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