I recently visited the distribution center of a large national hard goods distributor. This company is experiencing a significant problem with the amount of excess inventory in both their distribution center and their 100 store locations. We have to eliminate this excess inventory to ensure the organization’s long-term success.
In my initial interview, management thought that the primary cause of this overstocking problem was their buyer’s lack of knowledge of how to properly use the replenishment tools in their computer software package. However, we quickly determined that the underlying problem was inaccurate on-hand quantities in their computer system. That is, the on-hand quantities in their computer system did not agree with what was on the shelf in their warehouse. In fact, they weren’t even close. These discrepancies, as often is the case, were the result of “sloppy” material handling procedures such as:
• Providing customers with samples of products without recording their removal from the warehouse
• Substituting a product for an out of stock item without properly recording what was actually removed from inventory
• “No paperwork swaps” where a customer exchanges a product purchased in error for the correct item without a credit memo and a new invoice being issued
• Removing recently delivered material from the receiving dock before the stock receipt is properly processed
Everyone in your organization must understand that inaccurate on-hand quantities in your computer system creates numerous problems including:
• Overstocking products in order to maintain your desired level of customer service
• Reordering products at the wrong time
• A lot of wasted time. “We can’t trust the quantities in our computer system. I’d better run out to the warehouse to be sure the quantity you need is actually in stock.”
It is imperative that the on-hand quantities of products in your computer system agree with what is on the shelf. Establish a rule that cannot be broken: NO MATERIAL LEAVES A WAREHOUSE WITHOUT THE PROPER PAPERWORK!
Successful organizations have established policies and procedures for processing all material movement including:
• Normal stock receipts
• Unexpected stock receipts
• Sales orders to be shipped, delivered or picked up
• Sales orders for non-stock products
• Direct shipments from your vendor to the customer
• Transfers to other facilities
• Assembly orders
• Bin-to-bin transfers
• Return of stock material, non-stock items and damaged goods
• Adjustments to on-hand quantities – Both positive and negative
• Scrapping and writing-off stock
You probably can add to this list. Remember that inventory is valuable. You should have a documented procedure for every type of transaction processed by your company.