How To Fix Broken Inventory Processes

Subject: How A Broken Inventory System Can Ruin A Company

Case Study by Thomas Kingsley

This case study illustrates the issue and resolution of broken inventory processes and how the broken processes negatively influence other aspects of the business.

Company profile

A retail company that generates in excess of $75B annually and is one of the top ten largest retailers in the United States. The organization sells products through brick and mortar locations and digital channels.

Background

Thomas was considering a transfer for an opportunity overseeing logistics. This is a high-level position that is second in charge to the general manager. After the interview, the general manager said, “let’s take a walk so you can see what you will be dealing with before you decide if you want to take the job.” Thomas found the location had a broken inventory process. It was bad, the absolute worst-case scenario. The broken process negatively affected every department. After inspecting the location, Thomas said he could fix the issues and accepted the job.

Day One:

The general manager wants to know by the end of the week if Thomas is going to fire the employees or try to save them.

Day Five:

After Thomas analyzed the methods the employees were using to do their jobs, he found that they were not following corporate procedures, which created a snowball effect that turned into a catastrophe.

Simplifying The Process

  1. Inventory is sent to a brick and mortar location. Employees at the location unload the truck while scanning the merchandise in the Inventory Management system. The merchandise is pushed directly to the sales floor to stock shelves. Whatever does not fit on the sales floor is placed in the warehouse as back stock. The back stock is then cataloged in location via the Inventory Management system.
  2. When a customer makes a purchase, the Point of Sale (POS) system communicates to the Inventory Management system that X SKUs were sold, which tells the warehouse workers to pull the back stock SKUs to replenish the sales floor. When the Inventory Management system runs low on a SKU, the system then communicates to a Distribution Center (DC) and automatically creates a replenishment order to be shipped to the location to keep the sales floor shelves full. Revenue is generated when this process is working.

Analysis Results

Thomas found:

  1. The replenishment team was not efficiently unloading trucks and pushing merchandise to the sales floor. In addition, they were not correctly stocking shelves. This resulted in an overabundance of back stock.
  2. The warehouse team could not keep up with the replenishment back stock and daily pulls. As a result, employees were placing inventory on warehouse shelves and eventually onto pallets without cataloging the merchandise in the Inventory Management system. The broken inventory process resulted in 125 pallets of merchandise that accumulated in the warehouse isles with no way to locate specific items.

    Not cataloging merchandise in the Inventory Management system creates problems for the sales floor because department managers research their areas for merchandise that is low or empty, and while the Inventory Management system indicates merchandise is in stock, many items are not showing a warehouse location, which means merchandise cannot be pulled from the warehouse and sent to the floor for sale.

    The issue is further intensified because the Inventory Management system shows a positive inventory, and as a result the Distribution Center does not automatically replenish the merchandise. The only way around this is to manually zero out the inventory count for the specific SKU to force the Distribution Center to send more merchandise. However, this creates another problem which results in excess Capital being tied up in surplus inventory. This vicious cycle results in empty shelves that produces zero revenue, and then the location develops excess debt because of manual ordering that results in surplus inventory. The surplus ordering results in too much of a product that will ultimately need to be liquidated, and again another loss in revenue for the organization.
  3. When a new delivery truck arrives from the Distribution Center, the replenishment and warehouse teams waste time moving the 125 pallets out of the warehouse so they could unload the new truck. At the end of the shift, the employees waste time moving the pallets back in the warehouse. This means each employee lost almost three hours of his or her shift moving pallets rather than being productive.
  4. Aside from the broken process, the issue also made it dangerous to work in the warehouse because there was so much merchandise on pallets cluttering the isles. Merchandise on pallets was trampled during the day because workers stepped on them to access the cataloged merchandise for daily pulls.
  5. Last, Thomas found a storage trailer in the back with thousands of dollars in merchandise inside. In addition to the merchandise, the location is paying rent for the storage trailer. What makes this worse, absolutely nobody questioned why the trailer was there or thought to look inside.

Resolution

  1. Retain the replenishment team to efficiently unload trucks, push merchandise to the sales floor, and correctly stock shelves to minimize back stock.
  2. Retrain the warehouse team to correctly manage the back stock and daily pulls.
  3. Retrain the sales floor team to perform daily pulls and correctly stock shelves to minimize back stock.
  4. Review workers performance and provide feedback.
  5. Empty storage trailer and return it to the vendor.
  6. Reorganize the warehouse to accommodate all merchandise and rescan the entire warehouse to catalog inventory in the Inventory Management system.
  7. Perform an inventory audit.

Conclusion

Determining the issue was easy during the first week. The locations system broke because the previous management did not execute their job functions. At the very least a manager’s responsibility is to ensure his or her employees has the knowledge and tools to do their jobs correctly while holding them accountable for the work they perform. In this instance, Thomas knew he could fix the issues because the current employees were already familiar with the tools, and that it was just a matter of fixing the processes they use. Also, the notion of replacing and hiring 30+ new employees at the same time for one location would take more time than the location could afford. Furthermore, management should also be analyzing the operational reports consistently to ensure books are balanced within the organization.

Regarding the broken inventory procedures as it relates to an audit is massive. However, Thomas simplifies the inventory audit as follows. An auditor uses multiple methods to check a company’s inventory to confirm that the financial records and physical count of goods match. In this instance, the audit revealed the inventory was off nearly $2M. Once the processes were corrected and inventory systems balanced with the books the location was on its way moving forward as a revenue producing operation.

It is important to note that there are two methods that ensure standardization occurs when performing an audit. In short, the Generally Accepted Accounting Principles (GAAP) outline the accounting standards that companies must follow and the Generally Accepted Auditing Standards (GAAS) provide the auditing standards that auditors must follow. Furthermore, the Securities and Exchange Commission (SEC) requires that the financial statements of public companies are examined by external, independent auditors.

Last, the parent organization at this time operated nearly 1,000 brick and mortar locations, and this location was at the bottom of the company list. Several months after correcting the issues, the store made it onto the top 25 profitable locations for the company, thus proving that using correct procedures and ensuring employees have the knowledge and tools to do their jobs correctly while being held accountable for the work they perform is key to a smooth running operation that produces a profit.

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