In other words, even when products are sitting around in a warehouse or distribution center, they still cost a lot of money. That’s why inventory management is so important.
The goal of inventory management is to balance the needs of your customers with the cost of meeting their needs. The higher your customers’ expectations are, the more you’ll need to spend on inventory to meet their needs, and the more they’ll need to pay you to have those needs met.
Suppose that you run a fast-food restaurant. You know that it’s very important to never, ever run out of French fries. You have to decide how many French fries you need to keep in inventory: enough for an average week, perhaps, or enough for the busiest week you’ve ever had. The only real way to guarantee that you’ll never run out of French fries would be to have an infinite amount of inventory, which would be silly, so you have to determine some reasonable target for inventory. That amount depends on demand (how much your customers are going to buy) and supply. If you know that your suppliers can ship a load of French fries in 24 hours, you don’t need to keep much inventory in your restaurant. But if it takes your supplier a week to send you a new shipment, you probably need to have more inventory on hand as a buffer against a surprise spike in demand.
You can think about inventory in terms of the chart in the following figure. Every time a new shipment of French fries arrives, the amount of inventory goes up. As you sell French fries to customers, inventory gradually goes down. You need to make sure that a new shipment shows up before your inventory level reaches zero; otherwise, you’ll have customers who don’t get their French fries. This situation is called a stockout, and it creates two problems:
- It’s a lost sale. (You’ve lost out on money that you could have earned.)
- It makes your customers unhappy. (Unhappy customers stop buying from you and also tell their friends about their lousy experience.)
Stockouts are major challenges that often go unrecognized. Analyzing the sales that a company makes is easy, but discovering the sales that the company missed because of stockouts is hard.
Any store, factory, or distribution center employs eight high-level processes for physical inventory:
- Inventory counts
- Yard management
- Over, short, and damaged
ReceivingWhen products arrive at a facility, someone needs to let them in. The process for accepting inventory when it arrives is called receiving. Receiving often involves scheduling appointments for deliveries to occur, along with unloading the goods and performing a quality inspection.
Receiving is often done at a loading dock — a part of the facility that’s designed to make loading and unloading freight on trucks or railcars easy. In addition to unloading physical goods, receiving includes doing the paperwork and making computer entries to add the inventory to your records.
Put-awayAfter products have been received and passed a quality inspection, they need to be stored so that you can find them when you need them. This process is called put-away. The spot where you store a particular product is called a location. Distribution centers often have thousands of locations, all controlled by a warehouse management system.
Because products have different characteristics (dimensions, weights, and so on), dividing your locations often makes sense. One section of a warehouse might have small locations for light items; another area may have large locations on the floor for heavy items. This type of division is called slotting. To minimize the distances that people will travel, distribution centers should be laid out so that the products shipped most frequently are closer at hand and those shipped less often are farther away.
Inventory countsInventory is money, so anyone who’s looking at your business from a financial perspective wants to make sure that they know how much money you have and where it’s located. Periodically, you need to perform physical inventory counts to make sure that your records are accurate.
The traditional approach to conducting inventory counts is to shut down a facility during a slow time of year to count everything, one item at a time. This process is slow, expensive, and (unfortunately) not very accurate. The people who count the inventory may make mistakes along the way, so instead of fixing the inventory records, you may actually create some new inaccuracies.
Therefore, many companies have switched to cycle counting, in which they divide the facility and count each little bit of it at certain times throughout the year. By the end of the year, the company has done at least one physical inventory count in each section of the facility and corrected any errors that were found. Generally, cycle counting is more efficient and accurate than traditional physical inventory counting.
Inventory counts can be important for accountants, who want to make sure that the numbers they see on the books line up with what’s happening in the store. Inventory counts are also useful for logistics personnel to confirm that inventory isn’t being lost, damaged, or stolen. When inventory disappears for unexplained reasons, that disappearance is called shrinkage. Shrinkage is part of the game of inventory management, but it’s important to measure shrinkage and keep it as low as possible.
PickingWhen a customer wants a product that you’ve been storing in your distribution center, you need to pick that item off the shelf (or off the floor) and get it ready for shipping. Depending on how big your distribution center is, picking can take a while. (Many distribution centers cover more than 1 million square feet.) If two customers order the same product, you want to pick both items at the same time. And if a single customer orders two products, you want to pick both products during the same trip. When you think about how much time it takes to travel between where items are stored and where they’re packaged for shipment, you see how important — and inefficient — picking can be.
