What Is The Easiest Way To Cut Warehousing Logistics Cost To Minimum?

Very few companies seem to have enough warehousing space. Almost 80% of the companies I have interacted with as part of my projects (and that number runs in thousands, when you count the suppliers, customers and other supply chain partners of clients and customers) have sometime or other complained about running out of warehousing space.

And, if I had asked the remaining 20%, several of them would have also likely complained about the same thing. They did not complain only becuase their other problems were far more urgent and important.

So why are most companies almost always out of warehousing space?

We will come back to answer this question in a short while. But let us first see its effects.

You have probably already heard, and seen the effects yourself. People coming to you almost weekly (if not daily) to ask for more warehouse space. The request may be temporary, seasonal or permanent. It may come up in many different ways during the meeting.

Inventory has a tendency to accumulate

Even if you are not a hoarder by nature, someone else in your company might be enough to trigger the hoarding.

Let’s look at a few few case studies to get to the depth of it. Take a look at the picture below:

Each of the circles (or dots) in the picture above is a stocking location for a business. Larger circles mean larger stock holdings (in $). The horizontal axis is stock turns, so a stock turn of 2 a year means average stock holding of 6 months in this location. The vertical axis is annual sales in Million $.

What is clear from above picture is that barring two locations every other location is a low sales stock holding location. And about half those low sales location keep stock for 6 months or more.

Space runs out

And, this business was clamouring for more storage space. You might think that this business did not have a good enough inventory management system. But in fact, the system was barely understood, let alone used. So it did not matter whether it was good or not (and yes, it was not the best in any case, though they were led to believe by the vendor it was quite good).

Here is a picture of another business – this time look at the stock that was untouched for more than one year (multiple years in many cases.)

You might excuse this business, thinking that perhaps this one too had dozens of locations and thousands of items to stock. But, no. It has barely a handful of locations and a few hundred high velocity SKUs (items). So there was no reason for having such a large stock of inactive items.

I could of course produce dozens of charts like this from other projects, but I am sure these two already give you a picture.

Why does this happen?

So let’s come back to the question asked earlier. Why does every company seem to run out of inventory holding space?

Things happen. Sales people provide wrong forecasts. Or, they are optimistic about a particular customer and want to be prepared for when the order comes in. Or they have high expectations from a new range of products. In many cases – they want to have a warehouse full of product before they want to go out to make a sale. That puts psychological pressure on themselves, and also makes it easier to discount and make a sale.

Operations people make mistakes all the time. It is always better to be safe, than sorry. Last thing operations and supply chain staff want is to run out of stuff just when orders start rolling in.

You will right to ask, isn’t there some sort to science around inventory planning and targeting. What use is all this predictive analytics and AI if we cannot even manage inventories coherently.

I have written about systems short fall elsewhere so I do not want to divert my attention there. I want to add that in most cases even the personnel are not up to the job (despite the appearances).

Alas, it will take me an entire book to talk about potential reasons why the above charts are so typical of most businesses.

Sood’s Law Of Inventories

Let me sum it all up with a simple axiom – I call it Sood’s law of Inventories – “Inventory always expands to fill up all the warehousing space that is available”.

The reasons are partly technical, and partly psychological.

Just like the now famous Parkinson’s law of bureaucracy which states that “work expands to fill the time available for its completion,” and that a “sufficiently large bureaucracy will generate enough internal work to keep itself ‘busy’ and so justify its continued existence without commensurate output. “

I want to spend just one more minute on the elaborating its effect before moving to the potential solutions.

Imagine for a moment, what happens if you have third party logistics service warehousing providers who claims to have put at your disposal an unlimited storage? I will leave that corollary to you and move on to the potential solutions.

It is customary for most houses to do a sort of ‘spring cleaning’ or ‘after Christmas clearance’ to get rid of clutter. Many retailers use clearance sales a marketing tool or sales gimmick. Some even use them to genuinely empty out the warehouses. The solution is to use these more often, and more rigorously.

Look into every nook and corner of the warehouses. Question every stock holding. Ask for the inactive stock report for 12 months, 24 months, 6 months and even 2 months. Make it clear that you expect the stock to move, not sit. Flow creates momentum and performance. Expect it.

More importantly, do not allow people to fill warehouses with products that don’t sell.

The best way to minimise your warehousing logistics costs is minimise your warehousing logistics stock holding.

If you are getting too many excuses, get outside help. Here is how to get the best form of help in situations like these.

This is Just the Beginning

The reason I added this last subsection to this article here is because I got feedback from an ex client who read this article till this last subtitle that I left them with an impression that spring cleaning would be enough to minimise inventory, and thus the warehousing cost.

