Wednesday, August 18, 2010

Inventory Management: Warehousing Methods

In my previous blog, Inventory Management: Managing the Flow, I pointed out the fact that many business owners do not really see the impact inventory carries on the bottom line of the company. Therefore, there are many overheads get buried in the inventory costs without getting noticed. When you sit to review such growing costs coming out of your inventory it is already too late to recoup what you have lost but then it is never too late to correct what was done wrong in the past. Start by looking at your processes and kick in those cost savings initiatives.



Effective management of the warehouse operations through best practices will certainly have a positive impact on the company’s bottom line than probably any other area.


It must be understood that there is no global definition of a ‘good warehouse.’ Each warehouse has some features that are akin to the business and its needs and this sense of uniqueness must be taken into account.

The Pests of the Warehouse

After having gone through hundreds of warehouse operations over the years, I have come to the this simple understanding and this holds good true no matter what industry and what stage of growth the company is in. Most organizations hold unknown incremental costs within their warehouse in one of five following areas:




  1. Too much inventory
  2. Incorrect inventory mix
  3. Inventory placed in non-optimal locations in the warehouse
  4. Inefficient pick or put away processes
  5. High reliance on paper within the warehouse
Optimizing a warehouse and implementing best practice techniques can have a huge impact if a company focuses on these five areas of waste.


Too much inventory

Maintaining a ‘more than required’ inventory is a classic problem. This is generally a result of either one or is a combination of two or even all:


  • incorrect forecast of demand
  • a desire to have at all times enough inventory to service customers almost instantly
  • a (perceived) inability to procure product fast enough to meet business needs

Incorrect inventory mix

Inability to optimally position inventory leads to excessive “just in case” over-production, the wrong mix of inventory, and overspending in transportation on inbound and outbound expediting.


Incorrect inventory mix is usually caused by errors in forecasting. This starts a chain reaction which disturbs the inventory levels, which affects the purchases and their lead times, poor delivery schedules to the customer and eventually poor customer satisfaction ratings.

Inventory placed in non-optimal locations in the warehouse

This is an area where the biggest of companies and the most experienced of people charged with warehouse management make mistakes. They either do not store them ‘close enough’ based on the frequency of consumption and where they actually do; they do not store them in a very retriever friendly fashion.


FIFO is my favorite as far as inventory costing is concerned but when it comes to warehousing and inventory movement it has to follow the same rule, LIFO is not an option. Another area where most companies and warehouse managers make a mistake is they tend to stack every identical product together, where as they could have different manufacturing specifications, different packaging specifications, to illustrate, in one of my assignments where I was reviewing a company warehousing, I noticed that they had one specific chemical, an active ingredient in one of their premium products, lets call it Chemical X.


Understandably Chemical X was supplied by two companies, one in Europe and the other in South America. Both shipped Chemical X in steel barrels, both competitors used different packaging; Supplier One used a 220 liters barrel and Supplier Two used a 200 liters barrel. Stored together.


I asked them to continue using the same corner they used for Chemical X but then they had to be segregated based on Supplier and Packaging; storing based on any one of the two would offer better control on inventory and would enhance warehousing.



Inefficient pick or put away processes

Many warehouses do not really use floor space efficiently either. Some being adventurous do not really mind allocating floor space to different products at all and dump all inventory anywhere and everywhere and end up wasting hours looking for the products when required.



High reliance on paper within the warehouse

This is something that sent chills down my spine when I visited a warehouse of a company that dealt with building accessories and construction material. A complete inventory list, bin cards, physical count perfect, the inventory listed tallying with the system records with that with the accountants yet the warehouse was a disgrace.


Inventory placed in non-optimal locations in the warehouse, Inefficient pick or put away practice. A company that had over 300 products in inventory and all haphazardly stored the warehouse personnel prided themselves for being able to remember which corner had 12 boxes of 1” screws and the rest 12 boxes lied where exactly (which was almost 500 meters away stacked behind 250 other products).






With such warehousing practices, there are a lot of overheads; excess expenses in terms of electricity, security, sunlight and moisture protection. Not to mention the possibility of pilferage when products are small enough to be slipped in to pockets and actually have domestic use. Warehousing isn’t just a shed, it’s a complete management discipline.







Part II of the series on Inventory Management

Next Blog: Inventory Costing

Monday, August 09, 2010

Inventory Management: Managing the Flow

Inventory is a term used by American writers to mean the goods bought to resell during the course of business. The same is known as ‘stocks’ in the books from the UK. However, ‘stocks’ in the US mean shares of a company. Likewise, Americanally speaking a person may have an inventory of stocks which would Britishally mean, an investment in shares of a company by that individual. Therefore, in here and most of my blogs I would use the term Inventory to mean (British) stocks, not that it’s a brilliant term; it just saves us a lot of confusion.


Inventory is the most important asset of the business; it is from this where the bigger and the bulkier fixed assets come in to show off. Many business owners fail to understand its significance and treat it no more than a product bought, stored and sold; there is more to it than meets the eye.




Inventory relates to the goods purchased for resale by the business to be sold off within the 3 – 12 months of purchase. Like any other asset, it too has to be managed diligently; for the ease of avoiding fancy terms, we call it Inventory Management.



Inventory management deals with many important issues of which a few are listed here under:


  1. Managing the inventory flow
  2. Warehousing methodologies
  3. Stock keeping units
  4. Inventory costing – for financial reporting purposes
  5. Inventory replenishment
  6. ERP/MIS support
  7. Inventory analyses
  8. Understanding the implications of – over and under storage
  9. Understanding the implications of – slow moving and obsolete stock
These issues will be discussed in detail in separate blogs, however, at the end of this series on inventory management I will also be offering some tips on inventory management.




