Long before the economy took its nosedive, consultants and industry analysts were touting the importance of cost-reduction strategies throughout the supply channel. Finding ways to become more efficient, they argued, not only helps maximize profits in good times, but it can help companies weather economic downturns.

Of course, such measures often cost money up front. For those in a good cash position, investing in a warehouse management software system is one way to tackle the cost-reduction problem. Many industry-watchers say an efficient warehouse strikes at the very heart of a distributor's business — the ability to ship products to customers completely, correctly and on time. That, they say, translates into higher service levels, happier customers and, hopefully, more business.

In March, Industrial Distribution surveyed readers on their use of warehouse management software. Over 100 companies responded about their current and future use of WMS. Twenty-two percent said they will purchase a warehouse management software system in 2002, while 74 percent said they will not. Of the latter group, 43 percent said they already use such a system. The rest said they have other IT priorities or cut IT spending because of the economy. A small percentage said they simply are not interested in purchasing a system this year.

Despite the reasons for not investing in WMS, most distributors realize the importance of an efficient warehouse. A majority of respondents said that even if they lack a WMS system, they have examined warehouse costs and inefficiency. That should be good news to people like David Allais, president of Pathguide Technologies, a warehouse management software provider based in Seattle, Wash.

"What [distributors] do is ... handle materials. That's the engine underneath the business that provides the 'customer service' they are selling,'" says Allais, adding that a warehouse management system is "part of the whole image of a well-run, forward-thinking distributorship."

Distributors who plan to purchase a system this year have three main objectives: reducing shipping errors, increasing productivity, and tracking inventory levels. As for functionality, they want to: streamline and automate picking, automate tracking, and automate billing. All of those objectives can be achieved, says Allais, provided the company is dedicated to making the system work.

"It's so dependent upon management saying 'we're going to put this investment in and we're going to put a man on the ground to see that we get some benefit from it,'" he says. "If management is not dedicated to it, it's just not going to work."

In general, a distributor who implements a warehouse management system in 2002 should start to see a return on the investment in 2003, Allais says. You can track that progress in many ways. Jeffrey Ramras is charged with doing that for billion-dollar distributor Applied Industrial Technologies. Ramras is Applied's vice president of supply chain management. About seven years ago, Applied embarked on a new warehouse management program that included re-designed warehouse space, conveyor and automated sortation systems, and a software system that uses radio frequency bar coding. To date, five of Applied's eight distribution centers are up and running on the system; a sixth will be operational in July.

Increased productivity, error reduction, and inventory accuracy are three ways Applied has measured payback. In addition to allowing Applied's facilities to handle more inventory, WMS has increased employee productivity. In turn, the company has reduced personnel by 10 to 15 percent in each facility through attrition. Secondly, says Ramras, error rates have gone down because more automation and fewer people means less chance for human error. Thirdly, the system's cycle counting ability helps improve inventory accuracy, resulting in 99 percent accuracy rates.

"That accomplishes a couple of things," Ramras adds. "It enables us to no longer take a physical inventory ... and our service centers now can rely on the inventory that's posted on their screen."

There are other benefits, as well. Ramras emphasizes the ability to improve picking procedures, better utilize storage capability and reduce training time.

"It's quicker for people to learn the technology and therefore be more productive faster, than it is for them to learn the system, look at a piece of paper, figure out what it means, familiarize themselves with placement [of the products] ...," he explains.

Ramras says Applied typically sees payback on the system within two and a half years.

For Jim Beckstein, president of construction and general-line distributor Mill Supplies in Ft. Wayne, Ind., payback is measured in simpler terms. Mill Supplies has about 60 employees and two locations in Indiana. Four years ago, the company installed a real-time warehouse management system, which uses radio frequency bar coding.

"If I receive the item correctly from the manufacturer, I put it away correctly, then I write the order, pull it correctly, pack it correctly, ship it correctly, and the customer receives the right item — that's the payback, because I don't have errors," Beckstein says. The cost of an error is substantial, he adds, when you figure in the time it takes for the salesman to apologize to the customer, correct the problem and ensure that the customer is satisfied.

Like Ramras, Beckstein emphasizes the importance of regular cycle counting.

"[For distributors] who only do inventory once a year, there's only a brief moment that it's correct — December 31^st at midnight," Beckstein says. "It may be off for the rest of the year."

A common complaint among smaller companies is that the cost to install a WMS system is simply too high. Eric Allais, Pathguide Technologies' director of marketing, says a typical industrial distributor with a single warehouse facility and annual sales of about $10 million could expect to spend $125,000 to $150,000 on a system, including software, hardware, installation and training.

While the benefits outweigh the cost, David Allais says it might not be necessary for very small distributors to take the plunge. He says a few people working together, who are familiar with the warehouse and don't make a lot of mistakes, can do a good job without a high-tech system. When you've got more employees, more products coming through and a higher turnover rate, that's when a WMS system can help.

"There is a minimum size where a few people working together really do a good job," says Allais. "But when you get 10 people, turnover, a decent amount of stuff going through the warehouse — you'll find mistakes and inefficiencies."

That doesn't mean smaller companies shouldn't look into WMS systems. For one thing, if their strategic plan calls for significant growth, it may well be worth it to invest in a system sooner rather than later.

For companies that choose to make the investment, Ramras and others say it's vital to integrate the system with the company's overall operating system. Allowing all parts of the business to speak to each other can lead to other efficiencies. For instance, at Applied, Ramras says purchase order to receipt cycle time has been cut considerably. That's the time from when an order is placed for replenishment to when it actually shows up in Applied's distribution center, in the computer system, ready for sale.

Such achievements aren't easy, of course. And as David Allais emphasized, management buy-in and commitment to the program are vital to success.

"All too often, [distributors] don't want to invest in the warehouse, despite the fact that it's so important," says Allais. "But the ROI is exceptionally good, while you're building the base that lets you deliver customer service."