---
title: "How Distributors Should Manage Warehouse Inventory"
description: "Distributor owners often face the sad reality of working hard without profits, not receiving payments, and having their earnings tied up in warehouse inventory. Effective inventory control requires understanding both the quantitative increase in inventory and the qualitative composition of existing stock, focusing on the underlying causes such as demand, safety stock, strategic stock, turnover stock, and redundancy."
author: "New Distribution"
publisher: "New Distribution"
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published: "2014-07-30"
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---

# How Distributors Should Manage Warehouse Inventory

> Distributor owners often face the sad reality of working hard without profits, not receiving payments, and having their earnings tied up in warehouse inventory. Effective inventory control requires understanding both the quantitative increase in inventory and the qualitative composition of existing stock, focusing on the underlying causes such as demand, safety stock, strategic stock, turnover stock, and redundancy.

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Distributor owners often face three sad realities: working hard without seeing profits; expecting to earn a good amount but not receiving payments; and finally earning some money, only to find it not in the bank account but lying idle in the warehouse.

Inventory control is a concern for any enterprise and a core issue for distributor owners. However, in most cases, inventory analysis is conducted from a "results" perspective, such as balance sheets and turnover rates, but the explanations of how inventory arises and how to address it are often vague. Even many so-called "senior supply chain directors" and "experienced consultants" merely elaborate on how bad inventory is and its impact on the enterprise, using alarmist tactics to attract attention, without truly explaining where inventory comes from and how to control and reduce it.

**1. Quantitative Analysis of Inventory Increment**

Why is it important to first understand the increment issue? Because:

1) "Inventory increased" is the most urgent issue to address. For example, "Last month inventory was 5 million, this month it's 8 million, why?" This will bother the boss more, and he often won't ask, "Why did we have 5 million in inventory last month?"

2) Compared to the "stock" issue, the increment has a shorter occurrence cycle and can be more easily understood.

3) If the increment issue is analyzed clearly, we can then look at the "stock" issue, because "stock" is simply the accumulation of increments.

Inventory amount = Inventory quantity * Inventory cost.

Inventory increment = (Ending inventory quantity * Ending inventory cost - Beginning inventory quantity * Beginning inventory cost)

Assume:
Beginning inventory quantity = x1
Beginning inventory cost = p1
Ending inventory quantity = x2
Ending inventory cost = p2

Then inventory increment = x2*p2 - x1*p1
= (x2 - x1)*p1 + (p2 - p1)*x2

Note: Why make this transformation? This is a crucial derivation logic: the change in inventory amount is caused by both "quantity" and "cost (price)" factors! Without seeing this clearly, inventory analysis has no practical value. That's why we emphasized the need to first understand the inventory increment.

(x2 - x1)*p1 — quantity increase
(p2 - p1)*x2 — price increase

Of course, these two terms are my own inventions and may not be precise, but they attempt to quantitatively describe what causes inventory changes. As seen from the formula, they can sometimes be negative (when the increment is negative).

The interaction of these two factors on inventory increment can be combined in four ways:

Next, we can delve deeper: The quantity increase occurs as a result of the effectiveness or ineffectiveness of internal supply operations, which is a controllable area. The price increase is caused by external factors, such as material price fluctuations or standard cost revaluation, which is an uncontrollable area and represents environmental risk in business operations (we will later discuss how to control this "environmental risk" in the stock analysis).

A small case study on the application of the above analysis:

If the ending inventory amount increases, does it necessarily mean control failure? If the ending inventory decreases, is it necessarily the purchasing manager's achievement? Perhaps the opposite is true: the connection between "inventory results" and "management effectiveness" may be exactly opposite to the surface data.

In conclusion, for the purchasing department, the key is to understand the factors behind the "quantity increase" and make it the focus of improvement. Vague talk about "inventory" won't lead to targeted solutions. Calculating "turnover rate" or "turnover days" can macroscopically explain the impact of inventory on the enterprise from a balance sheet perspective, but to solve the problem, micro-level quantitative analysis is necessary. Therefore, operations people should understand financial logic but also analyze inventory issues from a professional operations perspective, not just "result to result" but "cause to result."

