Inventory is one of the largest costs for a distributor. Proper planning, positioning and turnover of the inventory can impact not only a business’ profits, but also its customer satisfaction, brand and reputation. While increasing inventory turns generates more free cash flow, it often comes at a price (increased transaction costs, more receiving, inspecting, put-away, etc.). The solution is to have the proper equipment and processes in place to turn inventory quicker and fulfill orders faster while reducing operational costs.
Inventory turnover is a measure of the number of times that inventory converts to sales in a period. The formula is cost of goods sold divided by the average investment in inventory for the period. The faster a product sells and the inventory turns over, the less cash investment you have tied up in inventory. Industrial distributors with multiple locations, product lines and product types need to implement inventory turnover best practices, which includes locating inventory in the right location in the right amount at the right time.
Often businesses implement safety stock or buffers of inventory to ensure they have inventory available and can avoid stock-outs, but this adds significant costs. Balancing demand with supply avoids lost sales due to out-of-stocks and having to have more space in the warehouse and fulfillment labor to move products.
Placing inventory is not guesswork; instead, data-driven analysis should be used to ensure inventory is available and correctly positioned for orders to be fulfilled properly and to eliminate out-of-stocks. If you need to increase order picking rates and improve space utilization, analyzing the movement of your inventory and slotting the position of inventory is a start that leads to increased inventory turnover.
Slotting is the process of allocating products (SKUs) to locations in a warehouse according to business rules and product characteristics. Effective slotting requires an understanding of a company’s business and goals, taking into account the physical size and aspects of the warehouse, current and future material handling equipment, SKU makeup, seasonal capacity changes, worker skill and customer service levels.
Slotting can also be used to:
- Balance workloads across multiple pick zones
- Improve ergonomics by slotting fast movers at mid-level to eliminate reaching and bending and bulky items at lower levels for easy access to material handling equipment
- Match stocking requirements to the pick process
- Reduce footsteps on the pick patch and increase pick time
Slotting within a warehouse can increase inventory turnover. Slotting supports the movement of SKUs, whether fast or slow moving. It also improves throughput so that customer orders can be delivered on time. Effective slotting can also reduce product damage, improve worker productivity, and speed fulfillment. Proper slotting not only delivers much needed space, but appropriately locates the fastest-moving items in the right location to speed fulfillment.
Speed Picking With Right Equipment
Keeping the pick face full in an inventory storage location means that order pickers don’t have to push inventory forward to be able to reach it for picking or climb into a shelf to get a box or carton, which can slow picking and possibly put the picker in danger. Using shelves that have rollers so products flow forward, speeds the picking process and helps keep the pick face full, especially if the shelves are tilted forward.
Distributors need to assign the slowest velocity items to be picked from one area and the fastest velocity items should be located in the “golden zone,” the area between the knees and the shoulders that makes reaching for products easier. Position fast-moving items together to decrease travel time and speed up the picking process.
Mixing multiple SKUs in the same location reduces picking productivity as the picker has to sort through the SKUs to find the right one to fulfill an order. Having discrete pick locations is key, but you must also have the appropriate storage media. Keep fast-moving items in pallet positions in racks instead of loading them onto shelves or into lanes for carton flow. As these products move quickly, you will avoid double handling of the products (moving SKUs to designated location, then unload SKUs from their pallet position). Don’t put slow moving SKUs in pallet positions because these SKUs will take up valuable warehouse space for a prolonged period of time.
When optimizing inventory positioning, the type of products you sell make a difference in fulfillment levels. For distributors that carry only one or two units of a given product in certain sizes and colors, it can be harder to fulfill online orders. These are best fulfilled from a DC with inventory specifically allocated for these types of orders.
Often distributors and shippers have multiple locations that hold inventory in a variety of ways, such as:
- Fast moving products stored in one DC; slow movers stored in others
- Slow-moving SKUs stored in one DC; fast-moving SKUs stored in multiple DCs
- Mix of both fast and slow-moving SKUs per DC
While multi-DC operations have many advantages, inventory costs is one of the major expenses for this type of operation.
Whichever inventory mix is best for your business depends on what service levels your customers want or how much your business wants to cut inventory-carrying costs. Will you stock inventory by location closest to customers to achieve freight cost savings or will you need to make a second shipment from one center to another to place the inventory correctly. Using supply chain analysis of buying trends, customer purchasing history, shipping methods, etc. can help businesses determine what inventory to stock where and in the right quantity.
Distributors also need to understand where they are wasting time in the fulfillment process and implement products and processes to speed fulfillment and increase inventory turns. First, look holistically at your entire operation to understand where inventory, customers and suppliers are located. Drive waste out by optimizing inventory at every point in the supply chain.
Keep track of lead times and lead time variability and look for ways to reduce them. For example, putting popular products close to the ends of aisles near the main “thoroughfare” of the warehouse or distribution center helps order pickers get to and pick those items much faster. Bringing products to workers reduces travel times and searching for products to complete an order.
Data and KPI Analysis
With proper, accurate and timely inventory data and analysis, distributors can better manage their inventory. Analyze a unified model of supply and demand with “what if” scenarios and simulation to support inventory planning decisions. With analytics, distributors can capitalize on how to best locate, position and move inventory.
Brian C. Neuwirth is the Vice President of Sales & Marketing at UNEX Manufacturing, a provider of order picking solutions for retailers, manufacturers and distributors.