eBook: Improving and Optimizing Inventory Management › hubfs › CXGlobals 2017 ›...

eBook: Improving and OptimizingInventory Management

eBook

Table of Contents

1. Introduction

2. Accuracy in the Warehouse and Information Systems

3. Optimizing the Warehouse Floor

4. Partnering with Suppliers

5. Improving Receiving

6. Improving Picking Efficiencies

7. Inventory in a Kitting and Assembly Environment

8. Managing Channel Proliferation

9. Managing SKU Proliferation

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Introduction

As a distributor you understand the importance of managing your inventory. You need the

goods available when your customer places an order. As a business owner, you also

don’t want your working capital tied up in what could become obsolete inventory. Our experience tells us that you know more than these basic truths, but our experience has also informed us that many companies do not change their business processes on a

regular basis. Many warehouses practices have evolved over time and were not

designed for the current business environment.

This eBook provides ideas and options for eight areas of inventory management that can improve your bottom line. Starting with the basics of having an accurate perpetual

inventory count, the concepts continue through warehouse layout, picking and packing and the other common concepts of inventory management. We continue with the more

multifaceted topics such as white labeling, eCommerce, Omni-channel and kitting that make your life more complicated.

The eBook is organized into 8 sections full of ideas for you to explore and select from. We utilize SAP Business One in several sections to describe how an Enterprise Resource Planning (ERP) system can help provide you the information you need to make informed decisions about your inventory.


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Accuracy in the Warehouse and Information Systems

When our clients and prospects are successful, we assume that they have visibility into

an accurate, perpetual inventory count. A July 2016 study, however, found that only 81%

of best-in-class distributors and 63% of the remaining distributors had real-time inventory

information. If you don’t have a perpetual inventory system, you need one – a complete, accurate, and real-time inventory system.

There’s a difference between a perpetual inventory system and real-time inventory, though. A perpetual inventory system updates the quantity of inventory on hand each

time a transaction posts. The key to real-time inventory, on the other hand, is that trans-

actions post as they’re occurring versus sometime in the future or after a review.

We rarely hear that inaccurate/non-real-time inventory counts are because the processes

to support real-time inventory are foreign to the company; the most common reasons are

exceptions to the rules. Businesses often can’t keep up with the process fast enough to meet the customer demands, leading to bad information that creates more exceptions,

expediting, and cost. And worst of all, a lost sale.

Some recent examples include:

1. Salespeople walking onto the floor and grabbing inventory for a customer as a sample or for a quick sale.2. Inventory isn’t received into the system before shipping out to the customer because they “don’t have time.”3. Counts occur annually and the December “surprise” adjustment is now considered normal.

The list could go on; in reality, the time to follow the process is typically far less than the

time required to fix the mistakes or recover from the errors created. Any management book will indicate that rigorous and consistent adherence to a good process is the key to going from good to great.

Consider these key points when setting up your processes.


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You can’t track it in real time if you don’t capture it in real time

Therefore, make this process as easy as possible and make your systems mirror the process.

1. Set up items with appropriate Unit of Measure (UoM) conversions. UoM conversions are often different in purchasing (receiving) functions than sales (shipping) functions; counting one container is much easier than counting the 113 items in a container.

2. Use bar codes. Bar code scanning systems increase both speed (efficiency) and data capture accuracy. Bar coding must be tightly integrated with your business

management software, however, and is typically only effective when your item master

is complete and accurate; we recommend implementation of these systems in a

separate phase as an enhancement to your core functionality.

Control access to your warehouseItems may not have legs and your people may have only the best intentions, but it’s amazing how many places you’ll see items walking out of the warehouse – unaccounted for. Things as simple as locks on doors and enforced “no sales people beyond this point” signs can radically improve inventory accuracy.

The schedule should vary based on several factors:

1. How quickly does the inventory turn? 2. How much is the item worth in dollars and margin?3. How accurate are the counts on the inventory?

