Developing a Business Case for WMS

An illustrative business case that analyses both quantitative cost justifications and qualitative intangible benefits can help understand how implementation of WMS solution can make a difference. Deploying WMS results in reduced operational costs of various categories such as inventory, shipping, labor, space, etc., and thereby cutting down the total cost of operations (TCOp).  Let us analyze the cost savings usually realized through WMS solution that impacts the TCOp and RoI, along four different dimensions, viz., productivity, inventory accuracy, shipping efficiency, space utilization.

Labor Productivity

Warehouse labor cost savings realized through the implementation of WMS is the major contributor for the reduction of total cost of operations (TCOp) and quick realization of ROI. Each process of the warehouse has to be analyzed thoroughly against the projected time/cost to get the true picture of the labour cost savings. As the use of WMS results in improved labour efficiency, most of the material handling activities such as receiving, put-away, picking, shipping, etc., can be completed within the standard working time avoiding the need for overtimes. Due to system directed execution of operations, time spent on identifying and planning the activities that are to be done is minimized, while time taken to locate, travel and perform the activity also reduces increasing the direct labour productivity. Use of auto id technologies that automatically captures data, such as barcode readers, radio frequency (RF) eliminates paperwork and the data entry activities. Further with the cross-docking ability, WMS eliminates the need for put away, storing and picking operations so that labor resources can be effectively used for other activities.

By the way of improvements in the productivity around 20 per cent, the direct labor will cost much lesser than earlier. Similarly, indirect and administrative labor costs also reduce as the supervisors and clerical staff productivity improves by about 30 and 70 per cent respectively. As the supervisors can proactively plan the day-to-day operations very easily with WMS, they can focus on other activities. Efficiency of clerical staff also improves with the data integrity maintained by WMS, while elimination of paper work avoids handling and managing volumes of paper.

 Inventory Accuracy 

Lack of true inventory status information leads to over or under stocking, missed sales opportunities, reduced labor productivity, affected customer service levels, etc. Inaccurate inventory data loses the confidence on the warehouse and leads to excess purchases than required to ensure against stock outs. This way additional capital is tied up with the excess inventory and also affects the warehouse capacity.

Warehouse Management System (WMS), with its capabilities such as auto data capturing, cycle counting and self-checking, provides almost accurate inventory data at any time. It improves the material handling and purchasing activities reducing the safety stock requirements. As WMS provides credible inventory information, warehouse managers make informed purchasing that will avoid excess stock keeping. In these ways, the overall inventory level reduces usually by 5 – 20 %. Besides, better visibility into inventory may increase the capability to shift book value to the suppliers.

Inventory reductions convert into costs savings in several ways. Reduced inventory means reduced capital tied up in the inventory, which obviously is the lower interest payment. On the other hand, minimized inventory levels results in reduced warehouse space needs decreasing the space or carrying costs. Further, the risks such as obsolescence and damages are minimized, while reducing the need for inventory write-offs. Thus, deployment of WMS results in the reduction of working capital requirements and associated costs, carrying costs, cost of risks and inventory write-off costs.

Shipping Efficiency

Errors in outbound shipments can cost the warehouse very much, while delays in shipping/receiving results in the detention charges. Most often, the shipments are expedited to cover their delays, which involve in additional freight and labor costs. Inaccurate shipments ultimately lead to return processes adding the restocking and return freight costs.

In a warehouse with WMS, the accuracy of shipments increases as it provides capabilities such as automated order complete verifications, shipment loading confirmations, etc. As the accuracy and timeline performance of shipping activity improves with the use of WMS, the chances of first time correct order shipment increases. Obviously the volume of orders returned due to incorrect shipment also decreases.

With enhanced accuracy and timely shipment, all the associated costs reduce significantly. Most importantly, the detention charges levied due to delayed shipments decreases. Similarly, other costs such as expedited order costs and returns management costs are also minimized or eliminated.

Space Utilization Savings

One of the significant factors contributing to the reduction of warehouse operating expense is the space utilization. Mis-managed inventory may often create the need for additional storage requirements, which is mostly outsourced. Usually outside storage space can’t be available on demand.  It has to be leased out on certain cost for the predetermined period, irrespective of its utilization. When outside storage space is leased, along with the cost of lease other costs such as insurance and transportation costs are involved.

As WMS improves the space utilization, the need for outside storage capacity reduces, proportionately cutting down the associated costs. Usually the cost of lease, insurance and transportation associated with it is eliminated or reduced. Even the associated labour costs are reduced as the volume of stocking or unstocking and the need for transporting the inventory back and forth are minimized.

Apart from above-highlighted quantifiable benefits, other qualitative benefits such as improved customer service, increased customer satisfaction levels, employee satisfaction, etc., add to the savings in terms of reducing the operating expense or optimization of warehouse value.  With fast pack back period, WMS optimizes the returns on investments, while increasing the sales and employee retention.

