When I speak with distribution executives nowadays, they all say the same thing, “We are struggling to keep our head above water because of the economy”. However, before the economy took a turn for the worse they talked about: low profit margins, high inventory levels with low turns and an erosion of their profitability because of their warehouse. I often am forced to ask, “Is the economy really that bad? Or, is your inability to deliver what your customers want, when they want it and at a competitive price making it seem worse to your organization?”
Your organization is currently under a microscope. Every order you deliver to your customers is magnified 1,000 times. When there is a mistake you wonder will they order from you again. Your sales staff is working harder than they have probably ever had to work for orders. But they are not competing against other sales people. Your warehouse is competing against other warehouses. So, if you really want to know how to survive in “any” economy, all you have to do is look in your warehouse.
Your warehouse, like every other warehouse, is comprised of two main elements: People and Inventory! Most distribution organizations do a horrible job at managing both of these fundamentals.
To prove it, the value of your inventory ranges between 6-20% of your top line sales. That means a company with 100 million dollars in sales will generally have on-hand, between six to 20 million dollars of inventory. Let me ask you this question, when was the last time your warehouse supervisor took a course on managing inventory?
Assuming you are generating a 4% return, that would mean for every $100 of lost inventory, your hard working sales staff must generate $2,500 in new sales to make up for the $100 of inventory your warehouse lost. If your warehouse was to lose $100 a week equating to $5,200 a year, your sales staff would have to generate $130,000 to make up for the $5,200 of inventory the warehouse lost. I guarantee your warehouse loses more than $5,200 of inventory a year which means a good portion of your sales staff efforts, goes straight to purchasing to make up for your warehouses inability to accurately control your inventory! This is a simple example that proves most distributors do a horrible job at managing their inventory.
Scott Hess, a Principal with Red Hawk Advisors, a mergers and acquisitions firm had this to say: “In the due diligence phase of an acquisition, the inventory is often overstated and usually reassessed at a much lower value, due to antiquated accounting statements on the balance sheets.
“Your customer service personnel spend a portion of their day performing warehouse tasks. They often place a customer on hold, walk by a two warehouse personnel talking, so they can verify that the inventory in the bin matches the quantity displayed on the screen. Your outside sales personnel often have to pick their own orders because your counter is so busy. And the inventory in their trunk is probably more accurate than the inventory in your warehouse.
Your picking and putaway personnel spend a good portion of their day, 55-60% of their time, traveling to and from your locations. And, when the product is not there for the pickers or the location is full during putaway, which happens quite frequently, they spend approximately an hour a day searching for it in other locations. I have another question for you, “When was the last time your warehouse supervisor took a course on how to slot and profile your product?”
Because most company’s are in, “Dumbsizing” mode it appears the staff is more productive. We even see that national numbers stating productivity is on the rise. However, you have product from vendors that does not get received for days. Therefore your purchasing department spends their time reviewing proof of deliveries from your vendors. You have returns, which take a backseat to every other process in your warehouse, and for distributors between three to eight percent of your orders are returned. And on average a customer will call four times to inquire about their return. Again, because it takes so long to process, while the cost of handling a return can be two to three times that of an outbound shipment. When was the last time your warehouse supervisor took a course on improving productivity and reducing picking errors?
Right now you have someone controlling 20% of your revenue, hiring and firing key personnel, and they have probably never taken a course, attended a seminar, or read a book on inventory control, how to efficiently layout your warehouse or improving employee productivity. I have to ask, “Is the economy really that bad? Or, is your inability to deliver what your customers want, when they want it and at a competitive price making it worse for your organization?”
Your warehouse was a problem prior to the economy taking a turn for the worse. Your warehouse was a problem prior to the housing slowdown. Your warehouse was a problem and you have known about the problems your warehouse creates for some time now but you have chosen to ignore it.
So I say, “Don’t blame the economy for the problems your organization is experiencing right now, blame your warehouse!” By addressing your warehouse problems your organization will be able to survive in any economy. But if you continue to overlook them, this economy will consume your organization along with the many others it has already devoured.