How Distributors Are Turning 2025 Pricing Volatility Into a Competitive Edge

For distributors in 2025, pricing volatility has shifted from an occasional headache to an everyday reality.

What was once predictable has become a complex web of tariff impacts, inflation pressures, and shifting supplier behaviors that can change overnight. For distributors managing thousands of SKUs, this volatility creates decisions that can make or break quarterly performance.

The stakes are high. Get your pricing strategy wrong, and you risk damaging client relationships. React too slowly, and competitors gain ground. Move too aggressively on inventory, and cash flow suffers.

But the most successful distributors aren’t just surviving this volatility—they’re turning it into a competitive advantage. They have clear frameworks for when to adjust prices, how to communicate changes, and which suppliers offer unexpected flexibility.

In this article, we’ll examine the distinct response patterns emerging in the market and provide actionable strategies for protecting margins and client relationships.

Two Distinct Responses to Volatility Are Emerging

As we work with distributors across various industries, a clear pattern has emerged: companies are splitting into two distinct camps when facing pricing uncertainty.

The first group is betting on future price increases by stockpiling inventory now. They’re hedging against inflation by converting cash into physical goods before costs rise further.

The second group takes a more conservative position. They’re preserving cash, tightening operations, and preparing for potential demand slowdowns. With many distributors also anticipating slower economic growth or even recession, this cautious stance focuses on maintaining liquidity over inventory optimization.

Neither strategy is inherently right or wrong, but both carry significant risks. Aggressive inventory positioning can strain cash flow and warehouse capacity, while overly conservative strategies might leave companies scrambling when supply constraints hit.

The key is understanding how these tradeoffs—carrying costs, pricing trends, and margin exposure—interact specifically within your business model and market position.

Pricing Changes Require Strategy, Not Panic

When costs spike unexpectedly, the natural instinct is to raise prices immediately. However, hasty decisions can damage the client relationships, which took years to build.

The difference between B2B distribution and online retail is stark—while e-commerce companies can adjust prices daily based on market conditions, distributors operate in a relationship-driven world where sudden changes can trigger contract disputes and erode trust.

Smart distributors handle pricing adjustments with discipline:

Timing matters. Don’t wait until new inventory arrives at higher costs to announce increases. Plan ahead and communicate early when you have visibility into cost changes.
Communication is everything. A two-week lead time on pricing notices can preserve relationships. Clients appreciate transparency about market conditions driving the changes.
Use data, not emotions. Incorporate margin modeling, client segmentation, and historical data into decisions rather than reacting to daily headlines.

The most successful distributors have developed pricing playbooks with specific triggers for action, standardized communication templates, and clear escalation procedures for high-value accounts. This systematic method turns pricing volatility from a crisis into a manageable business process.

Flexibility in the Supply Chain May Surprise You

Despite headlines about tariff impacts and rigid supplier relationships, many distributors are discovering unexpected negotiating opportunities.

This contradicts the assumption that tariff-exposed suppliers would simply pass costs through without discussion.

A recent example from one of Hydrian’s clients illustrates this point. A major supplier—a publicly traded company—announced a 7% price increase, citing tariffs as the primary driver. However, Hydrian’s analysis of the supplier’s public financial disclosures revealed minimal actual tariff exposure.

When the client presented this information, the conversation shifted. The supplier acknowledged they had held prices for an extended period and that tariffs were simply the catalyst for a long-overdue adjustment. The 7% increase became 3%.

Suppliers facing genuine pressure often offer creative solutions:

Volume-based discounts to offset increased costs
Extended payment terms to ease cash flow pressure
Co-investment in freight or logistics improvements

The key is preparation. Research your suppliers’ actual exposure to cost pressures before accepting price increases at face value. Many suppliers are more willing to negotiate than they initially indicate, especially when presented with objective data about their true cost situation.

Best Practices for Navigating Volatility

While market uncertainty continues, the most successful distributors aren’t waiting for stability to return. They’re actively implementing systematic methods that turn pricing challenges into operational advantages.

