Logistics Beyond The Warehouse: Financial Implications of Supply Chain Management

Whether striving to finance business expansions or day-to-day operations, these have been difficult times.  For this reason, many companies are increasingly acknowledging the strategic need to unlock large amounts of cash tied up in inventories, sales and purchases.

The working capital of a company, that is, the difference between its current assets and short-term liabilities is an indicator of two things: first, the financial health of the company and its ability to meet its immediate obligations; and second, the company’s operational efficiency.

The importance of optimizing and managing working capital resides in the fact that companies need cash to finance growth and ongoing operations alike - as it’s just not possible to pay suppliers and employees with inventory.

A common shortcoming many companies encounter when implementing cash-driven initiatives is: failing to understand the relationship between supply chain activities and financial performance.  For example, the way orders are selected in the warehouse can affect Days-Sales-Outstanding (DSO) in addition vendor delivery performance can be leveraged when negotiating payment terms.

The following are a few examples of factors sometimes considered “soft” issues that can, in fact, provide a quantifiable return when improved:

Perfect Order Rate

The collection of invoices with erroneous deliveries (i.e. undetected mispicks, scratches) will cause not only deductions and charge-backs but also delays due to customers’ payment cycles.

Safety Stock Levels

There are several factors affecting inventory, however, when launching an inventory optimization initiative, the first step is to determine what the level of safety stock should be, and although inventory levels will fluctuate due to legitimate business reasons, there should be a set target.  For example, the total inventory of a product shouldn’t be greater than its safety stock if the product is received and shipped every day in full truck loads.

Fast moving material handling systems

Introducing cross-docking, reverse line picking and flow-through programs for those items and vendors that meet the volume, quality, service level and cost requirements will impact inventory reduction capability.

Order fulfillment cycle time

Once the company has a firm order from a customer, the time it takes to fulfill that order is incorporated into the cash conversion cycle.  Given this, the ability to respond to demand faster and while maintaining or lowering cost should drive transportation and warehouse initiatives.

Vendor Collaboration

Working with Vendors can make a big difference.  For example, moving inventory off the balance sheet through the pursuit of Vendor Managed Inventory initiatives can reduce a company’s investment in inventory.

There are many other factors rooted in supply chain activities that impact working capital performance and should be incorporated into the supply chain performance metrics.  These include:

• Vendor lead times
• Supply chain visibility
• Real-time proof of deliveries
• Forecasting accuracy
• Vendor performance linked to payment terms
• Minimum order quantity

The extent to which each of these factors influence the financial results vary from company-to-company, however, in order to implement an effective working capital optimization initiative the following steps should not be overlooked:

Analyse end-to-end supply chain processes - to identify opportunities based on depth of research and data analysis from vendors to customers.

Define performance metrics - to measure not only results but also leading indicators (e.g. input variables that impact results).

Set goals - at tactical and operational levels to ensure execution effectiveness.

Align cross-functional accountability - create cross-functional teams to drive improvement initiatives across the supply chain.

By increasing overall awareness and the attention given to the relationship between the supply chain and financial performance, companies can strive to link their activities in this area to their Working Capital Optimization initiatives.  The above most specifically suggests how to do so in regard to warehouse operations and material handling systems, and stresses the importance of the related Supply Chain metrics used to support this effort.

Add comment August 11th, 2009

Cubic Inventory Storage and NWC

How many rack bays are needed to satisfy the cubic inventory storage requirements, on average and at a peak? What height of building is required to efficiently store the required inventory?The necessary storage volume is often expressed in terms of cube (square footage).  The ability of a distribution center to efficiently store cube is defined as net working capacity (NWC).  Once pick-slot requirements have been determined and converted into rack bays, the cubic inventory on hand will determine the required height of the bays, and thus the entire building size.  The NWC is then calculated at varying building heights to ensure that inventory will fit overhead of the pick slots. In some designs, where inventory levels are very high, special dense storage sections may be added to the DC layout in order to minimize stacking height requirements.

It is always vital to hold inventory for a given item as close as possible to its designated pick location(s).  This minimizes the amount of put-away and replenishment labor required to stock the pick slot.

The travel aisle spacing between rack bays is dictated by the mobile equipment meant to operate within a given aisle. Generally, fork lift equipment outrigger dimensions will vary with the required lift height at which product is placed in overhead reserve locations.  The allowance for operators to pass easily in an aisle will determine the final aisle width. Passing is a requirement for efficiency as it prevents an operator being impeded by another from performing their function. A typical, conventional facility with a clear height range from 28′ to 35′ will have a minimum 10′6″ aisle width for single-deep pallet racking.

Add comment July 21st, 2009

The Plastic Pallet Pool

iGPS is a relatively new venture that is getting increasing attention in the supply chain industry.   For those who haven’t run into them yet, here’s a brief primer on what they are doing.

The  company rents pallets along the lines of the CHEP program.  The difference is that iGPS rents plastic pallets - imbedded with an RFID chip.

The traditional benefits of a plastic pallet are in full force: the pallets are roughly 30% lighter than typical wood pallets, providing attractive savings potential in freight and they are impervious to contamination.  Moreover, the iGPS pallets meet the GMA standards as well as ISO 8611-3 requirements and are capable of supporting loads up to 2,800 lbs.  They are rackable and provide comparable fire safety performance to wood pallets.

This option deserves exploration from operators across a broad range of industries, but, of course, the cost-benefits case needs to be made.  Like buying plastic pallets, renting them comes with a premium over their wooden counterparts.

Add comment August 8th, 2008