Category Archives: Inventory

Organizational Sustentation 59: Warehouse Management

This warehouse frightens me … still
Has me tied up in knots …

Dave Matthews Band

And, as per our damnation post, if your warehouse doesn’t frighten you, obviously you haven’t taken a really good look at it. The warehouse is responsible for inventory, and inventory is very costly … even when it is well managed. Many studies of inventory (carrying) costs have estimated inventory costs to be 25% of the value of the average inventory level (or more). That’s huge!

But this is not the only reason the warehouse is a damnation. It is also a damnation because the warehouse controls:

  • product availability

    and can take their time unloading product, packing product, shipping product, etc.

  • the final quality check

    and if they get lax, and don’t independently test the spinach, your company could be blamed for the next salmonella outbreak that is actually the fault of your supplier

  • overhead costs

    inventory, operations, etc.

So what can you do? Let’s start with the obvious:

JiT (Just in Time) Inventory

The less excess inventory on hand, the less inventory carrying cost, the less inventory for the warehouse to lose or damage, and the less overhead cost to consider.

VMI (Vendor Managed Inventory)

Sometimes your vendor can manage inventory better than you can, and if their revenue is dependent on good management, they are very incented to manage it well.

But that’s just the start. You can also:

Get (a) Lean (assessment).

Identify the inefficiencies, and make sure something is done about them to keep efficiency up and overhead costs down. Make sure the organization is focused on lean transformation and continual process improvement.

Get external audits (on operations and inbound product).

Not only to keep the warehouse in check but to help them identify areas for improvement.

Get the Warehouse Training.

It’s not only Procurement that never has enough in the training budget, it’s the warehouse too. Management thinks that because it’s a manual job, it’s a low skill job and little training is required. Maybe, but considering that lean, six sigma, and kanban processes can greatly improve efficiency and minimize costs, it doesn’t hurt to make sure that the processes, and the labour implementing them, have all the knowledge they need to be as efficient and effective as possible.

Consumer Damnation 74: Demand Planning

Each group of customers are a damnation upon themselves, and they will get the attention they deserve, but demand planning to meet customer demand is its own damnation. Why is this?

Traditional demand planning models require historical data.

To be precise, they require a fair amount of historical sales or usage data in order to be accurate. And sometimes a lot of sales data. But with new product introductions coming fast and furious every day, there are so many categories without a decent amount, if any, historical sales data that it’s hard to make good predictions. Now, one can always use the most similar product, or the product the new product is expected to replace, but this weakens the model and the confidence in the result.

Traditional demand planning models require market predictability.

To be more precise, they expect that the market will not substantially change. That the needs will stay the same. The utilization or replacement curves will stay about the same. That a competitor won’t substantially increase or decrease their market share overnight. That a revolutionary new product won’t be released that causes a huge market shift.

Traditional demand planning models require market foresight.

In addition to requiring historical data and market predictability, traditional demand planning requires market foresight. Knowledge of potential competitor product introductions that could change the market demand. Knowledge of innovations that will begin demand shifts. Knowledge of general market conditions that could delay replacements or result in reduced demand due to cash availability.

Demand Planning requires knowledge of the expected price point.

Most products are services, especially in the end consumer market, are very price dependent. People will pay more if they perceive more value, which could be better quality, more functionality, or owning an iconic brand, but if they don’t perceive more value in your product which is priced higher than a competitor’s product, don’t think for a minute, even if they bought from you last time, they won’t shift. And price prediction is difficult if it is dependent on production cost, which can be variable if transportation can involve unpredictable fuel surcharges, raw material prices can skyrocket due to insufficient supply as a result of a disaster, and labour prices are dependent on contingent labour to meet demands at peak periods.

In other words, sometimes demand prediction models fall flat, and demand projections come from a place that can only be seen by a proctologist with a flashlight, so how do you effectively plan for those as a Procurement Professional? You don’t. It’s damnation.

Organizational Damnation 59: Warehouse Management


This warehouse frightens me.
Has me tied up in knots …
   Dave Matthews Band

And if your warehouse doesn’t frighten you, obviously you haven’t taken a good look at it.

