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Jan. 31 2007 04:31 PM

If your operation is to succeed, it is critical to embark on a fact-finding mission to discover if receiving is a profit drain or gain in your warehouse. Part I of our series will examine how to make this determination and how to document the causes and effects, while Part II will discuss solutions and ways to turn these profit drains into gains.


Recently while touring a warehouse with the warehouse manager, I saw a worker jumping up and down with excitement. When I asked the warehouse manager why, he explained, He found the item of the day and won $50. You see, the item of the day is an item lost in the warehouse, most likely a receiving error. I then wondered how many back orders this created and how often this happens. It probably happens more than any of us realize.


This got me thinking, is receiving a profit drain or gain? For many warehouses, it is a profit drain. For some the drip is slow, while for others the drip is rapid. Either way, its a detriment to your organization. Unfortunately, many companies are too busy shipping orders and spending time on other warehouse improvement projects to hear the sound of this drip or spend time to correct it. How large is this drip in your warehouse?


Receiving Ensures What Was Ordered Is Received

Receiving is the function and process that accepts the product ordered into your warehouse. When a shipment arrives in receiving, it is counted to ensure the count ordered and shipped was the count sent. Additionally, the item often is inspected to determine if the item received is what was ordered; the correct color, dimensions, etc. After receiving accepts the product, accounting pays for the item. However, there are often issues that are not remedied, thereby causing problems. If the count is under, the company overpays, and back orders may occur in the future. When the item is different from the sample or the previous shipment, extra time and money to correct this difference are expended. If the difference is not found until later, back orders may occur, or, even worse, customer returns may occur. 


The Problem

Receiving is the most complicated function and process in the warehouse because the department handles thousands of items varying in different shapes, sizes and forms from hundreds of vendors, all of whom pick, pack and ship differently. If this was not difficult enough, add to the complexity several new vendors each season or year. Unfortunately, most companies I visit handicap receiving; space is often tight, new product information is sparse, training is minimal, workers are not adequately compensated and morale is low because the employees get blamed for mistakes.


Receiving errors cause the largest profit drain, and like a boulder thrown into a lake, they have numerous effects, some not found until later, which multiplies the loss. Therefore, receiving is one of the most important functions in the warehouse and deserves the most attention. Unfortunately, many companies fail to realize this and spend little or no time correcting these profit drains, which would provide huge returns for minimal capital investment. Sadly, receiving is the Rodney Dangerfield of the warehouse it doesnt get any respect.


A Closer Look What is Happening in Your Receiving Area?

It is crucial that you closely examine what is happening in your warehouse, specifically the receiving department. Most companies do not understand exactly what is happening in receiving. You may hear of a problem receipt or two, but the entire picture is unclear because organizations fail to document them. Lets visit your warehouse to uncover the full picture and discover what receiving profit drains may exist. First, we will document the reasons that cause problem shipments before quantifying how many times they occur and what their effects on your warehouse are.


Your Vendors

The way your vendors pick, pack and ship products to your warehouse determines the fate of your receiving operation and your business. Its important to realize that your vendors can either help you or hurt you. For example, when a shipment arrives at your receiving dock with incorrect counts, which requires extra handling to correct, it costs additional money and increases the chance of an error. Consider a vendor shipment whose packing list has manual corrections and, upon closer examination, incorrect box counts. This vendor often ships boxes with quantities over or under. To ensure the correct quantity counts are received, the receiver opens all the boxes and verifies the count. Not only does this take time, but it also requires extra space in the receiving area to correct this situation. Sound familiar? How often does this happen in your operation?


As you can see, each vendor shipment can potentially increase the labor costs in your receiving operation and drain your profits. Each extra dollar spent comes from profits. However, one of the main problems is that many operations fail to take the time to collect and document these facts to understand how large a problem this is. Without these facts, it is difficult for management to understand the depth of the problem and to take action. Remember, it is hard to argue with the facts.


Qualifying the Profit Drain How Often Does It Happen?

To discover how often this happens and what effect your vendors have on your business, examine how many times your vendors ship you multiple items in a carton, no packing list, incorrect items, incorrectly marked items, defective or damaged products or incorrect counts per carton or shipment. Furthermore, how often do they use the wrong freight method or carrier? Now lets take a look at the effect or damage of these vendor shipments by quantifying these occurrences.


Quantifying the Effect What Is the Cost?

In many companies, it is difficult to get buy-in for a program to change this situation. That is why it is important to undertake this discovery process. In the worst case, you will have fact-based data to support why your receiving costs are high. In the best case, you will have fact-based data to begin a program to reduce this silent profit drain and your warehouse costs. Either scenario is a win-win. Lets examine the effect of one vendor behavior receiving multiple items in a carton by calculating the extra time and cost to receive this type of shipment.


Lets say that your organization received an incorrect quantity per carton in a 30 carton shipment. To determine the effect of this mistake, collect the time spent sorting the items, counting them and, if necessary, re-boxing them. Next, multiply this time by your hourly rate. In this example, it took 10 hours, and in this warehouse, the receiving labor cost was $15 per hour, thus costing $150 extra to receive this shipment. This extra cost reduces your profits, increases your warehouse labor costs and, most importantly, reduces the true gross margin of these items. Imagine if these items were received every month.


This does not take into account any potential errors that could occur from the received counts that are over or under or product that gets damaged in the sorting. Also not included is the warehouse space used during this sorting. Worse, if you outsourced your warehouse operation, the cost for this would be double. The point is that in most operations, when vendors send you a shipment that requires extra labor, you pay for it out of your profits unless you do something to correct this.


To discover these profit drains in your warehouse, create a list of all the problems that can occur in receiving. Next, over a few weeks, collect and document the following information for these problem shipments:  vendor, date, P.O. #, issue, time expended and the amount of money required to correct the problem.


Remember, you can not fix a problem if you do not know what it is, who is doing it, how often it happens and what the effect is. Take the first step by beginning this process. You will find the results eye-opening, and your receiving team will appreciate the effort to try and make their lives easier. Best of class companies have embraced this process and reaped the benefits you can too.


Wayne M. Teres is President of Teres Consulting Inc., a consulting firm he established to help companies succeed by upgrading their fulfillment operations. Visit him on the Web at