Editor�s Note: Tom Quinn will be presenting at the annual Parcel Shipping & Distribution Forum (see page 23). As a prelude to his session, �Have Excess Capacity? When and How to Add Fulfillment Service,� Mr. Quinn has written the following article.
For those companies in the third-party fulfillment (3PF) industry or those contemplating entry into the industry, beware of the side door. It is the source of most of the inventory problems you will encounter while storing material for other companies. One of the unique characteristics of the 3PF industry is how many �touches� there are for a given product. We not only �touch� a line item for the traditional warehouse activities such as storing, pulling, cycle counting and general warehouse maintenance, but we touch many products for kit assembly, mailings, special projects and more during the life cycle of a product stored in your inventory. These additional �touches� are the source of the inventory mystery.
The process of accurately receiving product into inventory is the starting point of accurate inventory management for fulfillment clients. My premise has been and continues to be that if a 3PF company can control one metric very well, the company will be successful. The one metric is inventory accuracy. The reason this metric is so important is that not providing accurate inventory still remains the primary reason for companies moving their business to another fulfillment center. So the down side of not doing inventory correctly is extremely high, and the upside is that the clients expect you to be very accurate. If inventories are maintained at an accurate level, the client and 3PF will be able to complete all daily functions (i.e. order fulfillment, kit assembly, special distributions, etc.) as specified. The need to maintain accurate inventory has risen to a new level because the new Web-based fulfillment software technologies allow clients a 24/7 view of a 3PF�s inventory. In the past, we provided reports on a regular basis and had time to review and understand inventory anomalies before presenting the data. However, we are now real-time and must stand by the data available to the client.
It has been my experience that when inventory accuracy problems occur, it is very easy to fix the back door. Furthermore, most 3PFs do a better than average job at receiving at the back door. However, I have found that most of the inventory problems (over 90% in my research) can be traced to the side door activity. The situations that develop in your company with respect to the side door will be discussed further on, but first, here are a few tips to help fix any back door problems you may be experiencing.
The Back Door
Hire qualified personnel � One of the most common errors made by companies new in the business is to view the warehousing and receiving jobs as minimum entry-level positions. In many companies, these positions would be the lowest-paid employees. It is important to recognize that the entire integrity of your inventory will be dependent on the receiving and warehouse personnel. Therefore, it is imperative that the personnel assigned to these positions be able to add, subtract, multiply and divide, but more importantly, that they need to be able to recognize a problem when it arrives at the back door and take the appropriate action. Failure to hire qualified personnel will be the very best example of the old saying, �garbage in garbage out,� you will ever experience. You must start the process correctly with accurate inventory counts.
Establish a receiving policy � Good inventory begins with educating your clients concerning acceptable delivery practices and assuring that their vendors comply with your policy. The receiving policy should include the following: hours of operation, location and directions, delivery schedule instruction, key contact names, pallet size and configuration, pallet and container marking requirements, special instructions and any other requirements specific to your operation, location or building configuration.
Follow software vendor guidelines � One of the important features provided by the primary software vendors in our industry is the identification and marking of a pallet or container in the receiving process. An actual sheet of paper or label is generated during the receiving process that contains the product number or SKU, the description, the quantity per carton, total quantity per pallet and most importantly, the pallet location to store the material in the warehouse. This software feature provides 3PF companies with a high degree of confidence that the right product is being stored in the right place.
Establish receiving procedures �Receiving procedures should be the first procedures written when a fulfillment company is established. The procedures, for the most part, will be driven by the software system chosen by the fulfillment company. These procedures need to be implemented and enforced on an ongoing basis. Each receiving problem that occurs should be analyzed and understood. If necessary, procedures should be amended to assure the problem does not occur again.
Provide the correct equipment � We normally think of the correct equipment for the receiving function as forklifts, motorized pallet jacks and pallet jacks. These are important and necessary tools for inventory movement; however, the most important tools for receiving are counting scales, calculators and in more sophisticated warehouse environments, RF scanners. The warehouse personnel should never assume that the packing list provided with a receipt is correct. Every shipment should be weight-counted and the actual receipt amount entered into the inventory system.
