21 mistakes adding cost and killing productivity in your warehouse - #4

4. Carrying too much stock or too little stock

The money you have tied up in stock is usually one of the most significant ongoing investments you have in your business.  Just like any investment, the return will depend a lot on your skill in investing in the right stock at the right time.  Fortunately there are ways of doing this much more reliably for your business stock than there are for your stock market investments!

Too much stock will cost you money not only to buy, but to store.  Your warehouse is an engine that burns cash whether it is standing still or earning you money.  Lease costs, outgoings, electricity, pallet hire, capital costs and depreciation add up to a significant cost per pallet of storage.  This can be anywhere from $4-$8 per pallet per week depending on your circumstance.  

This is one of the most under estimated expense impacts in business.  Slow moving or non-moving susinestock not only depreciates in market value over time but it accumulates storage costs that eat away profit margins and also have an opportunity cost of not warehousing and selling productive stock.  

Often the realization of this does not come to light until the warehouse is full and newly delivered stock must go into hastily arranged offsite storage.  This will get the finance manager’s attention when a large and unexpected invoice lands on his desk!

Too little stock will cost you money in lost sales.  Perhaps the most basic business rule if you rely on product distribution for your bread and butter is to have stock available when the customer wants to buy.  Unless you are tracking this lost demand you may be blissfully unaware that it is even happening.  

Stock-outs will drive your customers to your competition in search of what they need.  It is literally like handing them cash out of your pocket.  You let your customer down and your competitor saves them.  The loss of reputation and customer loyalty may never be recovered.

There are three things you need to do to fix this problem.

1. Use the correct purchasing calculations for re-ordering stock
• This is just mathematics and the functionality should be built into your business system, but it still needs to be set up with correct data.  If your system has the ability to do this and you are not using it then you should get some help to set it up ASAP.
2. Improve your forecasting system

• The re-order calculations are useless without a forecast to estimate how much of each product you will sell in the future.  Forecasting is usually done on a monthly basis.  A forecast can be as simple as a multi-month moving average, or as sophisticated as a best fit iterative forecasting system which uses historical data to assess seasonality and growth trends and then applies the best fit mathematical formula to each individual product.
• Forecasting can be done on a spreadsheet at low cost or a sophisticated forecasting system costing from around ten thousand to millions of dollars depending on the size of your business and the system you choose.  SAP APO anyone?

1. Introduce a sales and operations planning (S&OP) process into your business

• Once you have the first two in place then you need to go beyond the maths and historical demand and gather market intelligence from your sales team and your customers as to what unusual events are planned or likely in the future that will impact on your calculated forecast.
• Get your sales team and your purchasing people together and talk through what is likely to happen and agree on a number for each product or group of products.  This is S&OP.
• Your KPI for this process is forecast accuracy.  The better your accuracy then the stock you will need to hold, the higher your service level will be and the less overstocks you will have.

This is post is taken from an ebook that is now available as a bonus to members of the Warehouse Performance Initiative (WPI*).

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