Your specific cycle counting technique will vary based on a number of factors. Some

companies use the A, B, C method, others use a color-coding scheme on a 9-quadrant

model, but the most effective method is the one tailored to your warehouse – the method you’ll actually use because it actually works.

Many of these concepts are familiar, but if your process doesn’t change with your busi-ness and isn’t supported by an easy-to-use, adaptable system, exceptions creep in and efficiency and accuracy erode – along with your profitability.

Count your inventory on a schedule.

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Optimizing the Warehouse Floor

When I meet a new prospective customer, one of the first things I like to do is walk their warehouse floor. The organization, cleanliness, and structure tell me a great deal about how the business will be as a client and how I approach working with them.

Some people believe that optimizing the warehouse floor begins with receiving – putting goods away into a designated spot as quickly as possible. But while this does eliminate a great deal of problems, optimizing the warehouse floor really starts with space utilization and slotting.

At its most basic level, slotting is the series of tasks that precedes the decision of where to put inventory based on the space available in your warehouse. Truly, though, it’s far more than available space.

Optimal location is also based on other factors:

1. Inventory turns – most frequently used inventory should be in the most accessible places.

2. Picking efficiency – items frequently picked together should be located close together to limit the amount of picker travel. You may also slot bulk and individual goods differently for picking efficiency.

3. Value – high-value items are placed in more secure areas. (Not that we’re assuming you have shrinkage!)

4. Physical space – a warehouse has a certain capacity in certain areas, and you must take those physical constraints into consideration. Conversely, you can slot based upon maximizing the space you have in relation to cube utilization.

5. Special requirements – whether it’s storage temperature, expiration dates, seasonal sales, or other factors, some inventory has special requirements that influence how

you place it in the warehouse.

“You should continuously tweak your slotting strategy in response to changes in

your product usage and other factors.”


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These factors are typically in flux, making warehouse optimization more complicated than it initially seems. Accordingly, you should continuously tweak your slotting strategy in response to changes in your product usage and other factors. For example, as you

grow your business, you may hire additional staff for pick, pack, and put away; this might cause you to change your slotting strategy to segregate your warehouse into zones and assign pickers by zone to minimize picker travel.

One thing that will unquestioningly help you optimize your warehouse is a good system for tracking and analyzing information. Components you should look for in a system include:

1. Ability to track historical usage and forecast future demand based on usage patterns and/or projected sales

2. Ability to manage bin locations, including their attributes

3. Ability to identify slow-moving and obsolete inventory

4. Ability to highlight fast-moving inventory

With this inventory system, you can do much more than just shorten the pick path – you can also ensure that the fast-moving inventory is in the fast turnover area and the slow

movers are removed or eliminated.

Inventory optimization is not a simple activity, nor is it one you can only do once. The use of regular slotting analysis will improve your warehouse flow as well as offer a

tangible monetary return on your time.


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Partnering with Suppliers

Supply chain gurus have promoted collaboration with suppliers to share in the benefits of

optimization for years, but the 21st century has become more of a demand-driven economy that can be moved by a tweet or an opportunistic or happenstance product

placement on a social media post.

Combine that with more goods coming from overseas and the related lead-time, and

collaboration becomes increasingly important when the goal is to minimize inventory without affecting your ability to meet customer demand.

Partnering with suppliers isn’t easy. Very rarely are your priorities the same as those of your suppliers and rarely does a small business owner have any power in a relationship

with a larger supplier or manufacturer. The key, then, is aligning the benefits for you and your supplier in such a way as to create a win-win relationship.

Common examples include:

1. Consolidated purchasing with a supplier for better terms, lower minimums, or better

pricing.

2. Supplier packaging and labeling in exchange for an exclusive contract for the branded line.

3. Vendor-managed inventory in exchange for preferred marketing and a committed marketing budget.

Some key points to consider in evaluating collaboration offerings:

Collaborate in areas of strength

Too often people seek to collaborate to cover weaknesses. If you can’t do something well, partnering with others will rarely make you better at it. Furthermore, you won’t have any leverage in negotiation.