This analysis is especially necessary in enterprises with large inventories and batch process manufacturing.

**2. Qualitative Analysis Logic for Inventory Stock**

Stock is the accumulation of increments; remember this firmly. The quantitative analysis above addressed "what it is," and now we need to answer "why."

The ABC classification method or the 80/20 principle from textbooks, which have been passed down from early Taiwanese manufacturing, have a major problem: they discuss inventory in isolation, which is very crude. Why can C-class inventory be left aside? Just because it's "low value"? Regardless of value, a consistent management philosophy should be applied. If a boss hesitates to give an employee a 100 yuan raise, why can C-class inventory be ignored? Isn't it worth 100 yuan?

There are many entry points for looking at inventory from a stock perspective, but from a practical standpoint, I prefer this equation:

Point-in-time inventory stock = Safety stock + Strategic stock + Turnover stock + Redundant stock;

Or: Point-in-time inventory stock = (Safety stock + Safety stock redundancy) + Strategic stock + (Turnover stock + Turnover stock redundancy) + Redundant stock;

Why do we need two transformed formulas? Note that this is another crucial derivation logic: when we say "inventory is unreasonable" or "we need to reduce inventory," we must first understand "what level of inventory is reasonable" or "what is our goal for reducing inventory." Vague calls to "reduce inventory" won't solve the problem. Most consultants and implementation advisors lack the ability to address this issue and simply tell clients, "Your inventory level is too high; you must cut it." So, consultants say what clients already know, just more eloquently.

Even the other day, a friend in materials management proudly said that within a month of taking office, he helped the boss dispose of several million yuan worth of dead stock. I found it amusing because the boss had simply made a tough decision to cut off the tumor, but the root cause wasn't solved. After this cut, it will grow back after a while.

All inventory comes from "demand," not from thin air. This is the essence of inventory generation. Therefore, the essence of inventory control is to see through "demand." Whether you're a purchasing manager or director, you're playing the game of "supply-demand balance." The essence of your work is to have strong analytical and reasoning abilities to uncover the truth behind the data. As the saying goes, "You've seen a pig run, even if you've never eaten pork." Many people rely on their "years of experience" to vaguely fool the boss, but true experts know "how the pig actually walks" and "how to make the pig walk like a model." Just "seeing a pig run" is not a skill.

The following analysis will prove that purchasing experts still need strong quantitative analysis skills when making qualitative conclusions. The significance of qualitative analysis is that we must first set aside the current inventory level, whether it's 10 million or 100 million, and establish a "reasonable inventory structure." Then, use this structure to compare with the current situation, distinguish what is truly necessary and what is redundant, and then apply targeted solutions.

In fact, enterprises with high inventory don't necessarily have good on-time delivery; often these two are inversely related in reality. So, "inventory control" doesn't necessarily mean absolute "reduction"; sometimes it might even require "increase." Often, no one in the purchasing department dares to ask the boss to "increase inventory" because it seems to violate basic values, but perhaps it is necessary and feasible.

**1) Why is safety stock needed? What determines the safety stock level?**

Safety stock, as the name implies, is "active inventory" created for "safety" needs. Simply put, it's trying to "buy peace of mind," but this is often the most unjustified inventory generation factor.

Well, the necessity of safety stock seems to be the result of three factors: customer order cycle vs. (procurement cycle + production cycle). Of course, avoiding risks in material procurement and production processes is another angle. Therefore, determining a reasonable safety stock level is a task that requires great caution and time. For each item (note: not each category, but each item), we need to clearly track order cycles, necessary procurement cycles, and necessary production cycles, find their corresponding patterns, and determine the inventory level for each item.

Again, setting safety stock is a meticulous quantitative task, not a "decision" made on a whim. Conversely, to reduce safety stock levels, the essence is to carefully analyze the principles behind safety stock setting and question their necessity. Earlier, I said "safety stock is the most unjustified" because it can be several million or even tens of millions, but it often comes from a few people's "impressions" of certain things, not rigorous derivation.