Firms seeking to implement WMS solutions should assess their warehouse processes and identify WMS that meets both current and future requirements. As the return potential of WMS depends on the scope and size of operations involved, a specific project study should be undertaken either by engaging a project consultant or setting up an internal team. 

Future of Multi-Sourcing: Will it Change the Outsourcing Outlook?

With giant firms like ABN Amro, General Motors, Nissan, Procter & Gamble (P&G), etc., from banking, automobile and other major industries opting to outsource their IT functions to multiple vendors, multi-sourcing is slowly gaining traction as a mainstream outsourcing model. Despite several challenges involved, businesses will seek to go with multi-vendor strategy due to the increasing pressures from shareholders to improve bottom line performance. As ‘sole-sourcing’ doesn’t look promising for speedy growth, multi-sourcing strategy is the alternate option to pursue. Though firms would be reluctant initially due to complexity involved in integrating and managing multiple vendors, best practices such as operational level agreements (OLAs), Responsible-Accountable-Consulted-Informed (RACI) matrix, guardian vendor, etc., and the availability of more sophisticated technology with good ROI, are expected to build confidence to pursue this model.

Multi-sourcing will be predominantly adopted in outsourcing projects whose contracts are set to expire in next few years. New outsourcing projects will also opt for multiple vendors as the early adopters become successful. But the corporate world will not give up viewing ‘multi-sourcing’ as an alternate model and would keep watching it while exploring new avenues. As it emerges successful, the practice will be spread to other functions such as HR, Marketing, etc., instead confining to IT outsourcing. The chances to go the multi-sourcing way are very high in case of high-end, mission-critical outsourcing tasks, like knowledge and transformation services. However, ‘access to multiple specialists or expertise’ will be the key reason for opting multi-sourcing in transformation services.

Ultimately, ‘multi-sourcing’ is expected to transform the outlook of global outsourcing as subscribing to multi-vendor creates several ‘mini markets’ or ‘internal markets’ for firms across the world. This would rather make the situation more complex and intimidating for the service providers to manage multiple clients and sustain across those ‘mini markets.’ Service providers will focus on building their competitiveness and may even tend to provide value-added services to their clients. Eventually, it may result in acquisition of small service providers by the big players in order to retain their businesses. In essence, multi-sourcing would result in streamlining and consolidating the global outsourcing industry where only the giant players may remain offering multiple services.

Vendor Managed Inventory (VMI) - Go Beyond the Practice

Vendor Managed Inventory (VMI) has at present gained the power and support to deliver its ‘true’ promise. Though its adoption continues to grow while posing new challenges, VMI is likely to diffuse to a new set of industries triggering the need for multi-vendor management and cross-vendor cooperation.

 
Well, it is no more a concern to ensure adequate inventory or minimize stock-out situations, in their own locations.  Now, the inventory manager is the vendor himself. Globally, firms have recognized the importance of efficiently managing their response to customers (so-called ‘efficient customer response (ECR)’).  This notion has forced several manufacturers and retailers insist on their immediate suppliers to, assume the responsibility of managing inventory and execution of purchase orders on their behalf. Vendors too are displaying keen interest to assume such responsibility as they find it a better way to either insure or optimize their sales.  This philosophy of B2B relationships to realize mutual benefits has placed the vendor in the new role leading to the concept of ‘vendor-managed inventory (VMI).’  However, there are several concerns both current and emerging, which pose a great challenge to the parties involved in VMI.  Addressing those concerns should take an institutional approach as delved in the ensuing discussion.

Vendor’s Resilience Matters

A major concern that is very often questioned in VMI context is, the vendor’s resilience. When firms encounter mammoth increases in demand for their end products, the chances that their suppliers can replenish inventory matching the required levels, are usually low. Vendors can be resilient upto their own maximum capacity to which they can serve. However, once the demand level goes up beyond vendor’s maximum potential, right replenishment of customer’s inventory can’t be guaranteed. 

Service Disruptions Will be There

Though vendors can replenish their customers’ inventory for any level of variability in demand, ensuring timely replenishment at times of trouble can be a major challenge to the vendors. Every time, when emergency situations arise due to unexpected disasters, keeping up the vendor promise is not practical. System and network outages for extended periods can also make the vendors completely handicapped, taking the inventory management into chaos. When conventional or manual systems are leveraged for data sharing, very often, they result in distorted information that leads to mis-communication, ultimately making mess of customer’s inventory management. 

Should Marry Culturally too

 Finding the right ‘fit’ between vendor and customer firms is a very rare thing. Value systems, technology maturity, employee mind-set, service-orientation, performance standards, etc., may vary across both organizations. These cultural differences, pose a greater challenge in achieving seamless integration between both parties. Very often, this factor turns out as a major hurdle while executing VMI process.

