food prices will go up, and if true, what rising prices will mean to a food service wholesaler? 

With a perpetual inventory system, such as the one in SAP ERP, the decisions a food service wholesaler faces become far more manageable.  The risks of not having enough to meet customer demand or alternatively buying too much and being forced to reduce prices during the selling cycle are reduced or mitigated.

Knowing what you have and where it is are key metrics that no wholesaler can do without.  However, having key data readily available in a single system, such as cost, (i.e., what you paid for it), and key dates such as when it was produced, when it was received at your location, and when it will hit an expiration date allows decisions to be made based on data, not estimates or the judgment and experience of key employees. In multi-site distribution businesses, the requirement for accurate, timely data is even more acute.

Let’s examine some use cases that show how inventory systems improve the daily operation of a food service wholesaler.

First let’s look at how a food service wholesale company benefits from tracking the market cost of the products they sell, (as most do). In this example let’s assume that the trend of the market cost has been rising for several months.  The wholesaler knows the direction of the trend and when an unexpected dip in prices occurs, they know that they have been presented with an opportunity to buy more than they usually do – to “buy ahead”- in order to take advantage of a short term drop in market cost.  In this situation they also need to calculate how long it will take to sell it. By knowing average inventory on hand, and rolling inventory levels over time, they can quickly calculate how long it will take to sell what they have. Therefore, knowing the trend, the usage rate, the expiration date and the existing inventory levels will allow the wholesaler with integrated inventory systems to make a bargain purchase well in advance of the expiration date, store it safely and sell it when prices rise.

On the opposite side of the leger, when the price of an item or a group of items is falling, the decision making process described above is reversed.  For example, when the trend is lower but you observe an unexpected spike upwards, you can make an informed decision to either buy as you usually do, or make a smaller purchase in anticipation that the price trend will continue lower.

In these two examples, accurate inventory systems allowed key decisions to be made based on actual data.

Another feature of integrated inventory systems is the ability to track dates. SAP’s ERP inventory functionality can track seven dates for each product.  This allows a food wholesaler to track when a product was produced by the supplier, when it left the supplier’s facility, when it was received into the central warehouse when it was moved to a picking location, when it was picked, when it was shipped and another date of his choosing.  With data on shipments (lots) from a given supplier or on a given product the wholesaler can make informed decisions to ship on a given day.

As we have seen, accurate inventory systems can make price dislocations caused by severe weather much easier to handle and the food service wholesaler with these systems will have a significant edge on their competitors without these tools.

Mike Thornton is a Solution Manager with the Wholesale Distribution IBU at SAP.  He is based in Chicago.

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