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You Might Have a Bad Warehouse If... You Can Hide the "Ark of the Covenant."

By Kate Vitasek | 03/01/2010 | 5:59 PM

Now, if you are hiding the "Ark of the Covenant" then lots of excess inventory is just what you need. If you are trying to run a profitable business it's the last thing you need.

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The sad thing is when companies THINK they have their E&O under control but really have no clue. The bad warehouse practice in this week's blog involves a company that ran their inventory reports monthly, without fail. The inventory analyst was proud to show us the bookshelf with each month's report carefully logged. I asked for a dump of their data in an Excel spreadsheet and in about 10 minutes had sorted the data by days of supply. I quickly pointed out they had product in inventory with years - not days - of supply. The winning product was good for 126 years based on the current demand. The problem? The inventory analyst was going through the process - but the owner of the company just could not bear to write off the excess because of how it would reflect financially on the firm. So each month, the reports were run, and each month nothing was done.

To make matters worse, the stock was being held for them by a 3PL provider who clearly had no incentive to free up the space they were charging the client for. This is what we call a perverse incentive. You can learn more about perverse incentives at www.vestedoutsourcing.com.

A good test for excess and obsolete is to calculate days of supply for each Stock Keeping Unit (SKU). Products above your targeted Days of Supply (DOS) are in excess; SKUs with zero sales (or demand) over an extended period are obviously obsolete, however some industries require a limited stock of repair parts. Calculate the value of product over your target DOS, this is capital that is not being used well.

I urge you to take a critical look at the inventory that is sitting on your warehouse shelves. Calculating E&O inventory as a percentage of the total inventory value may be sobering. Many experts have found that 25%, and as much as 45%, of a company's inventory value including carrying costs fall into this category. "Not in my warehouse!" you say. I challenge you to run the reports, surprises may await.

The Warehousing Education and Research Council says that companies should understand the financial implications of holding non-productive inventory and have in place processes and strategies to minimize its impact. There are indirect costs too: obsolete inventory takes up what should be productive warehouse space and impacts a company's return on assets performance. Read the section on Inventory Control Warehouse Processes in the WERC "Warehousing & Fulfillment Process Benchmark & Best Practices Guide" available from the WERC Online Store. Addressing excess and obsolete inventory, especially in today's tight credit markets will drive bottom line results.

For those seeking more information there is a nice paper posted on technologyevaluation.com titled "Is There a Smarter Way to Handle Excess Active and Obsolete Inventory?" by P.J. Jakovljevic. The paper outline ways to better manage excess and obsolete inventory (free registration required). Take a walk through your warehouse and look for the signs of slow moving inventory. If it's not moving - move it out - through liquidation, by scrapping or donating it, but get it out of the warehouse.

If you find yourself needing to clean house, look to outside firms like Active International or Excessi which specializes in liquidating excess stock or even consider putting it on eBay.

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).

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About Kate Vitasek

Kate Vitasek

Kate Vitasek is a nationally recognized innovator in the practice of supply chain management. Vitasek is founder of Supply Chain Visions—a boutique consulting firm specializing in supply chain management. She is also a faculty member at the University of Tennessee's Center for Executive Education. A prolific writer, Vitasek has authored the Council of Supply Chain Management Professionals' best-selling mini-book series, Supply Chain Process Standards, and has contributed to other management books as well. Along with Karl Manrodt of Georgia Southern University, she co-leads WERC's popular annual benchmarking study.



About Steve Murray

Steve Murray

Steve Murray is a Principal Consultant and Chief of Research for Supply Chain Visions, a boutique consulting firm specializing in supply chain management. Prior to joining Supply Chain Visions he held a variety of functional and management roles in the distribution and manufacturing sectors, including 15 year managing an IT consulting firm. Steve has been instrumental in development of the Council of Supply Chain Management Professional's "Supply Chain Management Process Standards", the Warehousing Education and Research Council's Warehousing & Fulfillment Process Benchmarking & Best Practice Guide" and the WERC "Warehouse Certification Program". He is lead auditor for the WERC's Certification Program.



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