Manufacturing and distribution companies have been on a mission of late to become “lean.” One way of accomplishing this has been to optimize and reduce inventory levels across the supply chain.
Financial executives are excited by demand planning and forecasting projects that produce not only one-time inventory reductions, but also increased inventory turns that help them maintain lower inventory levels over time. This is a great way to increase shareholder value by presenting better financial results—and there’s no doubt that these solutions are accomplishing what they’re intended to do. Software vendors have plenty of success stories and broadcast benefits that typically involve customer service improvements and inventory and lead time reductions. Once projects begin, companies realize substantial returns on the investment in a very short period of time. On paper, the results are impressive, and the dial is quickly turned to start reducing inventories.

The problem we often see, though, is distribution operations never had the opportunity to take part in planning for this change. Sometimes, they’re not even aware of the changes until they slowly start seeing once-stable environments become less so.  Even when companies do involve distribution operations, the discussions don’t consider potential side effects because nobody really understands them. When buyers get the green light to begin reducing inventories, it may take anywhere from a few days for high-volume items to a few months for slow-moving items to start seeing impact. But the same can also be said for trying to turn back the dial when things start going wrong in the warehouse.

Anticipate and plan for the side effects of reduced inventory levels

Increasing inventory turns – therefore having smaller and more frequent deliveries – changes dynamics and processes for multiple distribution center operations. Inventory optimization projects should consider, analyze, and plan for several potential impacts. 

Yard management, appointment, and dock scheduling. If many independent suppliers deliver goods to your facility, you’ll start noticing an increase in the number of appointment requests (if you procure goods through wholesalers or distributors, the impact may not be as great). As deliveries increase, so does trailer congestion, especially if you don’t have extra dock capacity. And if you can’t quickly unload these shipments, demurrage charges may increase and/or you may have to start postponing appointments past their expected delivery date.

Receiving. Once the trailer reaches one of your dock doors, you might not notice an immediate productivity drop—but unless you’ve planned for additional deliveries, your current workforce won’t be able to handle the increased workload. Since the majority of receiving time is spent on gathering proper documentation, sorting and identifying products, and associating the order with the right purchase order and packing slip, the total processing time for receiving orders increases considerably.

More frequent receipts also may require tracking more lot numbers and expiration dates, which further increases receiving time. Depending on configuration and management of the warehouse, this could require many more storage locations if put-away rules don’t allow mixing lot numbers or expiration dates in the same bin. In some industries, this becomes a cascading issue if customers use products as raw materials in a production environment and don’t want to or are not allowed to mix lot numbers or expiration dates.

Another important factor is making sure buyers have access to and understand the importance of buying “standard” quantities of products: full cases, full pallet layers, or full pallets. This will simplify receiving and the subsequent tasks downstream.

Quality control. If you’re required to conduct inspections during receipt, then you’ll also have more samples to process. The higher the sampling rate, the more work involved. In facilities where receipts are not put away until inspections are complete, the quality control department can quickly become a bottleneck and dock-to-stock performance can deteriorate.

Put away. One might expect inventory reductions to increase warehouse capacity—but once you begin putting away goods, you might actually experience the opposite. Storage locations may now be filled with less-than-full pallets, the result of smaller delivery quantities. There’s no easy fix unless you’ve properly planned for the change. For facilities where the majority of loads are palletized for put away and storage, more receipts simply means more pallets. For example, when a warehouse is designed to store full pallets of products and new inventory optimization “guidelines” require purchase of half pallets, you will either have to double stack products in the same bin or lose half of your storage space.

Some options for resolving new space constraints may include:

  • Asking fork lift drivers to drop the current pallet in the slot and fill it up with the current receipt, which will be very time consuming and physically challenging for heavy loads.
  • Stacking multiple pallets in a single storage slot; more often than not, though, products are not stackable, or adding an extra five inches for the pallet will make a slot too small for two pallets of the same product. This would require overriding warehouse management system rules to allow multiple SKUs in a single slot and/or to modify the “stackability” factor of products and slots.

In reality, the best option is to understand the changes ahead of time and adapt your environment to support these changes.

Picking and letdowns. Picking is typically not affected as much as other areas, since inventory reductions don’t drive sales volume. Where we see the biggest impact is with tracking lot numbers and expiration dates during picking, since smaller, more frequent deliveries typically equates to more disparate lot numbers and expiration dates. An environment where rules dictate not combining those within the same picking bin in order to reduce the burden on pickers, therefore, will require more frequent replenishments or creation of additional picking slots to support this new constraint.

Inventory control. Cycle counts and physical counts also become more time consuming when staff have to count less-than-full pallets. In addition, inventory clerks will have to spend more time tracking additional lot numbers and expiration dates.

It is important to note that the same impacts would apply in a manufacturing environment that decides to decrease work in process and produce smaller batches.

Avoid unforeseen headaches

When designing a warehouse or storage facility, we analyze a variety of historical and forecasted data to ensure the design supports the organization’s business model; number of receipts and inventory on hand are two of those key measures. If these values change due to a major overhaul in procurement, then the existing model becomes outdated and unable to support the new business model. As noted earlier, it takes time to see the impact of changing purchasing quantities, so companies often struggle to resolve new issues that arise in the warehouse without any way to quickly stop the pain.

Next time your organization decides to embark on an inventory optimization project, make sure you take the time to uncover and plan for the potential impacts on your warehouse operations. It will save you some headaches trying to solve for the new business model now in place…and that could cast a shadow over the expected financial benefits of the inventory optimization project.

For more information, please contact Jeff Primeau at jprimeau@westmonroepartners.com.