What leading distributors are doing now:

Scenario planning with pricing inputs. Simple 12-month sales averages no longer provide reliable forecasting. When price changes can rapidly alter your market position, static methods become dangerous. Instead, implement responsive forecasting techniques that emphasize recent data and account for sudden market shifts.
Segmented client communications. Avoid one-size-fits-all messaging when announcing price changes. High-value, long-term clients deserve personalized explanations and advance notice, while transactional accounts may receive standardized communications.
Inventory flexibility with dynamic demand modeling. Run demand planning processes more frequently—weekly or bi-weekly instead of monthly or quarterly. When industries change rapidly, static planning cycles become obsolete.

Pricing volatility isn’t going away, but proactive planning creates resilience. The distributors thriving in this market aren’t the ones with perfect predictions—they’re the ones with adaptable frameworks.

If your business hasn’t updated its pricing protocols in the last 6-12 months, it’s time.

Best Practices for Navigating Volatility

The distributors thriving in 2025 have stopped treating pricing volatility as temporary and started building it into their operations.

Whether your strategy leans toward aggressive inventory positioning or conservative cash preservation, success depends on systematic methods. Companies struggling now are making reactive decisions—chasing price spikes, panicking over supplier notifications, or assuming conditions will normalize.

Volatility creates opportunities. Suppliers are more willing to negotiate than expected. Transparent communication can strengthen customer relationships. Market disruptions reveal inefficiencies that become competitive advantages once addressed.

Success requires combining data analysis, supplier intelligence, and responsive forecasting. It means moving beyond gut instinct toward systematic decision-making.

Check out the full video here!

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Inflation, Tariffs, and Supply Chains: Managing Price Increases

Featuring Josh Bartel

Guest-at-a-glance

Josh Bartel

Co-founder & CEO

Hydrian Inventory Optimization

Josh graduated from Stanford and previously co-founded Sanitopia.

Episode summary

In this video, Josh Bartel, Co-founder and CEO of Hydrian, discusses how to navigate the turbulent import tariff environment. He shares three key observations and strategies to help businesses adapt.

First, Josh notes significant price relief from suppliers due to tariffs. He advises importers to contact suppliers for potential discounts and domestic businesses to leverage existing inventory bought pre-tariff. Competition for these deals is high, so act quickly.

Second, Josh observes a shift towards domestic sourcing, though he cautions that increased demand affects pricing and lead times. A hybrid approach, maintaining some import sourcing, is recommended.

Finally, Josh addresses preparing for a potential economic downturn. He emphasizes responsive forecasting and inventory control, especially for long lead-time items. Prioritize inventory dollars over service levels for lower-volume products and actively manage open purchase orders to adapt to changing demand.

Key insights

Thoughtful Pricing in B2B is Crucial

Price changes in business-to-business relationships require careful consideration. Unlike online retailers who can adjust prices dynamically, B2B companies must prioritize long-term relationships. Sudden price hikes can damage trust and client retention. Transparency and open communication about price adjustments are key to maintaining strong partnerships. Sharing anticipated changes early on allows clients to adapt and strengthens collaboration. A measured approach to pricing fosters stability and demonstrates respect for established connections

Don’t Let Suppliers Exploit Tariff Situations

While some suppliers exhibit flexibility in mitigating tariff impacts through discounts, others use tariffs as a pretext for raising prices even without direct exposure. Businesses must be vigilant in scrutinizing price increases and requesting justification. Arming yourself with market information about actual tariff rates and competitor pricing empowers you to negotiate effectively. Don’t hesitate to push back against suspicious price hikes. Transparency and open communication are crucial in these negotiations.

Adapt to the “New Normal” of Volatility

The current economic landscape, marked by fluctuating tariffs, inflation, and supply chain disruptions, is not a temporary anomaly. Businesses should adapt their operations to this “new normal” rather than waiting for a return to previous stability. This includes developing flexible sourcing strategies, nurturing relationships with secondary suppliers, and adopting a more responsive forecasting approach. By acknowledging the ongoing nature of market volatility, businesses can proactively mitigate risks and maintain a competitive edge.

