Why would an experienced warehouse consultant ever want to justify products that don't sell? The dead stuff takes up valuable real estate, forces everyone to walk further to get to live materials and ties up capital that could be better spent on higher demand merchandise.
The answer is romance. Not in the sense of recent Supreme Court rulings, but rather the heart and soul of the business. There have been plumbing and HVAC/R distributors who tried to sell only the prime, most popular items. Their success has been chronicled in bankruptcy court proceedings. When it comes to distribution in the real world, there is a huge difference between theory and what actually works. The “Name of the Game” is customer satisfaction, not just profits and losses.
Given this reality, slow-moving merchandise, usually termed “D” items, is a permanent fixture of the logistics landscape and therefore should be addressed, not ignored. Painful as it may seem, slow-moving products are one of the reasons why customers turn to you initially, and keep coming back. Often, these oddball and difficult-to-obtain items are your best salesmen, and provide the best rationale for customer loyalty. While the academics tell us to “throw the junk out,” the realists and “old-timers” continue to hold onto these materials saying: “You can't sell off an empty cart.” The most profitable course of action lies somewhere between these two extremes, but is often overlooked.
Where did all this dead stuff come from?
Any analysis of dead items must start with an examination of what the parts are, and where they came from. The origins will frequently dictate the destination.For example, a valve that was an “A” item can become dead overnight when the customer makes an engineering change. This obsolescence can reverse just as fast if the part is reinstated, or if it becomes a component of a “repair assembly.” Under these circumstances today's junk can be magically transformed into tomorrow's gold. This is particularly true if the cost of reproducing the part is high due to special materials or tooling. There is no way of knowing this without taking the obvious step of asking the customers about their intent, and there is no reason to ask if you don't even know that something has changed. Tracking usage and correlating this with specific customers can identify the problem, quantify future needs, and develop an appropriate plan of action. After all, if it's never coming back, why carry it? But in the meantime should you play the odds when you can load the dice?
Contrast this with an item that has become obsolete due to changes in codes or common usage. Under this scenario, getting the materials out of the stock is the only guarantee that they will never generate a liability claim. Removing the discontinued Stock Keeping Unit (SKU) from inventory, and never buying it again, will generate more space in the warehouse, raise efficiency and save time taking inventory. Unfortunately, without specific and rigorous rules when the inventory goes to zero, an order might be generated. This is one way to make a bad situation far worse.
Rejected special order materials are another source of dead items. If many SKUs are found to share this origin, programs and procedures for dealing with these problematic items and/or customers should be introduced. The last thing that a salesperson wants to say to a customer is: “No, we don't do special orders.” The second to the last is: “We will need a deposit on that special order.” And the third is: “There will be a restocking charge.” For a customer-oriented supply house all three phrases are forbidden. This does not mean carte blanche authorization on all specials. What is fair and equitable is to agree that you are both taking some risk on the order and the customer should share in any problems. Defining this in the context of your market is difficult, but not impossible.
In any supply business, blanket policies will always be overridden and rules will always be bent. Therefore, stay flexible. The goal is to get the newly minted “junk” out of the warehouse as fast as possible. Returning the product to the supplier, even with a restocking charge, is usually the best. At the opposite extreme is throwing it in the dumpster. Many creative strategies lie in between. For example, try selling the item on eBay, acting as an agent for your customer.
Returns are also a frequent source of “D” items. The solution is to deal with the problem at the source. A high return rate from one salesperson or customer is indicative of a problem in communication. Ignorance or poor catalog descriptions can be easily overcome - once identified. Enhancing return procedures to get the item back into inventory, or scrapped, will also eliminate a hidden dead item, one that is placed on the shelf in unusable condition. “Garbage in, never out” can be a real problem. If you would not sell the product to the customer in its current condition, why did someone put it back on the shelf? Look for these materials in the warehouse and vow never to allow it to happen again.
Hidden “D” items can also be created through misguided diligence. Cannibalizing parts off an assembly can satisfy a counter customer, but it leaves a piece of junk on the shelf, and the item is still listed in inventory. Sooner or later this piece will be the last one in the bin, and a future customer will be disappointed. Even worse, an unsuspecting employee gives the now defective item to a customer and the problem is recycled. Training and procedures are the only way to attack this problem.
When all else fails, donations to Gifts in Kind (www.giftsinkind.org) or The National Association for the Exchange of Industrial Resources (www.naeir.org) can turn a mistake into a charitable donation. These groups will take almost anything in reasonable condition, and pass it on to a school, charity, or not-for-profit institution that might be able to use it.