Check inventory accuracy on a continual basis � Cycle counting of inventory items should be completed on a regular basis. Cycle counting patterns and schedules can usually be pre-scheduled by your fulfillment software program. There are two points in the inventory life cycle of a product that counting of each product is absolutely necessary. These points are when inventory counts reach the reorder level or a discrepancy is found with respect to inventory accuracy of a product. �
The Side Door
I have always been intrigued by the fact that something as simple as adding 1 + 1 could be so difficult for so many companies. Inventory inaccuracy is not only a problem for 3PFs, but it is also a universal problem across all industries and warehouses. How is it possible that something so simple that we master in the first or second grade (addition) can affect the whole profitability of companies? I am not sure about other industries, but the fulfillment industry has some unique activities such as kit assembly, mailing projects, utilizing product in many different product configurations, sending product to special events and returning partial quantities to inventory, etc. that require additional product movement within the fulfillment center after receipt and initial storage. A 3PF company can be great at back-door receiving and still find itself with a myriad of inventory problems. The most common scenario that causes inaccuracy in inventory is at the side door and can be described as the following:
� A project is identified by the client, a job number is assigned, and an order is input to pull stock from inventory and stage for or delivery to the shop floor. It is a common and necessary practice to pull more material to the floor to accommodate for setup shrinkage, damaged material and other shrinkage factors.
� The materials are pulled and delivered to the shop floor.
� The job is completed, and the remaining materials are placed on a pallet(s) and possibly delivered to the warehouse, time permitting.
� The remaining inventory will sit in the warehouse until the warehouse crew has time to process the material and put it back into inventory. Generally, no paperwork will accompany this material back into the warehouse.
� Inventory will be formally receipted and shown as available in the fulfillment inventory system.
The inventory accuracy problem can occur because of one or several of the following causes: the shop floor runs out of material and emergency materials are pulled to the shop floor without paperwork; the inventory sits on the shop floor and never gets back to the warehouse; the material is not identified by the production crew and goes back to the warehouse without any counts or product information; the warehouse incorrectly identifies the product; no account is made for damaged or wasted material; or the warehouse crew never formally receives the product, and unidentified product is eventually discarded.
Guidelines to Combat Side Door Opportunities
Don�t lose sight of inventory moved to the shop floor in your WMS � It is important that the client be able to view and understand the whereabouts of all inventory items in your facility. Your software system, particularly the warehouse management system, should be able to provide your client with information that specific inventory has been moved to the shop floor and is either work in process or under some special project status. The system should not treat the movement of material to the shop floor as a regular order because it will deduct it from inventory, when in fact, it may just be moving and being placed in a kit which will eventually be placed back in inventory.
Establish procedures and clear lines of responsibility � The procedures established for completing a project should include the movement material and associated responsibility. Here is a recommended list of activities to be included: customer service creates a pull manifest; warehouse crew pulls material and stages product for the shop floor; product personnel sign for the material and move it to the shop floor; at the completion of job, the production personnel marks all product and completes a reconciliation form for entry into the computer system; remaining material is moved to the warehouse staging area, and counts are verified by the receiving personnel; and product is formally replaced in the system and is stored as specified by the system. Please note that in this procedure, production is not finished with the job until all paperwork has been completed and the warehouse has accepted the receipt. Also note that the material placed back in inventory was not formally receipted, but replaced. A receipt of the material would distort the number of receipts and cause confusion when viewed by the client.
Organize the warehouse for success � Provide specific zones within the warehouse for staging areas for material to be picked up by the shop floor personnel and material coming from the shop floor. These areas should be specifically designated and marked. Either tape or paint can designate the area. If possible, do not utilize one area for both types of material because it may cause the wrong material to find its way on to the shop floor.
Set standards for completion of specific material movement tasks � After the completion of a job on the shop floor there is a sense of urgency to get the job jacket back to customer service so the job can be billed. The job jacket should not be considered to be complete until the remaining material has been placed back into inventory. This is now the true completion point of the job. Furthermore, time standards should be set for the completion of the reconciliation form by production and the movement of material from post production staging to inventory. Preferably, a new job would not be started until the paperwork was completed on the first job, however, in real time, this is rarely practical or possible, so in these cases, a �one-shift rule� should apply. The time standard for replacing material back into stock should be the same as the basic dock to stock criteria utilized at the back door.
Well, it really was not a mystery at all. The side door can be easily controlled by following a few simple procedures, but management must be adamant about enforcing these procedures because an error in this part of the inventory process could cost your company a hard-earned and long-time client.
Tom Quinn is Director of Fulfillment Services, Mailing & Fulfillment Service Association (MFSA). For more information, please visit www.mfsanet.org.
