The PSSI Blog

We close out our series of posts on WHY businesses need WMS by highlighting Aberdeen Group’s conclusions about the place of WMS technology – that is bar-coded scanning and automated warehouse management systems.

In terms of technology in its surveyed Best in Class firms, 88% of those firms used a defined, computer-based warehouse management solution – compared to just over half that number in the Laggards category, who did not.

As a result, inventory accuracy among WMS users was about 97%, vs. 92% for non-users.  Better inventory accuracy leads to better visibility, higher-fill rates, fewer back-orders and better promises to customers.

Picking accuracy was 98% among WMS users vs. 95% among non-users.  Now, a 3% improvement may not sound like much… until you recall (in our third post in this series) how just a 1% improvement yielded tens of thousands of dollars per year in cost savings.  In high-volume operations, the improvement in cost savings could be measured in the hundreds of thousands of dollars annually.

WMS users utilizing bar-coding technologies were, of course, more likely than all other companies to use their technology to confirm warehouse transactions.  As the report noted, “this ensures that both the correct action was taken, as well as that the underlying data is in sync with the warehouse reality.”  Again: higher pick accuracy and quicker turnarounds.  It’s all about beating the competition.

Additionally, WMS users tended to measure their performance (compared to their non-WMS-using peers) twice as frequently – a key component in any quest for continuous improvement.

Better still, turnaround time among WMS users was nearly a full day better (2.5 vs. 3.5 days) among WMS users. 

And as Aberdeen also noted, visibility into locations of goods after put-away was dramatically better (than all others) when companies used WMS and kept it up to date.  The study found visibility was about three times better for clients who stayed current in their WMS, versus those running older systems.  And better visibility means better decisions about shipments, faster turnaround, and happier customers.

And after all, aside from reducing expenses, isn’t “happier customers” what improved warehouse operations is all about?

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WE HOPE THIS SERIES HAS BEEN USEFUL TO YOU IN ASSESSING THE BENEFITS OF AN AUTOMATED WAREHOUSE MANAGEMENT SOLUTION.  We encourage you to review Aberdeen’s original report, authored by Messrs. Scott Pezza and Nari Viswanathan, here. 

We are also grateful to the blog http://barcodeinformation.wordpress.com/ produced by a company called Ryzex, who did their own analysis of Aberdeen’s report, and is a provider of WMS technology solutions.

And lastly, our shameless plug: Our firm implements warehouse management systems, including our own E-Z WMS system now in use by several firms – and soon to be more.  If you’re looking for an effective WMS that can be implemented for about half the cost of traditional systems, we encourage you to contact us any time.   You can click on the link following to download a four-page feature brochure in PDF format to learn more:

E-Z Warehouse Manager 4-Page Flyer 2009

Thank you.

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This is our second-to-last post derived from a report compiled from the findings of over 200 companies by the Aberdeen Group, available here, and titled “On-Time and Under Budget: Maximizing Profits with Efficient Warehouse Management.” 

In our previous four posts (starting here) we talked in Post #1 about the competitive pressures that are forcing today’s companies to take a hard look at their warehouse operations.  In Post #2 we looked at the costs of warehouse mistakes in hard dollars.  In Post #3 we looked at the surprisingly large number of dollars that can be recaptured by eliminating those errors.  In Post #4 we looked at the key action points that Best of Class companies use to excel in warehouse management.  Here in Post #5 we’ll look at Aberdeen’s three key conclusions – and break them down according to whether those recommendations are for the Best of Class, the Average, or the Laggards in WMS performance.  In other words, everyone has room for improvement.

For the Laggards… Aberdeen has three key recommendations:

1. Implement cycle counting. Companies utilizing an organized, systematic batch-oriented approach to cycle counting (or what we often call ABC – Activity Based Costing – analysis) have 8% fewer inventory discrepancies between what they have and what they think they have in the warehouse.
2. Enable centralized direction of warehouse processes. Here, organization is the key.  As Aberdeen writes, “When tasks are assigned from a single source, and not dictated by the choices of individual workers, there is a common basis for all order fulfillment operations.”  The result is higher inventory accuracy and significantly improved on-time performance.
3. Provide additional training resources to warehouse staff.  Those companies providing resources for process improvement and technology to staff enjoy noticeable improvements in picking accuracy and on-time performance.

For the Industry Average performers, Aberdeen recommends:

1. Improve collaboration with suppliers and customers.  Collaboration with suppliers regarding incoming deliveries and with customers for visibility into outbound shipments yields higher on-time delivery success.
2. Implement Engineered Labor Standards.  Conducting discrete studies related to warehouse tasks can help reset the bar on performance, according to Aberdeen.  The idea is to shift from benchmarks for past achievements to higher theoretical ideals.
3. Enable real-time communication and confirmation.  Mobile, electronic warehouse technologies for order fulfillment, confirmation and mistake reduction collectively serve to increase picking accuracy and on-time delivery, as well as faster turnaround times.