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Don’t make commitments you can’t guarantee

If you are in a demand-driven market, you can’t guarantee a purchase level. You can, however, make commitments for sole sourcing and a dedicated marketing budget to selling the product as part of a win-win formula.

Share the benefit and accept some riskThe deal should be equally beneficial for both parties. For example, if your supplier

agrees to warehouse your goods and drop ship to customers in exchange for a preferred

marketing arrangement, you’ll need to send them information in a format their systems can use, and they’ll need a mechanism to receive those orders. These are costs for both parties, and you may need to share some benefits until you achieve a volume for them.

Bigger doesn’t always equal better; the biggest prospective partner may not be the best partner for you. They may have more products and big potential, but a smaller partner

may invest more time and effort with you. You may also find that a big partner wants to

invest where they get the most value – which may not be where you see your business going.

Select partners based upon capability, strategic goals, and potential


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“Just as you may need advanced inventory planning for your optimization efforts, the ability to provide that

information to your suppliers in or near real time may make the difference when creating that win-win deal.”

Invest in the right infrastructure

Just as you may need advanced inventory planning for your optimization efforts, the ability to provide that information to your suppliers in or near real time may make the difference when creating that win-win deal. You can also use a single system that

provides one version of the truth for your team to collaborate beyond your organization.

Establish a joint performance measurement and management system

After you make the deal, monitor and manage it! Choose measurements that show the benefits and review them with your partner. Be prepared to adjust the deal so it’s mutually beneficial for the long term.

Working with your suppliers can help you in ways beyond the actual cost of goods. Reducing your stock levels is only the most obvious of the solutions, and you’ll be amazed at the variety of collaboration deals that exist when you start looking for them.

Collaboration keys are always:

1. Make partnering mutually beneficial2. Make your collaboration strategic and based on the market (not your purchases)3. Put in the systems to manage, measure, and report on the benefits


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Improving Receiving

As previously mentioned, effective inventory management starts with partnering with

suppliers before you even receive your stock. Then, if you consider that effective inventory management is also having the right quantity of the right item in the right location at the

right time, you can see how important receiving inventory and recording the putting away

of goods properly.

As also previously mentioned, you’ll need an optimized warehouse floor so that before you receive goods, you already have a designated location for them or a general area to which

they’re dynamically assigned based on user-defined criteria.

You may have arranged your warehouse around your shipping and receiving docks so that when you pick, pack, or put away goods, those stocked most frequently are closest to the doors. In the discussion about optimizing your warehouse floor, we indicated that it’s a good idea to store goods that are frequently picked together in close proximity to eliminate travel time.

In 21st-century inventory optimization, nothing is determined by a single variable. You may have bulk or surplus goods that need their own location; this indicates the reality that goods are often stored in multiple places in the warehouse. For example: if you kit or assemble goods, you may want to have a stocking location near the assembly line. If you have goods that are ready to ship as soon as they are received, it doesn’t make sense to put them away – it’s more optimal to keep them in the staging area.

The following questions, which should be answered before the receipt of goods, can guide

receiving managers and employees through the receiving process:

1. What goods are we scheduled to receive today?

2. Do the goods need to be inspected and counted? If so, at what level of detail?

3. Can I accept the goods?


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“Our goal is to eliminate waste.”

To make these questions easier to answer, you can request advanced shipping notifica-

tions from your partners and update purchase orders automatically in your ERP system – including information about return merchandise authorizations from your customers. Another method is to schedule receiving for specific times during the day and assign

times to vendors when possible.

