The McKinsey Quarterly is out with an interesting point, in regards to the challenges of consolidating supply chain data — and some advice for focusing IT resources to make sure you’re capturing the data that matters most.

The problem is, according to the report, is that companies today not only buy more from far-flung third parties in an effort to cut costs, but they also rely more on third-party contractors to move these goods around the world. That means critical supply chain data (such as quality, inventory, and capacity) is “locked up in the IT systems or spreadsheets of a dozen or more companies.”

Aside from the inefficiency of redundant IT investments, the problem is that companies lose horizontal visibility — they can’t see the whole picture. In search of solutions, McKinsey interviewed several global, high-tech companies that have outsourced their manufacturing and logistics, and identified the following best practices for reuniting supply chain data:

1) Fit information flows to supply chain types. For fashion-oriented products such as iPods, for example, focus on IT connections that help you “chase demand rapidly by providing repaid coordination between designers and suppliers.” But for commodities such as TV tubes, focus on cost and inventory data.

2) Develop deep monitoring capabilities, or systems that allow you to pull key data from both your suppliers’ systems and their suppliers’ systems (you’ll probably have to give suppliers incentives to invest in this, McKinsey warns).

3) Think cross-functionally and use detailed scorecards. Your purchasing people may be rewarded for selecting the lowest-cost supplier, but the manufacturing group may be rewarded for keeping inventory low and fill-rates high. They must get in a room and agree on performance metrics to make sure you get all the data you need from your suppliers.

Although the report makes sense, it misses the boat in one key area: human nature. Companies, as do people, sometimes don’t want to pass information on to partners for competitive reasons, control reasons, or just for no reason at all. If you’ve got the power to force them to do so, great. But if not, you’ve got to find the win-wins first before IT can re-connect the dots.

Peter Drucker, the foremost author and expert on enterprise and self-management, and one whom I am sure everyone reading this has probably heard of, stated, “We know little more about distribution today than Napoleon’s contemporaries knew about the interior of Africa.”

I found out just how true this was when I was gathering information for a project for client some time ago. I began by searching to see what other experts had to say about maintaining an accurate inventory. About one week after beginning my search, I was no closer than when I started, so I decided to talk to people in the industry and ask them three simple questions:

* What are your currently doing to maintain the accuracy of your inventory?
* Is what you are currently doing working?
* If what you are currently doing is not working then why haven’t you changed?

You know what the interesting thing was? Everyone answered number 1 and number 2, but when it came to number 3, I ended up right back where I started: scratching my head and saying, “I can’t believe since inventory is one of an organization’s greatest asset, why do most companies do so little to maintain it?”
There are some interesting things about inventory that I am sure everyone knows, but before I get to the nineteen steps I’m going to reiterate some key points about inventory.

* Distribution inventory values range between 6 percent and 20 percent of the company’s annual revenue.
* An inaccurate inventory causes several problems: lost sales, decreases in profitability, and lost productivity from searching for products.
* Companies use inventory as a security blanket to cover deficiencies in their warehouse.

Given all of this, the only thing you really need to know is that it takes $2,500 in new sales to make up $100 in lost inventory, assuming a 4 percent return. I don’t think I am the only one in our industry who knows this, but if I am not, then why are so few people talking about how to control the accuracy of their inventory? Think about how much having an inaccurate inventory costing you and your organization.

Again, your inventory is one of the biggest, if not the largest investment you have in your company. The only thing that comes close to it is your people. But you know what I have learned over the years? People do what you inspect and not what you expect! Most leaders expect their people to know why inventory accuracy is important to the company, and it is with this assumption where the problems begin. It is also where I am going to begin the first step.

Step 1: Set Goals.

I know this is a sore subject for most business leaders because they feel goals in the warehouse is an oxymoron. However, I am not saying that by completing this article today you will have 100 percent accuracy on your next physical. It takes time for your warehouse personnel to internalize your warehouse goals. What I am saying is that to do this, you need to determine how many

* inventory adjustments your warehouse makes on a daily basis
* stock-outs you have on a daily basis
* backorders you have because the inventory was inaccurate
* items that were wrong during your last physical

From those numbers, you need to determine what will be acceptable and then you need to implement the remaining eighteen steps to get to that level of acceptability. I guarantee every department in your organization has goals except for your warehouse. Why is that? You know what Michelangelo said: “The greatest danger is not that our aim is too high and we miss it, but that it is too low and we reach it.” You need to address your inventory issues by aiming higher than you have in the past.

