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Warehouse Cost Reductions: 3 Understandings Driven By Inventory Management & Lean Principles

Editor’s Note: Today’s blog post is from Chuck Intrieri. Mr. Intrieri is a highly experienced and credentialed Supply Chain Management professional and is a recognized thought leader and innovator, primarily in the areas of Supply Chain Optimization, LEAN initiatives, Operations, Manufacturing, Third Party Logistics (3PL) International Purchasing/Importing, Inventory Management and Logistics, Strategic Sourcing, and Procurement Operations.
Today, I will address how a focus on inventory will allow for warehouse cost reductions as well. These are based on my 40 years working in operations at Schwinn and other companies as well as consulting many companies on how to select the best 3PL for my client’s needs.

A Focus on Inventory Control Begets Warehouse Cost Reductions

First, look at inventory as MONEY/CASH. It is not just SKUs, part numbers, boxes or pallets: it is cash, your cash! Inventory cost is defined as the cost of holding goods in stock. If you are looking for warehouse cost reductions, chances are you are stocking too much inventory. Too much on-hand inventory increases your storage costs, your cost of goods sold (cogs), and ties up liquid cash.

Understand Data Integrity to Reduce Inventory Costs

First, data integrity is vital. Never assume your inventory is accurate just because your people tell you it is. Try a sample cycle count. Match the number on hand in the warehouse to the number on hand in the computer. Are they the same? If not, you just can’t change these figures, so they match. You have to find the root cause as to why there is such a variation.

Too many variations? First, take a physical wall-to-wall inventory. Second, after reconciliation, cycle count daily. Your goal should be 98-99% accuracy daily. If you do this with discipline daily, your computer system will output accurate data. If not, all data output is suspect.

You can eliminate physical inventories by cycle counting and sustaining the 98-99% accuracy for months. This will be a big achievement towards your mission of warehouse cost reductions.

Using your Enterprise Resource Planning (ERP) cloud system to keep track of your inventory levels is the most straightforward way to prevent overstocking inventory and, as a result, reduce inventory cost.  Use the Item Master of the ERP System to set inventory turns to six to eight turns, set minimum/maximum inventories, re-order points and lead times. Try a “pull” system based on demand/customer orders as opposed to a “push” system where you push inventory into warehouse stock to prepare for future orders. Monitor Safety Stock. Keep Safety Stock to a minimum to avoid too much Safety Stock: if not managed effectively, this can add to the money invested in Inventory.

Understand “Hidden Costs” in the Warehouse Cost Reductions Quest

It’s important to remember standard inventory management does not cover hidden costs, according to Total Trax’s Brian Quigley such as:

  • Opportunity Cost: Money spent on an inefficient warehouse operation would be better and more profitably spent elsewhere. Inventory-related issues cost managers hundreds of millions of dollars in lost goods every year.
  • Productivity Cost: Searching for inventory is not only frustrating but also drags down the productivity of your entire operation. Locating lost inventory wastes and an enormous number of man-hours.
  • Decreased Competitiveness: In the age of e-commerce, everyone is competing for customers. Carrying slow-moving inventory or shipping damaged/incorrect product hurts customer relationships.
  • Forecasting Cost: Food, fashion, and retail all have a seasonal turnover. In order to avoid excess inventory and keep your business lean, you must understand the pace of movement of each product.
  • Overhead CostWarehouse Management Systems are expensive, and so are inventory managers. More efficient and actionable data can reduce the costs of managing inventory.

Try using a Vendor Managed Inventory (VMI). The Supplier gives you standard parts and puts them in your warehouse. You do not pay for these parts until you use them, versus paying for an entire lot or release. Communication between you and the Supplier are critical in managing a VMI system.

You can also place a blanket order with a supplier and manage releases versus taking in larger quantities to save costs. Purchasing can place the order and negotiate prices; Production Planning can release these items based on the latest Material Requirements Planning (MRP) report.

