Are You Overlooking the Profit Opportunity in Your Receiving Operation?

Jan 03, 2007 9:42 PM  By

This is the first of a two-part series. This article examines how establishing receiving practices can increase your bottom line. Part two will discuss how to use this information to improve your operation and your profits.

Recently while touring a warehouse, I noticed a large shipment spread over the receiving-area floor. When I asked the warehouse manager about it, he said the vendor shipped all the cartons with mixed SKUs in each. I wondered how often this happened and how much time extra time it took to open all the cartons, separate them by item, count each SKU, and then repack them into single-item cartons. And that got me thinking about how much this extra receiving work drains profits.

Receiving is the most complicated function and process in the warehouse. The receiving department accepts, counts, and inspects thousands of items of varying shapes, sizes, and forms from hundreds of vendors that pick, pack, and ship differently. Data from the receiving department determines what accounting pays for the item. If receiving doesn’t note when the count is under, the company will overpay, and backorders may occur. If the items received are different from what was expected, additional time and money is required to correct—and again, if the receiving department doesn’t find this discrepancy until later, backorders or, even worse, customer returns may result.

When vendor shipments need extra time in receiving, they cost additional labor and dollars and increase the potential for a receiving error. Errors in receiving, unlike most other errors in the warehouse, can have a ripple effect: Because receiving determines what you pay for your receipts and their errors can be very costly, I would argue that receiving is the most important function in the warehouse and represents the greatest overlooked opportunity.

Sadly, many companies fail to realize this, spending little or no time on improving their receiving process. In fact, receiving is the Rodney Dangerfield of the warehouse: It don’t get no respect.

A closer look
Most companies fail to understand what exactly is happening in receiving. To further understand the situation, let’s visit your warehouse to fully uncover what profit drains exist by discovering them, quantifying how many times they occur and what their effect on your profits is.

The way your vendors ship product to you determines the fate of your receiving operation and even the profit of your company. Your vendors can help you or hurt you. For example, when a shipment arrives requiring extra handling, not only is receipt of the product slowed down, but you also have to spend extra time completing the process, which costs you additional money and increases the chance for a receiving error.

Consider a shipment of children’s Halloween costumes with several styles of costumes in varying sizes in the same carton, with each costume poorly identified. Each carton would need to be opened and visually inspected to identify the style and size of each item. Further, all the cartons would need to be sorted prior to counting, receiving and putting away the shipment, requiring extra space in the receiving area.

To understand what effect your vendors have on your business, collect the following information for a few weeks:

How many times do your vendors

  • pack multiple items in a carton?
  • omit packing lists with their shipments?
  • incorrectly pack items?
  • incorrectly mark items?
  • ship defective or damaged product?
  • ship incorrect counts?
  • use the wrong freight method or carrier?
  • miss delivery dates?

Now let’s take a look at the effect or damage of these actions. In many companies, it is difficult to get buy-in for a program to change the way vendors’ ship product. That is why it is important to undertake this discovery process. In the worst case, you will have fact-based data to support why your receiving costs are high. In the best case, you will have fact-based data to begin a program to reduce the profit drain and your warehouse costs.

Let’s examine the effect of one behavior, receiving multiple items in a carton, by calculating the costs of the extra time required to receive this shipment. First, tally the time the receiving department spends sorting the items, counting them, and reboxing them. Next, multiply this time by your hourly pay rate.

Let’s say it took 15 hours to sort the Halloween costumes mentioned above into boxes containing one SKU and one size each. If the receiving labor cost was $15 an hour, this shipment cost an additional $225 to receive. This extra expense reduces the true gross margin of these items and eats away at your profitability. And this doesn’t take into account the potential errors that could occur from incorrect counts or the possible damage that could result from the additional handling of the sorting process. Also not included is the warehouse space used during this sorting. And it is important to note that if you outsourced your warehouse operation, the cost for this would be double.

As you collect the data regarding receiving problems and calculate the effect in terms of time and money, you should keep track with a spreadsheet along the lines of this:

Vendor Date P.O. # Issue Time and $’s to Correct
Acme 1/2/07 123465 Multi-Item/Carton 15 hours- $225

The only way you to begin to correct receiving problems and profit leaks is to identify what they are, which vendors are causing them, how often it happens, and how much it is costing you.

Wayne M. Teres is president of Framingham, MA-based Teres Consulting. He can be reached at www.teresconsulting.com