We start by talking about managing the inventory flow. Inventory flow is more or less the same as a supply chain within the company; ensuring the materials are available for the production as and when they are required and once out of one phase being moved in to the next phase for further value addition till the final or the finished good/product is ready to be shelved in the warehouse. There on, how the finished products would be dealt with once they are being dispatched for delivery to the customer.




This is a fairly simple illustration of the inventory flow; it is however, worthwhile to notice that the trigger here is the production plan. Where companies have powerful ERPs that can handle complex situations and manage big databases and their integration to customers and suppliers’ ERP is possible then the triggers move out from the production plans in to the customers demand for the product. A common example is, a chain of departmental stores has given restricted access to its suppliers in China; now where one item sold off a shelf in any one of the outlets within the chain in the US the suppliers in China know of it and pack the piece accordingly.

Documentation is the Key
In a company I used to work they had absolutely no documentation at all so much so being a manufacturing company and that too almost all its products were prepared on specifications from the customer. Being a small family business is never an excuse and I didn’t want to take that for an excuse either.


Many such small companies (sole proprietors / small family businesses / small partnerships) have this notion that they and the business are the same, in saying so, what ever the business owns is theirs no real need to complicate things but recording and noting where lies what; my point is, if I were to agree with them that what ever the business owns is theirs then what ever they own belongs to their business too and this can prove to be true if the company were to go insolvent due to poor/inefficient management. Lack of documentation is the first sign of a poor managed company.


A store room was in place, racks full of screws of all sizes, nuts and bolts and drill-bits all over the place, chemicals (hazardous: inflammable) lying around. I have recurring nightmares to date when the brain recollects those images of the ‘first day at work.’


The entire process was defined, all sub-process identified, all activities with counted. All inventories listed, counted and marked. Bin cards prepared, inventory database created in the system, Standard Operating Procedures (SoPs) written to structure all requests from the production floor directed towards the stores and likewise all company purchases were formalized; various forms printed with a strict requirement to approve material requisition by the supervisors. Initial days were very difficult; they were slow and the new systems were being taunted and frowned up on. Stores had a hard time explaining to people that no issues unless the documentation was in place and approved by the supervisor; a couple of weeks down the line and every nut and bolt issued was recorded and the best thing of it all was everyone understood the positive change a different approach brought to their work style bought, they felt the impact.


Here under are generally required documents, they may be and should be lots more to suit the nature of your business and would effectively reflect the efficiency of the internal controls


  1. Materials requisition note           to request stores for materials for production
  2. Stores issue note                       record materials issued to production
  3. Stores requisition note to           request for materials for stores
  4. Purchase order                         sent to suppliers for materials
  5. Goods received note GRN          prepared once materials are received from suppliers
  6. Delivery note DN                       prepared once goods are delivered to the customers
  7. Invoice – supplier                      supplier’s invoice to be paid
  8. Invoice – customer                     invoice to be sent to customer
The relationship of these documents should be ‘domino effect.’ Unless there is a requirement (cause) to add/move inventory there should be no issues (effect) from the stores and the surprise physical counts should ideally match with the system records.







Part I of the series on Inventory Management

Next Blog on:  Warehousing Methodologies

Wednesday, August 04, 2010

Supply Chain Management

Rising operating costs primarily due to the upward trend in the global economy companies try to operate efficiently so that the costs are reduced and controlled effectively. The main goal of today’s corporations is to reduce uncertainty, operating costs and providing customers with a quicker response as compared to a slow response. In doing so, companies try to manage their working capital and operating cycle time diligently. Similarly managing and reducing risks in the supply chain, managing inventory and warehousing, improving production through-put to ensure better response to customers’ demand.


The benefits of a supply chain management have long been felt and seen by many in today’s ever-changing and competitive business environments. So much that efficient and effective supply chains are critical to the survival of most moreover; these supply chains rely heavily on support from dynamic information systems and ERP tools.


The function of the Supply Chain Management is to plan, organize and coordinate the supply chain activities. Today, supply chain management is a total systems approach to managing the entire supply chain


The Three Flows of a Supply Chain


Supply chain is the precision in arranging goods and services from their source, adding value and delivery to the customer. The Supply Chain encompasses the flow of materials, services, information and payments from raw materials to factories through warehouses to the end user of the product or service.



Materials, Information & Finances
1. Materials mean the flow of materials from the suppliers to the factories, the internal movement within factories based on the production planning and into warehouses as finished goods and ultimately from the logistics to their distribution and delivery to the end user

2. Information of all the activities generated within the company should be available in time and accurately so that the company can better plan its production and make efficient use of its resources

3. Finances include information regarding all payments, bank-transfers, E-payments




Components of a Supply Chain

The supply chain also includes companies and processes that add-value by processing, enhancing product life/quality and also by delivering products to the end user. It is a close-knitted network of activities that delivers the product or service to the end user.

It includes, purchasing, payment flow, materials handling, production planning and control, logistics and warehousing, inventory control, distribution and delivery

Supply chain is more or less a vertical movement of unless there is a need to undergo processing to add value to the deliverable product. Upstream is when sourcing or purchases from external suppliers takes place; internal, when the company itself or any of its partners in the supply chain add value to the product or service by virtue of processing, assembly, and packaging; similarly, downstream, where distribution to customers takes place, frequently by external distributors, or a disposal takes place.

Aggregate Demand

* Aggregate Demand – Concept We’ve studied the Law of Demand, we know it is a negative relationship between the price of a commodity and it...