Remaining competitive in today’s business environment means having a wide product selection. Unfortunately, a wide product selection also means a larger inventory. Together, a wide product selection and a large inventory makes inventory control more difficult on many levels – ordering, sorting, storing, and re-filling your stock are all more complicated and expensive. Uncertainties in vendor lead times and about product demand requires safety stock for each of the different products in your inventory. In short, offering a wide product selection to your customers is important, but also costly.
It is, however, possible to reduce the number of products in your inventory without reducing the variety of products that you offer to your customers. This is done using something called delayed differentiation.
For example, you offer an item in red, orange, green, black, and white. If you’re using delayed differentiation, you can, instead of ordering 100 items of each color to keep in your inventory, order only white ones to keep in stock. Then, when a customer orders ten green items, you take ten of your white items, turn them green, and ship them to your customer. In this way, you pay for less inventory, most likely waste fewer items, save room in the warehouse to store other necessities, etc. It also reduces the need to have very specific demand forecasting, as speculating which colors will be the most popular is nearly impossible.
Delayed differentiation isn’t limited to product color. Perhaps you ship to many different countries, all of which require different packaging or labels. Instead of ordering each kind of packaging or label, order one that can be customized in-house. Like with colors, forecasting for this aspect of necessary inventory would be difficult – how many orders from the United States will you get? How many from China? – and having labels that you can alter as needed will save you money, space, and time.
For other examples: if you offer both glazed and unglazed glass, try stocking only unglazed glass and then glazing the glass as you receive orders. If you offer items of different lengths, you can use delayed differentiation by ordering the longest item possible and then cutting it to size once it’s in the warehouse and an order has been received.
Delayed differentiation doesn’t always make sense, especially if you have items that can’t be altered on-site, sell items that move very quickly, have highly predictable demand, and have highly reliable suppliers. Under these circumstances, inventory levels can be readily optimized. However, if you must carry a wide selection of the same product, consider using delayed differentiation to keep your inventory expenses down while keeping your customer satisfaction levels up.
For more information on delayed differentiation or other inventory control questions, contact Acumen Information Systems today.
