Logistics optimization is an ongoing concern for every business. The most competitive ones realize that there’s always room for improvement and constantly look for new ways to improve their logistics.
Logistics efficiency owes it importance to the fact that it underpins the ability of a business to compete and grow. And, warehouse inventory management when done right unlocks greater efficiencies, making it a top priority for businesses looking to improve customer satisfaction, increase margins and grow revenues.
The ultimate goal of effective inventory management is to balance order fulfillment needs while minimizing the inventory carrying costs. A warehouse inventory management plan has to balance several conflicting goals – like overstocking/understocking, shorter lead times, rapid order fulfillments, smooth product flow, fluid work flow, improved visibility, good selectivity, more productivity, and maximum capacity. Sounds tricky? It sure is.
To help you achieve your key warehousing objectives, we have identified a set of inventory management techniques. Based on your specific context and warehouse characteristics you can implement mix of these tactics to further optimize your inventory.
These tips are expected to achieve:
- Minimize inventory holding costs
- Increase operational efficiency
- Improve order fulfillment
- Reduce error rate
- Raise Productivity
And, here they are:
- CATEGORIZE YOUR INVENTORY
There are various models to categorize your inventory and few that merit serious consideration are,
- ABC Analysis
ABC analysis is a stock classification technique based on the Pareto Principle (80-20 rule), which states that about 20% of the total items constitute 80% of the overall consumption value. In this technique, the on-hand inventory is divided into 3 categories: A, B, and C, on the basis of on annual consumption of units, cost significance and inventory value into:
A: High value items (70%) and low in number (10%)
B: Moderate value Items (20%) and moderate in number (20%)
C: Small value items (10%) and large in number (70%)
You can do differentiated resource allocation (of staff and funds) for each category. Careful application of this method can reduce both warehouse storage expenses and risk of stock damage.
- Just in time (JIT)
The Just In Time (JIT) is an inventory management method in which the inventory is purchased only a few days before it is required for sale or distribution.
JIT helps companies cut down on inventory costs and ensures that the stocks do not sit on the racks for a long time. To implement JIT, you need a business intelligence (BI) and analytics solution that give accurate insights on customer buying habits, reliable supplier sources, seasonal demand, etc.
- Drop Shipping
In this method, the customer orders and shipment details are transferred directly to your wholesaler/manufacturer, who in turn ships the products to your customer. This eliminates the need to keep the goods in warehouse, which leads to savings on upfront inventory costs and a positive cash flow lifecycle.
- DEFINE STOCK LEVELS
Over-stocking and under-stocking are both inefficient, the first lowers warehousing efficiency and the second lowers customer experience. Accurate demand forecasting is needed to determine the minimum level, maximum level, re-order level, danger level and average level of materials to be stocked for different categories of goods.
Let’s look at how each of these levels contribute to efficient stock management:
# Re-ordering level: The level at which store-keeper will initiate purchase requisition. It is set between maximum and minimum levels. The number of units between re-order level and minimum level should meet fulfillment needs until replenishment.
# Maximum Level: The maximum units of a particular SKU that should be stored at any time. Setting a proper maximum level will lessen capital locked up in inventory, losses due to deterioration and stock turning obsolete, and warehouse storage and overhead costs.
# Minimum Level: Ideally stock should not fall below this level at any time. This ensures order fulfillment or production is not held up due to shortage of materials.
# Average Stock Level: Average stock level is fixed by averaging the minimum and maximum level of stocks. Deviations will reflect changes in consumer buying habits or trends.
# Danger Level: Stock levels should not fall below the danger level in any case. This level is set slightly below minimum order level and indicates to the purchase manager that special effort is needed to complete stock replenishment quickly.
# Economic Order Quantity (E.O.Q.): Purchase departments need to arrive at the optimum order quantity for a given time of purchase. Buying in bulk is cheaper but comes with higher carrying costs while for smaller purchase quantities tends to be higher in price. Economic order quantity will need to strike the right balance between purchase costs and inventory carrying costs for efficient capital deployment.
- EFFICIENT DEMAND FORECASTING
Efficient demand forecasting is key to ensuring that even with minimal stock levels, you never run out of it.
If you are using a warehouse management system (WMS) you will have lots of data on how products move through your logistics. Accurate demand forecasting by mining actual sales and demand pattern history can reduce warehouse storage costs significantly. Overstocking is a definite no and is not a smart warehousing technique even for products with good demand. Warehousing experts usually suggest holding enough stock in the inventory to meet about 1.5 times the average demand for the product at any time.
Apart from using WMS data, it’s important to involve sales & marketing to forecast demand as it helps to ensure that stock levels are optimized to meet the changing customer needs and preferences.
Any item with a declining customer demand should be flagged in the system and its safety stock level thresholds and re-order points should be downwardly adjusted to mitigate risk of obsolescence and cost.