Step 2: Document your processes.

Now even though this article is about your inventory, you have to document all of the processes that go on in your warehouse. How can you legitimately establish any type of inventory control program if your people are not sure about what they should be doing? The “follow Nancy around” approach to learn processes only works in the restaurant business. Your people need to know different picking (P) and receiving (R) functions: What to do when I go to pick an item and there is no product in the bin? (P) What do I do when the wrong product is in the bin? (P) What do I do when I am receiving and the vendor sends a replacement item? (R) What do I do if the item in the bin is damaged? and What do I do if the item is not in the bin, but I see the item in overstock? (inventory)

Even though some of the processes are picking and receiving-related, improper processes will cause inventory problems throughout the year and will lead to problems during the annual physical. Your people need to know what processes to follow; however, we know your people are not going to consult a training manual every time they encounter a problem so develop “Cheat Sheets” that are brief references showing how to troubleshoot problems. (See figure 1)

Step 3: Develop and use stock check cards.

Whether you have an automated or a manual system, your people need a vehicle to identify problems and notify the appropriate personnel. A stock check form (figure 2) does just that. It must have certain things on it, such as the order number, picker’s name, date, product code, quantity, reason for completing the “stock check” form, etc.
If an item is backordered by a warehouse person, it should be accompanied with a stock check form, which will eliminate the vicious cycle of the backorder fillable report as well. That’s when the picker backorders an item, then the purchasing department fills the backorder because the system says its in stock, and another picker backorders it again, causing the buyer not only to fill the order again, but to include a note asking the picker to find the product, all the while muttering obscenities about the warehouse. A new, untrained picker backorders the item again, because no one ever explained what those notes on the pick ticket meant. Now the buyer is livid so he or she goes to get the piece, which he or she can’t find, and eventually has to order.

Step 4: Clean and organize the warehouse.

James Q Wilson and George Keilling developed the “Broken Windows Theory” which states that “Crime is the result of disorder. If a window is broken and not repaired people will conclude that no one cares. Soon more windows will be broken and a sense of anarchy will move to the street upon which it faces.” Replace “broken window” with “dirty shelves” and it becomes the very relevant “Dirty Shelves Theory”.

An inaccurate inventory is the result of disorder. If an aisle is messy, a Coke can is left on a shelf, a box is not put away properly, or a light remains broken, people will conclude that no one cares. Soon more aisles will be messy, more cans will be left on shelves, and more product will not be put away. Pretty soon, an order will be picked incorrectly, and an item will be put in the wrong box at the packing station, and then we wonder why our inventory is so inaccurate.
Remember what I said earlier: “People do what you inspect and not what you expect.” If your warehouse supervisor can’t hold your people accountable for keeping the warehouse clean, it will not be realistic to expect an accurate inventory. Develop a simple aisle maintenance sheet that includes removing empty boxes, checking for broken lights, removing discarded shrink wrap, emptying the trash can etc. to prevent the warehouse from becoming a mess.

Step 5: Assign all of your product to bin locations.

The average picker spends over one hour per day searching for product. If you have eight pickers that’s equivalent to one person per day—and extra person that is probably not needed, or can be used doing something more productive. By assigning product to locations this will eliminate pickers searching for product throughout the warehouse.

Step 6: Allow only warehouse personnel to receive.

Receiving is the most important task your warehouse performs. If an item is received incorrectly, it will be putaway, picked, and shipped wrong. If the paperwork is not processed correctly, the wrong product will be received and given to the customer. When the order is generated, the picker looks for the product and can’t find it, so the buyer then orders another while saying “Those warehouse guys are clueless. They just received this product this morning. Now they cannot find it.” Eventually, shipping sends the order to the client, but meanwhile, the second order comes in , and the buyer decides to receive the product and personally ship it to the customer. If the product is returned because the customer doesn’t need it, a sales person will likely say, “Don’t send it back to the vendor. The customer will need another one for another job.” The product then just sits on the shelf until it is lost or is counted at the next annual physical. Hopefully the first order was corrected because the customer was never billed for the second one, but for some reason you show two items in stock. Another vicious cycle of inaccurate inventory ensues.

Step 7: Address non-stock and dead inventory.

