A mid-sized manufacturer of dried fruit and juice products was running high inventory and below target customer delivery metrics. The primary reason was that its inventory management operations in the warehouse were tracking finished goods by quantity, but not by storage location. As a result, they knew whether or not they had product in stock, but could not tell which warehouse location had it, leading to significant incremental costs in pulling products for shipment.
They knew that a warehouse inventory management system will help them reduce inventory costs, while improving delivery metrics. One of the biggest challenges before them was what type of system to choose -- a 'good enough' system that comes as a module within their ERP solution and hence is tightly pre-integrated for warehouse and inventory management or a system from a specialist warehouse software provider that provides lots of bells and whistles, but they have to worry about integration? This article provides a basic framework to help understand such tradeoffs.
Framework for Evaluation
Effectively managing inventory and logistics is an increasingly complex challenge for most organizations. In the face of market uncertainties, fluctuating fuel prices, and growing customer expectations, it becomes even more essential that operations managers run a lean, reliable logistics operation. These managers are asking questions such as a) How can we cut inventory and logistics costs further by optimizing our warehouse assets and resources while still meeting our customers' expectations? b) How can we adjust our systems to increase flexibility in offering the right services and meet the individual requirements of different customers? c) How can we implement efficient, customer-specific put-away and retrieval strategies in our environment?
A warehouse and inventory management system enables organizations to address these questions, reduce costs, increase reliability and raise throughput of their logistics and warehouse operations. These systems also enable the organizations to easily implement embedded best practices such as wave picking, cross-docking and value-added services (such as product assembly, labeling, packing or kitting) within their warehouse operations.
As you evaluate various options, you have a choice of deploying one of the four possible solutions:
- A warehouse and inventory management solution that exists as a module within your ERP system (integrated)
- Standalone solution for warehouse management designed for mid-sized organizations
- Advanced warehouse and logistics capabilities from your ERP provider than can be implemented stand alone or with your ERP provider's system
- Standalone advanced warehouse and logistics management solution from a niche WMS specialist
If you are a mid-sized organization (like the fruit and juice manufacturer above), then which option do you choose -- option 1) or option 2)? If you are a transportation and shipping company, which of the options do you choose?
The framework discussed below will help prioritize these choices, as you evaluate these systems. But before I review the framework, let's define the two dimensions of the framework.
Integrated vs. Stand Alone: A warehouse and logistics operation can be managed as a completely standalone entity or it may be managed in the context of the overall material/customer order flow. A completely standalone warehouse operation is responsible for meeting its service levels at the lowest possible cost of operations -- i.e. it does not need to consider any other part of the organization as it strives to drive towards maximum efficiency (i.e. lowest cost and highest throughput). However, for a manufacturer, that has associated warehouses, it needs to look at warehouse as an integral part of its overall value chain.
Hence the manufacturer needs to minimize the total cost of delivered product while hitting its promised delivery metrics. It does not need to have the minimum cost in any one operation (such as raw materials inventory, manufacturing, finished goods inventory, logistics or distribution), but the lowest cost of the overall operation. To achieve this, it must integrate its end-to-end logistics and fulfillment operations to gain visibility and control across all nodes in the network. Such integration can allow warehouse managers and logistics executives to anticipate supply chain disruptions and take proactive, timely, and profitable actions across the global logistics network to ensure customer delivery are met.
At the same time, the integration allows it to pursue strategies that lower its overall product costs -- i.e. not minimizing its warehouse inventory costs at the risk of disproportionately increasing manufacturing and distribution costs. End result is hitting its target customer delivery metrics at the highest possible margin. Additionally, with an integrated view, businesses can monitor the customer satisfaction indices for their end customers, tracking metrics such as on-time shipments with product returns, lifetime order values etc.
High Operational Complexity: Certain warehouse systems are better designed to meet the needs of customers with higher operational complexity such as distribution-oriented customers as opposed to material storage oriented customers (e.g. production supply facility). These systems do better when the customer needs include a higher level of material flow velocity (i.e. high number of transfer orders or line items or high transaction volume), multiple types of material handling equipment, complex material flows or need for value-added services (such as special labeling, pricing, packaging and hazardous material notes on shipping documents.)Using these two dimensions, below is a framework to help evaluate which warehouse management system is right for you.
Explanation of Framework
The framework above recommends that when operational complexity is high and integration with rest of the supply chain is essential, the best solution to consider is the advanced warehouse management system (WMS) system from your ERP provider. You will get the advanced warehouse management capabilities, as well as the highest degree of ERP integration without needing to invest your own resources in an expensive integration. Additionally, this integration will be carried forward as you upgrade to new releases. It will also ensure your environment optimizes on lowest cost to the customer, not the lowest warehousing cost - potentially a key competitive advantage.
With such a solution, you will not only have up-to-the-minute cost and inventory visibility into individual warehouse work centers -- including the dock and the yard - for each of your branch locations, but the solution will also bring together all of the data points from across your organization to give you instant access to your perfect-order metric. If your ERP vendor does not provide advanced warehouse management capabilities, then you should evaluate best-in-class solutions, but you would need to invest in expensive integration to bring it all together.
Advanced capabilities in either of these solutions should include:
- Deconsolidation -- Upon receipt, the products can be directed to a deconsolidation work area where like products can be separated off of the mixed pallet and put away as homogenous units.
- Kitting -- Kit to Order, Kit-to-Stock and Reverse Kitting.
- Slotting -- Determine the best location of product storage within the warehouse
- Support for multiple cross-docking scenarios including pass through transportation hubs
- Support for Wave processing by allowing you to group items into waves based on activity area, route, or product.
- Yard Management -- Manage trucks and trailers in your yard, map their movements based on warehouse tasks, and monitor the yard via a warehouse monitor.
- Put-away and stock removal -- Automatically determine appropriate storage strategies. The software assigns appropriate bins for placement and picking of goods
- Quality management -- Inspect whether delivered products satisfy your quality criteria
- Support for value-added services, including product assembly, labeling, packing, or kitting) in the warehouse using orders.
- Optimize replenishment using advanced strategies such as demand based stock requirements
- Connectivity, management and orchestration of automated material handling equipment and RFID
- Graphical Warehouse Layout -- A graphical representation of the warehouse and the yard of the warehouse for both definition and re-warehousing efforts.
- Labor Management: Ability to plan, measure, view, and simulate labor activities to better manage the time and productivity of warehouse workers.
If the warehouse operational complexity is high, but the integration requirements are low, either advanced warehouse management system (WMS system from your ERP provider or a best-in-class system can do the job. These scenarios are not common and are influenced by the governance model of the company. However, in most cases even a distribution or a third party logistics (3PL) company would want to integrate its warehouse operations with its customer order system.
When the warehouse operational complexity is low, but integration requirements are high (most manufacturers fall into this bucket), the best option is a simple warehouse management solution that comes with your ERP system. With such a solution, you can integrate warehouse management operations with order management and finance. This allows you to synchronize supply with demand by creating a balanced push-and-pull network and aligning warehouse activity with replenishment on the basis of customer demand. A simple warehouse system can do the trick, but would need expensive integration with the ERP backbone.
Having the right warehouse management system in place can have far-reaching implications for customers, and can enable customers to run a run a logistics operation that is leaner, efficient and more reliable. With this framework, you will able to select the right inventory and warehouse management system based on the complexity of your environment, as well as your integration needs.
Manju Bansal is director of Marketing at SAP and is responsible for marketing the SAP Business All-in-One solution, SAP's ERP solution for the SME (Small Business and Mid-sized Enterprises) market.