One key point to effective receiving is receiving the goods in your systems as soon as possible. Doing so can answer the questions:

1. Can I fill orders with this receipt?

2. Where should I put the goods?

We ask these questions because our goal is to eliminate waste, and the best way to do so is with accurate and reliable data. To this end, back order fill reports, available to promise, production requirements reports, and other similar reports are invaluable to

waste reduction/elimination. One benefit of the reports is that they allow your business to keep goods in the staging area that don’t need to be put away. And, as your warehouse becomes more sophisticated, an advanced warehouse management system with bar

code scanning is helpful when putting away your goods.


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Improving Picking Efficiencies

Efficiency can be defined as the ability to accomplish a job with a minimum expenditure of time and effort. Earlier, we discussed receiving efficiency, but it’s picking, packing, and shipping that’s at least half – if not more – of your warehouse’s labor effort.

The concept in picking is the same as in receiving – items picked most frequently are closest to the doors. Those items being the same for both receiving and picking doesn’t, unfortunately, always make things easier. In many warehouses, shipping and receiving doors aren’t the same and, due to procurement and sales patterns, the volume of receiving is quite often lower than the volume of shipping.

Horizontal Picking, Vertical Picking, and SlottingIn addition to storing frequently picked goods together to eliminate travel time, you can improve conventional order picking productivity by keeping the most frequently picked items at ground level – it costs more to pick vertically than it does to pick horizontally.

However, because you live in the real 3-dimensional world, you may find that you can

streamline picking by storing faster-moving items at an easy-to-pick shelf level.

Using Software to Help

These techniques require data gathering and analysis, and almost none of it can be

done by just any small business system because your warehouse layout is unique and your patterns are complex.

However, there are several easy to use techniques supported by business solutions

such as SAP Business One.


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Pick the Way You Want ToYou don’t have the pick the way your system dictates. Many legacy systems are based on the concept of single order picking, but if you use this method, you’ll be traipsing quite inefficiently all over the warehouse.

Alternatives include:

1. Picking by zone/area or item and taking to a staging area for packing and shipping.

2. Picking by customer delivery site. If you have multiple people from a single customer ordering goods, you may be able to pick multiple orders and consolidate for shipping purposes.

3. Segregate “special orders.” We all have special customers who require special treatment. Assign their orders a different priority, a different picker, or group their typical goods in a separate zone. If they’re special, treat them accordingly.

4. Optimize stock for picking prior to release of orders. Consider relocating stock from bulk to quick pick zones based on anticipated upcoming deliveries as an end of day/week activity. (Be careful to avoid restocking during pick times, however.)

5. Store accurate weights and dimensions in your inventory master file. Estimating or integrated shipping calculations can speed the packing and shipping process tremendously.

A tool like the Pick and Pack Manager, which is part of SAP Business One allows you to choose the orders to be picked and then lets you sort and filter by any column in the grid (which is customizable, of course!)

Other picking efficiencies may require some new warehouse investments:

1. If you have small items, consider multi-bin carts for picking multiple orders in one pass into segregated bins. This technique can also be used for single line orders that can

also be segregated as special orders.

2. Consider hand-held devices on your picking carts or forklifts to record the pick as it occurs.

3. Conveyor systems can speed the movement from one area to another and reduce

human travel time.


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Inventory in a Kitting and Assembly Environment

Some people consider kitting and assembly to be the same thing, but for our purposes:

1. Kitting is the packaging of multiple discrete items together at time of delivery. The listing of items is often called a sales Bill of Materials (BOM).

2. Assembly is the combination of multiple discrete items together as a production

process. The listing of items is often called a manufacturing BOM.

Adding Value with Kitting and AssemblyMany distributors find that they can add value for their customers by performing a kitting or assembly function as part of their warehouse activities. Some examples include:

1. Kitting as bringing items that are sold in a bundle together and shipping them at a

bundled price.

2. Assembly may include white labeling, where a distributor sells the same item in

different packaging and/or labeling for one or more customers.

