There is nothing more frustrating for a distribution manager than walking by dust-shrouded pallets in a prime picking zone. The overly optimistic merchant who ordered thousands of widgets that were bought by merely dozens of customers is partly to blame — but only partly. Optimistic demand must always be counterbalanced with sound inventory management principles. Here’s what you can do to maintain a lean inventory and storage profile in your operation.
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Work with the merchants and the buyers regularly to strengthen the communication lines. Have them visit the distribution center at least once a quarter, and show them the space and the layers of dust. This is an incredibly effective strategy. Introduce them to the staffs that have to manage the inventory. Buyers are often driven to action after seeing the raw storage space required for dormant products, so make them a partner in the space management process.
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Consider having senior management provide incentives or penalties such as space allocation charge-backs to the division (or product lines) based on quarterly space consumption. If you have a robust inventory management system, charge product lines a fee for storage used in excess of the company’s target for inventory turns: If the target is 10 turns a year, and product X averages five, that product line pays a premium.
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Perform a “lifetime forecast” on the buyer’s behalf. Sometimes buyers are too busy ordering for future sales to look back on prior purchases. Here is an easy way to present a compelling case for inventory write-offs: Take the peak order demand for the SKU. Extrapolate that number out across all the units you have to see how long the inventory should last. Present the buyer with a simple line graph that compares stored units and “years of inventory.” Use decades or even centuries if years won’t suffice. Using this approach, I have seen companies with sufficient inventory to last several thousand years!
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Consolidate not just within SKUs but also across them. SKU consolidation is always the first step in better location management. Combining two half-pallets of the same SKU into one solid pallet is easy enough. But look closer at other options. A solution for a national office products company went deeper than combining pallets of the same SKU. The company picks full- and broken-case products. It quickly opened up several hundred active carton pick slots by identifying slow-moving products with only several cartons in stocks. With no new receipts on the horizon, the distribution center staff moved a few units to a bin. The remaining items were palletized with other slow-moving carton stock, mixed onto single bulk pallets, and stored in remote locations. The labor expended to do this is offset by the immediate gain of valuable golden zone slots immediately. And if an item is slow today, chances are it will be slow six month from now.
Granted, mixing SKUs can be dangerous, so ensure that picking quality control is maintained. Having a flexible system to allow mixed SKUs per location and location velocity codes is critical. Which brings us to…
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Implement location velocity codes. Some companies have product velocity codes, a value of the inventory turn or a combination of cube and inventory turn of the product. Fewer companies have formal location velocity codes, or velocity-ranked zones and areas. A location velocity code prioritizes the accessibility and travel time to a pick location in your distribution center. I recommend keeping it simple. Assign zones within areas that categorize prime picking. Prime zones are typically the first rack in the shipping zone, away from dead storage areas such as a mezzanine location. Take into account vertical (levels) and horizontal (distance from a central point) travel time when assigning location velocity codes.
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Create cubic velocity codes. These are a reflection of the cubic use of a product during its lifetime. To pull it all together, multiply cubic velocity by pick velocity. Many operations slot inventory based solely on cubic velocity: using the metric dimensions (length times width times height) of the SKUs to establish the cube of the product. The concept works well with some operations, but with certain product mixes relying exclusively on cubic velocity is problematic. You’re better off multiplying the cubic velocity by a pick velocity factor.
The pick velocity is the number of visits or trips a picker makes to a product’s location within a given period of time. Keep that period of time standard throughout. Also, bear in mind that the pick velocity code may differ from sales volumes if you use batch-picking methods such as bulk pick (all the SKUS for the day’s order demand are picked in one sweep) or run multiple waves (batches of orders consolidated for a shift). In your formulas don’t forget put-away visits if your returns are high. If you are just starting out, though, you can keep it simple and simply use sales volume; it’s better than not calculating pick velocity at all.
The result of multiplying cubic velocity by pick velocity is a cubic pick code that tells you how much flow-through space your product will consume for a given period. Once you have these codes, rank the results and sort your SKUs. Then marry your product velocity codes to your sorted location velocity codes. This is your ideal slotting profile. If you use unique numbers across all locations and products, don’t worry that the location velocity codes and cubic velocity codes don’t match perfectly. If product A with velocity code of 57 is in location B with velocity code of 73, that’s fine. If it’s in location C with a velocity code of 9,050, that might be a relocation candidate. The key is to make them close, not perfect. Don’t spend excessive labor on relocation; just strike a balance. Also consider clustering products that customers generally order together.
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Consider creating an exception report that highlights the products stored in poor location velocity ranges. These are ideal relocation candidates. Or better yet, talk to your buyer about retiring the SKU. You’ll win some points with senior management by proactively beating them to the punch on a SKU that’s dying a slow death.
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Don’t neglect to evaluate downstream labor. If you use the cubic velocity alone, you will likely store very heavy, dense products next to light, crushable products with comparable product velocity codes. The result? Most every order having heavy products mixed with light products will have to be moved by the staff up to three times before it ships (since light, crushable products may already be on the bottom of the pallet or the picking tote). Provide education and exposure to your inventory staff. Don’t overlook the ABCs of slotting. Velocity is not all that should be considered while assigning slots. Basic rules — using the prime pick zones for high-volume picks, placing your seldom-ordered products deep within your storage scheme — are vital weapons in the war on reducing inventory fluff. Labor is probably your top expense and therefore must play a decisive factor. Slotting will be flawed if all the labor-related activities are not clearly visible to the inventory control team.
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For operations performing pallet picks, try building giant theoretical pallets. That is, create a pick sequence model as if you had to build a giant pallet with every SKU and not have to rehandle the products for packing and shipping. Use this approach to complement cubic velocity as your strategy for effective slotting. Assign all your SKUs within zones based on cubic velocity and a theoretical pallet build. Assign heavy items in zones that are picked early in the pick routine. Slot light and oversize products at the end of the pick routine. Find a balance that might be counterintuitive and increase your travel time. Look twice and see if that increased travel time is more than offset by reduced handling with your labeling, quality control, packing, and shipping stages.
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Implement a periodic reslotting program. Distribution center managers rarely have open slots to profile things the way they want, so they pragmatically choose the best available slots. A 2005 industry survey demonstrated the premium on space, with more than 60% of the respondents indicating that they were at better than 95% storage capacity during their peak season; in fact, more than a third of respondents were at more than 99% capacity. It’s no wonder that few companies have proactive re-slotting programs that continually shuffle primary pick locations as a form of location hygiene.
If your operation is one of the many that can’t afford a regular weekly routine, you should at least make a point of reslotting during your seasonal lulls. Remember that sales dynamics are continually changing. Your distribution facility has to be a living, breathing reflection of those changes. The fewer open locations you have, the more critical the maintenance becomes.
Finding the right balance among location maintenance, material handling, and cube optimization is a difficult task — and an ever-changing one. Ultimately you should make it part of your management plan to integrate reslotting as part of your team’s weekly goals. Try it with just 10 locations a week for a start. You will be amazed at the gains in both productivity and service.
Stephen G. Martin is a senior supply chain consultant with Lee & Klatskin Associates, a Teterboro, NJ-based commercial real estate services provider.
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