Avoiding Excess Inventory and Excess Costs in Your Warehouse - How to Buy Smarter to Save

by Dani Kaplan
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Many businesses in today's market are experiencing excess inventory challenges in their warehouse. One of the leading reasons for excess inventory is not "buying smart." Usually, this is because businesses rely on input from their sales force who project what the sales will be next season or next year, rather than using a sophisticated computer forecasting system. And many times, sales force projections that are based more on "feelings" instead of "facts" lead purchasing departments to decide what products should be purchased. The result is out of stock or excess inventory.

Excess inventory creates the following problems:

  1. Unsold inventory consumes warehouse space and results in insufficient space when new inventory is received. Excess inventory also often results in the business having to rent additional space at public warehouses, or buy or acquire another warehouse.
  2. Inventory cost is increased resulting from borrowing money to finance it until it's sold. Some of the inventory will never be sold and will end up being liquidated by selling it to the conciliators at a loss.

Recently, I was asked by a CPA firm to visit one of their clients who needed help with his computer system. The company is a successful family owned business. When I met the company president, he told me that they experience business issues resulting from their current aging computer system but have been reluctant to do anything about it because: "buying a new computer system is expensive and I don't know if I can afford it." Hearing his analogy, I responded by saying that in today's competitive market, prudent businesspeople need to evaluate new expenditure very carefully before making decisions. Rather than discussing new computer system features and functions, I suggested we should discuss his most pressing business issues.

The following are the business issues of his company:

  1. Excess Inventory: When I asked the president and his CPA how accurate their inventory count in the warehouse, he responded: "we have excess inventory but it's okay; we are not in better or worse shape than any other business we know."

    Hearing his response I told the president that clients who are using a modern integrated computer system achieve 99% inventory accuracy. When I asked the CPA what kind of savings they would archive if they could lower their inventory level by 10%, resulting from a newly integrated computer system, his answer was: "lowering the inventory by 10% would result in $1 million dollars savings."
  2. "Paper bound" Daily Business Flow: Fulfilling daily orders and paying vendors for received inventory results in excess manual efforts. The president indicated that they are a "paper bound" company and the users always have to go to the computer department to get anything done. The computer department consists of 5 people who support 50 users company wide.

    When I explained to the president and his CPA that a newly efficient computer system would require only one server, and an installation of 80+ users only 2 computer people, they responded by saying that lowering their computer staff by 3 people would save $200,000 a year in salaries.
  3. Inaccurate Purchasing: Because the users are dependent on the computer department personnel to produce and print reports, information is not readily available. The result is that the purchasing department must buy new inventory based on the salespersons' projections of what they feel will sell within the next season or next year.

    Hearing this, I explained to the president and his CPA that the integrated forecasting module would be able to project what to buy after taking into account the open orders, purchase orders, on-hand inventory levels and product maturity. Based on this accumulated information, the system would recommend what should be purchased and the users could choose to override the computer results.

The next step I recommended was hiring a warehouse logistics consultant to evaluate the warehouse layout and the inventory picking procedure. When the warehouse logistics consultant finished his study, he issued a report indicating that the inventory on the racks is not stored for optimum picking and bottlenecks occur when new inventory is received in the warehouse.

Researching new computer software:

Looking for new computer software can be challenging. At the demo, any software can look very impressive. The question that should be asked is: how would it work for the company in the real world? When I speak with CEO's and CFO's about buying new software, I always recommend that the department heads should create a "shopping list" that describes the most crucial business issues they encounter in their daily affairs. Having this "shopping list" we can create a "workshop" type demo rather then viewing an `ideal state' demo given by professional sales people who were trained for it. One of the major issues businesses face when they buy new software is how flexible it is and how easily it can be tailored to the users' abilities. Choosing sophisticated software with no flexibility can result in the users having a very high learning curve before they master it, resulting in business disruptions.

One of our new clients hired us because they had accumulated excess inventory in the warehouse—inventory they will never be able to sell. Because of the excess inventory, new inventory received at the warehouse had to be stored in trailers that were stationed outside the building. This client eventually ended up buying a new, larger warehouse. When I asked the president why he had so much excess inventory, he attributed it to his previous computer system which had been used for twenty years. "Not having an adequate forecasting system, our salespeople made mistakes not being able to determine the product maturity and market demands regarding what would sell, resulting in useless inventory."

Another company CEO responsible for many nationwide locations told me last year that his company bought new computer software two years before we spoke and the users were still not completely proficient with the system. The warehouse was not fully automated and the company was unable to take advantage of the warehouse-module sophistications. "Looking back, we should have checked the software for ease of use besides looking at its sophistication that turned out to be `over kill' for us.' When the demo was given to us, the "paperless warehouse" features were emphasized and sounded very good in theory. In reality, in order for us to take advantage of it, we needed to replace all of our pickers and hire more sophisticated staff at a much higher rate than we are paying now."

When looking for a new computer system, the "shopping list" of business issues can be a very powerful tool. Besides looking at the features and functions the new software offers, ease of use and the number of computer people required to run the system should be considered. Systems that require multiple servers will result in a large number of computer staff that will increase the cost of the operation.

Click here for a PDF version of this article.


About Dani Kaplan: Dani Kaplan has worked with corporate executives since 1980, helping them realize substantial improvements and increased profitability by implementing solutions for inventory management, warehouse management and distribution management. Dani is president of SMC Data Systems (www.smcdata.com) and can be reached at (917) 647-2466 or e-mail dani@smcdata.com





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