As we continue our series of “challenges” that we started four weeks ago and will continue leading up to MODEX, we’re going to keep drilling down and spend a second week on the Eight Forms of Waste as they relate to Inventory. Last week we delved into the three areas of “Talent (Underutilized Resources)”, “Waiting Time” and “Extra Motion” (See “Eight Forms of Waste – Inventory, Part I”). This week we’ll look at four more forms of waste and how they impact your Inventory processes:
- Extra Processing
- Over Production
Applying Lean principles to any process requires us to keep the guiding principles for that process in mind in order to identify and prioritize the most important challenges. For Inventory Management, these are often defined as:
- Demand forecasting
- Warehouse flow
- Inventory turns
- Cycle counting
- Process auditing
So while applying Lean thinking to your own facility, consider it within the principles you already apply to the process.
The Defects Effect
Defects have a ripple effect through the entire organization. At the very end of the workflow, it results in lower customer satisfaction. Working your way back from the disappointment on the customer’s face, it means more returns, reshipments, extra shipping costs, lower margins, repackaging or disposal and even lower employee morale dealing with wasted effort. Defects create additional costs at every point in the business. So how does a warehouse address this?
To avoid having defects sitting in the warehouse that will only result in tears later, how about not letting them in the door in the first place? One proven method is to employ a strict Quality Control process – in Receiving
If you can’t have inspections done at the manufacturing site (not always easy for smaller businesses using foreign factories), then setting up a QC section just aside your Receiving area can help. For each incoming SKU, set a pre-determined percentage of units to be inspected, and a failure rate. Any incoming SKU that exceeds the failure rate for a test sample can then be inspected for more, if not all, of the units before determining to return it or move it into your storage shelves.
Transporting Your Profits Away
Obviously, defects result in unusable product taking up space in containers, adding weight to your shipments and in the worst case, extra shipping costs for the packages going to the soon to be displeased customer. Inaccurate forecasting generates wasted trucking – either from too many deliveries up front or too many, and more expensive ones, later as additional inventory is rushed to meet unforeseen demand. Warehouse flow and inventory turns are also disrupted by unplanned deliveries.
Over Processing Drives Overtime
Defective inventory that gets into your warehouse will result in wasted processing because of the additional work that will result in processing returns, reshipping orders, restocking other items that came back in the returns and more. All of these tasks generate hours that not only cost profits, but also take up shelf space for products that should have never been on them in the first place.
The other aspect of “Over Processing” refers to products that have additional features or uses higher-quality materials and components that are not desired by the customer. This directly impacts “Demand Forecasting” in Inventory as it results in product sitting in the warehouse longer and eventually leaving the warehouse for lower profits as it gets moved on sale or clearance. It will also impact your Inventory Turns too.
Over Produce to Under Profit
There is no area more directly impacted by Demand forecasting than Over Production. Predicting the future is hard for anyone (to date, no psychic has ever managed to predict their own demise, arrest, or favorite TV series finale), but for Inventory the performance in this area directly impacts almost all the important KPIs for the business.
Not enough production? Lost sales, lost customers, lost profits, competitor opportunity. Too much production? Overstock, low turns, lower margins, etc.
Forecasting has moved from spreadsheets to more sophisticated tools that your team should be deploying to give themselves the best chance to forecast accurately. But with or without the more sophisticated tools, it’s critical that access to historical data is there. For seasonal products (i.e. sweaters or flip-flops), data needs to include sales by date, by SKU (for different sizes and colors), prices, return rates, and even information on how it was marketed (i.e. a sweater with 8 colors will generally sell more of what is featured on the model than the other colors.)
From looking up and down seven of the “Eight Forms of Waste”, one part of inventory management that stands out is “Demand Forecasting”. Logically, the more accuracy that comes from this skill area the easier it is to manage out sources of waste. The one major item that can throw a monkey wrench into the forecast is “Defects”, because if an incoming shipment that is intended to be sold over a 12-16 week season turns up with a large percentage of defective items, the most accurate forecast will suddenly become a bad one as customers will not be able to order their product and lost sales result.
Where do you see your lowest hanging fruit to reduce waste in Inventory?