Impediments in the Way…

 ‘Information exchange’ is one of the crucial requirements to facilitate collaboration between both parties of VMI practice. Usually, the data with regards to inventory, point of sales (PoS) or demand and sales promotion calendar is provided to the vendor for making timely replenishment decisions. When electronic medium is leveraged for data transfer, data sources and systems of both parties should be seamlessly integrated. However, achieving ‘interoperability’ while linking vendor and customer’s systems is one of the major challenges for successful implementation of VMI. Since data sources and applications are divergent operating on different platforms, ensuring compatibility of such technology integration is a serious issue. As new and sophisticated technologies emerge, or when internal systems are upgraded, convincing the other party of the VMI relationships to upgrade technology is extremely hard.

Information integration is though quite complex and not so a easy task, gaining ‘trust’ between both parties of the VMI is even a greater challenge. Sharing critical information such as demand or PoS data and sales promotion calendar with the vendor is based on the level of confidence and trust that exists between both parties.

On the other hand, personnel of both parties display reluctance to change. In view of the threat of loss of employment, sales force of vendor and buyers or inventory managers of customer organization, resist the move towards VMI adoption.  Overcoming this barrier is highly crucial for successful implementation. But, gaining the employees support is not possible without a meticulous employee-benefit program. Very often, such high-level resistance from employees can have a serious impact on the part of VMI implementation team to address the cultural changes required. Both parties should, therefore, explore reliable change management options to overcome employee resistance.

Continuous trend of globalization is leading to the practice of ‘strategic sourcing’ by customers. This will question the viability of managing customer’s inventory, while offering products at a competitive or discounted price.
 

Bottlenecks Ahead

The ongoing trend of globalization, emergence of extended supply chains, increasing threats and regulations in distribution, and current trends in retail businesses are likely to add few more challenges, predominantly to the vendors and manufacturers. The following are ‘may-be’ concerns that will emerge.

1. Extended supply chain environment is adding new stakeholders like contract manufacturers (CMs) in between vendor and OEMs. This will increase the complexity and distribution costs for the vendor, and creates the need to make changes in their replenishment policies and contracts. Besides, access to inventory data from multiple sources to gain a consolidated view is not so easy task for both VMI parties.

2.  Vendors will have to comply with the emerging transportation and distribution regulations in the process of executing replenishment plan, particularly in case of pharma and biotech industries.

3.  Similarly, the emerging distribution challenges such as cross-border terrorism or bio-terrorism, etc., should be effectively managed, particularly by the manufacturers when replenishing inventory at distributor or retailer’s location.

4. Retail industry consolidation and the ongoing power-shift from manufacturers to retailers may throw several challenges. One significant challenge could be managing the threat of increased demand for additional services from the ‘big-box’ retailers.

5.  Another significant trend in retailing is the emergence of network of multiple retail outlets distributed geographically. As retailer’s operations grow and spread across geography, managing and replenishing ‘islands of inventory’ becomes more complex and challenging.

6.  With increasing cost of working capital, vendors may find it difficult to replenish the demanded inventory beyond certain level at customers’ place, at promised rate.

7. As demand variability increases, vendors should make necessary preparations to replenish customer’s inventory, ‘on-demand’. To ensure on-demand inventory replenishment, suppliers should set up distribution centers (DC) or warehouses at customer’s proximity, which may increase the operating costs of the vendor.

Govern ‘Board of Vendors’

Instituting VMI practice across all suppliers is a herculean task.  Particularly, manufacturers find it very hard to convince all part/component vendors to offer the vendor-managed inventory services. In the absence of such multi-vendor managed inventory, it turns out to be very hard on the part of manufacturer to ensure absolute ‘synch’ of inventory across all parts/components. On the other hand, governing cross-vendor relationships emerges as a great challenge as multiple vendors agree for offering inventory management services. This leads to the other challenge i.e., managing synchronization of ‘inventory replenishment’ across all parts suppliers.

Manage Cross-Vendor Partnerships

When same parts are sourced from multiple vendors, what is the chance that all suppliers offer vendor-managed inventory services? Infact, it becomes a tough deal to convince every one on the board. Even if everything goes well, ensuring accuracy of replenishment decisions made by each supplier, in isolation, is hard unless cross-vendor cooperation and seamless visibility into the customer’s inventory are instituted. However, on the other hand, cultural differences and lack of process or technology standardization across vendors may strongly affect continuity of operations. 

 

With advancements in data collection and integration technologies, there will be breakthrough improvements in VMI potential. A seamless integration is possible now that can promise real-time visibility into how products are selling, giving the on-demand and accurate replenishment capabilities. On the other hand, the move towards seamless e-business integration and increased adoption of B2B collaboration, are likely to create a congenial environment for the VMI to flourish. As a result of these, vendors and manufacturers are empowered further to reap the true benefits of VMI.