Ramlee Ibrahim & Associates

Someone with 25 years experience in operations management starts to believe he’s seen it all. He’s confident his fine-honed skills will solve any and all problems. Such was my state of mind when I accepted an engagement to help a company with its inventory management woes. Little did I know that it would require all my skills, and add several more to my war chest.

I was asked immediately if I would observe the physical inventory of the company’s plants in Thailand and write a critique of the inventory process. I agreed but I realized that this exercise would provide insights into problems that I soon would inherit. To my dismay, I was exposed to a classic lesson of how not to take physical inventory.

Upon arriving, I was surprised to see counting and production taking place in the same area. The activity level in all five plants was the same – people counting and people working. I inquired about cutoffs and was told there were none. I asked if the lines were being purged of work in progress to make counting of the line and finished goods (FG) easier. No, the line would be working through the week. I felt a burning sensation in the pit of my stomach. (more…)

What do you do with slow movers? You can identify and focus on a few inventory items – the A items. But another side must be considered: what to do with the slow movers? Read on and I will help identify different strategies to effectively deal with slow movers by first identifying the problems slow movers create.

The slow movers are those items or SKUs for which sporadic or very little demand exists. Typically, these items fall into the “C” category of the ABC analysis and constitute about 50 percent of the part numbers but only about 5 percent of the total value (where total value is based on total revenue and demand usage).

But a single C-class item, while generating less demand per unit, consumes about the same amount of overhead resources used to store the item (physical space, stockeeping personnel, obsolesence costs, and the time and effort to enter the data and to maintain it in the computer system) and to maintain the demand for the products that use these items. These resources are also used to maintain the demand and the products that use these items. Fir the first, the demand, there is marketing and the need for a marketing/sales person to call people and to forecast demand. For the second, the products that use these items, consider the time and effort needed for an engineer to design, revise, and maintain the demands. At some point, you have to consider that the costs for many C-class items often exceed the benefits. (more…)

Article after article is written about improving warehouses. There are robots, carousels, retrieval systems, theories of layout, and computer models to simulate flow. Then textbooks and consultants tell you warehouses are obsolete. Instead, build to order and ship directly to the customer. As always, there are two attractive, totally opposite theories, as the following examples illustrate. (more…)

Traditional measures of accuracy can be a double-edged sword. While their objective is to confirm cost or inventory accuracy, these methods often serve as a disincentive by inadvertently discouraging an all-out effort to find and eliminate the real root of the problem. When too many inaccuracies are found, the company’s calculated inventory accuracy drops, and this reflects poorly on the worker or workers responsible.

In this instance, the manufacturer needs to understand that inventory accuracy is only an indicator of performance and is not a true measure of the actual process. By definition, performance measures track a process, but something must have been performed in order to have a performance measure. Cycle counting is a process and has a performance measure related to its effectiveness.

Traditionally, companies judge a cycle-counting process based upon a measure of inventory accuracy. The more the process confirms the accuracy of the company’s inventory, the higher the process’ measure of effectiveness – or so it would seem.

Challenging The Traditional Measures

Consider the results of the cycle counts shown below. The mix of counts is representative of the category mix in order to suggest a level of inventory accuracy across all parts. Compare the total calculated accuracy of 98.7% with the following weighted calculation (there is more than one way to calculate accuracy): (more…)

The crux of managing inventory effectively is to ensure that our distributor will be able to at least meet or exceed his customers' expectations in order to maximize his profits. Customers' expectations differ – some will demand immediate delivery of an ordered item but some are prepared to wait longer. But what is relevant is to examine if customers are always this demanding. Surely there must be some items demanded that can be delivered in a certain time without negatively jeopardizing the customer service levels?

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Many employees don’t realize the value of your stock inventory and may “borrow” products or take samples for their personal use. Unfortunately, there is another reason why material disappears: theft. Many distributors find it hard to believe that their employees or customers would steal. But unfortunately stealing, especially petty theft, is a very common reason for “inventory shrinkage.” And a distributor who doesn’t admit that theft is a problem, or a potential problem, is just burying his or her head in the sand.

