The high cost of inefficient warehouses

Outmoded processes and paper-based picking and inventory management systems in the warehouse may be costing you more than you ever suspected. Mispicks in the distribution center cost companies as much as $390,000 per year, and inefficient processes may be wasting upwards of 3,000 labor hours annually. Those are the results of a survey from mobile computer, bar code hardware, and warehouse management technology vendor Intermec.

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Intermec surveyed 250 supply chain and distribution managers in the United States, United Kingdom, France and Germany. Research firm Vanson Bourne carried out the research in October 2012, surveying companies with more than 500 employees across a variety of vertical industries, including retail, chemicals, logistics, manufacturing, transport, and pharmaceuticals.

According to the study, distribution centers are losing an average of nearly $390,000 per year because of mispicks. The average mispick costs approximately $22, with more than half of companies reporting a pick rate of less than 97 percent. Another 19 percent of respondents didn't measure the costs of mispicks at all, so the losses could be even higher than reported.

Those costs are generated by the rework that it takes to pick the correct item, processing paperwork, and handling returned goods. "That adds up quite quickly, and shows us that an investment in the right technology, as well as process improvements, can provide a quick ROI," says Bruce Stubbs, Intermec industry marketing director for distribution center operations.

Inefficient processes generate even more costs. According to the survey, managers stated that over an eight-hour shift, each worker loses an average of 15 minutes of productivity because of inefficiencies. For small- and medium-sized warehouses with 50 workers, that could mean up to 3,000 man-hours per year.

These managers are under increasing pressure to control costs, with nearly eight out of ten of them being asked to find cost savings of 19 percent, on average, from existing operations. More than half (59 percent) of respondents are rolling out "Perfect Order" metrics to identify areas for improvement, with demand for improved efficiency and lower costs.

However, one in three managers reported not having conducted a review of workflow processes in the past year.

"That was one of the biggest surprises," says Stubbs. "Most of these managers have been tasked with making process improvements, and they are quite significant. They are looking for a 20 percent improvement or more, but only a small number of those have actually done any kind of process improvement review in the past 18 to 24 months. There's a disconnect there."

Picking, reverse logistics need improvement

Technology can help. The majority of managers (89 percent) believe investing in new technology would improve productivity and reduce costs, but a quarter (23 percent) of companies surveyed were still using paper in the DC, rather than mobile technology and other forms of automation.

The operational areas that required the most improvement were no surprise, Stubbs says. Among companies that had completed a workflow process review, 47 percent said picking was a key area where cost savings could be easily achieved. Companies using the perfect order metric saw complete shipments (43 percent) as the most profitable opportunity for savings.

"There's a two-pronged problem with picking: productivity and accuracy," Stubbs says. "Most of the survey respondents said productivity in picking is not where it should be. If it's paper-based, it's even more of a productivity drain, and that carries over into accuracy, as well."

Most managers said that the most inefficient workflow was in packing and loading (20 percent), followed by picking and inventory control (18 percent).

Reverse logistics and returns are also a problem. While the Intermec survey focused predominately on companies outside of the automotive sector, managing returns is a significant problem in the aftermarket, as well. According to the survey, 61 percent of respondents reported that the post-holiday period was a challenging time of the year because of the high numbers of returns, and 52 percent said they did not have the appropriate processes and tools in place to determine if returned goods should be discarded, returned to the vendor, or moved back into inventory.

"Most companies just don't have the processes in place to manage returns well," Stubbs says. "In fact, many companies outsource the entire process, creating a sort of 'reverse fulfillment' center. Best practice is to manage this electronically. Where we see the most success is using bar codes, so that when the material comes back, the bar code can be scanned and that automatically IDs that item to whoever it was that sent it back. You can call up the product information, take photos to show any damage, and communicate directly with the system of record based on that data."

Despite the high costs, many companies delay taking action to improve these processes. Of the managers who had not held a review in the past year, 28 percent said that only compliance issues would prompt them to do so, while 27 percent said that poor performance would have to be the motivator. One in five (16 percent) said they would only review workflow processes if a customer complained.

Deploying technology seen as a challenge

The majority (74 percent) of mangers said that increasing automation and adopting new technology would have the greatest effect on profitability. Just over half of them, though, think that adopting the technology among employees will be a big challenge. Forty-nine percent of respondents also said that being able to "pinpoint areas in the distribution center where investment would yield the greatest result is difficult to achieve."

There were some positive signs when it comes to technology. More than half (52 percent) of managers reported using RFID in their DCs, and 24 percent use voice-directed technology.

Stubbs recommended having vendors or consultants do a complete DC walk through to evaluate all warehouse and yard processes, and identify the areas where improvements will provide the best bang for the buck. "That's what we've been doing with our own clients as part of our Value Engagement Process," Stubbs says. "We show them where they have the most bleeding. It allows them to understand where it is they have the biggest problems, and then focus on those first."

According to Stubbs, the combination of a good warehouse management system, along with bar code technology and (in some applications) voice-based picking solutions can go a long way toward improving these warehouse operations.

"You can have a direct impact on the bottom line by reducing the costs in a distribution center," Stubbs says.

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