Avoid Speculative Inventory Purchases

The allure of buying large quantities of inventory when prices appear low can be tempting, but it’s a risky strategy. Commodity prices are inherently volatile, and attempting to time the market is often futile. Instead of speculating, focus on maintaining appropriate inventory levels to meet customer demand. A responsive forecasting model and close monitoring of sales and profitability are more effective than gambling on future price movements. Concentrate on core business strengths and leave market speculation to the financial professionals.

Episode Highlights

Flexibility and Negotiation with Suppliers

Timestamp: [00:00:46]

One surprising observation Josh shares is the flexibility shown by importers directly affected by tariffs. Many are willing to work with clients to mitigate the impact, offering discounts or sharing the burden. He advises businesses to actively engage with suppliers and explore potential cost-sharing arrangements. This proactive approach can lead to mutually beneficial outcomes and strengthen supplier relationships.

“Importers who are directly exposed to tariffs have shown a surprising amount of flexibility in working with our clients. An example might be they have a 25% tariff that applies to all the goods they sell, and they’re willing to give you a 10% discount.”

The Impact of Inflation on Inventory and Forecasting

Timestamp: [00:02:06]

Josh discusses the effect of inflation on pricing decisions. While inflation remained relatively low at the time of recording, the anticipation of rising inflation among businesses is influencing their behavior. This includes taking more aggressive inventory positions, anticipating higher prices, and bracing for potential economic slowdowns. This forward-looking perspective highlights the need for adaptable strategies and a proactive approach to managing potential risks.

“What’s important about that fact is that if they believe that’s the case, and they do, they’re going to respond by doing a few things. One is taking more aggressive inventory positions, buying more stock now before inflation happens.”

Maintaining Flexible Sourcing Strategies

Timestamp: [00:05:47]

Josh underscores the importance of flexible sourcing strategies. Having backup suppliers, even if they are not as price-competitive, can be invaluable during times of disruption. He advises businesses to not just identify these secondary sources but to actively cultivate relationships and maintain a baseline level of purchasing. This proactive approach ensures a readily available alternative in case of disruptions with primary suppliers.

“We recommend not only knowing who those companies are, but starting to have some level of buying with them. So, let’s say you import your product from overseas, you get really great pricing, maybe reserve 10% of your purchasing for a domestic source that’s not nearly as price-competitive, but you maintain that relationship.”

Supply Chain Disruptions and Scarcity

Timestamp: [00:03:35]

Josh discusses emerging supply chain disruptions, noting instances of empty shelves and product shortages. He draws parallels to the COVID-related shortages, although he anticipates a milder impact. He emphasizes that scarcity drives prices upward, impacting both acquisition costs and selling prices. Businesses need to be aware of these potential disruptions and factor them into their pricing and inventory strategies.

“One more thing I want to mention, too, is supply chain disruptions. We are starting to see, in June 2025, as we predicted a couple of months ago, some supply constraints. In other words, we’re seeing empty shelves among certain retailers, certain products.”

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Tariff Strategies: Price Breaks, Domestic Options, and Planning for a Downturn

Featuring Josh Bartel

Guest-at-a-glance

Josh Bartel

Co-founder & CEO

Hydrian Inventory Optimization

Josh graduated from Stanford and previously co-founded Sanitopia.

Episode summary

Josh Bartel, Co-founder and CEO of Hydrian, discusses how to navigate the turbulent import tariff environment. He shares three key observations and strategies to help businesses adapt.

Second, Josh observes a shift towards domestic sourcing, though he cautions that increased demand affects pricing and lead times. A hybrid approach, maintaining some import sourcing, is recommended.

Key insights

Price Relief Opportunities in a Tariff Environment

Many suppliers offer tariff-related price breaks. Importers should proactively seek discounts from their suppliers to mitigate cost increases. Domestic businesses can take advantage of pre-tariff inventory held by domestic suppliers, offering temporary cost savings. However, high competition for these deals requires swift action to secure favorable terms.