Warehouse OperationsIn both circumstances and countless others, the warehouse operations can become

significantly complicated by:

1. Adding the assembly function to a formerly simple pick, pack, and ship operation

2. The need to determine whether a stock of assemblies is required

3. The need to forecast demand for the single item and one or more kits

4. Determining whether or not you should stage, or “reserve,” items to be kitted

5. Determining whether or not you should store the assemblies or component

assemblies in a separate area of the warehouse

6. Deciding where to perform the assembly.

If in a kit, will it be part of the normal packaging process or do you need a separate assembly area?


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The answers to these questions, of course, depend on the volume and nature of your

kitting and assembly activities as well as the flexibility and skills of your employees. As a business owner, the objective of adding kitting and assembly to warehouse operations is to increase sales/margin or ward off a competitor. Once you can kit, assembly opportunities will become more evident and your kitting operations will likely expand.

Further complicating the situation is that your kits are likely to be dynamic over time; a kit may survive, but a component may be replaced by a newer version. Given the dynamic

nature of the market and the opportunity to grow your business by providing more and varied assembly services, you’ll want a system that can support different functions to support your new capability.

1. Assembly and disassembly – At some point, you’ll need to break kits apart into their component items because a BOM has changed, been discontinued, or because you need to sell a component.

2. Where-used reporting – If an item is bad, or is being replaced by a new component, it’s important to know where the item was or is being used.

3. Add, change, or remove components – Not only do you need to be able to find an item, you may want to change the bills of material that contain the item.

4. Production orders – If you’re assembling to stock because you have a blanket PO or a large assembly job for future delivery, you need to have some form of an instruction sheet for your team to know what to pick, pack, and assemble.

With SAPDistribution.com, you not only have kitting, assembly, and production order capabilities in your system, you also have a powerful materials resource planning (MRP) function to help you order the correct amount of stock for your regular and kit sales.


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Managing Channel Proliferation

Back in the brick and mortar days, you shipped goods for your customers from your physical location to their physical location. Then came eCommerce, and now you have

both brick and mortar and online sales. The same goods are often available via multiple online locations, including Amazon, eBay and industry buying portals; this is known as an Omni-channel and is officially defined as “denoting or relating to a type of retail that integrates the different methods of shopping available to consumers (e.g., online, in a

physical store, or by phone). With the Omni-channel setup, you have to meet multiple demands with varying levels of quantity and cycle time expectations.

The key is having the right inventory available for your customers when they need it without overstocking. It became common practice to segregate inventory for the eCommerce site to ensure you weren't out of stock for items sold on a website where you had already charged a credit card. This resulted in having two locations with two minimum

stock levels and therefore too much inventory. Add Omni-channel, and the problem gets worse.

In addition to having accurate inventory information and partnering with your suppliers,

what can you as a distributor do?

1. Have all of your information in one place

2. Capture your demand in real or as close as possible.

3. Determine the optimal sourcing option based upon the channel.

Is it possible to drop ship directly to the customer from your supplier or manufacturer? If you have the option of Amazon fulfillment, can you drop ship to the Amazon location?

4. Forecast, forecast, forecast.

Use tools that show your inventory holistically and provide the flexibility to forecast by

channel, warehouse, or in a combination.


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SAP Business One supports this with a 6-step wizard that allows you to create multiple scenarios to plan your inventory. You can choose warehouses as a source to run your

projections, and you can include one or more forecasts, current balances, and transaction data to hone in on what you should order, when you should order it, and how

much you need within each timeframe in your planning horizon.

This powerful tool can also exclude blanket orders or orders you specify if you know you have outliers from your normal operations.

“The key is having the right inventory available for your customers when they need it without overstocking.”


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Managing SKU Proliferation

In the field of inventory management, a stock-keeping unit (SKU) refers to a specific item stored in a specific location; the SKU is intended to be the most disaggregated level

when dealing with inventory, and all units stored in the same SKU are supposed to be

indistinguishable. SKU proliferation is another fact of business life for retailers and

wholesale distributors – everyone is trying to find the magic bullet to increase sales and the perception is that offering more products, styles, and colors creates a competitive

advantage.

