There are lots of mistakes commonly made by small and medium businesses when running their logistics operations. SMEs are under acute competitive pressure to perform and scaling up only magnifies the issues. Even larger businesses often don't have the expertise and resources to get the most out of their logistics. We see it all the time. Here's our top 7 logistics mistakes and how to fix them.
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1 Carrying too much stock or too little stock
The money you have tied up in stock is usually one of the most significant ongoing investments you have in your business. Just like any investment, the return will depend a lot on your skill in investing in the right stock at the right time. Fortunately, there are ways of doing this much more reliably for your business stock than there are for your stock market investments!
Too much stock will cost you money not only to buy, but to store. Your warehouse is an engine that burns cash whether it is standing still or earning you money. Lease costs, outgoings, electricity, pallet hire, capital costs and depreciation add up to a significant cost per pallet of storage. This can be anywhere from $3-$8 per pallet per week depending on your circumstance. This is one of the most under estimated expense impacts in business. Slow moving or non-moving stock not only depreciates in market value over time, but it accumulates storage costs that eat away profit margins and also have an opportunity cost of not warehousing and selling productive stock. Often the realization of this does not come to light until the warehouse is full and newly delivered stock must go into hastily arranged offsite storage. This will get the finance manager’s attention when a large and unexpected invoice lands on his desk!
Too little stock will cost you money in lost sales. Perhaps the most basic business rule if you rely on product distribution for your bread and butter, is to have stock available when the customer wants to buy. Unless you are tracking this lost demand, you may be blissfully unaware that it is even happening. Stock-outs will drive your customers to your competition in search of what they need. It is literally like handing them cash out of your pocket. You let your customer down and your competitor saves them. The loss of reputation and customer loyalty may never be recovered.
There are three things you need to do to fix this problem.
2 Storing products in family groups, product or description order or Bob* knows where
Before computerised warehouse management systems, warehouses were run entirely by manual paper based systems and human memory (and many still are). When there was a product to pick for an order there had to be some sort of system and logic to how stock was put-away so that individual items could be found. Often stock was stored in family groups like in a supermarket where the same type of items are stored in the same area. So long as the item you needed was there somewhere, you would be able to find it if you looked hard enough. A variant of this is to store items alphabetically or numerically in code order. This is a how your local video store used to keep its weekly video rentals (remember that?); they had family groups (drama, comedy, horror) and then put the videos in order by title. If the warehouse and product range is very large and storing in logical product sequence becomes impossible then some variant of a stock locator card would be used to check product in and out of a numbered storage bay or location within the warehouse.
The problem with manual systems like this is that they continually break down due to the dynamic nature of modern business. New products and product ranges come and go constantly. A new product range takes off and needs a lot more space. This means constant rearranging of stock to maintain order, which is very time consuming (i.e. expensive). So, what happens in practice is the rearranging either never happens or only when the system is very broken. Stock will be put-away wherever it fits. This is like the drama section in your video store becoming full and the overflow going into the foreign language film section. Maybe someone will stick on a Post It Note to tell you, or you stumble upon this by accident or when you ask the staff they wave in the general direction and say “oh, that one’s in the foreign film section”.
The other problems with a manual logic based storage system are that too much time is lost searching for products even when everything is in order (which is almost never the case). Once products are put where they fit instead of where they should be, that search time can go up exponentially. New staff have a long learning curve to become productive, because the system is based on memory and they have to ask an experienced colleague where things are located. Bringing in casual labour to help manage a peak in work or a stocktake can be an expensive and futile exercise as they will be slow and unproductive.
Unfortunately, too many businesses still run manual warehouse systems like this. This is of course the fault of the modern business system. All the effort has been put into making the accounting and sales process efficient and little thought is given to the warehouse operations. Many business systems have basic location control of one location per product. This is usually a text field added to the inventory file and not a separate location file allowing multiple items per location. Whilst this is a major step up from nothing, it does not give you the tools you need to run your warehouse efficiently.
The best solution to the problem is to invest in a Warehouse Management System (WMS) that will allow you to optimise the storage and physical product flows in your warehouse and eliminate the time lost in searching for products during picking or empty space during put-away. These systems pay for themselves in around 3-6 months for medium and larger warehouses and 9-18 months for smaller warehouses with less than 10 staff.