The real goal of this study is to quantify the magnitude of the problem. An inventory with 1% to 5% of the items classified as “D” may actually be quite healthy, especially if the dollars involved with these products are miniscule in proportion to the total inventory. Remember if the item count for slow-movers is low but the dollars are high, the problem is that you have too much. Reducing the total quantity, but maintaining some on hand is a very legitimate strategy.
Dealing with what's left
Now that some managerial energy has been focused on the problem, can one get rid of all the dead stuff? No, not really. There will always be an irreducible minimum to be retained against contract obligations, projected future needs, or that inevitable customer who comes in and says: “I suppose you don't have…” Add to this the necessity for being a “full line house” and the end result will be a fairly high number of slow movers in the warehouse. This is especially true where the number of SKUs is high, but the number of individual SKUs touched more than once a day is less than 5% of the total stock. Don't believe this? Run a listing of how many times a year an item is picked, and see where the break point is for 250+ hits (250 working days per year).While there is no reason to maintain thousands of an unproductive SKU, one can justify maintaining a representative sample on hand to satisfy an occasional demand. If you are operating a “supply house” while your competitors have only “branches” in your market, the advantages of being “first call” are enormous. This is especially true when serving customers who know how to “repair” rather than only “replace” on a service call. There is a huge difference between “parts” and “assemblies.” Similarly, a “plumber” is willing to “fake it” with bushings and reducers, while a “pipe fitter” will only accept the specialty fitting required for a professional job. Find out which types of customers you serve, and establish inventory policies to meet their needs.
Most measurements of customer service are predicated on supplying the full quantity of what the customer asks for on the first pass. In actuality, a better paradigm for slow-moving items is to give the customer something to get started, followed by the rest of the order on the second pass. This defines service from the customer's perspective, not the distributor's perception. Try tracking this, and see how you really perform - in your customer's eyes.
Stocking what's left
Physically, there are two basic ways of dealing with these vital “D” items in the warehouse. They can be integrated in with the rest of a vendor family, or separated into a new family of “solutions waiting to happen.”For small items the traditional warehouse rule is to maintain all products from one vendor or family together in a section of shelving, rack or an aisle. With an effective Warehouse Management System (WMS) this is unnecessary and often counterproductive. It is best to store items that are sold together in one location that considers the “affinity factor.” Under this paradigm there is no real reason to keep all the products in part number sequence. This is especially true with the slowest moving products in a “line.” An example of this is a valve used only on an oil tank. Storing it in the “valve family” by vendor is clearly less efficient than storing it in the “oil heat family” where it will be picked in conjunction with other products.
Once one moves beyond the traditional stocking concepts, there are many opportunities for storing slow movers with much greater efficiency. By definition “D” items are almost never reordered, so this eliminates the “stocking excuse.” They are rarely touched, and typically counted at most once a year, so this reduces the need for maintaining a tight inventory control. Under these circumstances, alternative storage opportunities can be exploited without any capital expenditures.
Taking the slowest SKUs and pulling them out of strict family sequence can mean nothing more than moving these products to the far end of an aisle. This opens up shelf space for faster movers close to the pick path and significantly reduces the order picker's steps. Translate this into time saved and greater overall efficiency. A frequent side benefit is enhanced quality, especially when the products have uniform packaging or are easily mistaken. Separating similar items precludes mistaking a #4578BL (black) from a #4578AL (almond).
For larger objects, separating stock will often save space as well as time. If most of a product line is palletized, and the slow movers are stored strictly by the case, these products can be segregated into shelving, hand stacked on pallet racks, placed in carton flow racking or handled in some other high density storage medium. A minimum cost strategy would be to condense the slow movers into one section of rack at the far end of an aisle, with tight beam spacing. Several pallet rack manufacturers have developed retail store accessories that can even commingle palletized goods with individual cases. For an example of this, go to www.unarcorack.com and click on “retail.”
In an operation that utilizes an “Order Picker” or “Stock Selector” forklift (controlled from a position on the forks) a good strategy is to maintain the fast-moving products at floor level, with the “D” items directly above the related materials. This takes advantage of the fact that the forklift can elevate far faster than it will travel horizontally. By “popping up” for the slow movers, product affinities can be maintained without slowing the picking operation.
The bottom line…
is that “D” items are a fact of life. They fetch business, and if properly controlled can offer a higher return through better margins. The trick is to exploit their differences, and treat them as an important and necessary factor of a successful supply house. While the “A” and “B” items offer more glamour, all too often the “Cs” and “Ds” pay the overhead.And, for those who are seeking more romance in their lives, becoming a local or Web-based specialist in hard-to-find products may be the ultimate answer. But that's another story. <<
