Distribution center storage and inventory control may not seem like the sexiest parts of a multichannel business. But unless you have the product in stock — and your warehouse workers can get to it quickly and easily — you’re going to have a lot of unhappy customers. And you can’t afford to disappoint today’s consumers, who continue to demand more for less. That’s why many operations professionals focus on benchmarking and best practices as a way to drive improvement.
In the final article in our series on fulfillment best practices, we’ll look at key elements of the storage and inventory control process and how to improve them. Storage and inventory control processes include the activities related to holding material and the processes of counting and transacting the material as it moved through the warehouse. These are some of the common practices that best-in-class companies use to optimize storage and manage inventory.
LOCATION MANAGEMENT AND REVIEW
The layout requirements of a warehouse that supports a manufacturing operation will differ from those of a facility supporting product distribution or one that supports end-user fulfillment. Some operations place emphasis on replenishment of product to the point of use; others focus on product picking or order fulfillment. Regardless of the ultimate mission of the warehouse, best-practice companies have designed storage systems to meet the needs of the current and planned mix of storage types.
For instance, they have optimized storage locations and layouts to fit product without the need to restack or repalletize it once received. The warehouse management system will track storage location profiles and properly assign merchandise to the best storage location. As a result, leading companies have excellent cube fill rates.
In addition to optimizing the cubic fill of storage locations, best practice is to minimize worker travel time. If a product is in high demand, place it closer to its next point of use. In this case, demand should be based on the number of times the product is required, not on the number of units required. You should also consider the difficulty of retrieval in travel time; place higher-demand product on the most easily accessed storage space, typically floor level for racking and between waist and shoulder level in pick racks.
Not all companies need to track product by lot or serial number, but if that is required, integrate that capability into your warehouse and shipping processes and use the system of record to manage the lot and serial number data.
Most operations executives put much effort into the initial layout of the warehouse, but industry surveys will tell you that as many as half the companies do not have an ongoing process in place to review their layouts. You need to review how storage areas are configured and have processes in place to reconfigure storage areas as product mix changes.
This is critical to maintaining high levels of space utilization and efficiency. Making continuous small adjustments to racks, shelving or other storage equipment can have a huge impact on use of space.
PRODUCT DATA AND SPECIAL REQUIREMENTS
All warehousing software runs on data; therefore, you must keep product and storage location data current and accurate. To do this, savvy merchants maintain all information on a single system of record. Product data should include all item characteristics including cube data, lot/serial number information, and special requirements so that product can be directed to special storage areas.
Keep in mid that you may need to use special storage areas to segregate items with odor transfer or fire risk, or products that require temperature control. High-value product might need caged and/or controlled access storage.
INVENTORY CONTROL SYSTEM
Inventory is money, so you should have well documented and defined processes to maintain inventory accuracy. Processes detail specific tasks and requirements and direct how inventory is managed and transactions processed. Employees must be properly trained so that they have a complete understanding of procedures and expectations. They need to measure the accuracy of inventory activity and transactions to minimum standards and use measurements to drive process improvements.
Controlling and managing inventory is easier when you have a single system of record. Ensure that transactions flow seamlessly between order management, warehouse management, transportation management, and financial management systems. Inventory control benefits from good housekeeping and warehouse organization. Crowded, unorganized, and improperly or poorly marked storage areas subject product to damage and are prone to inventory transaction errors.
Just like customer service, safety, or quality, inventory accuracy should be important to every employee — it’s not just the responsibility of those who perform inventory transactions. All levels of the organization should promote it and support it. Make certain that your systems support inventory accuracy as well.
In a warehouse that has product in multiple locations, establishing a process for location consolidation is important. By pulling a report from your WMS of all locations that are not full, you can consolidate product into a single location.
Product should be counted as it is consolidated. Many companies add this process to the duties of the cycle-count team. (More on cycle counting later.) It provides two main benefits: better space utilization and improved inventory control and accuracy.
TRANSACTION PROCESSING
The most efficient marketers use a single system of record and perform transactions in real time. Personnel and lift trucks are outfitted with portable radio frequency devices that allow employees to perform transactions as product is moved. Using barcode and RFID tags helps improve transaction accuracy and reduce keystroke errors. Accurate and timely inventory balances are crucial to meeting customer satisfaction goals.
CYCLE COUNT
Cycle counting is an inventory accuracy audit technique in which inventory is counted on a cyclic schedule rather than once a year. Most effective cycle counting systems require counting a certain number of items every workday, with each item counted at a prescribed frequency. You do this to identify items with on-hand quantity errors, thus triggering research, identification, and elimination of the cause of the errors.
The real power of cycle counting is identifying problems and resolving their root cause so that the errors do not occur in the first place. You should have processes in place to drive accuracy at the front end. For instance, train personnel, have documented procedures, use barcodes to help validate product, and motivate employees to be accurate.
Most companies use an ABC analysis to prioritize counting. An ABC inventory control approach classifies each product in inventory, ranking the SKUs from the highest to the lowest. This can be done by dollar volume or unit throughput — or a combination of both.
For example, the “A” classification is typically assigned to the top 10% to 20% of products that represent 50% to 70% of the projected dollar volume. The “B” classification is often given to the next 20% of products that represent about 20% of the dollar volume, and the “C” classification contains from 60% to 70% of the products that make up about 10% of the dollar volume.
By stratifying the inventory using the ABC classification, you can count the higher value and higher volume components more frequently and the lower value components less frequently. When you use storage locations, the cycle count process should record the total part count as well as the location count accuracy.
INVENTORY STRATEGY
Best practice companies use vendor managed inventory (VMI) and supplier stocking programs that are system supported. VMI is the practice of making suppliers responsible for determining order size and delivery timing, usually based inventory data.
In vendor stocking programs, the supplier is asked to deliver product to a specific stocking or pick location; the supplier is also required to replenish only material used from the location or to an established stocking level. The goal of these programs is to increase inventory turns and reduce stock-outs.
If you’re an operations leader, your systems and processes will support just-in-time (JIT) and Kanban-based replenishment processes. JIT is an inventory reduction strategy that feeds production lines and pick-areas with products delivered “just in time.” Developed by the auto industry, it refers to shipping goods in smaller, more frequent lots.
Kanban in replenishment is an inventory process which uses standard container or lot sizes in the replenishment process.
You should have an aggressive program to manage excess and obsolete inventory. Slow-moving, obsolete, and excess inventory that fills warehouse space is costing the company money.
Looking at this class of inventory as a percentage of the total inventory value may be sobering. Many experts have found that 25%, and as much as 45%, of a company’s inventory value, including carrying costs, fall into this category. You need processes to quickly recover value from excess and obsolete product. This is especially true for products with short life cycles that lose value quickly.
Best practice is to remove obsolete product from active inventory as part of the engineering change process. It may be possible to return product to suppliers, sell it into secondary markets, or sell for scrap value. In the worst case, product should be written off and destroyed. In the long run, it may cost less to quickly get rid of the product than to hold on it.
Kate Vitasek is managing partner of Supply Chain Visions, a consulting firm specializing in supply chain strategy and education.