Demand planning and forecasting projects are popular tactics today for boosting financial results and shareholder value-for good reason. They typically produce one-time and often significant inventory reductions but also higher inventory turns that allow organizations to sustain lower inventory levels over time. The results look great on paper, prompting executives to search for more ways to "optimize" inventory throughout the supply chain.
Too often, though, the decisions to cut inventory and methods for doing so happen with little input from those responsible for distribution operations. Sometimes, distribution centers aren’t even aware of the changes until they notice issues emerging in their once-stable environments. Even when distribution leaders do take part in the discussion, they often fail to consider the potential side effects—primarily because few understand them.
Increases in inventory turns affect many facets of the distribution center operations, making it important to anticipate the impacts before customers feel them. If you have plans or initiatives in place to optimize inventory, consider these potential side effects:
1. Congestion on the calendar, in the yard, and at the dock
Unless you procure goods through wholesalers or distributors, your
appointment requests may increase as more independent suppliers begin
delivering goods to your facility. More deliveries mean increased trailer
traffic and congestion, especially if you don’t have extra dock space
available. And failing to unload shipments fast enough increases the risk of
demurrage charges or having to postpone appointments.
2. Increases in receiving time
A good percentage of receiving time is spent collecting documentation,
organizing products, and coordinating purchase orders and packing slips;
therefore, the overall processing time for receiving orders will grow as the
number of deliveries increases. In addition, more frequent receipts may
require more tracking, which also will increase receiving time. You may not
see an immediate decline in productivity when a trailer reaches your
facility, but unless you have prepared for extra deliveries; your workforce
will struggle under the increased workload.
Buying “standard” product quantities can make the receiving process
smoother and simplify subsequent tasks; therefore, buyers should
understand this and have access to this option.
3. New bottlenecks in quality control
If you require inspections during receipt, be prepared to process more
samples. If receipts aren’t put away until inspections are finished, then the
quality control department can quickly become bottleneck in the dock-to-
4. Changes in space utilization
It’s logical to assume that inventory reductions will increase warehouse
capacity, but once you begin putting away goods, you may find just the
opposite. Smaller delivery quantities often lead to storage locations
becoming packed with less-than-full pallets. In addition, you may need to
add more storage locations if put-away regulations don’t allow mixing of
lot numbers or expiration dates—for example, an issue where customers
use the products as raw materials and can’t mix lot numbers or expiration
Adapting to new space constraints will require some planning and
adjustments. One option is to have forklift drivers to top off the current
receipt with the remaining quantity in the location—although this can be
time consuming and physically demanding. Another option is to stack
multiple pallets in a single storage slot; but products often aren’t stackable
and adding even a few extra inches to a pallet will make a slot too small
for two pallets of the same product to fit properly. Note that allowing
multiple SKUs in a single slot or changing procedures for stacking products
will require overriding the warehouse management system regulations.
5. Extra picking slots
Reducing inventory typically doesn’t have a significant impact on picking,
although you may see a change when tracking lot
numbers and expiration dates during picking, since smaller and more
frequent deliveries cause more disparate numbers and dates. If you are
unable to combine these attributes in the same picking bin, then you will
need regular replenishments or extra picking slots in order to support the
6. Increased effort to manage inventory
Counting less-than-full pallets will require more time and care. Moreover,
inventory clerks may have to spend more time tracking additional lot
numbers and expiration dates. The same is true in a manufacturing
environment that chooses to decrease work in process and produce smaller
Inventory optimization has its benefits. But before undertaking an optimization project, make sure you understand the hidden—and potentially adverse—effects it may have on your operations. With foresight and proper planning, it is possible to address these effectively up front—and save time, money, and stress down the road.
Jeff Primeau is a senior manager in the Supply Chain practice of management and technology consulting firm West Monroe Partners.