Balancing Domestic and Import Sourcing

The current environment sees businesses shifting from import to domestic products due to tariff-related price hikes. While domestic sourcing can be advantageous, consider increased demand, resulting in rising prices and longer lead times. A balanced, hybrid approach that retains some import sourcing is recommended to manage risk and maintain flexibility. Evaluate both domestic and import options carefully to find the most cost-effective and timely supply solutions.

Preparing for a Potential Economic Downturn

Recessionary concerns underscore the need for proactive inventory management. Regularly updated forecasts, responsive inventory controls, and dynamic forecasting models are critical. As demand fluctuates, inventory levels should adjust accordingly. Evaluate long lead-time items, balancing service level against inventory costs, and consider reducing inventory levels for low-volume items to free up resources. Actively managing open purchase orders provides another lever for quickly adjusting to shifts in demand.

Open PO Management for Adaptability

Purchase orders for long lead-time items represent significant commitments in uncertain times. Establish a clear workflow for modifying open purchase orders with suppliers. This includes knowing whom to contact and acceptable timelines for adjustments. Having these processes in place enables quick responses to changing demand, reducing risk and potentially avoiding excess inventory. Good reporting systems can highlight areas where PO adjustments may be necessary, providing an opportunity for proactive inventory management.

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Maximizing efficiency through PO optimization

Featuring Josh Bartel and Drew Roth

Guest-at-a-glance

Josh Bartel

CEO

Hydrian Inventory Optimization

Josh graduated from Stanford and previously co-founded Sanitopia.

Drew Roth

Director of Product Engineering

Hydrian Inventory Optimization

Experienced software engineer focused on inventory optimization.

Episode summary

In this episode, Josh Bartel and Drew Roth discuss PO (Purchase Order) optimization, a crucial component of inventory optimization services. They explain how PO optimization focuses on improving the “how” of placing purchase orders, aiming to minimize inventory while maintaining high customer service levels and reducing labor costs.

Josh and Drew highlight common issues in traditional PO processes, such as long closure times and multiple receipts per order. They introduce key principles of PO optimization, including building orders unique to each fulfillment facility and matching quantities to vendor stock levels. The duo emphasizes the benefits of this approach, including reduced lead times, fewer errors, and labor savings through improved unit of measure rounding.

The conversation also covers the advantages for suppliers, the data requirements for implementing PO optimization, and the significant improvements seen in clients’ operations. Josh and Drew share examples of how this process can lead to more efficient truck loading and drastically increase the percentage of order value arriving in the first receipt. They conclude by noting that PO optimization is part of Hydrian’s broader service offering, aimed at enhancing coordination between clients and their vendors.

Key insights

Understanding PO Optimization

Understanding PO optimization means making sure we use less inventory and spend less on labor while still making customers happy. It’s all about getting better at how we order things from our suppliers.

Factors in Purchase Order Creation

Factors influencing PO creation include tailoring each order to suit specific ordering and fulfilling facility lanes. By customizing POs in this manner, companies can optimize logistics, minimize errors, and ensure smoother operations throughout the supply chain. Additionally, verifying that ordered quantities align with vendor stock levels is crucial to prevent fulfillment complications, such as backorders or delays.

Vendor Benefits and Collaboration

Optimized PO has advantages for both clients and suppliers. By enhancing the efficiency of order fulfillment, vendors may experience significant cost savings and operational streamlining. Importantly, these benefits can be achieved without disruption to existing workflows, fostering a positive collaborative environment between parties. Overall, optimizing purchase orders fosters mutual gains and strengthens relationships within the supply chain ecosystem.

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Product sourcing challenges in the automotive industry

Featuring Josh Bartel and Drew Roth

Guest-at-a-glance

Josh Bartel

CEO

Hydrian Inventory Optimization

Josh graduated from Stanford and previously co-founded Sanitopia.

Drew Roth

Director of Product Engineering

Hydrian Inventory Optimization

Experienced software engineer focused on inventory optimization.

Episode summary

In this video, Josh Bartel and Drew Roth discuss product sourcing in the automotive industry. Josh and Drew explore the challenges faced by distributors, wholesalers, and online retailers when dealing with multiple sources for each product.