In case you thought this is all I have to say on the matter, I want to add that in addition, there is a an internal manual our company uses to train new recruits on the ‘science of inventory management’. It details FIVE different types of inventories, why they are necessary and useful, how to scientifically calculate each type of inventory for each item at each place, how to automate the process and how to use it to keep the inventories under check.

Unfortunately, that manual is not yet good enough to put in the public domain. When my team has time, sometimes with in the next 18 months, we will refurbish that approx 300 page manual so you don’t have to be a top notch consultant to understand bulk of the content.

If you are keen to get a flavour of the subject, and if you can look past the antiquated 2011 era video production technologies we had, here is a video in which I explain to Fanny Martinache the problems in inventory management.

PROBLEMS IN INVENTORY MANAGEMENT – PART 1
(C) GLOBAL SUPPLY CHAIN GROUP

That just gets you in the right mindset to make use of the manual. I am not sure, but there might be a book out there somewhere which might give you some starting advise on the science of Inventory management. Otherwise, contact me and I will send you some pages out of our internal manual.

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Vivek Sood

I write about "The Supply Chain CEOs", "The 5-STAR Business Networks", and, how to "Unchain Your Corporation". In my work, I help create extraordinary corporate results using several 'unique' supply chain methodologies. Contact me for interesting, high impact projects, or, to get access to my IP for creating transformations using these methodologies.

  • Moiser says:

    Quite surprised to know the shocking truths about warehousing. I am rather astonished that only a few companies are actually serious to maintain a warehousing space. Maintaining a warehousing space is of damn importance. I mean how a company exists in the market without a warehouse? Or if they do have a warehouse, they are liable to solve all the related problems so that they can increase their profits and efficiency. Both profit and efficiency are dependent on how large is a company’s warehouse space. The larger spaces undoubtedly yield larger profits. The problematic warehouse is sure to decrease the overall efficiency of the company.

  • Deresinsky says:

    Occupying a warehousing space isn’t a matter of feeling proud. For instance, if your company occupies larger space other than your competitor, does this situation give you a winner’s kind of feeling? If you say “Yes”, you are suffering from a kind of psychological disorder, I must say. Because this is by no means is a professional attitude. If you have an enormous space for your accumulating goods into your inventory with utmost ease, you are doing well. Any company should focus on increasing their financial and physical resources rather than competing only with their competitors. Warehouse lodging is a serious issue and only knowledgeable company executives understand its seriousness.

  • Casey says:

    Dealing with problems is a matter of readiness and willingness. Willingness to crack the inventory problems and readiness to respond to a problem at any given time are the ultimate solution to every warehouse related matters. You have given reference to different companies facing multiple issues but have they ever tried to do a root cause analysis? An analysis is to be done before estimating the space for establishing a warehouse and root cause analysis is essential after encountering the problems within the warehouse boundaries. Both per and post analysis is a key factor to avoid any forthcoming problems. And all you do when you are willing to resolve the problems earnestly.

  • Barbara says:

    How a company could even survive when lots of inventory troubles are prevailing inside the company? As you have mentioned in this article a number of companies are trying to survive in the market with lesser depository spaces. Such conditions arise when a company underestimates or overestimates their monthly, weekly or yearly productions. The proper assessment is needed to address such serious glitches. The gravity of spaces is so powerful that it can bring any company to the ground. The survival becomes difficult and profits decrease to unexpected levels. Sometimes even the survival turns out to be relatively challenging and hard

  • Dan Weston says:

    Warehouse management could reduce the costs of warehouse space to exponential levels. A very well planned warehouse management allows the organizations to control monitor and administer the company operations from the time goods or materials to enter a warehouse until they move out. Warehouse management must be based on the management of operations let’s say inventory management, picking processes and auditing. Management provides a crystal clear visibility to an organization’s inventory and supply chain operations at any time and locality whether in a facility or a transfer. Appropriate planning forms the basis of management. Planning is an ongoing process. It starts from the very start of the project and goes till the end. So, if the planning is right the management will also be effective.

  • Sean Jeryy says:

    Does company size increase the complexity of this matter? I think yes. The size, structure, and nature of the company affect warehouse management, supply chain decisions, operations, and implementation methods. Small sized organizations need a lesser amount of space to manage their inventories and associated resources. The large scale organizations are however hard to manage. Large scale organizations need an expanded warehouse to store their annual goods. Medium sized and large scale organizations need a sophisticated strategy to maintain their stock in such a way that they never face space shortage problems. Some very articulated tactics must be adopted by these two types of organizations to escape the negative consequences.