The warehouse is responsible for inventory, and inventory is very costly even when it’s well managed. Some studies of inventory (carrying) costs have estimated inventory costs to be 25% of the value of the average inventory level. Having your inventory cost you up to 25% of its value is a damnation in itself! That’s why many organizations have been migrating to JiT (Just in Time) inventory strategies. But this brings its own problems — and is another source of warehouse damnation (but we’ll get to that).

If an organization aggressively pursues a JiT inventory strategy, even a slight delay can result in a stockout which can result in production line downtime if the product was needed internally or a loss of sales if the product was for sale and needed on the shelf.

Now, besides costing a small fortune, why is the warehouse a damnation?

They control product availability.

If they take their time unloading product, temporarily misplace product, damage product, miscount product, or store it in the least efficient location, the product won’t be available when you need it.

They are the final product quality check.

If they don’t carefully check deliveries for apparent damage, don’t return defective units (and accidentally restock them), and don’t perform any quality checks they are supposed to perform on delivery, defective (or tainted) product can get in the system, get shipped to customers, and give you a black eye.

They control product delivery.

If they take their time loading product, or get behind in orders, customers won’t get their product on time and you will be blamed even if the order arrived on time.

They have a huge impact on inventory cost.

You can move to JiT and optimize inventory levels, but inventory cost is the overhead costs and the depreciation costs, and the overhead costs are the space utilized, the manpower employed, and the operational overhead. If poor planning requires 50% more manpower, on average, than is needed, that bumps up cost. If poor organization means each product retrieval or shipment takes 50% longer than it should (because the warehouse is not lean), that bumps up cost. If poor operational policies or systems means that it is heated 24 hours a day, even though only staffed 10 hours, that bumps up cost. Warehouse controls all of this, not Procurement.

Even a warehouse staff with the best of intentions can cause Procurement the worst of nightmares. It’s yet another organizational damnation that you need to deal with on a daily basis.

Procurement Trend #26: Increased Accuracy in Demand Planning

Twenty-three lacklustre, backwater, trends from yester-year still remain, so let’s get back to it. The sooner we get through these, the sooner we get back to modern times.

So why do so many historians keep pegging increased accuracy as a future trend, and helping poor LOLCat regress to past lives? There are a number of reasons, but among the top three today are:

    • Hyper-competitive markets make demand planning difficult
      because a one week’s difference in release date due to an unexpected delay can result in a competitor beating you to market and siphoning off a significant portion of your expected market share for the product
  • lack of long-term data in short lifecycle product categories makes trending hard
    which makes it even harder to predict not only when a product instance is going to reach end of useful (sales) life but when the next iteration is going to bomb because the product has reached end of life and needs to be retired
  • most tools are still using outdated inventory models
    because the initial versions were created twenty, thirty, and even forty years ago and it’s just not possible to force fit new, complex, innovative inventory costing and projection models into them

So what do you do?

Hyper-Competitive Markets

As per above, Procurement not only needs to identify suppliers who can add value at little or no incremental cost but needs to identify suppliers who can help it get an edge in these markets. It needs to move to JIT (Just in Time) production and distribution to the extent possible, track product and consumer trends carefully, and adapt as needed.

Lack of Long-Term Data in Short Lifecycle Product Categories

It needs to collect as much market data as it can from analyst and trade bureaus to identify global trends, and analyze all of the data it has on past and current products to predict life-cycle trends that are in-line with current market conditions.

Outdated Inventory & Forecasting Models

It needs to update its inventory management and demand planning tools ASAP to not only plan with more data, more resolution, and more options, but support forecasting under different conditions.

Is MRO Inventory Bogging You Down? Maybe You Need a Bit of Xtivity? Part II

Yesterday, we finished Part I by asking What is Xtivity?