Employee theft is not a new phenomenon. Nearly a hundred years ago, my grandfather owned a clothing store. He occasionally commented that he’d been in business for 30 years and had never sold a single handkerchief to an employee (these were the days before Kleenex).

Did the employees think they were stealing? Probably not. These were good people who never would have thought of taking money out of the cash register. But they didn’t appreciate the true value of inventory. They didn’t see the direct relationship between the inventory in the store, turning that inventory into cash by selling it to customers, and using that cash to pay employees and other expenses. I stress that employees must see all inventory shrinkage as an expense that reduces the amount of money available to pay wages and benefits. It takes money out of their pockets.

There are, of course, some people who are truly thieves. And sometimes a distributor inadvertently hires one. Thieves usually don’t see their long-term security tied to the success of the firm that employs them. Most often these individuals have a short-term goal: that is, getting as much material as possible out of the warehouse (without being caught).

Some distributors install security cameras and other theft-deterrent devices. While they are important tools in a retail environment, the effectiveness of these “hi-tech” solutions in a distribution warehouse is questionable. True, they may be a deterrent to some theft, but employees who are also thieves usually put considerable thought and effort into getting around these systems and continue to steal. At the same time, honest employees often feel intimidated and resentful as “big brother” continually watches their every move. These feelings often discourage good and loyal employees from giving their all for the company.

A better way to discourage theft is for management to create an atmosphere that encourages effective inventory management. Here are several policies that will help to solve the inventory shrinkage problems faced by many distributors.

Limit access to the warehouse. You cannot hold your warehouse employees responsible for the material in your warehouse if customers, truckers, salespeople, and other individuals can walk through the aisles, unescorted, at any time. Only the people receiving, moving, picking, and packing material should be allowed in the area where merchandise is stocked. After all, how many people are allowed to wander around the vault at your local bank?

Your salespeople may complain that they need to run out to the warehouse to check material availability because the stock balances in the computer are inaccurate. This may be true. Unfortunately, one of the major reasons why computer stock balances are inaccurate involves the number of people who have access to the warehouse. This is truly a “chicken and egg” situation: Your salespeople need access to the warehouse because your stock balances are inaccurate. Your stock balances are inaccurate because your salespeople (along with customers, vendors, truckers, and others) have access to the warehouse. This is a vicious cycle that won’t be broken until you implement business policies that are designed to maintain accurate stock quantities.

O.K., some distributors can’t keep salespeople out of their warehouse. Maybe they don’t have enough help, or maybe salespeople are responsible for providing after-hours service to customers. If your company is in this situation, be sure to implement a tool that allows salespeople to easily record any material they remove. In fact, many companies allow the salespeople themselves to develop the system to record the products they remove for emergencies, samples, or other valid reasons. This “system” is often just a clip-board hanging by the warehouse door. At one company, the following information is noted for each item taken (that’s not listed on an actual pick ticket):

Every day, a clerical employee will update the computer for each item listed on the clipboard. Management reviews these material withdrawals on a regular basis. Be sure to keep this system simple. Don’t give your salespeople any reason for not recording every piece of every item they remove from stock. In fact, let them design the procedures. Then they won’t have any excuses not to follow them.

In addition to controlling theft, there are several other reasons why limiting access to your warehouse is important:

• It takes time to run out to the warehouse to check stock. If a salesperson must run out to the warehouse every time she needs to check the availability of a product, how much time does she spend on her feet? How many fewer customer inquiries can she answer? Should you pay her by the mile rather than by the hour?
• If you check stock by physical inspection, you may commit material to one customer that was just promised, by another salesperson, to another customer.
• The person manually inspecting the on-hand quantity of an item may be unaware of additional quantities in other warehouse locations.