The conversation covers key considerations for selecting the most suitable source, including drop-shipping capabilities, cost and margin analysis, and lead times. They emphasize the importance of balancing profitability with maintaining stock availability to retain customer trust. Josh and Drew also discuss the concept of “gap buying” — making smaller domestic purchases to bridge inventory gaps while waiting for larger, more cost-effective overseas shipments.

The duo highlights the significance of understanding stock-out costs and maintaining good relationships with multiple vendors. They stress the value of diversifying supplier relationships, even with competitors or smaller partners, to ensure business continuity and flexibility in sourcing. Josh and Drew conclude by addressing the complexities of dealing with “gray market” products and the benefits of having access to vendor inventory data for making informed sourcing decisions.

Key insights

Understanding Product Sourcing Dynamics

The podcast delves into the complexities of product sourcing, particularly within the automotive and automotive aftermarket industries. It highlights the challenge of selecting the best source for each product, considering factors beyond just profitability.

Considerations for Selecting Sources

Drew outlines three primary considerations for selecting sources: drop shipping feasibility, cost analysis including margins, and lead time assessment, with a focus on domestic suppliers’ quicker turnarounds compared to potentially cheaper but slower overseas options.

Importance of Vendor Relationships

They emphasize the importance of maintaining good relationships with vendors, even with secondary or smaller-scale suppliers. These relationships can prove crucial during stock shortages or if primary suppliers become unavailable.

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AutoZone’s supply chain expansion: A case study

Featuring Josh Bartel and Drew Roth

Guest-at-a-glance

Josh Bartel

CEO

Hydrian Inventory Optimization

Josh graduated from Stanford and previously co-founded Sanitopia.

Drew Roth

Director of Product Engineering

Hydrian Inventory Optimization

Experienced software engineer focused on inventory optimization.

Episode summary

Drew Roth sits down with Josh Bartel to discuss the challenges and opportunities of supply chain expansion. Using AutoZone’s ambitious plan to build 200 new distribution centers as a case study, Josh explores the potential benefits and downsides of multi-echelon networks.

While expanding a company’s geographic footprint can lead to faster delivery and increased sales, Josh cautions listeners about hidden costs. Internal freight costs, outbound shipping expenses, and the complexity of managing inventory across multiple locations can cut into any potential gains.

Josh emphasizes the importance of focusing on local fill rates as a key performance indicator. He advises companies to prioritize optimizing inventory at existing facilities before expanding their network. This episode offers practical advice for any business leader looking to improve their supply chain strategy.

Key insights

Don’t confuse network fill rate with success

While expanding your distribution center network might look good on paper — increasing your overall in-stock rate — it can mask inefficiencies. Josh cautions against focusing solely on network-wide fill rates. He stresses the importance of local fill rates, meaning the percentage of orders fulfilled from the DC closest to the customer. A high network fill rate alongside a low local fill rate often indicates an imbalance requiring attention.

Hidden costs can undermine expansion benefits

Before embarking on an ambitious DC expansion project, businesses need to fully grasp the potential hidden costs. Josh highlights internal freight expenses as a common culprit. Moving inventory between DCs to fulfill orders adds up quickly and often goes unnoticed as it’s grouped with general transportation costs. Additionally, increased inventory carrying costs and the added complexity of managing a larger network can significantly impact the bottom line.

Prioritize inventory optimization before expansion

Josh advises companies to exhaust inventory optimization strategies at existing facilities before investing in new distribution centers. Often, companies can achieve significant improvements in delivery speed and customer satisfaction by simply improving inventory management practices at their current locations. This might involve implementing demand forecasting tools, optimizing safety stock levels, and streamlining warehouse operations for greater efficiency.

Test new markets with 3PLs before full expansion

For companies considering expanding their geographic reach, Josh recommends a cautious approach. Instead of immediately investing in new facilities, he suggests partnering with a third-party logistics provider (3PL). This allows companies to test demand and gauge the market’s response to faster delivery times in a new region without the significant upfront costs associated with building or leasing a DC.

