This is the second part of my series on various ways to reduce overall costs as it relates to logistics and warehouse cost reductions. In the first part I put forth 6 areas of focus in order to reduce logistics costs. Today, I will now 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. If you need help, feel free to contact me or visit my website at TheLeanSupplyChain.com.
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.
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.
It’s important to remember standard inventory management does not cover hidden costs, according to Total Trax’s Brian Quigley such as:
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.
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:
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.
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 realized warehouse cost reductions.
How do you achieve warehouse cost reductions? Let me know in the comments below!
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