In a distribution center, however, SKU proliferation actually translates to more item num-

bers, which complicates bin location optimization and leads to greater potential for errors in pick, pack, and ship operations. Combine that with kitting and assembly, and the number grows even larger. Then, change an item slightly for the new season and watch

the impact ripple through the warehouse.

If you’re a masochist, tell your sales manager or CEO to stop creating new items and see where that gets you! What you need are proven tools and techniques for managing the proliferation.

These tools/techniques can be broken down into three basic categories:

1. Physical warehouse changes

2. Tools to manage complexity

3. Keeping your systems clean


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Physical Warehouse ChangesSometimes the answer must be a reconfiguration of storage. More items turn into a need

for more storage areas.

1. Pallet racks can be converted to static wide-span shelving with multiple openings instead of one 6-foot pallet opening.

2. 10-foot aisles can be converted to 4-foot aisles when storage areas move from pallet

to bin.

3. Consider location optimization on a more frequent basis during the period after a new line is introduced.

For example, relocate stock from bulk to quick-pick zones based on anticipated upcoming deliveries as an end of day/week activity.

Tools to Manage ComplexityYour systems should help you manage growth and complexity. Effective dating, for example, specifies from when an item is active to when it’s inactive, or any combination of dates. Effective dating allows you to make system changes before a new product line becomes active or obsolete to eliminate the last minute scrambling that inevitably leads to

errors.

But just because you’ve made an item obsolete doesn’t mean your customers won’t order it! Your system should have the capability to track alternative items and recommend them when an order is placed for an obsolete item. We have customers who change the color

name on an annual basis to “keep up with fashion.” To the untrained eye, the color appears identical; however, you now have a new item number. The alternative should be

prompted to users throughout the system.

Using where-used reports and mass change utilities for component management makes it easier to manage the world of ever-changing values; additional attribute fields can be

utilized to search and filter items to find data faster. SAP Business One has 64 user-defined checkbox (yes/no) properties that can be utilized in most standard reports as well as unlimited user defined fields.

If you have more items, you may need to implement more cycle count procedures to

optimize your counting processes. Flexible tools that help you select, execute, and capture your counting activity will reduce the burden of additional items in your counting

processes.


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Keep Your Systems CleanMost systems won’t allow you to remove items that have activity, regardless of whether or not they’ve been deemed obsolete by a new model. We’ve seen systems with hundreds of thousands of obsolete items clogging up reports, slowing down lookups, and creating operator errors and inefficiencies.

Clean up the mess and remove the noise:

1. Mark the items inactive or obsolete. In many systems, this will remove them from active lookups in some, if not most, places.

2. Since your system should not allow you to remove items with transaction data, you

must remove or archive the old data. Depending on your system, there should be a

utility to purge or archive historical data.

In SAP Business One, there’s a wizard that will remove “clusters” of completed and closed transactions before a specified date. This data is copied to an archive company

for future analysis and reporting but cleans up the “live” company database.

The good old days when life was simple and you knew every item you had and where it was in the warehouse are gone. The new reality of exploding SKUs and “mass

customization” will likely continue for some time, so now is the time to get prepared and take control!

In ConclusionIn this eight-part eBook, we explored the components for inventory optimization. Now, we encourage you to take time and carefully assess your current inventory management situation. Ask yourself the following questions: Can I accomplish my objectives with my current financial system? Could our processes be simplified to increase productivity and employee effectiveness? Does our inventory management system meet my current needs and will it grow with the business in the future?

Included in the eBook are examples of how we help companies improve their processes with SAP Business One. If you think you may benefit from a better inventory management system but don’t have the time, experience or resources to do it yourself, contact the professionals at SAPDistribution.com today – we’d love to help you with your inventory management needs!


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Contact Us


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