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Optimize your offering: Item level net profitability

Featuring Josh Bartel and Drew Roth

Guest-at-a-glance

Josh Bartel

CEO

Hydrian Inventory Optimization

Josh graduated from Stanford and previously co-founded Sanitopia.

Drew Roth

Director of Product Engineering

Hydrian Inventory Optimization

Experienced software engineer focused on inventory optimization.

Episode summary

Josh Bartel and Drew Roth tackle the crucial question: which items should distributors and wholesalers carry? They explore the pros and cons of common inventory strategies including stocking, just-in-time ordering, dropshipping, and removing items from your catalog entirely.

Drew emphasizes the need to analyze factors beyond gross margin when determining true item profitability. Minimum order quantities, vendor performance, shipping costs, and even customer order composition can significantly impact an item’s financial viability.

Discover how one client achieved impressive results by embracing a “SKU diet.” By strategically reducing their product catalog by 40% based on Hydrian’s data-driven analysis, they unlocked revenue growth and increased overall profitability. This episode offers valuable insights and advice for anyone interested in optimizing their inventory.

Episode summary

Key insights

The "SKU diet": Less can be more

Distributors and wholesalers often feel pressure to offer vast product catalogs. However, carrying too many SKUs can negatively impact profitability and customer experience. Josh and Drew advocate for a “SKU diet” – strategically reducing your catalog by eliminating underperforming or unprofitable items. This simplifies operations, reduces inventory costs, and can even lead to sales growth by improving customer focus.

True profitability: Beyond gross margin

Don’t be seduced by a product’s seemingly attractive gross profit margin. Drew emphasizes the importance of considering all costs associated with an item, including inbound freight, storage, outbound shipping, and potential obsolescence. By calculating the true net profitability, businesses can make more informed stocking decisions.

Vendor performance: A key factor in dropshipping

Dropshipping can be an attractive alternative to stocking inventory, but vendor reliability is paramount. Drew and Josh advise carefully evaluating potential dropship partners on factors like shipping speed, packaging quality, and inventory accuracy. Inconsistent vendor performance can damage customer relationships and negatively impact your brand.

Data-driven decisions: The key to inventory optimization

Making sound inventory decisions requires more than intuition. Josh highlights the power of data analysis in identifying underperforming SKUs, optimizing inventory levels, and ultimately improving profitability. By leveraging tools and insights, businesses can move away from gut feelings and towards objective, data-supported inventory strategies.

Want to learn more? Check out this blog post.

Master item-level profitability and maximize your product portfolio's potential

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We’re so confident in our results, we offer a free performance assessment to all prospective clients. This isn’t a canned sales deck – it’s a bespoke presentation that takes 20 hours of our time. Whether we work together or not, we promise you’ll walk away with useful insights that will improve your business.

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Higher demand and longer leadtimes: The COVID “double whammy”

Presented at International Fastener Expo 2021

In early 2020 as COVID swept across the globe, supply chains began to reel as the consequences of the pandemic forced actions such as factory shutdowns and workforce shortages. The resulting leadtime increase led to a jump in order quantities to account for the extended time between receipt of shipments, but between March and May of 2020 there was a massive plummet in demand. All of a sudden businesses had more inventory than they had had in the recent past and half the demand, leading to a tremendous jump in ‘Days on Hand’.

Fortunately, this March to May stretch did not last and demand recovered quickly and continues to climb. The only issue is leadtimes have not recovered like demand, in fact, they have continued to decline. This has led to the opposite problem experienced in March through May as businesses now have declining ‘Days on Hand’ caused by rising demand and inability to get items on the shelf.

The above is obviously applying a broad brush to the current set of issues created by COVID, but is representative of the “general” inventory issues present for most businesses. Using some anonymized client data from Hydrian, it is possible to see how these effects have played out with a real business and lends itself to a discussion on how to mitigate the effects of the current state.

Pulled from actual client data, we can see in the graphic below that since September of 2020, lead times have not only risen but the spread between the median lead time and 75th percentile of leadtime has widened. This means that it takes longer to get what you ordered from your supplier AND the actual count of days you will receive it in is less predictable, culminating in increased inventory values.

