Respect the bottom line

When it comes to inventory accuracy, the bottom line is the main goal for Jon Rauch, factory logistics manager with high-end computer manufacturer SGI (www.sgi.com). In his case, it is served with speed.

"Our orders come in assemble-to-order, each with a unique bill of materials," Rauch explains. "Our warehouse management system (WMS) directs picking of components per each discrete job. With the WMS controlling everything in the factory, we've reduced by two days the time from receiving an order until it's shipped."

The WMS makes every transaction a task driven by the system. SGI uses software from Oracle Inc. (www.oracle.com) to track goods from outside the warehouse into the factory. Everything takes place in the background without human involvement.

"Material-wise, our A parts are nearly 100% accurate at all times," Rauch claims. His people use handhelds to scan bar codes and the system does the transactions — transactions happen when anything moves. From a staffing standpoint, Rauch was able to reduce inventory analyst staffing by 33% and material handling staff by 55%.

Today, systems at SGI work together to yield high levels of inventory accuracy. It wasn't always so. In some locations, the manufacturer had separate WMS systems and had to write interfaces to link them. Humans had to request parts, which made room for more errors.

"Being able to do transactions with a bar code reader minimizes human error," Rauch notes, "though we still have problems. Someone might pick six items instead of five. But our daily cycle count program in the WMS makes the adjustment. If we physically move an item, the WMS catches the move in the next daily cycle count."

In its quest for even better efficiency, SGI recently started using XYZ coordinates to reduce travel time. Pickers maximize picks in a location.

Fast food retail chain Wendy's International Inc. (www.wendys.com), meanwhile, is implementing new technology tools that allow inventory managers to look at individual restaurants.

"We're trying to get as granular as possible," states Tony Scherer, director of supply chain management with Wendy's, "but mostly we're looking at tools to forecast demand in an area of 40 to 50 stores. Overall, our total volume might be predictable, but different regions vary greatly. For example, while ski season heats up in the Rockies, eastern markets tend to slow down in colder weather. Regional volume differences make it difficult to do a general forecast, but we can predict seasonality and note different patterns for different locations."

To date, Scherer's team has rolled out a restaurant forecasting tool to about 20% of the chain's 6,000 stores. The tool allows individual stores to receive a weekly forecast based on historic sales data. It forecasts volume of sales per product every half hour throughout each day. While the original purpose of the forecasting tool was to better plan labor needs, it has allowed the fast food chain to also reduce safety stock in the store and the warehouse.

Stores receive three deliveries per week and those on the new system typically maintain eight hours of safety stock on perishable items. However, the majority of stores do not have the automated ordering system. Those stores tend to hold two to three days safety stock on perishables.

"Too much inventory costs us money. We try to operate restaurants as tightly as manufacturers operate under just-in-time programs," Scherer states. "By implementing the technology across our network, we can greatly reduce safety stock."

To minimize safety stock, the forecasting program generates a suggested order for the manager that, 90% of the time, the manager uses as is. However, if an individual store manager knows that, say, a local high school football game will mean a surge in business, they can alter the order.

Another piece of Wendy's' technology tool — a collaborative program — is in the testing stage. It supplies certain supply chain metrics upstream to suppliers and distributors. "We take sales data from our 6,000 restaurants and load them into a database to create 18-month forecasts for suppliers. The forecast can be to the individual store level but more commonly it's for all stores served by a distributor," says Scherer.

Wendys' marketing group plugs factors into the forecast such as promotions past and future, holidays, and seasonality. In the pilot, forecast accuracy is running about 96% in the shorter time frames, a major improvement over the 60-65% accuracy suppliers and distributors were forecasting on their own. On some items, inventory forecasts are 80% accurate as far as 18 months out.

"With a more accurate forecast, suppliers and distributors can plan inventory more closely. Those in the pilot can plan several months in the future to avoid out of stocks" Scherer adds. "To avoid stock outs, suppliers not in the system now carry a month worth of inventory. With our new collaborative program, they could reduce that to a week or even a half week of many items. This investment should allow us to remove enough supply chain cost to give us a competitive edge," he concludes.

Five years ago, a major consumer packaged goods (CPG) company took stock of inventory accuracy and realized there was considerable room for improvement. Controls were not good and the annual shut-down for physical inventory was disruptive. Poor inventory accuracy affected customer service, drove up costs for expedited transportation, and led to rotation issues — shelf life becomes a liability if there is excess inventory at any location. Returns also were not well managed. "To right the situation," notes the company's top logistics executive, "we had to work on processes and we made it a priority to develop a better inventory control system."

The first step was to define goals and objectives. The project team asked, What are best-in-class measures and how far off are we? What processes did we need to close the gap?

"Then we had to find a technology solution to enable the processes," notes the executive. "We needed technology to back up and enforce the right processes."

For the CPG company, its WMS is the enabler for inventory accuracy in the distribution network, including all finished goods and movements in the U.S. On goods inbound from manufacturing facilities, the team implemented advance shipment notices (ASN) and bar code pallet labels with license plates matching the ASN, typically with one SKU per license plate. The license plate allows receiving to validate the process.

Not only does the license plate validation yield improved inventory accuracy, the combination of radio frequency identification (RFID) tags, bar codes and ASNs means timely and accurate discovery of discrepancies. Because the CPG company operates in a closed loop system, the team can identify discrepancies immediately and figure out what went wrong. Finding the root cause has helped diminish or eliminate discrepancies. "As people realize their work is watched and questioned, their work becomes more accurate," adds the logistics executive.

Employing bar codes has improved accuracy in putaway as well. Bar code-directed putaway makes location accuracy excellent. Then the CPG company uses bar codes to track inventory movement and order picking. In fact, the company's validation process when doing inventory picks — it amounts to a mini cycle count — ensures both that the correct amount has been pulled and that the correct amount remains on the shelf.

In this mini-cycle count process, the WMS alerts the operator if it detects an error. If the operator cannot resolve the issue, a supervisor is called to investigate further. So problems are resolved before a shipment leaves the building.

With these means, inventory accuracy in the network is above 99.97% at item location level and order accuracy is greatly improved.

Another useful function of the WMS is creating a picking label on every outbound order showing who picked it, when and what's in it. Since every pallet is checked and labeled, the system can create a shipping manifest showing where the pallet is on the truck and what's on the pallet.

"As the customer receives — and many still do it manually — they could inadvertently mark an order as over or under," the executive explains. "We can use our system to challenge many of these claims. We work with our customers to build accuracy in their receiving process. We use our processes to help them fix their processes."

The CPG company took a lot of discrepancies out of the system, but errors still happen occasionally. "If we have a validated error, we investigate and identify what went wrong. We use it as a coaching tool to educate and improve rather than as negative feedback," adds the logistics executive.

Calculating benefits the CPG company has realized from increased inventory accuracy is difficult because it was not a mutually exclusive process. The company rebuilt its whole U.S. distribution network with new warehouses. The push for inventory accuracy was just part of a best-in-class approach for how its new system would operate. Overall, they took millions of dollars of inventory loss out of the system — inventory loss due to errors, aging of time-sensitive product, reported lost product at the customer. They also improved the productivity of the people in the warehouse.

"They're no longer scrambling to find missing product," notes the executive. "And we eliminated the annual closure for physical inventory. We use cycle count locations and send in auditors to validate our count and processes."

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