Have you ever wondered how to get more out of your distribution software? Most distributors use less than 25 percent of the capability built into their distribution software package, yet they paid 100 percent of the cost. That doesn't really seem to fall into the category of “best practice,” does it?
The best way to get your money's worth is to master the art of extracting data into meaningful reports. Over the next few months, we'll look at the merits of three power reports that can help you maximize your investment in any distribution package. This month, we'll tackle the HITS report.
The HITS report is a little like a stock-keeping-unit (SKU) popularity contest. This report is not concerned with how many units customers purchased when they placed the order. Instead, we simply use it to find out how popular an item is with the entire customer base. Each order is recorded as one hit.
The report can be used for several different inventory management tasks. The most beneficial uses: organizing warehouse products for logistical efficiency, speeding up the cycle-count process, sniffing out the nearly dead items in your product mix and determining how much safety stock to apply to an item.
Organizing the warehouse
I grew up in a warehouse environment where all products from the same vendor were grouped together. The products were arranged by manufacturer SKU number so a picker could find something relatively quickly. (This was before bin locations became integrated into our distribution software.) The problem with products grouped by vendors is order pickers find themselves traveling all over the warehouse to fill an order. In a small facility, this doesn't really seem like too big a deal, but in a larger warehouse, those additional footsteps really add up.
One way to improve picking efficiency is by changing a warehouse layout based on product velocity. Using the HITS report, place the most popular products closest to the shipping point. Place less popular products further away from the shipping point. In a facility arranged by product movement, most of the picking activity occurs in the first couple of rows. As a result, facilities with this arrangement must provide extra room in the first couple of rows so folks aren't always bumping into one another.
Distributors don't have to organize products in the exact order from the report. I've seen several different adaptations on this theme. One client created a small high-pick zone located right next to the shipping dock. Another client has been experimenting with a carousel conveyor system for their high-pick items. A zone approach works well because of the different shelving requirements needed. Remember the goal: increasing the efficiency of pickers by reducing additional footsteps.
By setting up velocity zones, you automatically create an easy way to count your most popular items more often. In a warehouse not organized by product popularity, when cycle counting by velocity, counters must move around the facility looking for high-pick items. With a zoned facility, your counters can really focus their attention where it's most needed. Most inventory discrepancies will occur in your highest velocity products. Obviously, they should be counted the most often.
Most distributors struggle with dead inventory, and it usually ranks high on the list of management headaches. When dead-stock dollars rise too high, there is usually a concentrated effort to liquidate the material and clean up the shelves. Once the threshold of pain is met, dead-stock management usually returns to the back burner. As items continue to lose favor with the customer base, the death toll rises and the cycle repeats itself. So how do you stay ahead of the game?
The HITS report is an excellent tool in the battle against rising dead inventory. As a product begins to reach the end of its life cycle, it will fall lower on this report. An interesting bit of research for those geeks who like to explore this stuff would be to track the hits on a product from introduction to demise.
To get ahead of the dead-stock game, establish a “terminally-ill point” on the report. For most hard-goods distributors, four hits is a good threshold. When a product falls below this threshold, consider converting it to non-stock status.
Take a hard look at your list. How many stock items fall into this category? How many dollars are tied up in these items? How much shelf space is allocated to items your customers are clearly not too interested in?
Note that some exceptions exist to this four-hit threshold. If you have an item that is part of a bigger item, you may wish to keep this as an active SKU. For example, you should keep replacement breakers for the fastest-moving load center in stock. They may fall below the four-hit threshold, but when your customer calls, you better be able to say “yes.”
One of the most common consulting phone calls I receive goes something like this, “I keep running out of my fast-moving items, and I have a mountain of slow-moving stuff.” The solution to their dilemma usually resides in setting the safety stock. Enter the HITS report.
Most distribution software comes out the box, metaphorically of course, with the safety stock set equally across the board. It's up to the user to determine which products should be set higher and which should be set lower. Remember the set-up process of your software? What was top of mind on the go-live date? Setting the safety stock probably didn't even grace the top 10. By leaving the factory defaults, the package treated all items the same. Thus, fast movers sold out before they could be replenished, and the slow movers kept piling up.
How much safety stock should a distributor carry? True to the consultant's credo, it depends. Safety stock is there to cover you during times of uncertainty. If you knew exactly when every customer needed the product and exactly how much lead time it required to receive the product from your supplier, you probably wouldn't need much in the way of safety stock.
Look at setting safety stock levels as a way to say “yes” to your customers as many times as possible. At the same time, balance this concept with your financial responsibility to the company. In order to make the most customers happy, concentrate on the items they buy most often.
Use the HITS report to set your safety-stock percentages. Give the top 5 percent of your items, by popularity, a high percentage. A 100 percent safety-stock percentage is not a bad place to start. As items go down the popularity continuum, drop the safety stock percentage. Once you reach the 50-percent mark on your entire inventory of active SKUs, ask yourself if safety stock is really necessary. Why invest a bunch of money in items your customers are not that interested in?
Using the HITS report will help you increase the return on your technology investment. We'll explore a couple more reports in future articles. If you need some help getting started, or a sample copy of a HITS report, send me an e-mail and I'll be happy to point you in the right direction.
Jason Bader is a partner with The Distribution Team Inc., a consulting firm that works with wholesale distributors to improve their net profit through effective inventory management. Visit the firm's Web site at www.thedistributionteam.com. Bader can be reached at (503)282-2333; e-mail: Jason@distributionteam.com