If you are not ready to invest in a WMS, then it may be possible to enhance your existing system with some new fields and revised reports to provide some basic functionality to improve what you have as an interim measure. We have done this to great effect with older ERP systems, but the same principles can be applied to any system. Bear in mind that if you go this route you are investing in a short term solution that you will throw away later and you should only do this if the WMS option is simply not viable for your business, but you have to do something. I strongly suggest that if you think you need to do something that you call us to discuss what your best options are or join our low cost Top 3 Warehouse Accelerators Program.
* Bob is your longest serving warehouse operator.
3 Not separating fast pick areas and bulk storage
At the heart of all warehouse productivity improvement is the target of eliminating the waste of motion. Simply moving something from one place to another in the warehouse does not add any value. One of the most common mistakes we see in warehouses is the failure to optimise the placement of the most commonly picked items to reduce travel path when picking and replenishing.
What do you do when you have lots of stock of those fast moving products? If you keep all your stock together it will take up so much space in your fast moving rack zone that your fast moving products will not be near each other.
The solution to this problem is to create a pick location with just enough of each fast moving product to allow you to keep a lot of products in a restricted amount of space and keep the bulk quantities of the stock somewhere else in your warehouse. This means you will need to periodically replenish the stock of each item in the fast from the bulk zone. This process is known as pick area replenishment.
The configuration of your fast pick zone will depend upon your products and their physical size and order profile. Ideally you want at least a day’s worth of stock in a pick face and a week’s stock is better. If the stock is batch controlled or expiry dated, then you will want to have two pick faces to allow for different batches/dates. You should avoid mixing batches/dates of product in the same location if batch control and traceability is important to your business (it may not be).
Replenishment of the pick face can be done on demand or to a schedule. On demand means that you do not do any replenishment until you absolutely have to, so when you empty a pick face you go to the bulk reserve stock and fill the pick face up again. The disadvantage of this is that it can slow down your order fulfillment as you cannot complete those orders waiting on the pick face to be replenished.
Scheduled replenishment means that you can use slower times of warehouse activity to perform replenishment so that your high activity times during order processing can be devoted to processing orders in the shortest possible time. The best solution will depend on your particular cycles of activity for your business.
If you have a basic business system that only allows one location per item, then how do you find the bulk stock if you have set the pick face to be the only location for the item? There are two solutions to this problem:
4 Incorrect picking methodology
Picking is the highest labour activity in the warehouse and consequently gets a lot of focus on optimising it by both the Warehouse system developers and the materials handling equipment manufacturers. Failing to select the best picking methodologies for your particular business needs will see you missing out on what can be relatively easily won productivity gains.
There are four basic picking methodologies and a nearly endless variety of variations depending on the technology, equipment and layout employed in your warehouse. The four basic picking methods are:
5 Freight: using multiple systems, not tracking costs, paying too much
Most, if not all carriers today will want you to give them your freight despatch information electronically. Whilst there are still plenty of circumstances where a hand written consignment note is unavoidable, the processing of manual con-notes is more expensive for you and the carrier. To make this easier for you and for them they have developed computerised freight management systems. Unfortunately, these systems are designed to work with one carrier (i.e. the carrier providing the system). This means that when you inevitably need to use the services of a different carrier that is either cheaper or provides services that you cannot get from your other carrier, you end up with another freight system. This can end in multiple carrier specific freight systems. This is a mistake and it is much better to implement your own multi-carrier freight system. But why should I pay for something that I can get for free, you ask?
Carriers don’t want you to use anyone else for your freight, a single carrier system tends to lock you into that carrier. Once you break this barrier and have multiple systems you now have a training load to learn an additional system. It may also take different sized labels, so you have an additional critical supply to manage. You have just added more points of potential failure.
You have now also split your data into multiple systems. The 21st century more than any other is the age of data and you should regard your data as a gold mine to be guarded and protected from loss and fragmentation. What use is my old freight data apart from looking up old consignment notes for Proof of Delivery requests, you ask?
Freight will be one of your company’s largest costs and not being able to measure and report on its performance and costs as a whole package, is a significant deficiency in your reporting. Freight cost reporting is significantly easier if you have all the data in one multi-carrier system. A multi-carrier system lets you extract data from all of your services so that you can get it costed by alternative carriers when you perform a freight review; which you should do annually.