Even if you are not currently implementing a WMS, you could still use order and fulfillment data to eliminate unnecessary inventory. Doing so reduces holding costs and frees up warehouse storage space for other products.
- USE ANALYTICS FOR WAREHOUSE RACKING LAYOUT RECONFIGURATION
Change warehouse racking layout to reflect changes in product, demand and warehousing objectives. Make reconfiguration easy by leveraging analytics data to segment products according to the demand and getting rid of unwanted inventory. Besides gaining warehouse storage space, layout reorganization speeds up product retrieval and order fulfillment.
Make room for receiving
Inventory errors can be costly and happen when warehouse personnel don’t have adequate space to work. Don’t expect your personnel to do their best work in a small stuffy room at the end of the warehouse. Instead, use ergonomically designed workspaces and equipment to enhance labor productivity and to eliminate receiving errors
- PLAN RACK LOCATIONS FOR QUICK ACCESS
Rack locations are warehouse segments that provide complete information on where a particular product can be found from its spatial location to the exact rack/shelf number. Plan rack locations based on item/product profile. A product profile includes both its physical and transactional characteristics, with highest priority being given to its demand characteristics. For products with high demand enable fast pick access by placing them in racks that can ensure faster picking and shipping.
To identify fast moving products or high sellers analyze order information using your WMS. Getting product placement right can enable quick and clutter-free product and work flows. And planning rack locations based on product demand can be an easy way to improve warehouse operational efficiencies.
- MINIMIZE ORDER PICKING ERRORS
Manual operations are error-prone and can add to warehousing costs. Order picking mistakes not only add to fulfillment costs but also result in business loss or a negative brand experience for your customers. Smart placement of SKUs can drastically lower order picking errors. Do not place similar products in nearby bin locations to minimize chances of your order picker picking up the wrong product.
Using simple technology like barcode or RFIDs also can bring down error rates. Using barcodes to label each product, makes picking and packaging easy helping to improve inventory accuracy significantly. These methods offer greater flexibility and easily accommodate changes in picking process/methods.
- INVENTORY TURNOVER RATIO
This metric determines how quickly inventory is used up or “turned over” in a given period of time. The higher this ratio the shorter the shelf life of inventory which means higher sales volume and profitability for companies. Inventory turnover must be closely watched for every item in the warehouse. Demand will fluctuate over the product’s life cycle, and cause logistics variability. Accurate tracking and forecasting of demand patterns is necessary to ensure product replenishment calculations are optimized.
- TRY EFFICIENT TECHNIQUES LIKE CROSS-DOCKING, WAVE PICKING
Some innovation and experimentation with order picking methods can help you save time and space and reap productivity and efficiency gains.
One such method is cross-docking. In cross docking, products are moved directly from manufacturer to customer with little or no storage and material handling in between. Cross docking reduces need for warehouse storage as products from manufacturing are sent to the loading area and processed further for outbound deliverables. It reduces inventory holding costs by reducing the amount of time that a stock is on storage racks. Cross-docking when used in the right contexts can expedite order fulfillment and positively impact customer experience.
Wave picking is another technique that can improve order picking efficiency. With wave picking orders are grouped into small groups and order pickers will pick all orders within one wave in one pass. Each wave comprises of 4-12 orders based on the average number of picks per order. Wave picking optimizes the picking process by reducing travel time for pickers and letting them make additional picks in the same area. Wave picking method can lead to productivity gains only in scenarios where there are enough orders to batch similar picks to create a wave. However, wave picking introduces a small time lag in order processing which makes it unsuitable for same day shipping orders.
- TIDY UP FOR THE NEXT DAY
Make sure you schedule a cleanup operation before clock out time. Stop all order processing activities 30 minutes prior to closing time and allocate the remaining time for cleaning. Employees will clean up faster at the end of the day in a bid to get home quickly. Leaving your warehouse organized will ensure order processing begins early next day and there are no holdups due to things being in disarray from the previous day’s activities.
- REAL-TIME SHIPMENT TRACKING
A warehouse operation isn’t complete until the dispatched product reaches the intended destination. Tracking delays or damages to shipments is possible by enabling shipping notifications. Such notifications relay real-time information on product location using geo location technology. Real-time updates are particularly useful in fast-paced supply environments as they help warehouse managers to take appropriate decisions in the event of a disruption. It also reduces instances of miscommunication of shipment information, particularly in context of warehouse to warehouse transfers.
Most products lose quality and utility over time. But, even if products maintain their quality and utility over time, technical obsolescence, changing consumer preferences, and several other factors can still reduce the value of such inventory. Better inventory control can effectively counteract such problems, cut costs and impact customer experience positively.
The above tips can enable better inventory management in a wide variety of warehouses with vastly different stock characteristics. So, whatever your warehouse product mix, SKU shelf-life and product volumes, you can count on these tips to drive greater efficiency.