Note that this is the value of "demand analysis," and it's also the value of PMC. So, neither MRP nor SAP can solve this problem because it's a management task. If this task isn't done well, using systems to "manage safety stock" might lead to "the more correct the process, the more wrong the result."

**2) Why is strategic stock needed? What determines the strategic stock level?**

What is "strategic stock"? It generally includes factors like: the boss's gut feeling that "something will rise in price" or "a certain customer will place a large order," the boss's desire for a form of monopoly or hoarding for speculation, production economic batch requirements, and minimum order quantity requirements from procurement.

Well, we won't interfere with the boss's gut feelings; that's his prerogative, and he has the freedom to squander his wealth. Let's talk about "economic batch" and "minimum purchase quantity" because in enterprises, only the boss has the right to make mistakes.

What should the "economic batch" be? How is it calculated? Has anyone actually calculated it? Generally, to reduce "abnormal work hours" like die changes, machine changes, debugging, and pre-processing, "making a bit more" seems justified and can bring some savings. But looking at only this aspect is insufficient; it must be compared with the opportunity cost of inventory capital and the risk of inventory devaluation. It's just a math problem of comparing sizes and finding balance. For example, reducing one equipment debug saves 4 hours, with labor and fixed costs of 50 per hour, saving 200 yuan, but it creates 10,000 yuan of extra inventory that sits for a month, costing 300 yuan in interest. Which is more cost-effective?

So, "economic batch," like safety stock calculation, has no shortcut; you must use the most basic method, filtering and comparing item by item, not relying on gut feeling. The production floor would naturally prefer not to change machines or molds for a month, thinking it's "most efficient," but it might have no practical significance. Has anyone complained that eating rice one mouthful at a time is too troublesome and wished to swallow a whole bowl at once? That would indeed be "efficient."

Who sets the "minimum purchase quantity"?

The purchasing department says, "We can't help it; the supplier requires a minimum order of one ton, or they won't deliver." So, the "minimum purchase quantity" for this material is set at one ton. Note that inventory is often generated this simply. As a professional PMC manager, how can you allow your boss to be sold out so easily? Because of a young lady's words, the boss has to spend tens of thousands more and leave it in the warehouse?

Go negotiate, coax, or threaten to make the supplier retract that statement. Or, even if you have to pay extra shipping or accept a price increase, don't easily accept the "minimum purchase quantity." Of course, this also needs to be weighed against the extra cost and the opportunity cost and devaluation risk of the resulting redundant inventory, just like calculating "economic batch."

"Economic batch" and "minimum purchase quantity" sound professional, but you need to get to the bottom of them. Don't equate "reasonableness" with "necessity."

**3) Why is turnover stock needed? What determines the turnover stock level?**

What is "turnover stock"? It refers to the raw materials, work-in-progress, semi-finished goods, and finished goods in stock that are needed for production and distribution to meet order demand (MTO). This is often the largest category of inventory.

This is the real challenge in inventory control because it involves production operations and the basic process settings and constraints of every operational area and link in internal logistics. It's one of the core tasks of operations management.

Whether in assembly manufacturing or process manufacturing, achieving "JIT" or "one-piece flow" is a long road for most enterprises. In management practice, the following angles can partially solve the turnover stock issue:

**3.1) External procurement inbound model.**

Typically, procurement requires suppliers to deliver "on schedule," and "delivery achievement" is a key performance indicator for buyers, which is correct. However, in actual internal production, production schedules change, meaning the "actual required date" for materials has shifted significantly, with later delivery dates shifting more. If there's a lack of smooth communication channels or platforms between material control or planners and procurement, the common result is that the materials truly needed don't arrive, while materials not currently needed still arrive "on schedule."

PMC managers must fully recognize the impact of this issue on inventory and have the ability to solve it: determine the communication methods, channels, and platforms between parties; fairly evaluate "procurement delivery achievement rate" and buyer performance; and properly handle the transmission and realization of true demand to suppliers.

