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Tips for Successful Supply Chain Management

by Dick Friedman

Many people think that “supply chain management” (SCM) refers only to inbound and outbound transportation arrangements and activities, and not to activities within a distributor’s facility. But successful SCM requires problem-free warehouse operations and inventory management. Here are a few problems that limit that success of SCM, and tips for avoiding the problems.

Out of Stock But In Stock
A truck bringing products from a manufacturer arrived, was unloaded, and the products were verified against corresponding P.O. data; everything needed arrived. But warehouse personnel were too busy filling orders to enter receipts data into the system, let alone put away the products. The people who checked in the receipt did not know that the distributorship was out of stock of a product that had just arrived. Thirty minutes after the check in, one of Murphy’s Laws came into play: a customer called with an order for several products, including the out of stock product that had not been “received in.” The rep who took the call told the customer that the distributor was out of stock on that one product, and the customer did not place the order.

Tip: If entry of receipts data often occurs several hours after the physical receipt, as does the put away, consider hiring a part-time person to do the check in, data entry and put away.

Keep Customers Happy, At A Loss
When the rep who took the call described above noticed there was no stock of a product needed by the customer, she offered a compatible but higher-quality product at the same price as the stocked-out item. The substitute product was a very slow mover and the purchase cost was more than the sell price paid by the customer. During the next few hours, data for the out-of-stock product was still not entered but a few more customers called for it, and were sold the money-losing substitute. The next morning, data was entered and the products were put away, but a problem already started. The system detected that the quantity on hand for the substitute had reached its “Min” level, and recommended ordering more; it was purchased, and will be in stock for a very long time. The system ignored the product that had been out of stock because there was no demand for it.

Tip: Use the ERP software feature that allows entry of the code for the product the customer wanted, then canceling it, entering an indicator signifying a substitution and entering the code for the substitute. The system would use data for the substitute in sales reports, but use only data for the formerly stocked-out product in determining when and how much to buy. If there is no such feature in the system, the problem cannot be prevented but can be minimized. Print a daily report listing products that were sold for less than the target gross margin; data for products sold at a loss would appear at the top.

Very High Productivity Hurts Customers
A distributor was experiencing a high rate of mis-picks, all of which were being reported by angry customers who received the wrong products and/or quantities of correct products. Sales were down slightly, but head count was not. The warehouse was arranged by velocity, so productivity was very high, if no one counted the time spent putting away the wrong products that were returned, and the time spent picking and packing the right products to replace those returns. An investigation determined that about 10 percent of the products being put away were not put in the slots designated for them; they were being put in adjacent slots meant for very similar products. Most pickers assumed that all products in a slot belonged in that slot, and so did not verify that all boxes were the right ones. Some pickers spot-checked while picking, and made sure to get the right boxes but did not inform the warehouse manager of the problems they were finding and correcting. The people doing the packing compared the number of boxes picked to the data on the pick list, but did not verify that all boxes were the right ones; boxes of very similar items looked the same.

Tip: Store similar products at least three slots away from each other. Have pickers record (on the pick list) incorrect storage locations that they find, and have packers spot check boxes and record (on the pick list) mistakes they find. The warehouse manager should scan all pick tickets for information about mistakes, and track those mistakes over time. Distributors who implement these recommendations can attain warehouse accuracy of 99 percent or more.

Lower Cost That Wasn’t
A very large customer order was taken, and was supposed to be filled by placing a P.O. and requesting the factory to ship it direct to the customer. But the sales rep recognized that the unit purchase cost was so low that she asked someone in purchasing to increase the quantity of the purchase and bring it into the warehouse. The extra quantity would be kept in stock, and the remainder shipped to the customer. When the P.O. was received and data entered into the ERP system, the system stored a new last cost and re-computed a new average cost. If pricing is based on average cost or last cost, the system would compute new lower prices for these products, even though most of what will be sold to other customers was in stock prior to the receipt of the very large quantity, and is in stock at higher costs. True gross margins would be less than that shown on profitability reports.

Tip: Establish a policy that orders that are supposed to be direct-shipped cannot be changed to come in house without approval from top management who would, upon approval, arrange for adjustments to system data so that costs remain accurate.

For more than 40 years, Dick Friedman has been helping fastener, tool, industrial and MRO distributors prevent inventory shortages and warehouse mistakes that lose sales and customers; and helping them select ERP, e-commerce and WMS systems, while avoiding the problems and pitfalls. Dick does not sell systems, software or warehouse technology. He is a certified management consultant and is objective and unbiased. Reach him at (847) 256-1410 for a free consultation, or visit www.GenBusCon.com for more information or to send email.

This article originally appeared in the March/April. 2017 issue of Industrial Supply magazine. Copyright 2017, Direct Business Media.

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