Inventory management tips
Where possible, store products by current velocity.
If the economy slows as a result of a downturn in manufacturing, PHCP, HVAC and PVF distributors should expect sales to decline.
As we all know, some PVF distributors have been seeing reduced sales related to the current situation in the oil and gas patch.
In the face of a decline, distributors should change the way inventory is managed and how the warehouse is operated. Based on experience, here are some recommendations for avoiding too much inventory and for maintaining warehouse productivity even with a reduction in staff – all without hurting customer service. A previous article presented some ways to manage inventory and prevent warehouse mistakes in ways that enable competing with much larger big-box-type companies.
As sales decline, the ERP system may not react fast enough, so some adjustments to data and settings may be needed.
EOQ and min/max: As unit sales decrease, the use of the economical order quantity (or EOQ) formula for calculating the preliminary quantity to purchase may result in the wrong suggested quantity for some products managed by EOQ. Min/max may be a better method of determining when to consider purchasing (when the quantity on hand is at or below the minimum) and the quantity to purchase (which is roughly the maximum minus the quantity on hand). However, EOQ will still be used for managing many products, so the parameters that define the formula should be reviewed and changed if industry conditions have changed.
Order point and line point: For EOQ-managed products, when the quantity on hand is at or below the system-calculated order point (OP), the system will recommend that a purchase be considered. The line point (LP) is the OP plus sales forecasted for the buying cycle (time between buys). If not enough products and quantities are in the suggested-purchase display, many ERP systems will select products for which the quantity on hand is above their OP but below their LP. The concern about the LP is the forecast and the data used for forecasting may result in buying too much in light of declining sales.
Forecasting: Many systems come with several different formulas for forecasting future sales by using historical data. Regardless of which formula is used for which product family or individual product, there are parameters that should be reviewed in light of declining sales and adjusted to reflect expected overall unit sales.
Historical data: Those large projects and one-time large sales that helped make 2015 a good if not great year are included in sales history data, but are not likely to recur during a downturn. Although most systems adjust historical data to remove oddities before using the data to forecast future sales, the scope and amount of an adjustment depends on the values of certain parameters. It’s these parameters that should be reviewed and adjusted.
Safety stock: Safety stock is kept for products managed by EOQ and is kept in case sales exceed forecasted sales. SS is system-calculated by a complex formula and when sales are in decline, the parameters for those formulas need to be reviewed. At the same time, look for products for which the quantity on hand has not been less than its SS over the prior 12 months; there is too much inventory for those products.
Lead time: Lead time may be the most difficult value to determine because it is basically beyond a distributor’s control. Some systems use sophisticated formulas for calculating lead times and the parameters for them should be reviewed in light of changing vendor performance.
Some distributors may remember the recession of 2008-2010 and react to a decline in sales by reducing warehouse/yard staff — in which case productivity might decline. In any case, here are some suggestions for maintaining or increasing productivity in the warehouse.
Organization: Where possible, store products by current velocity – the fastest movers should be stored closest to the packing area. Even where products are stored by “family” or vendor line, the faster-moving ones should be stored closer to the front. Storing according to forecasted velocity would be better, but such a forecast would be very unreliable.
Receiving: When the code number of a product being received cannot be clearly established (via a packing list or such), the receiver should be capable of identifying the product via a computer search. Receiving and other warehouse personnel should be trained in the use of the ERP system.
Put away: If a product cannot be placed in the slot designated for it (because the slot is full or another product is there), the person doing the put away should record the new location on the document taken along during put away (e.g., copy of PO) or via scanning a location ID if barcode scanning is used during put away. This will save a lot of time looking for that product when picking.
Pulldown: The system should print a pulldown list that is used to replenish picking locations from bulk/overflow before daily picking begins. Pulling down and picking at the same time leads to congestion that reduces productivity.
Picking: All warehouse personnel, not just pickers, should be knowledgeable about the products stocked in the warehouse and yard. If storage locations are changed, change the parameters that define the shortest picking path so lines on a pick ticket are sequenced in the order that minimizes picking time.
Packing/QC: For inter-branch transfers, picked items should be packed in way that minimizes the put-away time at each branch.
Loading: Where possible, picked orders should be placed on rolling shelves used only for staging outbound orders, with only one order on any section of a rolling shelf. The shelves can be rolled into or near trucks. This is not suitable for pipe and large valves and fittings.
Even if the economy does not slow, or a PHCP, HVAC or PVF distributor does not experience a decline in sales, the suggestions presented here can still help increase return on inventory investment and warehouse productivity.