Pay your employees well. If you pay your employees more than they could earn at other distributors, and pay them based on how well they perform, you’ll probably be able to get the best people available in the workforce. When employees can see a direct correlation between performance and their compensation, they usually tend to work hard. And, if an employee doesn’t meet your expectations, there are probably many people (often trained by your competitors) waiting to take their place.

We’ve seen great results when the accuracy of on-hand quantities affects the compensation of all employees that have access to warehouse inventory. These employees are motivated to treat your inventory as if it was their own. It’s like having management constantly watching over your warehouse operations.

On the other hand, low-paid employees usually aren’t motivated. They can’t see a correlation between their performance and the compensation they receive. So why bother to put forth the extra effort necessary to do a good job? While at work, they tend to concentrate on what they must do “to get by” – that is, what they can get away with (possibly including theft) and avoid getting fired. Their lack of motivation is contagious and can easily become part of your corporate culture. And, in any case, they’ll be gone as soon as a better opportunity appears.

If someone is caught stealing, get rid of him. While most people don’t like big brother watching over their shoulder, they also don’t like people getting away with criminal acts. If someone steals, they are stealing from everyone who works for your company. After all, the money used to buy replacement merchandise is money that could have been used to pay higher wages or provide additional benef
its. If you overlook certain indiscretions or continually give people a “second chance,” you are condoning behavior that is detrimental to the well-being of your company and your employees.

Inventory accuracy is a necessary element in any effective replenishment system. If your buyers don’t know how much of a product is in your warehouse and available for sale, there is no way they can accurately determine when to replenish stock and how much to order. You’ll end up with a “lose-lose” inventory: shortages of products your customers expect you to have in stock, and excess quantities of slow-moving items.

I just remembered an occassion some time back when I was helping a food distributor deal with their inventory management challenges. The company has begun a program to achieve effective inventory management. As part of the program, they are cycle counting products and entering inventory adjustments when they find discrepancies between the quantity of a product in their warehouse and the perpetual inventory maintained by their computer system. Though the company has implemented a system that corrects current inaccurate inventory balances, it still needs to adopt a system that will improve future inventory accuracy. That is, they need to improve their methods of handling stock to prevent additional stock discrepancies. How will they do this? (more…)

Cycle counting is the process of verifying the on-hand quantity of a specific number of stock products every day. In previous articles, I have described how to set up and maintain an effective cycle counting program and why this process is usually better than a full physical inventory for maintaining an accurate perpetual inventory in your computer system. But verifying on-hand quantities is only one of the advantages of cycle counting. The other benefit of a cycle counting program is to improve your business processes, including:

• Making sure that all material movement is properly recorded.

• Ensuring that stock receipts are put away in the proper location.

• Verifying that the right quantity of the right item is shipped on outgoing orders or is pulled from stock for an assembly.

• Preventing shrinkage from theft and the mishandling of stocked items.

Process improvement results from carefully analyzing significant stock discrepancies. A discrepancy is the percentage difference between the actual quantity physically counted and the stock level in the computer system at the time of the count:

[Absolute Value of (Quantity Counted – Current Stock Level)] ÷ Current Stock Level

Including the "absolute value" of "Quantity Counted – Current Stock Level" in this equation signifies that a discrepancy should be analyzed if significantly more or less inventory is found during the cycle counting process. For example, assume that a distributor has a cycle count tolerance percentage of 5%.

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The goal of warehouse layout design is to optimize your warehousing functions and achieve maximum efficiency and space utilization. A warehouse is typically divided into areas to support your every day processes. These areas include: reserve storage, forward pick, cross docking, shipping, receiving, assembly/special handling lines, and quality/inspection area. Designing a new facility starts with analyzing your current and projected data on the activities in each of these areas, including the receiving, shipping and inventory levels. This data should be supported by other considerations such as process flows, material handling equipment, type and styles of racking equipment, special handling requirements, and personnel.

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