Another great way to look at warehouse cost reductions is to follow what Ernst & Young calls the “End to End” Planning and Fulfillment Network, which goes in line with the next section, Lean Principles.

Understand Lean Principles and How to Use them to Cut Out “Waste”

Lean initiatives

 can reduce costs by the elimination of all waste, yielding warehouse cost reductions, and creating value for the customer. However, to be successful in a Lean implementation, the company must have a cultural transformation. Top Management must commit and focus on Lean. People’s beliefs, habits and ways of working must change. Why? Lean is a new way of doing business. Using Lean tools, without a complete cultural shift, creates a Lean façade. The following 14 principles of Lean will allow you to fundamentally cut out waste leading to warehouse cost reductions:

  1. warehouse cost reductions lean principlesValue: Use Voice of the Customer (VoC) and Voice of the Employee (VoE) feedback to address pros and cons of your business. Make the adjustments requested to give value to your customers’ beyond their expectations.

For instance, if the customer and employee feedback show that product quality issues are prevalent, Lean Six Sigma has to be improved. Product quality is essential to retain customers. On average, it costs five times more to acquire a customer than to retain a customer.

  1. Value Stream Mapping (VSM): Breakdown current processes as a team, and improve them with new Value Streams to improve throughput to the customer. With your teams work to identify the company’s value and eliminate waste. Analyze your processes against the types of wastes below, and remove them.
  2. Transport: Unnecessary movement of materials from one location to another and not utilizing consolidation or pool point programs to optimize transportation can add to logistics and warehouse costs. Do all you can to optimize transportation by leveraging a partnership with a third party logistics company to stay strategic and competitive with better transportation management.
  3. Inventory: Overproduction of goods which might require enormous costs in storage, space consumption, and packaging costs.
  4. Motion: Use 5S: A place for everything, and everything in its place. Having tools in various locations creates unnecessary movement by workers to do their job. Without 5S time and money are wasted. Lean can require a re-redesign of the warehouse floor. Goal: everything must be at the associates’ disposal, in one location, clearly marked. Visuals help. Identify the area, name it, and use tape on the floor to have the area stand out from other areas nearby. Use “shadow boards” for tools. Outline each tool so when you put the tool back, you can readily see where it goes: no wasted time or effort.
  5. Waiting: Waiting for meetings is a waste of time. Meetings themselves can be a waste. Have a meeting agenda, and go through the list by priority, “the biggest bang for the buck.” Breakdowns in interdependent processes and inadequate technical support lead to a loss of time and missed opportunities.
  6. Over-Processing: Caused by lack of Standard Operating Procedures (SOPs) implementation and adoption. When employees do not adopt SOPs, this creates several issues such as each employee performing a task as they see fit instead of in compliance with the vetted out SOP. Another example to cite is using the wrong equipment for a task.
  7. Overproduction: Too much inventory, creating inventory carrying costs to increase due to lack of demand & supply data.
  8. Defects: poor quality control and quality assurance result in defective products, returns, and potential lawsuits.
  9. Wastes: Is human behavior the root cause of all wastes? Is Top Management not getting behind Lean another waste? What about never uncovered wastes? Are they the worst kind of wastes?
  10. Flow: Create constant flow and throughput to attain a balance between supply and demand.
  11. Pull: Companies should operate production based on demand directly from the customer. This requires having a Supply Chain Management (SCM) system that a provider integrates with the warehouse, suppliers, and e-commerce/omnichannel systems to bring faster value and delivery to the customer.
  12. Use Lean tools as a team: 5S (Sort, Set in order, Shine, Standardize, and Sustain), Continuous Daily Improvement/Kaizen, Kanban pull systems, and Lean Six Sigma with customer value always in mind by all employees.

Problem solve with Define, Measure, Analyze, Improve and Control (DMAIC) or Plan, Do, Check, Act (PDCA). The best way to problem solve is with a cross-functional team looking at a problem with different backgrounds.

By applying both a focus on inventory cost management and applying the principles of lean in logistics and warehouse management you can realize warehouse cost reductions.