Making the right investment in improved warehouse visibility

Manufacturing & Logistics IT spoke with Mike Smith, business development director of Clydebuilt Solutions, about how better warehouse control can reduce the level of required working capital, while also having a positive impact on an organisation's share price.

 
Profitability and effective use of available capital is, and has always been, key drivers for businesses. With this in mind, many organisations have group headquarters tasked with monitoring the effectiveness of their foreign factories and warehouses in terms of the return on capital employed (ROCE) and/or the local share price. But, as Clydebuilt Solutions' Mike Smith point out, lack of confidence in inventory accuracy can lead to excess material purchase; often known as the 'just in case syndrome' and also longer period stock turns. This, he explains, can not only result in costly and unnecessary levels of stock, but also, as a consequence, have a negative effect on the local share value. He adds that this, ultimately, can have a detrimental effect on the organisation's profitability as a whole.
 
Smith cites a hypothetical example of a US company that owns a number of factories and warehouses in Europe. "These sites might be closely monitored by group headquarters primarily either on the movement of the local ROCE or local share price," he said. "In the case of ROCE, let us suppose one of the sites had a return of around US$6.5 million, but was able to increase this to $8 million. With such a favourable financial performance, the site probably wouldn't be micromanaged by headquarters; HQ would instead primarily focus on the performance of the local ROCE." Smith elaborated by saying that it is not so much about whether the bottom line is $350,000 or $350 million; if the sites are making an improvement on the return on the money group HQ gave them, then all is well. Additionally, if these sites wish to make further investment and require, say, another $7 million from HQ, Smith maintains they would be more likely to get it if good returns were already being made, and if impressive improvements on these returns were being achieved.
 
According to Smith, one of the key facilitators of more efficient management of capital is IT.  However with regard to warehousing, he points out that many companies rely on ERP even though these systems' primary focus is on running the business and managing its finances rather than on the fine-grain aspects of warehouse management and stock control. "This isn't a criticism; it's simply a result of the way they're designed, and this is where solution providers such as Clydebuilt Solutions can help," he said. "If companies don't have good visibility of what materials they have and where they are, then the buyers tend to over-buy stock. This can result in goods and parts either sitting in the 'just in case' camp, often for long periods of time or lost and forgotten due to lack of visibility; the company hasn't the means to plan stock levels more efficiently based on demand and what's needed on the production shop floor within specific timelines."
 
In addition to excessive and often highly expensive stock tying up working capital, Smith pointed out that companies with inefficient means of managing inventory often also have the additional constraint of excess personnel doing tasks that could more easily and effectively be undertaken by a dedicated simple to use IT system. "Some companies have a large number of people compiling spread sheets and doing checking and counting exercises around the factory or warehouse," he said. "So on the one hand the company has excess staffing levels, and on the other it has a less than ideal method of monitoring and managing inventory." Smith also reiterated that the excess capital tied up in such poorly managed inventories materially affects the ROCE and can affect the share price. However, he remarked that if a company has better inventory visibility it is not so likely to source unnecessary levels of stock; it already knows what it has on site and where everything can be located complete with associated information like lot, batch, serial, BBE.  "If a company has this level of visibility then many of the people currently engaged in data entry exercises to feed the planners could be better employed in more high-value tasks; such as loading goods into vehicles to deliver orders to customers," he said.
 
Smith concluded: "The bottom line is that companies can maximise return on capital employed by reducing NPO costs and reducing working capital required by minimising capital tied up in inventories."