Lean thinking in distribution
Challenging old assumptions

by Howard Coleman

A previous article (Lean Thinking In Wholesale Distribution – Are You Ready For Little Miracles?) outlined the case for the application of “Lean Thinking” principles in the wholesale-distribution environment. It summarized how Toyota, which gave birth to the lean movement, looked at its entire operation to reduce waste (all non-value-added activities and inventory).

In my own client relationships, I’m often able to discover the following areas of non-value present in wholesale-distribution environments:

• Too much inventory – more than necessary to fill a reasonable day’s supply of customer demand

• The outdated use of economic order quantities that pushes inventory into the DC/warehouse

• Product waiting around for movement – resulting from the order processing chain of picking to checking, packing to manifesting, staging to loading, etc.

• Overprocessing – in the warehouse that could mean over checking

• Poor inventory control – finding product becomes a treasure hunt

• Receiving, put-away, picking and shipping errors

• Unused employee creativity – a waste of human resources

These are not unfamiliar issues to many wholesale-distributors. Some would even say this is not necessarily rocket science. That may be underestimating the case just a bit. Lean thinking may not require abstract thinking, but it takes perseverance and attention to detail.

This article will focus on just one issue, spreading lean thinking to suppliers.

Challenging assumptions
Frequent reordering of product from a vendor might seem antithetical to those who have spent their careers trying to reduce transportation costs or take advantage of a vendor’s prepaid shipment terms. It’s a fact that more frequent ordering reduces the average inventory on-hand and the associated annual carrying costs (typically estimated at 25 percent to 36 percent). I’m not suggesting you ask vendors to provide daily milk runs, and I recognize that most vendors are not located around the corner. But is it necessary to have a two- or three-month supply of a product on hand when it can be delivered in one or two weeks (or less)?

Lean thinking suggests putting in place a process that works toward a “sell one, buy one” result (assuming some safety stock for variations in demand). That is called pull. We may never reach the perfect promised land (we won’t buy one egg instead of a dozen), but we can have a dramatic impact on what we need to stock to satisfy customer demand by ordering to actual demand and fostering a continuous flow of product.

How we push inventory
ERP systems typically calculate a forecast (a daily, weekly, or monthly usage average). Yet, buyers frequently order multiples of what they really need to meet established prepaid order minimums. Even worse, I’ve seen safety stock and lead-time parameters raised just to be able to generate sufficient purchases to meet prepaid order minimums.

Many enterprise software solutions used by wholesale-distributors today overemphasize the use of economic order quantities (EOQs). It results in a large batch of inventory being pushed into warehouses. Half of the time, it’s more than needed to satisfy customer demand before the next inventory replenishment is received.

I often question vendor deals that involve accepting (again pushing) large quantities of product into inventory to obtain a discount or meet some previously agreed upon purchasing objective. Often this occurs at year end, maybe even just prior to a physical inventory.

The impact
The examples above can have a devastating impact on the total inventory investment and the potential for obsolescence, particularly when top sellers are involved. Often, the immediate issue becomes (and I hear this all the time), “Where do I put it all? My primary stocking location won’t hold it!” Or, “It’s an A item and I have to store it in the back of the DC or high up on pallet racking…and I’ll have to move it again later, otherwise we’ll lose picking productivity!”

Of course, there is also the issue of the cost to accommodate this situation, possibly overtime, and the missed benefits of a smooth and continuous flow operation that allows product to move through the DC/warehouse faster and allows for internal bottlenecks to be exposed that were hidden by the sheer volume of receiving product into inventory.

There is often a lot of talk about vendor/distributor relationships and how wholesale-distributors and suppliers should collaborate for mutual advantage. A client recently said to me: “I surely want to leverage my volume with my vendors, but I’m also looking for a continuous flow of product based on what I actually sell (pull vs. push). If I could just get my suppliers to accommodate, I know my inventory would go down, and I believe service would not be negatively impacted. You know, I might even consider paying a tad more per unit (cost sharing = win/win). I’m committed to service and flexibility; my suppliers have to be also.”

While my client never said those exact words, he wanted to take a total cost view. His objective is to reduce total costs, including inventory costs, rather than any one cost element, such as transportation. This is a deep question, just as deep as asking suppliers to reduce prices so you can be more competitive.

Wholesale-distributors need to elevate this “lean-pull” approach to inventory replenishment. It has the potential to connect the supplier to the wholesale-distributor in a collaborative way. Then the wholesale-distributor can focus on excelling at inventory replenishment at a level as close as possible to actual demand. Suppliers should examine their own processes to take costs out of their internal operations and reduce replenishment lead time.

As more wholesale-distributors recognize there is an advantage to transforming their distribution model into centralized distribution centers (CDCs), with the expectant reduction in overall inventory needs as a major benefit, this will only heighten the need to foster collaboration.

Beginning the dialogue
Beginning to ask the right questions is a simple but effective approach to finding ways that lean thinking can address issues of inventory, cost reduction, profitability and customer service. To suppliers, the downside seems weighty, and convincing them will be no small task because so much has been invested in the way we do things. A good starting point is to gain a common understanding of the mutual supply chain and distribution challenges between buyer and seller and seeing the issues from all sides.

A lean transformation will begin when both channel partners challenge the assumptions built into the fabric of their organizations and business processes. Confidence in taking additional steps will come with the growing sense that the relationship and collaboration can drive change and mutual advantage.

Howard Coleman is the principal of MCA Associates, a management consulting firm that works primarily with wholesale-distribution companies seeking operational excellence.
Contact MCA Associates at (203) 732-0603, at MCA’s Florida Southern Regional office at (561) 989-3221, or by e-mail at hcoleman@mcaassociates.com.

This article originally appeared in the March/April 2007 issue of Progressive Distributor. Copyright 2007.

back to top                back to Distribution Management archives