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Need Capital?
Have You Looked in Your Warehouse Lately?
By:
Dave Edwards
Recent industry benchmarking indicates there is a lot of
capital languishing in warehouses that could be better
deployed elsewhere.
According to CFO Magazine, DIO (Days Inventory
Outstanding) for all sectors rose 2.5% to 31.1 days from
2005 to 2006. In the article “Growing Problems: The 2007
Working Capital Survey” author Randy Myers asserts,
“Focused on growth and more reliant on overseas
suppliers, companies have let inventories swell.”
Of
course, not all companies have seen inventory increases;
best in class household products performer Clorox was
able to hold their DIO even with 2005 levels at 34 days
which was a 15% improvement over 2004 levels of 40 days.
But many others have not been able to achieve these same
results, some in the same sector seeing increases as
much as 18% over 2005 levels. Best in class DIO for
Household Products was 31 days in 2006, with a median of
45 days and a bottom end of 83 days (ouch). Clearly
there is room for improvement.
Staying in the same sector, let’s say you are a $200M
household products company with a median DIO of 45 days.
Calculating DIO for your company is pretty simple. Just
divide the total value of your inventory by your Net
Annual Sales/365.
That means you have $25M ($200 / 365 * 45) in total
inventory. Achieving a best in class DIO of 31 days
would reduce your total inventory to $17M ($200 / 365 *
31) for a whopping $8M reduction in working capital.
Apply these calculations to your own company in order to
determine your potential for working capital reduction.
If yours is like most companies, the potential reduction
will justify a substantial effort to attain it.
Achieving best in class performance in working capital
management is no accident. It requires a well defined
supply chain optimization approach that will ensure
results.
1. Commitment
- To improve working capital management, senior
management must lead the way,
be highly visible, communicate
clearly and deliver focused, full-time leadership. The
numerous expected benefits that will drive this
commitment include:
- Working Capital
Reduction
- Manufacturing
Disruption Decrease
- On-Time Delivery
Performance Increase
- Bottom Line
Results Improvement
2. Organization
– Companies must rethink how they organize to manage
their supply chain and achieve
optimal results. Companies that are still organized by
function and location lag behind in working capital
management. Cross functional collaboration on inventory
strategy is required to achieve optimal performance.
Best in class companies use single end to end supply
chain owners to achieve optimum results.
3. Strategies
– Strategic initiatives that drive supply chain
optimization and reduce working capital must be
evaluated and prioritized for action. The most prevalent
strategies driving supply chain optimization today are:
Source
- Collaboration
– Supplier managed or consignment inventory
- Execution -
Usage based replenishment systems
- Visibility
– Cross company supply chain transparency
Make
- Lean Culture
– focus on continuous improvement
- Waste
Elimination – eliminate unnecessary inventory
and assets
- Improve
Flexibility – reduce lead times and improve
delivery performance
Deliver
- Network Design
- Design distribution networks to mitigate
transportation time, cost, and capacity constraints
- Inventory
Optimization - Update inventory strategies and
policies multiple times a year, employ proper
optimization tools.
- Customer Level
Forecasting – Customer service driven
forecasting process aligned with inventory
optimization goals.
4. Tools and
Tactics – In order to achieve these strategic
advantages, companies need to design, implement, and
continually improve the use of proper tools. These tools
can range in cost and complexity from simple visual
KanBan systems to highly complex multi-echelon inventory
optimization systems. Developing or selecting the right
tactics and tools for the current and expected future
complexity of the supply chain is a critical strategic
decision.
5. Execution
– The best strategy-driven
tactics and tools available are worthless if they are
not properly executed. According to a recent survey by
the Aberdeen Group, the number one barrier to realizing
value from inventory management technology is a lack of
skilled resources within the company. The organization
must foster an environment of professional growth and
continuous improvement in order to achieve best in class
results. Members of the organization must be properly
motivated to achieve results; organizational incentives
must be aligned with inventory optimization goals to
achieve success.
6. Measurement
– Vince Lombardi once said,
“If you don’t keep score, you’re only practicing.”