In the chart below, it is clear to see how leadtimes have affected inventory investment. Inventory on order has risen to account for increased demand (shown by the red line), longer leadtimes, and less predictable lead times. However, we also see inventory on hand declining which tells us that receipt of shipments cannot keep up with demand due to these leadtime delays.

With unprecedented ‘inventory on order’ levels, the potential for an “ocean” of excess stock is a real concern if supply chain challenges suddenly resolve themselves. However, what we know about COVID is its impacts are hard to predict, so being prepared to be nimble regardless of circumstances is the new requirement. Below are some strategies to minimize stockouts in the face of huge demand and supply uncertainty and ensure that when lead times do recover and customer demand returns to normal, inventory doesn’t balloon in value due to a bullwhip effect.

1. Develop highly responsive inventory controls (e.g. min/max) and buying strategy

As lead times or demand grow, get more inventory “into the pipeline”
Conversely, be ready to reverse changes if demand falls or suppliers improve

2. Work with suppliers to adjust PO qtys, push / pull deliveries, and cancel if needed

Establish guidelines for “finalization” dates of PO qty, release date, etc
Share sales forecasts with suppliers (and ensure they utilize them)

3. Recognize unavoidable excess before it hits your shelf

If quantities can’t be changed / cancelled, start liquidating excess before it arrives
Consider price reduction, added marketing spend, or other promotion
When it makes sense, divert incoming POs to other facilities

4. Track appropriate metrics for measuring supplier and internal performance

Track both median / average as well as the distribution of lead times
Inventory turns / days on hand, in-stock rates, delivery speed, etc

A link to the full presentation can be found here.

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Fill rate vs. in-stock rate: what’s the difference and why it matters?

At the start of any engagement with a client, one of our first tasks is to agree on the language we’ll use to talk about inventory performance. One of the most important metrics is how much of your product is in-stock and available for sale to customers each day. In this post, we’ll talk through different ways to measure in-stock performance, how to calculate each one, and how each one can help you improve customer service in different ways.

Definitions

A sample of terms we hear clients use to talk about inventory performance include:

Fill rate
Backorder Rate
In-Stock Rate
Service Level

While each of the terms above has a textbook definition, we’ve found that it’s rare for clients to use that exact definition in their operation. Below, we’ll stick to the most common usage of each.

Fill Rate / Backorder Rate

Fill rate and backorder rate both refer to the percentage of actual demand from customers that you were able to fill immediately from inventory on the shelf. In companies that do not allow backordering, order lines that cannot be filled from stock are generally cancelled, and the customer is notified.

For example, assume a customer orders 100 units of an item, and you only have 50 in stock. You ship the 50 and backorder or cancel (depending on your policy) the remaining 50 units. In this case, you have a unit fill rate of 50% (from here on out we will use “fill rate” to mean both fill rate and backorder rate).

Unit, Line, and Order Fill Rate Examples

In the example above, we are using units shipped from stock for our fill rate. Many companies will instead measure their line fill rate. The difference is that 100% of the units on a line must be in-stock for that line to count as in-stock. So if a customer placed a 10 line order and all lines were fully in stock except the one above, that order would have a 90% line fill rate – we don’t get any credit for the 50 unit partial fill.

An order fill rate works the same way – all units on all lines of the order must be 100% in-stock in order for the order to count as in-stock. If we received 10 customer orders and all but the order above were 100% in-stock, we’d end up with a 90% order fill rate. We don’t get any credit for the 9 perfect lines on that last order, because the 10th line only had a 50% unit fill rate. Another term for order fill rate is “perfect order rate” since from the customer’s perspective, a successfully filled order, where all units on all lines are in-stock, is the best possible outcome.

We’d recommend tracking all three – unit, line, and order fill rate. Unit fill rate is the standard in many industries, but it can be dominated by low-impact items if you sell some SKUs at extremely high quantities relative to others. Line fill rates can correct for that sort of bias. Finally, order fill rates are probably the best measure of a total customer service success.