  • Shariff Vetter says:

    I agree with you at the point you said inventory has a tendency to accumulate. Here comes the dilemma of hoarding. I remember working with a company that deals with buying and selling computer hardware fragments and devices. They import the hardware devices from different countries and along-with selling them to their potential buyers, they used to stock them in sufficient amounts as well. When the demand for particular hardware part or device is increased, they bring that part out of their warehouse and sell it to the vendors on at desirable cost. I am not arguing here whether the hoarding is a decent approach or not. I am just focusing on hoarding repercussion. Hoarded items engulf the warehouse space and companies start seeking for more physical resources. I have seen my company facing trouble due to this very same issue. You cannot predict how long you have to hoard the items. I would recommend to empty space for actual items and spare some other place for the items you desire to hoard.

  • TJ Alexander says:

    Holding and hoarding, I have hated both philosophies my entire life. Whenever I hold something for longer, I lose interest in it. And when I hoarded, that hoarded item get spoiled. Hate it. Wondering the stamina of those who hoard the things for a prolonged length of time where I cannot hoard some of my very personal things. For me, hoarding is a kind of strategy. If you are strategic enough, you can intelligently hoard items in narrow spaces. The art of effectively piling up the items one over the other needs a clear cut strategy. Sadly, I have found myself strategically poor as I never succeeded holding and hoarding even little things. Hats off to those people and companies dealing with hoarding stuff effectively.

  • Nottelmann says:

    I could recall the days when I was working in a warehouse. I learned during that period of my life the difference between hoarding and effective hoarding. If you can predict the hoarding duration a specific item, you are doing effective hoarding. If you are hoarding an item without a clear prediction, you are just hoarding the item. Effective hoarding is not as dangerous as this simple hoarding is. Very few companies and executives are aware of this difference. Only expert and professional executives know this art. When the items are stocked blindly, both profit and productivity are victimized. I have seen myself people just focus on hoarding foreseeing its increased future demand. Blindfold of greed cover their eyes completely and forget do they actually have enough hoarding space?

  • Emma says:

    I can better understand the aftermaths of the wrong forecast. Once I planned to visit my aunt’s home living in Sydney. Before packing up my bags, I thought why I shouldn’t check the weather forecast as it would help me out in packing the right stuff. I checked the weather of the next few weeks and realized Sydney is expecting rains for two weeks. I never adored the rainy season. I canceled my plan for one month depending upon the weather forecast. Later on, one day when I was talking to my aunt, I came to know there was only one rainy day in the whole week and the weather there was quite pleasant. I just banged my head onto my laptop screen and blamed myself for relying on that shitty weather forecast. Well, I think the aftermaths of the wrong forecast are quite bearable for an individual but not for organizations.

  • Mendel says:

    I never thought the word inventory is as wide as you have depicted in this article. I have never messed my head with management and supply chain associated subjects. While surfing on the internet I came across this article. When I started reading this article I was quite amazed to know about the warehouse issues and spectrum. I never imagined that this small word inventory has such a wider spectrum. I have always heard this word and thought that this would be a matter of trivial importance. But I was wrong. It is such a complicated word as the whole profits of companies revolve around it. After reading the whole article I have reached the assumption this actually is the central point and rest of things are dependent on it.

  • Robinson says:

    Summing up the article in a comprehensive heading of Sood’s law of inventories stating “Inventory always expands to fill up all the warehousing space that is available”. I genuinely agree with you here. The expansion of inventories starts filling up the whole surrounding space. You have beautifully summarized the whole concept so that the reader may understand the concept of inventory and warehouse in depth and detail. In my opinion, this law is the summary of your article and every professional person either executives or managers could learn a lot. I would request you to write more on this topic as it relates to my field of interest and profession.

  • Annabeth says:

    Harding happens to everyone and it is not gender or age biased. Let’s admit this that we all are hoarders. Many of us have trouble parting with our possessions—even when we no longer need them. I have a collection of greeting cards I’ve been storing since childhood and will probably never look at again. Some people take their keepsakes to the extreme, holding onto decades’ worth of receipts, newspapers, and other seemingly useless items. A wave of recent TV shows like Hoarders and Hoarding: Buried Alive has publicized the rarest and most extreme form of hoarding, homes filled floor-to-ceiling with piles of boxes, books, knick-knacks, and rat- and bug-infested garbage. Anywhere from 2% to 6% of adults have hoarding habits. I believe such individuals when becoming the CEO of any organization they start practicing their hoarding behaviors at a wider level.

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