Getting the Blue-Light Special Out of the Red

by Tom Andel, chief editor

Why put a column on material handling basics in a management-oriented magazine? Just pick up the Wall Street Journal. Chances are you’ve been reading about Kmart’s efforts to stay in business. The reason it got in trouble in the first place is it forgot some of the material handling basics all companies need to make their supply chains work. I’m talking about inventory management.

Bankruptcy lawyers will tell you that in most of the cases they handle, their clients were often guilty of poor inventory control. The penalty is low profitability and iffy survivability.

John Hansen, an attorney with the bankruptcy practice of Nossaman, Guthner, Knox & Elliott LLP, says that even if good inventory control doesn’t keep you out of Chapter 11, it can still make your life easier.  He told me of one client that had  a huge warehouse full of computer equipment that had been sitting there for a long time. The company had no record of what was there. Finally,  a liquidator purchased all this inventory. Once they took possession, they realized that what was bought wasn’t what was thought.  A nasty dispute resulted because there was no way for anyone to cost effectively itemize the assets.

Technology aside, failure to communicate is typical of inventory mismanagement cases. Kmart is battling for its life because it didn’t keep its supply chain partners in the inventory management loop. The retailer  now acknowledges its mistake and is working hard to fix it. By the time you read this, Kmart will probably be under Chapter 11 protection. You can be sure it’s doing everything it can to keep shelves stocked and its good name viable. Bankruptcy does help here, because the courts give suppliers incentives to keep shipping goods to a retailer under Chapter 11. These suppliers get priority-payment status. Besides, why would any good supply chain partner want to lose a big customer like Kmart?

If you’re not Kmart-size, there are things you can do to keep from making the same size mistakes. First, start by studying the Kmart case. How did it get into so much economic trouble in the first place? Failure to communicate strikes again.

A Kmart source told me that once the retailer’s merchants were done with their planning for the Christmas season, buyers would order the goods, but never told the distribution network or the transportation network what would be coming at them. There was no integrated plan in the business process to take orders from the merchants and their planning organization all the way through to the people who had to pick and ship the products. As a result, warehouse capacities were exceeded and shipments arrived late.

Now Kmart is in the middle of business process re-engineering. That involves integrating demand planning, customer relationship management and promotional planning systems with its back-end supply chain management systems. It will also establish a national specialty center to handle only its high-value, slow-turning products and add four regional specialty centers to take the burden off its existing distribution center network. This will help the DCs improve service to local stores.

It will also allow Kmart to reduce inventory and reserve more slots based on the channel flow of goods. This year the chain expects to flow more freight more effectively and turn inventory a lot faster.

Kmart is working to be competitive with the best-in-class players in all product categories. That’s a worthy goal for any company, retail or industrial. But you can’t get there until you can separate the fast movers from the slow ones in your inventory.

How much warehouse space are you devoting to staging?

What role does packaging play in your warehousing costs?

Should you go with more conveyors or more lift trucks to handle your ever-increasing number of orders?

Are your most frequently picked SKUs slotted in the most accessible areas of the warehouse?

These issues are covered in the following pages. Take a look. Some of it may be stuff you learned a long time ago, but as Kmart learned, if you don’t revisit the basics occasionally, business process problems will start visiting you.