Call us if you have not done a recent carrier or freight review,
it’s quick, it’s free and will probably save you a lot of money
In addition to managing your freight costs, if you connect your freight data to your order management system you will now be able to do better Cost To Serve analysis of your customer base to determine relative profitability of different customer groups. This is very useful to assess the underperforming areas of your business.
If you have a large number of shipments per day, there is a significant productivity gain to be made from having your freight system integrated to your WMS or order management system to eliminate data entry. Creating freight labels at order confirmation or before each order pick is a huge productivity booster. You only want to integrate one system not four or five, so this means you need a multi-carrier system. One of our clients integrated their freight system and saved one full FTE*. At a fully loaded cost of ~$60,000 p.a. for a storeperson, with a development cost of only $5,000 this had a payback of less than a month!
*FTE=Full Time Equivalent, or the labour equivalent of one person working full time.
There are several major multi-carrier freight systems currently available:
Logistics Help have partnered with Myfreight who can supply not just the freight system but also manage the carrier relationship for you and reduce your costs by selecting the most appropriate carrier for your business.
6 Failing to invest in equipment, systems and technology
Equipment, warehouse systems and technology can be expensive and is an optional expense in the sense that it is not required to operate your business. For these reasons some businesses shy away from making capital purchases. The same businesses that do this will also have no problem meeting a non-optional, but high wages bill every week and pay overtime when required to meet customer demand. In our experience, provided the correct equipment is bought for your requirements, the investment in warehouse technology, systems and materials handling equipment is always rapidly paid for in reduced labour costs, let alone increases in accuracy and quality, responsiveness and improved safety.
Once you have adjusted your attitude to technology from scary cost to business investment, you will never look back. Look at every purchase as an investment in productivity and calculate the return and payback period. If you lack the capital to invest, then leasing or financing is usually a viable option if your business is strong. The payback even for large investments will typically be less than one year (i.e. 100%+ ROI), so if capital is tight, a loan or lease agreement can be structured to be cash flow positive to your business almost immediately.
Delaying an investment in productivity will usually only cost you money in lost cost reduction. Although you don’t feel this the same way as a sudden jump in costs, the impact is the same. Should you treat it as any less urgent? It is for this reason that I think failing to invest in technology when the option is available to you is wasting money.
Let’s look at how you can do a basic return on investment calculation for an area of business need. My number one technology investment recommendation for a warehouse is to implement a Warehouse Management System (WMS).
Let’s look at a return on investment calculation for the Upimium WMS. For a modestly sized 3,000sqm warehouse running a simple paper based ordering system and employing 12 stores people with two supervisors, an investment of $122k pays for itself in nine months and makes you $1.5M richer over ten years, that is an average interest rate of 129% p.a. (flat) over 10 years. You can’t get that from a bank! Lower cost WMS options are available for smaller warehouse operations so if you think you could benefit from this technology call us.
Unfortunately, not all investments in technology will have as high a payback as the implementation of a WMS but you get the idea. Find an area of need where labour can be saved and service quality increased, find a solution that you like, calculate the return, implement it well and reap the rewards.
7 Failing to maintain and develop your operations as your business grows and changes
The seventh habit in Stephen Covey’s Seven Habits of Highly Effective People is Sharpen the Saw. This is the recognition that even the best “saws” become blunt over time. If the saw wasn’t that sharp to begin with, then a few years down the track the work of cutting through becomes really hard! Does your warehouse feel like that? Just plain hard work to get through every day?
The mistake of not changing your warehouse operations as your business evolves can cost you dearly. Even traditional businesses now face change and the pace of change seems to keep increasing. New, products, new customers, new services, maybe even completely new business models can get dumped onto the warehouse and the common response is a hasty rehash of existing systems and processes to “get by for now”. This pattern accumulates inefficiencies over time and can end up with a very inefficient warehouse, staffed by a lot of frustrated people, with the whole operation in need of a major overhaul.
The antidote to “getting by for now” is a program of continuous improvement. I see two distinct areas to focus on to drive an effective continuous improvement program to keep your warehouse operations up to date and running smoothly.
The need for a change in strategy or infrastructure is often driven by competitive pressure, desire for growth or a change in the market requiring a move to a new business model. Sometimes change is driven by pain from service failures, customer complaints, out of stocks, overstocks, sudden changes in operational costs such as overflow storage or a large stock write off. If the resources to answer these challenges are not available within the business, then help from professional business advisors will be required to help formulate an appropriate response. This is where Logistics Help can advise a business that is:
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