March 2009: A Note from Jeff Mack
The Bottom Line...Drip, Drip, Drip...Is That Your Profit Seeping Out of Your Warehouse?

We’ve all had a leaky faucet with an annoying drip. The degree to which it’s considered annoying probably has something to do with its tempo, larghissimo or presto for example, and its proximity to your bed. If it’s slow and out of earshot, it no doubt can be ignored for a while. That can all change suddenly, however, when you receive your bill from the water department. You’re shocked at how much that little out-of-sight and out-of-mind drip is costing. Now you’re motivated to make it your top weekend project.

We can have leaky faucets in our businesses, too. You may not own your building, and they might not look like leaky faucets, but rest assured that drip, drip, drip is working around the clock. That means it’s costing you money while you sleep. It’s all of our jobs to find them and root them out of our business.

So where do we start to look? You’ve heard the expression “follow
the money,” right? Well that’s particularly good advice in this case. Many businesses have the majority of their assets invested in inventory, so that’s a great place to focus. Take a stroll out to your warehouse and observe what goes on. Can you spot any drips? Here are a few places to pay particular attention to.

Costly Mistakes You Can Avoid
Does a shipment ever go out the door with the wrong item in it? Do you ever have to correct the mistake and incur overnight freight charges? Or perhaps execute an emergency drop ship from your supplier? Are there extra picking and packing costs associated with sending the new correct item to the customer and perhaps processing a return of the incorrect item? Do you ever have to write off the first item that was shipped either because it was damaged upon return or perhaps simply because you tell them to keep the first item as a customer care effort? How about the cost of potential loss of customer confidence?

Have you calculated the estimated cost of a mistake in your warehouse? Is it $100, $200, or more? How many mistakes are made per month? Are you tracking your shipping accuracy? If so, you can estimate the cost of this leaky faucet. For example, let’s assume you enjoy a 98% accuracy rate and that you ship 50 orders per day, 250 days per year. That’s a total of 12,500 shipments, and 250 of them that would have been shipped in error. Assuming a low estimate of $100 per mistake, that equates to a cost of $25,000 annually. Drip, drip, drip.

Efficiency Improvements That Can Cut Costs
A warehouse can be a hubbub of activity with people and products moving in all directions. Whether you can see them or not, there are big dollars signs in lock step with all these movements to and fro. How much effort is required in your warehouse to locate a product, pack it and ship it? Or how much effort and cost is required in the “dock and stock” cycle?

What are some factors that contribute to all the scurrying back and forth? Well, obviously, inventory accuracy, visibility and transparency are key to making the right move the first time. Utilizing electronic tracking technologies is critical to improving accuracy and immediate access to vital data. In addition, these technologies enable you to do the job one time, say at the receiving end, and have those efforts pay dividends in the stocking, picking, packing, shipping, and invoicing processes.

Everyone’s warehouse is unique so I can’t estimate your potential savings from efficiency improvements, but double digit efficiency improvements are certainly attainable. Drip, drip, drip.

Playing with the Big Boys - Successfully
Perhaps you have, or want to have, relationships with large trading partners that require label compliance and use of EDI. The good news when you get invited to play is that your business volume usually rises and you might be able to use these relationships to springboard into other high volume relationships.

The challenge is that there can be significant penalties and charge-backs if you mess up. The big boys can refuse shipments if everything is not exactly as specified. Even though there may be a short ramp-up period to iron out the wrinkles of the relationship, in pretty short order they expect you to have the process dialed. Otherwise, you are costing them money and they will penalize you for that one way or another. It becomes paramount to ensure that your inventory and your inventory processes are accurate. It’s critical to make sure that your systems don’t show the signs of strain as order volume ramps up.

Again, having the right technology investments in place can provide confidence that you can supply the UCC 128 label, the electronic advance ship notices and outbound invoices instantly and precisely as dictated by your trading partners. Absent these things, you will surely incur additional costs, and perhaps even jeopardize the relationship that you worked so hard to establish. Drip, drip, drip.

Inventory Optimization To Cut Cost Leaks
When inventory accuracy is lacking in a warehouse, a common practice is to carry excess just-in-case inventory. Nobody wants to lose an order, particularly a salesperson. So given a chance, they will always encourage the purchasing manager to have more than ample safety stock on hand, just-in-case. Lacking empirical data, the purchasing manager is probably also inclined to err on the side of surplus. This of course leads to springing cost leaks in all directions…obsolete inventory, write-offs, lost inventory, warehousing and insurance, extra labor and handling, etc.

Removing steps that involve paper processing and/or processing delays can dramatically increase the accuracy of data relative to on-hand inventory and the supply and demand constraints affecting your inventory. Armed with relative information that is accurate, up to the minute, and far reaching, purchasing managers can make highly informed decisions regarding replenishment and stocking levels. Done properly, this can directly reduce inventory investments while delivering higher order fill rates. All of that translates to improved order-to-cash cycles.

So how big is your warehouse drip? $50,000, $100,000, $200,000 or more? My advice is to find out. Start observing, measuring, and thinking about how your warehouse operations can be dramatically improved with the infusion of some new thinking and new tools. With the current economic climate, is now the right time to make a strategic investment in your business? I can’t answer that, but I do know that lots of savvy investors are lining up their resources and licking their chops to take advantage of today’s opportunity. I also know that I wouldn’t want a leaky faucet in my warehouse now because every drip that’s eliminated can go right to the bottom line where it’s most needed. And that’s the bottom line.