"The right time" is more critical than "the right quantity" in forming inventory scale. In enterprises, the proportion of truly "dead stock" is small. Why do we have tens of millions in inventory that "looks useful but can't be used"? The key is the "time point" issue. What does material control control? Is it "materials"? No, it controls "time"! That's the essence of material control.

Of course, MRP+APS can partially solve the information transmission problem, but different enterprises have different functional implementations in management software and different system implementation paths. Also, different enterprises have different bargaining power in the supply chain, so the degree of realization varies.

However, if we accept JIT as a future goal, after establishing effective and smooth communication channels, trying to change the inbound model will definitely help in exploring ways to reduce turnover stock. For example, for certain categories of materials, evolve from "on-time delivery" to "call-based on-demand delivery."

**3.2) Internal logistics handling, handover processes, or operational modes.**

Often, the hardware layout and functional area planning of an enterprise are difficult to change, but deeply understanding the impact of "layout" on turnover is a basic skill for PMC managers. That's why many enterprises that have evolved to higher stages spend a lot of time and effort on plant site selection, area planning, and turnover tools. Outsiders look at a factory and see "large scale," "clean," and "advanced equipment," while insiders look at "planning" and "positioning."

However, we can try to change operational processes and requirements.

There are many factors affecting internal turnover speed. Common aspects in process design include:

A. What are those annoying handover and warehousing documents? Who writes them? When? Often, you see material handlers in the workshop drop off a pile of materials and then go find someone to sign, because without that signature, the materials can't move to the next process.

B. Inspection issues. After PQC, there's FQC, and after FQC, there's OQC. A batch of materials might be processed on a machine for 4 hours, but inspection might take 2 hours. In some enterprises, the inspection area and production area are not even together, requiring a 10-minute walk with the materials, or even elevator rides.

This is also the most hated issue for PMC members and the most helpless one. Even if they grit their teeth, they can't change it because "the process is stipulated this way." So, PMC managers, production managers, and quality managers must have a new perspective on this issue. For example, a product's production efficiency improved by 50%, but the time saved is completely buried in the turnover process. What did that improvement bring? Therefore, it's necessary to carefully scrutinize each process node to see if it can be simplified to speed up turnover.

What's the significance of "speeding up turnover"? Note that only when goods are delivered to the customer do we realize the enterprise's profitability and operational results (ignoring accounts receivable for now). Otherwise, no matter how many finished goods or semi-finished goods are piled up in the factory, it's zero for business operations, and no customer will thank you for "preparing so much inventory for me; you're such a good supplier."

Using data to illustrate: Suppose there are 10 processes, each taking 400 minutes of production time. With 30 minutes for inspection and 10 minutes for material handling, the total from production start to warehousing is 4400 minutes, of which 10% is turnover time. If turnover stock is 10 million and turnover days are 10, the opportunity cost (interest) is 100,000, of which 10,000 is wasted on this damn "process." If that 10,000 per month were used as bonuses for QC and material handlers, they'd be thrilled.

Improving internal turnover and reducing stock is a very meticulous and tough job because you must treat everyone as an "enemy" to fight against. In comparison, solving "safety stock" and "strategic stock" is really simple—just data analysis.

But this is the hard skill of PMC managers, and it highly tests their ability to effectively organize resources, coordinate operations, and improve the fundamentals of operations.

Only fools would "trade money for time"—using lots of inventory to accommodate slow production and ensure delivery is laziness and betrayal of the company. Is it impressive to win a fight with 100 people against 10?

Experts would "trade time for money"—using minimal inventory to demand fast turnover and ensure delivery. That's creating value for the enterprise. It's like using 10 people to fight 100 and winning; that's true skill.

**3.3) The value of "nothing on the floor."**

I often wonder, if those jewelry processing enterprises and Swiss watch factories managed their shop floors the same way, how many times would they have gone bankrupt? Note—this is another crucial conclusion: your value judgment on a problem determines your management behavior and results. So, "understanding management" is not a technical issue; it's first a value issue.

