Wednesday, November 18, 2009

Affecting Warehouse Efficiencies, Part 2: Inventory

Last week, I talked about the three main categories of warehouse efficiencies. These were operational, stocking, and fulfillment efficiencies. In this series of four posts, I am presenting the levers available to an organization to enhance these warehouse efficiencies. We would be talking about the four main levers to target and affect these efficiencies. These levers being Labor, Inventory, Slotting and Product Flow. In each of the four posts, I will focus on one of these levers and expand upon the functional capabilities that must be developed to enhance warehouse efficiency. In Part 1, the role of Labor was covered, today's topic is Inventory.

Inventory Management:

Inventories in the warehouse consist of a substantial amount of working-capital tied up in the supply chain to ensure that the demand fulfillment rates can be maintained at desirable levels. Ability to fulfill store and customer orders is central to the existence of warehouses in a supply chain, but this must be balanced against the need to reduce system-wide inventory costs. Fulfillment metrics measure this ability of the supply chains to balance the service levels against the inventory. Inventory efficiency at the warehouse balances between the conflicting requirements of high fill-rates and low inventory costs. The following capabilities can help in maintaining both.

  1. Inventory Optimization: Inventory optimization solutions provide the warehouses with the ability to compute and maintain optimal inventory levels that are sufficient enough to maintain the target fill-rates. The inventory solutions typically work by analyzing the historical variance in demand, supply, and replenishment lead-times. These solutions compute the inventory levels required for the projected demand to maintain the targeted service levels. Optimizing inventory can typically reduce inventory in the system by 10-20% while still maintaining desirable service-levels. The problem becomes more complex when the supply chains have many levels and the inventory must be computed at each stocking point of each echelon of the chain.
  2. Inventory Visibility: Inventory visibility across facilities is another primary tool that replenishment managers can use to enhance warehouse inventory-efficiency. Inventory visibility enables dynamic source-selection for fulfilling demand in the supply chain. The conventional supply chains model stores tied to a specific warehouse for replenishment. This rigid relationship forces higher inventory levels in the system because each order must be fulfilled from a pre-determined source. Inventory visibility makes it possible to source orders from alternate sources, thus allowing lower inventory levels while simultaneously maintaining comparable service-levels. Solutions integrated with logistics can also account for the cost of such changes to make the best decisions.

Better inventory management processes directly affect the fulfillment metrics of the warehouse which are primarily focused on its ability to address demand. The examples of such metrics are fill-rates, on-time fulfillment, pick and ship accuracy, and so on.

Next time, I will talk about the opportunities to enhance warehouse efficiencies through better slotting management in the warehouse that is a primary lever to drive the stocking and operational efficiencies at a warehouse.

© Vivek Sehgal, 2009, All Rights Reserved.

Want to know more about supply chain processes? How they work and what they afford? Check out my book on Enterprise Supply Chain Management at Amazon. You will find every supply chain function described in simple language that makes sense, as well as see its relationship to other functions.

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