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.

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