The good news is that technologies introduced in the past few years make picking more efficient. A warehouse execution system uses sophisticated routing algorithms to translate customer orders into pick paths that minimize time and distance for the people or robots picking the orders. Pick-to-light systems and other displays give pickers visual cues that help them work faster and more accurately. Pick-to-voice systems have conversations with pickers, telling them where to go and what to pick, and confirming that they’ve done the work correctly. Picking is a great example of how people and technology work side by side in a supply chain to improve efficiency.
PackingWhen you’re going to send something to a customer, you need to make sure that it will arrive in good condition. Packaging is the key. Packaging is a form of protection; it’s like an insurance policy against all the handling and environmental threats that your product will face from the time it leaves your facility until the time your customer is ready to use it.
Choosing the right packaging for a shipment depends on the products, the shipping method, and the destination. The right packaging method is the one that ensures that your product arrives in good condition for the lowest cost.
By far the most common form of packaging is cardboard, also known as corrugated fiberboard or just corrugate. Corrugate is cheap, strong, and light, so it’s the perfect material for packaging all kinds of products. Some products can still get damaged if they move around inside a cardboard box, however. One solution is to add filler materials such as packing paper, packing peanuts, or bubble wrap.
If the products you’re shipping are sensitive to moisture, you may also need to use an anticorrosion coating, special wrapping, or moisture-absorbing packets. Electronic products are sensitive to static electricity, so these products require special protection against electrostatic discharge.
Every time you need to touch a product, you add cost to the supply chain. When a product ships from a factory to a retail store, there can be many touches simply because of packaging. A product might be put into a bulk package and then shipped to another facility for custom packaging. Then the custom packaged product might be put in plain cardboard boxes. When the boxes are received by a retailer, the retailer’s employees need to undo all that packaging, dispose of the boxes, and then place the products on store shelves in order to sell them to a customer.To streamline this process, many retailer supply chains are adopting shelf-ready packaging. A common example of shelf-ready packaging is a colorful printed shipping box. These types of boxes can be placed directly on shelves or used in a stand-alone display, saving the retailer a lot of time.
ShippingYou have lots of ways to ship a product from one place to another. The mode of transportation you choose determines how you need to prepare the freight for shipment, including getting the paperwork and labeling correct. The paperwork for shipping a domestic package via a parcel carrier is very different from the paperwork for shipping internationally on a container ship.
Some products, such as alcohol and tobacco, require special licenses or permits. Other products are subject to trade restrictions when they’re shipped to another country. Also, some products are hazardous and may not be accepted by a particular carrier. Getting all these shipping details right requires communication among the seller, the buyer, and each carrier that handles the freight while it’s in transit. In the best cases, mistakes and miscommunications can cause delays that prevent products from reaching customers quickly and safely. In the worst cases, poor management of shipping processes could lead to injuries, lawsuits, and fines.
Yard managementAn important, often-overlooked aspect of managing a distribution facility is yard management, which is the process of tracking the trailers in your parking lot. To understand why yard management is such an important part of inventory management, you have to realize that carriers have two ways to deliver and pick up your freight:
- Live load and unload: A carrier shows up, unloads your freight from its trailer, and then leaves. Another carrier backs up to your loading dock, puts your cargo on its trailer, and carries it away.
The good part of live loading and unloading is that it keeps your freight moving. The bad part is that the truck has to sit and wait while it’s being loaded.
- Drop and hook: With drop and hook, when a truck arrives at the destination, it drops off the trailer and leaves. You can load a trailer and have it ready for the truck to hook up and haul away when it arrives.
Drop and hook is much faster for the truck than live load and unload, and it can be a better choice for making the supply chain run smoothly. The main problem is that when you’re using a drop-and-hook system, you have inventory sitting in trailers in your yard.
Managing inventory in the yard is just as important as managing the inventory inside your distribution center.
Over, short, and damagedWhen you have lots of inventory, either in a store or in a warehouse, lots of things can go wrong. Shipments may not have the right number of units in them, for example, or they could get damaged somewhere along the supply chain.
To deal with these issues, you should have an over, short, and damaged (OS&D) process. A good OS&D process plays two important roles:
- It allows you to spend the time you need to deal with exceptions without interfering with the normal flow of products and information.
- It allows you to fix problems efficiently and maintain accurate records of how they’ve been resolved.