Finally, even the Best of Class companies show areas that can be improved:

1. Optimize inventory location.  Strategically locating inventory in optimal positions, or slotting, “based on customized criteria rather than SKU velocity” helps to speed order turnaround.
2. Increase the focus on labor management.  Activities like ongoing data collection, performance comparison, process changes and training all show a positive effect on the quest for continuous improvement.
3. Implement dynamic task assignment.  Picking routes that minimize work travel distances are an important first step to improved warehouse operations.  But task-interleaving – combining pick and put-away tasks on the “same trip” — increases the number of tasks completed while keeping travel to a minimum.

Our final post in this WMS series comes next, highlighting the differences in performance among firms who use enabling WMS technology, and those that do not.

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So faced with the competitive pressure to reduce overall expenses… what do the best companies actually do to render warehouse improvements? 

As hinted at earlier, Aberdeen Research took a “PACE” – framed approach, as illustrated in the table below:

According to their research, the Number One answer among top-performing companies was to adopt more efficient order fulfillment processes.  In fact, across the entire spectrum of company “types” reported (i.e., Best of Class, Average, and Laggards) this was cited by roughly 70%.  Collaborating with customers to better predict demand came in a distant second.  Among Best in Class firms, offering additional value-added services ranked a close third.

Five characteristics of action stood out among all firms:

Process:  Here, accurate knowledge of true on-hand inventories was very important.  A perpetually updated and accurate inventory executed via automation and cycle counting was cited as delivering nearly 5% higher inventory accuracy, compared to firms with manual inventories.

Organization:  Centralized allocation of warehouse tasks, directions and processes was prevalent in twice as many Best of Class firms as it was in the Laggards.  Those Best of Class firms ended up with better improvement than others in on-time delivery improvement as well as under budget performance. 

Knowledge Management: In essence, Best of Class companies had better trained warehouse staff.  And with people accounting for 35% of warehouse overall costs, a better trained staff yielded over 3% better pick accuracy and over 4% better on-time shipments.

Technology: Best of Class companies used bar-code scanning and related automation strategies for warehouse transactions to accomplish somewhat higher pick accuracy but also dramatically improved order turnaround – about 2 days versus 4.

Performance Management:  Rigorous performance monitoring and benchmarking should be combined with an intelligent design of warehouse tasks and movements, designs and processes.   Best of Class companies use Engineered Labor Standards to ensure compliance and improvement in the warehouse.

 In our next and second-to-last post: Aberdeen’s recommendations for the warehouse.  What YOU need to know to improve your warehouse performance.

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The other way we mentioned in the previous post to calculate cost savings gained from improved warehouse management is to look at the gains from just a one percent improvement in picking accuracy.

(Recall that our data is derived from an Aberdeen Group research report on warehouse operations at over 200 companies, completed just last year.  Their research report is available here.)

We looked in the prior post at Aberdeen’s calculation of the cost of a shipping error.  Picking errors, while less costly, have their costs too.  Aberdeen found that of the 205 surveyed companies, a picking error (a mistake caught before it incurs the downstream cost of mis-shipments to your customers) cost $11 per piece, $9 per carton, and $14 per pallet.

A 1% improvement in picking accuracy can be applied to the same examples we use in our prior post…

On a 4,000 piece per day ship rate, you eliminate 40 errors per day, or $440, for an annualized savings (5 day week) of $110,000.  As we did earlier, let’s assume you ship only 1,000 pieces a day; this still results in annual savings in excess of $25,000.  If you only ship 100 pieces a day, it’s a $2,500 savings – not likely worth the investment in WMS by itself.

Here, only at higher pick rates will you see substantial return.  The gains are largely economic.  However, reduce mistakes on shipping errors and you will see gains both economic and in terms of customer satisfaction.

Ultimately, saving on either picking-correction costs (in the higher volume environment) or in shipping error-corrections serves to mitigate what is largely regarded as the number one competitive pressure in the warehouse environment noted in our first post: the need to decrease operating expenses.

As observed in our examples, deployment of appropriate warehouse management automation solutions can recoup their costs within a year of implementation. 

So… what do the best companies actually do to render warehouse improvements?  Aberdeen looked for the answer through the lens of a “PACE” analysis, identifying Pressures, Actions, Capabilities and Enablers.

In our next post, we’ll look at their conclusions.

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In our previous post (read it first here before you read this one), we outlined the proposition that improving your warehouse management via improved delivery capabilities with fewer mistakes will yield reduced expenses.  And that happened to be the Aberdeen research study group’s number one competitive pressure.  (In the land of flat revenues, reduced costs are king).

