The Hidden Costs in the Warehouse

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One of the major factors that contributes to business hidden costs is lacking an automated warehouse. Many companies who have not automated their warehouse take a physical inventory once a year and often get a bitter surprise, finding misplaced inventory that has become excess inventory. While the inventory they found collected dust on the shelves, new products were bought and had to be financed by banks or other lending institutes. 

Picked Inventory Issues

  • Wrong item is often being picked.  
  • If the item was misplaced a substitute is picked.
  • Misplaced item will not be found until the yearly physical count is taken.
  • The computer records have to be manually adjusted resulting in additional efforts.

Shipped Inventory Issues 

  • One person packs the order and a second person verifies that the right products and quantity are being shipped. 
  • In an automated warehouse this task can be performed by one person.  
  • The customer who refuses to accept incorrect shipments will return those items resulting in additional freight bills.

The Domino Effect of Incorrect Shipments  

  • Companies who learn to live with a high volume of returned merchandise resulting from lacking an automated warehouse view this as the “cost of doing business.” 
  • What they fail to realize is that it creates a domino effect of business disruptions that affects the bottom line profit.
  • After the inventory is shipped, it gets replenished. The returned inventory can become excess inventory.
  • Customers who received the wrong items and return them will dispute the invoice and will not pay until a credit is issued.
  • Returned inventory creates an additional workload for the Accounting Department which has to issue credits and adjust the computer records.
  • This often results in missing the vendors’ early payment discount date.
  • Disputed invoices create a large receivable resulting in having to borrow money from banks and various lending institutions.
  • The inventory in the warehouse is being financed by financial institutions who are using it as collateral and charge higher interest rate than banks.

Automated Warehouse Advantages

  • When new inventory is received in the warehouse it’s scanned by hand-held radio devices and the computer records are instantly updated. 
  • The real-time information is available companywide and customers can view it and order from the company website.
  • The pickers are instructed by the hand-held radio devices as to what location and quantity the inventory is to be picked. This ensures the correct items and quantities are chosen.
  • Before the inventory is shipped, it is being packed and scanned by one person who verifies that the correct items and quantities are being shipped. This results in labor saving costs.
  • Locations and shelves are scanned on a timely basis. The inventory is verified against the computer information. If a discrepancy is found, items from this location cannot be shipped until the computer files are updated.
  • Accurate shipments result in fewer returns and credits issued. 
  • The Accounting Department’s work load is reduced and can take advantage of vendor early payment discounts.
  • Proper payments when the customers don’t dispute the invoices result in a lower Account Receivable and improved cash flow.     

Inventory in Transit

Many companies face the issue of keeping track of the expected arrival date of inventory- in-transit at the warehouse. If the inventory arrives later than expected, it can result in customer orders being cancelled. 

  • The cancelled orders start a vicious cycle of lost sales’ revenue, excess inventory in the warehouse, and borrowing money to cover the inventory cost until it’s sold.
  • Having sophisticated ERP Software enables companies to keep track of the inventory-in-transit and when it will arrive at the warehouse. 
  • Having a realistic arrival date in the warehouse enables the company to allocate the orders to be shipped against the in-coming inventory. 
  • Pending orders can immediately be shipped from the warehouse loading dock. 
  • The remaining inventory is put into the warehouse and is available to be sold.
  • Using this method saves on the labor costs of putting the inventory into the warehouse and then picking it before it’s shipped.

About SMC & Dani Kaplan

Since 1980, Dani Kaplan has worked with Manufacturers, Distributors, Food Distributors and Food Processors, as the trusted advisor helping them lower their operating costs, streamline their operation and control the inventory.

Dani can be reached via SMC – http://www.smcdata.com/contact 

The original article published in CEO Online Magazine