I recently visited the distribution center of a large national hard goods distributor. This company is experiencing a significant problem with 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 actually on the shelf. 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
It is imperative that everyone in your organization understands that inaccurate on-hand quantities in your computer system creates additional work for your employees, causes you to overstock and results in customer service problems:
- Buyers must overstock in order to maintain your desired level of customer service
- Products are reordered at the wrong time
- You will waste 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!
This policy is essential for effective inventory management. After all, does your bank allow its employees to take samples out of the vault without proper paperwork? What is the difference between the bank’s inventory and yours?
Successful organizations must have established policies and procedures for processing the following types of transactions:
- Normal stock receipts
- Unexpected stock receipts
- Emergency requisitions
- Sales orders to be delivered
- Sales orders for non-stock
- Cash sales
- Direct shipments
- Transfers to other facilities
- Assembly orders
- Bin-to-bin transfers
- Returns: stock material
- Returns: non-stock material
- Returns: damaged material
- Returns to the supplier
- Adjustments to on-hand quantities – Who is allowed to approve adjustments? Under what circumstances?
- 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.