Why is it that when the workshop is full of stuff, "no one cares," and it's even considered normal? Is it a management capability issue? No, it's because you don't see that these things are burning money all the time and wasting resources. That's a value issue. I remember once, after continuous customer quality complaints, I scolded my quality manager, saying, "If this were a pharmaceutical factory, we'd both be arrested and jailed. You'd get the death penalty, and I'd get life imprisonment." He casually replied, "If we really were a pharmaceutical factory, I wouldn't have done it this way." Note that his hidden meaning was, "It's not that I don't know how to do it, but I don't think it's necessary, so I didn't do it." So, it's a value issue, not a management technique issue.

Therefore, we must admire the Japanese spirit of improvement because, no matter what they do, they strive to "do things to the best," which is a genuine value, sense of existence, and honor. In contrast, Chinese people often like to be self-righteous, use small tricks, settle for "good enough," and say "it's okay," so they can never truly learn PTS. Is there a difference between making pharmaceuticals and food versus making processing equipment? On the surface, yes, but in essence, no. Don't be clever and think "these are two different things."

"Nothing on the floor" means questioning why every item on the shop floor is there waiting. Understanding this is understanding the essence of "one-piece flow." From a technical perspective, achieving LEAN is very difficult, but as long as excellent production managers and PMC managers are never satisfied when inspecting the shop floor, always asking "why" and "what's a better way," rather than silently accepting "reality," that's the most powerful weapon toward LEAN.

What is execution? Yu Shiwei talks about it everywhere, but because his stories are so vivid, he never clearly explains what execution is. The essence of execution is persistence on the target result. Where does team execution come from? From the supervisor's persistence. Don't think that being resolute, decisive, fearless, vigorous, and thunderous looks like "execution." Hardness isn't necessarily strength, and softness isn't necessarily weakness. Dripping water wears away stone, a rope saws through wood, an iron pestle is ground into a needle, sitting on a cold bench, hearing thunder in silence—that's true "execution." Improvement itself is a process of grinding an iron pestle into a needle.

I love this quote: "The truly brave are those who are not startled by sudden adversity and not angered by unprovoked offense. They hold great principles and have far-reaching aspirations." (Su Shi, "On Jia Yi") This also speaks to how "values" determine a person's judgment, behavior, and results.

**4) Why does redundant stock occur?**

If the previous three situations are clearly understood, the rest is basically irrelevant. Often, those inexplicable redundant stocks are the result of multiple factors mentioned above, or they may come from certain "accidental" reasons—operational errors in order placement, customer order cancellations, or unexplained system errors. However, these occasional factors are not the main cause of the inventory stock scale.

The key is to understand the first three situations clearly.

**3. Basic Values for Viewing Inventory and Other Management Functions**

1) Emphasize data and logic. Analyzing problems is a necessary condition for solving them; slogans are useless.

2) See the unseen, know the unknown. What the masses think is right is often wrong. "Reasonableness" does not equal "necessity."

3) The essence of inventory is "demand." Don't just look at results or talk about inventory in isolation; always return to the source.

4) The essence of efficiency is to use time to exchange for money. "More, faster, better, cheaper" cannot be achieved by focusing on one point; you must have a holistic view of trade-offs.

5) "Understanding management" is not a technical issue; it's first a value issue.

6) "Do what you can, do what you should." Whether business results worsen or improve, there are external factors, but please look inward and examine your own work value. Complaining daily about "financing difficulties for SMEs" or cursing GCD corruption won't solve your enterprise's problems. Instead of hating bank officials, spend time figuring out that basket of dead stock that's been sitting in the workshop for months. It's like a beggar who can't beg for money; instead of cursing society for lacking compassion, he should vow to earn a living with his own hands. In other words, if your enterprise is managed chaotically, even if you get financing, can it become a Fortune 500? If all management problems can be solved with money and require money to solve, then we "management personnel" should jump off a building together—what's the point of living?

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