There is a difference between inventory management and inventory control. Every warehouse manager is responsible for control, which means that the physical inventory matches the book, and the status reports are always accurate. Inventory management the process of deciding how much of each SKU should be placed in the warehouse.
When certain items have stayed in the warehouse for years, and others are frequently out of stock, these are signs that inventory management is inadequate. There is little excuse for trying to improve the handling of items that should never be in the warehouse in the first place.
Stocking strategy
If your company has a group of warehouses and a large inventory, it is rare to stock every item in every warehouse. There are at least two proven strategies for handling inventory allocation.
The most common one is to stock every item at one central distribution center, and to keep only the fast-moving items in the branch warehouses. When a slow-moving item is needed at a branch location, it is transported from the central distribution point to the branch where it is cross-docked and then added to the remaining items to fill the order.
However, a different policy is to stock the fastest-moving items in the central distribution center and then to move this merchandise to the branches where it is cross-docked to fill customer orders. Slow-moving items are dispersed in different branches, with no one branch containing all of the slow-moving merchandise.
The location address for a slow-moving item will be governed by its demand history. Item 123 may be a slow-mover in several locations but quite popular in Boston. Therefore it will be stored only at Boston and shipped to the other branches as needed. Certain branches may store "must have" items that are essential to satisfy key customers.
Stocking strategy is almost always influenced by management decisions regarding centralization of warehousing and purchasing. In some organizations, the individual branch manager has total authority to keep any item in his warehouse that is considered essential. On the other extreme, some inventories are rigidly controlled from one central point. Certainly the best inventory strategy is one that lies between these two extremes.
Measuring inventory turnover
Inventory turnover has a major influence on warehousing costs. Whether you own or rent your warehouse, the cost of occupancy is normally calculated by the month. When inventory turnover increases from 12 turns per year to 24 turns per year, each square foot of space stores twice as much material. Conversely, when inventory turns are reduced from 12 to 6, the storage cost per unit is doubled.
Because of the importance of turnover, warehouse managers should know how to calculate turns. Inventory turnover can be improved either by moving the same amount of products through the warehouse with a lower average inventory or moving more products through the warehouse with the same average inventory.
The inventory turnover calculation is deceptively simple. Product flow for the year is divided by the average inventory, and the result is a turnover figure. The challenge is that both product flow and average inventory must be measured accurately, and inaccuracies are not uncommon.
For the warehouse manager, the best way to measure product flow is in number of units, not number of dollars. When there is a wide variation in dollar value within the inventory, a monetary measurement can be deceptive.
Average inventory is the typical amount of product in the warehouse at any given point in time. However, the worst error is to assume that one single point in time represents the average inventory. If product flow is variable, inventories expand and contract during different periods.
The most accurate measure would be to record the daily inventories for the year, add them up and then divide by the number of days that are recorded. This approach guarantees that seasonal highs and lows are considered. If the average inventory measure is faulty, the calculation of inventory turnover will also be inaccurate.
Tracking changes in turnover
One of the basic concepts of inventory management is the Pareto analysis, or ABC report. "A" items are the fastest movers, "C" items are the slowest and "B's" are in between.
However, in any dynamic inventory this situation changes, and in some operations it changes frequently. If the inventory is clothing, the turnover changes by season. Movement of other items is driven by holidays or special events. Therefore, an item assigned to your fast-pick area in December might be a slow-mover in June.
In many operations, alert warehouse workers may be the first to recognize the inventory turnover is changing. If there are dusty boxes in the fast-pick area, this is a clear sign that the ABC report now used has become obsolete. It is also a sign that it may be necessary to rearrange the inventory in your warehouse on a seasonal basis to conform to changes in activity among certain items.
Shut down the warehouse
Astute inventory management will occasionally yield drastic results. There are times when an entire warehouse should be eliminated. This happens when:
- Fixed facility costs are greater than the cost of premium transportation to serve the market
- Order cycle time is not critical
- Order fill rate is more important than service
- Much of the product is custom made and shipped from assembly line to customer
In the first case, if the warehouse costs $1 million per year to maintain, see if the LTL freight bill to serve those customers would be less than $1 million. Decisions made before deregulation may have been based on freight costs that are far different today.
In some industries, a relatively slow order-cycle time still allows you to be competitive in the marketplace. Do you have a regional DC based on super service that the customers do not really require?
Order fill rate from one warehouse is easier to maintain than from two warehouses, and the job gets progressively more difficult as more locations are added. If fill rate is more important than fast service, a single stocking location is best.
If the product is made to order, warehousing does not add any value. When warehousing is eliminated, total costs will be reduced.
Why management must be proactive
Some managers ignore inventory management because they don't have specific inventory responsibility. In fact, relatively few warehouse managers have inventory management formally assigned to them.
However, this is no excuse for being passive when warehouse inventory problems arise. If a significant portion of your warehouse is dedicated to storage of items that have not been received or shipped for months or years, you are not running a distribution center, you are really running a library.
When storage of dead items impedes your ability to efficiently handle the live items, your effectiveness has been hampered. That is a time when the best warehouse managers usually become highly proactive in demanding that dead inventory items be liquidated or at least removed from the distribution center.
Better inventory management is frequently both the fastest and the most effective way to improve operations in your warehouse. But this will happen only if and when you get involved in the process.
