You Might Have a Bad Warehouse If... "Safety in Numbers" is Your Safety Stock Strategy

I am reminded of an episode of M*A*S*H, where Hawkeye Pierce went to the main supply depot in Seoul, Korea to requisition a new microscope. The supply Sergeant was not willing to give up one even though he had three on the shelf. His logic, “If I give you one, then I’ll only have two.”

This week’s bad warehouse was witnessed by Mike Ledyard.  The President of a large company hired Supply Chain Visions to do an assessment because he had spent millions of dollars implementing a new Warehouse Management System and Advanced Planning System - but his inventory turns stayed at exactly 12 inventory turns a year despite the technology investments in improved systems.  How could the company spend so much money on the latest and greatest technology and still be getting such poor results? He asked us to do an assessment of their inventory management practices to uncover the problem.

The problem? The company's inventory analysts did not feel comfortable working in the fancy new software – and they would export key inventory information into an Excel spreadsheet where they felt more comfortable looking at the data. The software was making a recommendation for quantities to buy, but the analysts often questioned the numbers. To help them sense check the quantity the system was recommending, the analysts created a few extra columns where they would calculate the monthly average usage. When in doubt, the analysts would update the system’s recommendation with their “sense checked” number which was typically 4 weeks of inventory on hand. Over time – the analysts had overridden virtually all of the systems recommendations and replaced the “system’s math” with the analysts’ 4 weeks on hand rule of thumb. The result – inventory had stayed steady at 12 inventory turns – despite the investment in the advanced planning software!

On the other side of the coin we see examples where safety stock is put in place to mitigate a real risk, but the level is not revisited when the risk is gone. When we asked one company why the safety stock level was set at 120 days, we were told “it is there to cover possible disruptions while we change suppliers”, when we asked how that process was going, we were surprised to hear that the change took place well over a year earlier and the new supplier was performing well. A light turned on, and they changed the safety stock level that day.

Safety stock can also be used to cover peak or unplanned demand acting as a buffer between the supplier’s ability to replenish and customer demand. It can be especially difficult to manage when supply chains are stretched to the other side of the globe, but we have seen cases where the math is just wrong. One company added up all the lead-times, the supplier’s manufacturing lead-time plus the transit time from Asia, they even included a few days for order processing and receiving, when setting the total safety stock. Yet the material was a common part available from multiple suppliers and held by their supplier in a local warehouse, deliverable within days. Understanding how each component flows through the supply chain is an absolute requirement to setting your safety stock level.

Bottom line – if your inventory analysts act like the supply Sergeant in M*A*S*H and think there is safety in numbers – their behaviors to feel “safe” are likely costing you thousands if not millions of dollars. For all you inventory folks out there – please take this time to review your safety stock strategy and ensure it has a purpose.

I’d recommend you start by reading “Inventory Strategy” under “Storage and Inventory Control” in the WERC Warehousing and Fulfillment Process Benchmark & Best Practices Guide, available from the WERC Online Store.

For a good review of setting safety stock levels read “A New Look at Safety Stocks” by Jon Schreibfeder of Effective Inventory Management. Remember that your safety stock should be related to the element of risk as opposed to simple historical data.

For an alternative approach, try working with your suppliers to Purchase Capacity Rather Than Product. This approach can help your supply chain be more flexible – a key to reducing a company’s reliance on safety stock. Bob Parker provides an excellent overview (article is free to CSCMP members or you can subscribe).

I really love your feedback - and love your contributions to share those bad warehouse stories to help educate the profession on what NOT to do, and perhaps what to do if you’re not doing it.

If you've got an example of a bad warehouse practice, send me your story and photo(s) to [email protected].

If I feature your example in one of my blogs, WERC will send you a free copy of the WERC Warehousing & Fulfillment Process Benchmark & Best Practices Guide (a $160 value).

Your submission can be anonymous if you like so you don't get your boss or company in trouble! I'll be collecting examples all year and the winner will receive a free warehouse assessment by Supply Chain Visions, a $10,000 value. The runner up will win a free conference registration to the WERC conference (a $1,375 value).