Simply put, Xtivity is a solution for your MRO Inventory Optimization Needs and only your MRO Inventory Optimization Needs. If your organization is regularly managing tens of millions of dollars of inventory, or more, you probably know that MRO Inventory is costing you Millions and your current ERP/MRP/CPG Inventory Management systems aren’t helping you curb these costs while making sure that the part is always there when you need it. (Because, in the MRO world, unlike the CPG world or back-office world, availability always trumps cost savings. If you’re a retailer and you are out of stock on 2% of your catalog, no big deal, especially when the average stockout rate is 8%, and if your supply cabinet runs out of toner when the CFO wants to print out 500 pages of financial reports, you can just send a low-wage employee to the local office supply store to pick up a replacement. It’s annoying, but the most it’s going to cost the organization is an hour of someone’s time and maybe a 20% markup on a $50 cartridge. Big whopping deal, NOT! But if it costs 1 Million a day to run the production line and the company’s entire factory workforce sits idle for three days while your repair technician waits for a part to be express shipped to the Brazil factory from a supplier in China, a single stock-out can be the difference between the organization turning a big profit and suffering a big loss for the quarter.)

Accepting this reality and realizing that traditional ERP/MRP/CPG Inventory Management systems weren’t going to solve this problem (which is typically solved by the average company by significantly overstocking a critical replacement part in multiple locations), ten years ago, Xtivity formed to do something about it and nine years ago launched one of the first SaaS solutions to address the issue.

The xIO Software-as-a-Service platform is a 100% web-based MRO Inventory Optimization Solution that can plug into your current inventory management and procurement solutions, suck in your inventory (related) data, pass it through a number of proprietary and statistical models and algorithms, developed by Dr. Stephen Pearce (formerly of Texas A&M and author of Strategic MRO: A Roadmap for Transforming Assets into Competitive Advantage) and refined over the last decade for optimal performance across all of the major MRO industries (including Pharmaceutical, Oil & Gas, Automotive, Power Generation, Pulp & Paper, Automotive, Food Manufacturing, and Transportation), and output, on a monthly basis (or any other regular interval that makes sense from an operational perspective) the optimal order point, order quantity, and average lead time required for each MRO inventory item (by location) — taking the client’s business rules into account. The net result is increased part and material availability and fill rate, accurate lead time calculations, and cash-flow savings from reduced inventory across the board. Based on this information, the xIO solution then generates reports that recommend the suggested changes to future orders and calculates the expected savings both in inventory carrying costs and year-over-year cash outlays for MRO inventory.

But it doesn’t stop there. For each individual item it creates a detailed inventory report that shows the trend over the last 36 months, the projected trend, the expected savings from the initial change to the order frequency, and the expected MRO inventory savings over time. All of the data that go into the summary reports and report by inventory category (defined by inventory velocity) can be drilled into and all of the data (and reports) can be exported to Excel (if desired). And once the suggested changes are accepted, the Xtivity solution can push the new order points, order quantities, and lead times back into your inventory management solution which will take over the ordering, tracking, and classic inventory management functions.

Xtivity, which is well known in the reliability, maintenance improvement, and big MRO space, if not in the broader supply chain management space as a whole, has become so good in its niche that they are at the point where their average client sees a ROI in 90 days or less and 10x ROI over time. Plus, 99.99% of clients can use their solution out of the box. They support so many inventory systems and data formats (in addition to being SAP and Maximo certified) that they only had to do a custom data conversion project for 2 out of the last 1,000 global companies (of a solution that supports, and supports users in, 6 languages) that have tried their platform.

When Xtivity says xIO is a true SaaS solution with no hardware, software, or integration requirements that plugs the MRO optimization hole with virtually no effort (beyond an inventory manager reviewing the order point, order frequency, and lead time recommendations and approving them for push-back into the inventory management system), Xtivity means it. The entire application has been streamlined to not only optimize MRO inventory management and free up as much cash as possible without increasing operational risk, but to minimize the amount of effort required to get results. This is important because you generally don’t generate business value by wasting time on software support, you generate value by implementing and maintaining better (MRO) inventory management policies. And the Xtivity solution allows you to focus on operations, not software, and thus get a quick return. It fills its niche very well. So if you are looking to improve your MRO inventory management, and potentially free up Millions of dollars in cash-flow, check out the Xtivity xIO solution, it’s easy to try and very easy to use.  (For more information on Xtivity, they can be contacted at optimize@xtivity.com.)