There are two key ways to calculate your return on better warehouse management.

(1) You can compare the savings you would incur by reducing enough of your delivery mistakes to move up from the Industry Average or Laggards class of companies into the Best of Class companies.

(2) Or you can look at the cost savings derived from just an improvement – say 1% — in picking accuracy.  We’ll look at both…

It turns out that merely improving from Industry Average to Best of Class leads to a substantial cost savings – and the larger the company, the bigger the bang.

Just how big?  Let’s just say that they are proof-positive that companies who invest in improving their warehouse management capabilities – that is, their ability to pick, pack and ship better and faster – are setting themselves up for huge cost savings.  They not only make the investment cost of automated WMS a no-brainer, but they give themselves a competitive advantage in the marketplace: they not only deliver more accurately … they also get faster turnaround and are in a stronger position to provide more value-added services.

Here’s what I learned, based on Aberdeen’s figures:

To start, let’s look at a shipping error, which we noted earlier runs about $33 on a per piece basis.  And let’s look at the impact of that $33 per piece cost of a mistake, comparing just the Industry Average companies (roughly, the middle 50% of companies) to Best of Class.  In other words, you’re already pretty Okay in your warehouse management, but you aspire to be Best in Class. 

As we noted earlier, the difference between the two classes was a mere 2-1/2% in “on-time complete delivery.”

Now, the Aberdeen survey companies were large in some cases, averaging over 4,000 shipments per day.  Starting there, a $33 cost per error on a 2.5% performance gap (all numbers are rounded) yields $3,500 in daily error-costs which, multiplied over a year, produced a whopping $875,000 in added (mistake) costs!

Maybe you don’t ship 4,000 pieces a day.  Maybe you do 1,000.  But maybe you’re one of those “laggards” – those with the 88.43% on-time complete delivery.   Even at only 1,000 pieces shipped per day, if you could move up to Best in Class, your savings would be an equally whopping $700,000 per year!

And finally, even if you only ship a mere 100 pieces per day, and moved from Laggard to Best in Class, you’d recoup warehouse savings in excess of $70,000 – in just one year.

And by the way… if you calculate error-correction costs by the carton, all the figures above are 33% higher.  If you calculate by pallet, they are 78% higher.  (However, the number of cartons or pallets you ship is likely to be fewer than the number of “pieces” shipped in our examples, so the cost savings are relatively about the same overall.)

We’ll look at the other way you save with better warehouse management in the next post, our third in this series.

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Early this year the well known research firm Aberdeen Group released an extensive report on the financial impact of improved warehouse management.  Their findings were eye-opening, released in a report titled “On-Time and Under Budget: Maximizing Profits with Efficient Warehouse Management.”  A firm named Ryzex has made the full report available and you can download it here.

Aberdeen researched 205 companies, looking at the impact of various competitive pressures on warehouse management – and what actions to take about them.

Anyone with a warehouse that is serious about reducing their costs of operations and improving their performance for the long run should either read the full report or, for the lazier among us, peruse the key conclusions in the series of posts we begin here today.

First, Aberdeen surveyed those 205 companies and got to the core of the matter:

Roughly three in four (73%) stated that their key pressure was “the need to decrease operating expenses.”  This makes perfect sense today.  If your revenues are flat, you look to ways to reduce expenses!  A distant second (35%) said that “customer demand for faster turnaround time” was their top competitive pressure.

Aberdeen chose three warehouse performance metrics: picking accuracy (percent of orders picked with right items and quantities); inventory accuracy (percent of locations with accurate inventory and counts in the most recent cycle count or inventory); and performance against budget (difference between actual vs. budget costs).

Based on analysis, they defined three classes of companies:

The Best in Class were the top 20%.  These had 99.94% picking accuracy and 99.88% inventory accuracy.  Nearly perfect.  This group averaged 96.95% on-time complete delivery.

The Industry Average was the middle 50%, with 98.83% picking and 97.54% inventory accuracy.  This group averaged 94.92% on-time complete delivery.

The Laggards were the bottom 20%, with 91.87% picking and 87.6% inventory accuracy.  This group averaged 88.43% on-time complete delivery.   (Time to check your numbers?)

Next they calculated the error-correction costs of picking errors.  The short version from the data is that it cost $11 to correct a picking error and $33 for a shipping error on a per piece basis.  Those figures on a carton basis were $9 and $44.  For a full pallet they were $14 and $59.  In other words, the repercussive cost of making a picking mistake on a pallet was $14 and if you accidentally went so far as to ship it, the cost of that mistake averaged $59.

Now for the good stuff.  When I read the Aberdeen data, I got to calculating.  That was the Aha moment.  I’ll share the bottom line results that warehouse improvement can make with a key conclusions and examples in the series of five posts that follows. 

This is an eye-opener.

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