You have to address your non-stocks and your dead inventory. Non-stocks are a hassle and have to be dealt with. They should be counted regularly, clearly identified, and centrally located. Quite often, non-stocks and dead inventory are not addressed until the end of the year, and then management wonders why there are so many.
Dead inventory is usually DOA, “dead on arrival”. New items are the major cause of dead inventory. Climbing up ladders to pick orders or relocating because of space issues does not make sense if you have dead inventory occupying floor space. It is a loss of productivity and should be addressed immediately. Simply put, “If it would stink I bet you would get rid of it.” Treat DOA the same way. Get rid of it to streamline your warehouse processes

Also remember, a company has to pay cash for the materials and labor that make up inventory, and until the company gets paid, that outlay of money represents a financial burden to the organization. Your product is worth less each day you hold it in inventory—by the time it reaches the customer, you will have lost significant revenue..

Short for Enterprise Resource Planning software.
Enterprise Resource Planning or ERP is a business management system that means to integrate all facets of the business, including sales, manufacturing, planning, and marketing into a single coherent system.

As the ERP methodology has gained popularity among business managers, software application programs have been developed to enable them to implement ERP in business activities such as customer service, order tracking, finance, inventory control and human resources

Using technology to integrate processes and information offers small and medium companies a way to cost effectively streamline operations and gain a comprehensive overview of the business.

The smaller your business, the less you can afford inefficiency or waste. Intuitively, it might seem easier for a smaller business to achieve efficient processes and for management to have a comprehensive view of operations. Surely it’s easier for inefficiency to flourish in the depths of sprawling corporate giants, right? But the fact is that efficiency is often a larger challenge for a smaller business for several reasons. Processes are often informal and knowledge of them is stored primarily in people’s heads.

Information may be scattered across computers and among employees, and owners and managers often have to function in “player/coach” roles that leave them little time to spend gathering information and constructing a timely and accurate picture of operations that can aid in informed decision-making.

Integration of processes and information through a technical infrastructure offers small and medium-sized businesses a fairly fast and cost-effective way to meet these challenges. There is business software available to meet a number of integration needs, from customer relationship management (CRM) and sales force automation (SFA) applications that help you leverage customer information throughout your business to enterprise resource planning (ERP) applications that help you keep tighter control on inventory, production and cash flow. Whatever application is most appropriate to your business, the goal is consistent: to achieve consistent, efficient processes and a unified, accurate, timely view of operations. Automating processes helps ensure consistency and reduce errors, saves training time, and mitigates risk during employee absences or through turnover. Integrating business data provides you with an accurate, timely view of operations that aids decision-making and helps you achieve better control over business results.

While the idea of integration is simply, when you consider implementation, the choice of applications (and acronyms) can be confusing. The path you choose should be determined by your business model and objectives. Typical integration choices include:

* Customer Relationship Management (CRM) is the first step to integration for many businesses. CRM software integrates customer information in one database so that sales and customer service, management, and, in some cases, customers themselves can access information. CRM can help service representatives respond more quickly to customer needs or giving them immediate status on pending orders, help sales and marketing people by showing what other products a customer has purchased, and help management track purchasing trends and which customers are the best in terms of sales and service.

* Sales Force Automation (SFA) automates and integrates customer information and the sales process to help make the sales force be more effective and lower costs of sales. SFA may overlap with or be an add-on to a CRM system.

* Enterprise Resource Planning (ERP) software is used, by manufacturing and retail companies to manage areas such as product planning, inventory management and purchasing, production, customer service, and order tracking. ERP integrates operational data, tasks and processes to streamline operations and enable better real-time decision-making.

* Business intelligence (BI) applications integrate data to give an overall view of operations for better, more informed decision-making at the management/strategic level. BI applications generally include features that allow managers to project profit scenarios with different sets of assumptions, to see which will best maximize cash flow, profits, etc.

* Enterprise Application Integration (EAI) vendors offer software that helps tie together different databases and applications with a common interface or workflow. When you buy these products, the price often includes professional services to implement the software with your systems.

For many businesses, integration is an effective way to leverage information, streamline processes, and lower costs. Whatever your needs, there are available off-the-shelf software packages that are designed for your type of business. Integration also typically requires a corporate network, some kind of relational database and a business server on which to centralize data. Integration gives you big-picture visibility into and control over your business, and it is simpler than you might think.