Reducing Inventory through Better Public Warehouse Visibility

Many large companies are currently reevaluating their use of public warehouses (and terminals, in the Process industries), and are finding that they can create dramatic reductions in inventory by improving the visibility of product movements between themselves, the warehouses or terminals, and the end customer. Since a day or two reduction in Days of Inventory can create Balance Sheet and Income Statement savings measured in the millions of dollars for large enterprises, these initiatives are getting a lot of notice in many logistics organizations.

Until recently, many large companies communicated with their public warehouses using a mix of different approaches. Sometimes the warehouse communicated electronically using outputs from its own internal operational systems, often a warehouse management system (WMS). Message formats might be structured EDI or flat files. Very often the manufacturer would establish the warehouse as a stocking location inside its own ERP system and pay to put an ERP terminal in the public warehouse. For smaller local warehouses, the manufacturer would sometimes create a customized website where warehouse personnel could enter manual updates regarding product movements, which would then flow into the manufacturer’s ERP.

Putting an ERP terminal at public warehouses creates a number of security and even Sarbanes-Oxley compliance concerns. By inviting a third party into your internal business system, you are opening yourself to a number of security risks and unwanted intrusions into internal data areas where your warehouse partner should not have access. If you are taking this approach with your public warehouses and terminals today, it’s probably because your internal security hasn’t caught up with you yet.

There is also a cost component associated with giving a public warehouse one of your ERP terminals. In the SAP world, the cost is about $10K per seat, which starts to add up quickly if you are working with dozens or even hundreds of public warehouses. Again, many companies are starting to scrutinize this cost component. These ERP fees can be used to offset the cost of a warehouse visibility solution, which brings significant additional benefits in the way of inventory reductions.

So what are large companies doing instead? Many of them are pursuing arms-length B2B connections with their public warehouses and terminals. This approach standardizes the message flow between the manufacturer’s ERP system and the warehouses’ WMS systems, for simplification and lower-cost maintenance of these communications going forward.

Messaging can be standardized for both inbound shipments to the warehouse and for outbound shipments to the final customer. Inventory adjustments can also be communicated back and forth between the manufacturer and its warehouses, for short or long shipments, damaged inventory, evaporation losses, and other adjustments. The message flows can be enabled for machine-to-machine transactions (that is, between ERP and WMS systems) for larger warehouses, or with a web interface for smaller warehouses, using the same standardized message flows for ease of maintenance going forward.

Why are companies doing this? The payoff is big. For many large companies, taking just one day out of inventory in their supply chain can equal $20M+ in one-time inventory savings, which helps improve the Balance Sheet. And in this same example, there are ongoing savings of Inventory Carrying Costs of $4M+, which affect the Income Statement and continue their positive impact on earnings from year to year, provided that the message flows, the resulting visibility, and improved business processes are continued into the future.

Which brings me to a key point: visibility alone is not enough to create these inventory savings. The manufacturer must change and improve its inventory management processes in order to attain these advancements. Classic supply chain planning is the key, giving more visibility and reliable and timely supply chain data, which builds confidence and makes supply chain teams more willing to work with less and less inventory in the system. Inventory is a buffer against supply chain uncertainty – with more confidence and less uncertainty, inventory can be reduced little by little (or even in big chunks) without losing supply chain flexibility and agility.

If your public warehouses are delaying communications back to you about product movements — for example, to batch together all of the day’s product movements in one report — then there is an immediate gain in Days of Inventory equal to the length of the delay. For example, if the warehouse’s practice is to delay its communications with you until the following day, then automating the process reduces this delay to zero – and just like that, one day of inventory is saved, equaling a $20M improvement on the Balance Sheet and $4M on the Income Statement, in our example.

A number of innovative companies are taking this new approach to supply chain warehouse visibility today by utilizing a supply chain operating network to share information in real-time about inventory, product movements, and more. The result of bottom-line improvements may be worth taking a look at.

Jerry Turner is a Key Accounts Director at Elemica, managing commercial relationships with some of Elemica’s largest global clients. Jerry has a Masters in International Studies and an MBA in Marketing from the University of Maryland, and he did undergraduate work at the Ludwig-Maximilians Universität in Munich and graduate work at the Johannes Gutenberg-Universität in Mainz, Germany. He has spent his career in enterprise solutions for Supply Chain, Logistics, and B2B Integration.