To achieve best in class
inventory management the organization must continuously
measure and assess the effectiveness of its inventory
optimization strategies and tactics. If results do not
meet expectations, root cause analysis must be performed
to determine why. Results measurements must be reliable,
accurate, meaningful and well publicized within the
organization. Achievement of goals must be celebrated
and poor results must be approached with a genuine
effort to root out underlying causes and achieve future
success.
Operations Associates
is focused on optimizing manufacturing, distribution,
logistics and supply chain management operations in a
wide variety of industries.
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When Time and Space
Are Money: DC Product Slotting
By:
Bob Martin
Improving distribution center
productivity can frequently boil down to more
effectively performing the key activity of order
selection; product slotting is one factor that can
significantly impact overall pick rates. Slotting
involves a strategy for selective placement of products
within the distribution center in order to support
specific operational objectives. Generally, the goals
are associated with improved order selection
productivity and manageable replenishment.
Distribution center operations that are not effectively
slotted can incur a huge hit in throughput and
processing costs. We have observed order selection
employees searching for items not in the designated
location or retrieving elevated pallets to access a
required item, and then returning the pallet into the
rack. These practices are productivity killers that will
hinder the distribution center’s ability to respond to
orders and substantially increase the effort associated
with order selection.
Frequently, a small number of items (stock keeping
units, SKUs) account for the vast majority of the picks.
Effective slotting classifies items using such factors
as:
• When picked (daily, weekly, quarterly, seasonal)
• Cubic feet or volume picked (typically relates to
replenishment needs)
• Quantity picked during a period of time (velocity)
• Frequency picked during a period of time (hits)
• Weight, physical size, packaging
Approaches to effective slotting include some
sophisticated software packages that link to databases,
process volumes of data, and use priority rated goals to
rationalize product placement to best meet an overall
set of goals. Alternatively, a relatively simple
spreadsheet analysis supplemented with some logical
decision rules can probably get you very close to an
effective solution.
Key points to address include slotting the item in a
location that is suitable for its size, weight, and
level of activity. Small items that move slowly may be
located in bins. Larger items may be in pallet
locations. Heavy items must be accessible.
Locate the product based upon how it will be picked and
how it will be replenished. Manageable replenishment is
a very important factor. Frequently picked items should
be located in the “golden zone” at a height between the
knee and chest with slower movers located higher or
lower and fast movers closer to the main pick aisle.
Large, high volume items should be located in pallet
positions that are accessible from the floor or pick
module. Locate slow moving items in remote areas.
In summary, an effective product slotting activity can
significantly impact productivity even in small, simple
warehouses. Slotting is not a “one-time” activity but
something that should be reviewed periodically as
product activity changes. Some seasonal or cyclic items
may be moved in and out of prime locations. For example,
outboard motor oils are likely to sell in higher volumes
during the spring and summer while fire logs may sell
faster during the months with colder temperatures. There
are also life cycles for fashion or high technology
products that may sell rapidly during the months
immediately following introduction and then tail off
after several months.
If your company wants to improve productivity through
better product slotting, let Operations Associates help
you reach your potential.
Upcoming Events
5 – 7 May 2008
BDO Seidman Alliance Conference
Las Vegas, NV – Caesar’s Palace
Operations
Associates White Papers
Operations associates
provides complimentary copies of several of our industry
best-practices white papers. The available titles are:
-
Hiring a
Consultant: 10 Lessons from the Trade
-
Project
Management: 10 Steps to Avoid Project Failure
-
10 Mistakes to
Avoid in Distribution Center Planning
-
10 Mistakes to
Avoid in Manufacturing Facility Planning
Any of these white
papers or our Overview
Brochure can be requested using the contact information
listed below.
Contact Us
If you have any
upcoming project needs please contact us for assistance.
We have extensive experience in areas including, but not limited to:
Distribution
Manufacturing
Supply Chain Strategy
Supply Chain
Management
Michael Townes
Marketing Director
michaeltownes@operationsassociates.com
864.752.2332
800.864.4729
(toll-free)
Mike Rigg
President
mikerigg@operationsassociates.com
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