How many times have you heard that “you get what you pay for”? Many manufacturers and distributors have heard the expression and may have even used it in justifying the price of a high cost component to one of their customers. But these same companies often don’t follow their own advice in choosing new technologies to increase their profits or lower their operating costs.
I often see mid to large organizations using decades old methods to manage inventory and plan replenishment. They balk at the out-of-pocket cost of implementing new technology. They fail to calculate and consider the potential increased profitability, lowered expenses and the amount of time it will take to recoup their investments in those specific technologies that have the most potential to improve their productivity.
Let's examine two significant opportunities for productivity improvement: Advanced Forecasting Replenishment Systems and Warehouse Management Systems.
Today, most replenishment decisions made by distributors and manufacturers use a process developed hundreds of years ago. That method is called "SWG" (pronounced "swag"). SWG stands for scientific wild guessing. Buyers look at stock status reports listing usage history and the current available quantity in stock. Then they manually decide how much to order.
Productivity problems with a SWG system include:
- Many buyers are responsible for replenishing thousands of inventory items. They do not have the time to properly analyze each individual product in each stocking warehouse.
- Subjective decisions tend to result in overstock situations. If the "best buy" quantity of a product is 42 pieces, a buyer may decide to purchase 50 pieces. After all, stock outs are usually more painful than overstock situations.
- After staring at numbers all day, a buyer’s fatigue may cause him or her to overlook a critical situation.
- It is hard for a buyer to evaluate all potential purchasing possibilities at one time. For example, is it more advantageous to centrally warehouse a product? Should you take advantage of a vendor’s special order? How much of an item should be purchased for the upcoming season?
There is a great misconception that "best practice" forecasting/replenishment systems can replace buyers. In fact, the best practice systems put knowledge to best use by bringing to the buyers' attention only those situations that need their industry knowledge and experience.
These instances include:
- An unexpected increase or decrease in usage. Is the changing sales pattern due to unusual activity or the start of a new trend? A buyer's knowledge and expertise is necessary to evaluate this situation.
- When collaborative information about changes in sales volume from customers, salespeople and management are not accurate. Working together with a management team can determine why estimates were not accurate and what can be done to improve future predictions.
- A significant change in the lead time for an item. Will this lead time be reflected in replenishment shipments? If so, schedules for issuing replenishment orders will have to be modified.
- When the profitability of a product falls below or greatly exceeds expectations. How can the sales team react to or take advantage of these situations?
- Comparisons of the additional discounts for buying larger quantities of a product against the cost of carrying this additional inventory for a longer period of time.
- When the available stock of an item falls below a critical level. A buyer can react to the situation before a stockout occurs.
By automatically handling routine decisions and bringing exceptional situations to the attention of the appropriate buyer, these systems make the best use of the buyers' valuable time.
- More interesting work for buyers. Everything that the system brings to their attention needs their expertise. Buyers are no longer faced with piles of "busy work".
- Better inventory management allowing the company to meet or even exceed customers expectations of product availability with the amount of each item that will maximize the organization's profitability.
Our experience is that a well implemented comprehensive "best practice" forecasting/replenishment system has the potential to reduce an organization’s average inventory investment by 25% to 30%. If a company has a current average inventory value of $3,000,000, this would be a reduction of $750,000 to $900,000. If the organization’s annual cost of carrying inventory is 20%[i] this would result in an annual reduction in operating expense of $150,000 to $180,000. If a new "best practice" forecasting/replenishment system cost $180,000, the system would pay for itself within 12 months of implementation. After that, the reduction in operating expenses would directly increase the company's net profitability.
In other words, the savings would "drop" to the organization's bottom line. Other benefits, such as increased sales due to more accurate forecasting, would further decrease the payback time period.
Warehouse Management Systems
Many companies fill and ship hundreds, if not thousands, of customer orders per day. Like forecasting/replenishment activities at most organizations, the procedures used to fill these orders, as well as other activities that move material through their warehouse, has not changed much over many years.
In a typical warehouse:
- Receiving clerks check in incoming shipments from paper packing slips.
- Putaway clerks store material in its "usual location" and/or where space is available.
- Stock material is located in a "traditional" layout with similar items being stored in the same area, often in vendor product number sequence.
- Order pickers fill one order at a time from printed pick tickets.
- Current orders for incoming material filled after the inventory has been putaway in its normal stocking location.
- There is little or no control of material being removed from stock without being recorded in the company’s computer system.
- On-hand quantities of stocked products are "verified" once a year during a full physical inventory.
State of the art warehouse management systems have the potential to increase the efficiency of warehouse operations.
Common improvements include:
- Automated receiving: Bar coding technology can be used verify that the right quantities of the right items are received more accurately and in less time than using conventional paper records.
- Cross docking of material: Incoming inventory that is needed to fill current orders is identified while still on the receiving dock. Current orders are filled before the material is putaway. This avoids double handling of stock and shortens delivery time to the customer.
- Directed putaway: WMS systems can be used to ensure that the products with the most picking activity are stored in the most accessible locations. This reduces the time it takes to fill orders. Available surplus or "bulk storage" space is analyzed to best use the available warehouse space.
- Wave and zone picking: Wave picking allows a warehouse worker to pick multiple one or two line orders in one pass through the warehouse. Zone picking produces separate pick tickets for different areas of large or strangely shaped warehouses. By assigning order pickers to these specific areas "dead head" time (when order pickers walk around the warehouse with no material) is greatly reduced.
- Directed cycle counting: A full physical inventory is a great expense for most distributors. Directed cycle counting has order pickers verify the on-hand quantities of selected items as they fill customer orders. Product on-hand quantities remain accurate while the expense, as well as the business disruption associated with a full physical inventory, is eliminated.
The increased efficiencies provided by a state of the art WMS system can significantly lower warehouse operating costs. With one of our clients, the cost of filling and packing a typical four line order fell from $9.32 to $7.84; a savings of $1.48 per order. As the distributor fills 550 orders per day the result is a savings of $814 per day (550 orders * $1.48) or $203,500 per year. The complete implementation of a $100,000 WMS system including hardware, software and training paid for itself within six months. As with the forecasting/replenishment system described above after the payback period the savings realized by implementing the WMS system directly increase the distributor's bottom line.
Examine new technologies that have the potential to increase your organization's productivity. It is a key element in staying competitive in an ever changing world.
To learn more, read Tribridge's whitepaper, The Continuing Evolution of Wholesale Distribution.
[i] As of March, 2016 the annual inventory carrying costs for companies in North America typically ranged from 16% to 23%. This means that it costs and average of 16 cents to 23 cents to maintain a dollar's worth of inventory in your warehouse for an entire year.