In-Stock Rate

In-stock rate measures the percentage of expected demand that you have in-stock and available for sale. There are two major implications of using expected demand, rather than actual demand, as an inventory metric:

1) In-stock rates are generally based on a sales forecast, and as such, are subject to forecast error. For example, if you haven’t sold an item for a couple of months, you may have a zero forecast and won’t “ding” yourself if you are out of stock on that item. Of course, that doesn’t mean that a customer won’t buy that item. The broader and longer the “tail” of low volume items in your catalog, the less reliable in-stock rate will be as a metric.

2) In almost every business we work with, sales are depressed when an item is out of stock. Even among companies that don’t purport to advertise or share inventory status with customers, we see fewer orders arrive on days when items are out of stock vs in-stock. What this means is that fill rate (which measures only actual demand from customers) is going to be a falsely optimistic measure of performance, since you can’t have a backorder if the customer never bought the item! This is the main reason to utilize in-stock rates as well as fill rates in your metrics. (We’ll do a future article on “spill rate” which will allow you to quantify the financial impact of lost sales when out of stock.)

When is an Item In-Stock?

Generally, we recommend counting an item as in-stock if it has at least one day of expected demand or the median customer order quantity (whichever is greater) in stock at the start of the day. However, we find that unless you run an extremely tight inventory, the result you get using this method will be extremely close to the result achieved if you count any item that has any units available as in-stock.

Weighting In-Stock Rate

Most of our clients that utilize in-stock rate track this metric for each sales velocity class. For example, they will have an in-stock rate for A, B, C, and F items. While this is a good start, we strongly recommend weighting in-stock rate by sales volume at the item level.

For instance, if you have an item that sold 80 times in the last 90 days, and another item that sold 20 times, both may be “A” items. But the former item is four times more impactful to customer service if it is out of stock. A single, weighted in-stock rate is usually the best indicator of overall customer experience.

Simply take all the SKUs you stock, find the percentage that are in-stock on a given day, and then weight that percentage by each item’s forecast, recent sales, or some other volume indicator. We recommend weighting by order lines rather than units if possible, and find that lines sold during a rolling 90 day period is a good measure.

Service Level

Service level is a term that has a wide range of definitions among our clients. Generally, it refers to either the fill rate, backorder rate, or in-stock rate… depending on which of those metrics the client in question tends to prioritize. So feel free to be as liberal as you like with this term.

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Is your fill rate right for your business?

One of the questions we are asked by nearly every new client is: “What should my fill rate (or service level / in-stock rate / backorder rate) be?” Without diving into item-level sales and supply chain data, this is an impossible question to answer, and we strongly caution against trying to set fill rates against an industry benchmark.

We have clients with profit-maximizing fill rates in the 80% range, and clients with profit-maximizing fill rates well above 99%. This is a number that will vary not just by industry and company, but also among the different items sold within a single warehouse. In this article, we’ll talk about the 5 main factors that you should use to determine the right service level for any item in your inventory. In the end, the goal is to reallocate inventory dollars from low-quality items into higher quality, maximizing profit.

1) Profitability

Items that are out of stock will sell less (if at all, depending on a company’s backorder policy). Thus, you want to make sure that the items which return the most profit are also in-stock the most often.

2) Holding Cost

Item that are more expensive to keep in inventory should be more conservatively stocked, which will naturally lead to lower fill rates. For example, all else being equal, you want large, bulky items like bubble wrap to have a lower in-stock target than, say, a small pack of washers with the same cost and margin.

3) Sales Volume and Variance

As said above, many companies target different service levels based on sales volume. This is the right approach. Another thing that should be considered is sales variance. For example, assume two items have the same total sales, but one item sells smoothly and consistently while the other has more “chunky” demand. The more consistent item should have a higher target in-stock rate.

4) Lead Time Length and Variance

Items which have long or highly variant leadtimes are harder to stock efficiently. They require more safety stock, and thus, will have a lower profit-maximizing in-stock target.

5) Strategic Importance

Finally, if an item is an own-brand, “front page” flagship, or otherwise strategically important item, you may want to target a relatively high in-stock rate, no matter how it stacks up using the other metrics above.

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