Warehousing: Maximizing Distributor Profitability – Part 3

The warehouse is where most distributors make it or lose it. Sales is responsible for the top line, but if the warehouse (including inventory management) does not meet the six critical measures of success, all of the sales in the world will not help because you will lose customers quickly. In the last two issues we covered Metrics and Management, and the Cost of Mistakes which can be read on our blog.  This month we’ll cover the Benefits of a Streamlined Process to Minimize Errors.

There is another side to the coin. That is the value of a quality process that brings customers back and keeps them. A well run warehouse that minimizes errors can be a competitive advan­tage. It is something that can be sold. Documented error rates that are lower than the competition, guaranteed service levels based on qualitative data, and the ability to deliver superior service all win customers. Using the Customer Lifetime Value calculation, keeping a customer one extra year on average can add many thousands of dollars to the bottom line. Reduce the number of lost customers in conjunction with increas­ing their lifetime value and the results are impressive.

It is even better when you consider the total saved costs of not having to pay for extra shipping, extra handling, extra paper­work, extra customer service calls, and extra soothing of irate customers. Then calculate the lower cost of customer acquisition based on your reputation for top notch service and the wins keep coming in.  Fixing warehouse errors has so many positives; it is hard to understand why so few distributors do not focus on this easily managed area. Especially in the current economic situation, here is a way to reduce your costs and those of your customers. It is truly a win-win situation.

In the supply chain, there are multiple reasons that product must be (or is) returned to a supplier from a customer. It can be from an end user to the distributor or from the distributor to the manufacturer. In all cases, it can prove to be a nightmare of forms, lost information, and manual processes that create exces­sive paperwork, lost productivity, and reduced profits.

Some of the major reasons for returns are:

  • A wrong product was shipped (and the value was less than the customer was going to be charged)
  • The incorrect quantity was shipped (not enough to fill their customer order so they do not want the inventory or there was too much and the item does not turn enough to be worth the extra handling even if the excess inventory was not billed)
  • The product is damaged during shipping due to inad­equate or inappropriate packaging
  • Poor product quality that does not pass predefined inspection requirements
  • The product arrived late and the customer used an alternative supplier
  • The customer decides to no longer carry product (obso­lete inventory)
  • The customer wants to recover cash by returning non moving products

No matter what the reason, a complete process is necessary to initiate the process, track the material, handle it properly, issue credit memos, and finally, recover costs. In a perfect world, the process would be relatively simple.  When a customer initiates the return, it requires efficient handling by customer service personnel. They first must be able to verify that the inventory was actually purchased from their organization and then relate the purchase to a specific Purchase Order, shipment, and invoice.

Next, a shipping label with an easy to read bar code (linear or 2D) is generated which exactly identifies the material being returned and is sent to the customer by email (as an attachment) or FAX. The label provides a link to all of the electronically stored information that the CSR (Customer Service Representative) already researched and captured.  When the product arrives at the supplier’s receiving dock, it is positively identified by the bar code and instructions for its disposition are available to the receiving clerk. It may be held for testing, it may be inspected and returned to stock, or it may be cross docked to return to the manufacturer.

All of the internal paperwork is completed by the computer and the proper credit memos issued, less any restocking charges. Restocking charges can be determined by the product category cross referenced to the specific customer. If there was shipping damage, the system should assist the CSR in completing all necessary insurance claim forms and track them to payment. Any material that is to be returned to the next level supplier (importer, master distributor, or manufacturer) will be properly identified with a custom shipping label that meets the supplier’s specifications. The label will be applied to the package and it is then ready to be forwarded on without additional human intervention.

The system will track the physical return of the merchandise based on the bill of lading. Once it has left the shipping dock, the application should follow up to make sure appropriate credit memos are issued and applied. The electronic paper trail will be available at any point to track the current status of any individual return or all returns to a specific supplier.

The electronic system will eliminate the “spreadsheet in the drawer” that has been traditionally used to track and follow up as best as possible on returns. Through CSR access to information, both customers and vendors will have the ability to access and in­quire against the database to verify the status of any given return.

Once again, it is obvious that accuracy and real time infor­mation can improve the operational efficiency of any process. Reduced costs in processing, increased accuracy in reporting, and an overall improvement in trust between trading partners will have many benefits

Returns are just one of many supplier metrics which can assist a distributor in managing their warehouse. By using actual results, it is possible to create a “Vendor Report Card” that provides a picture of what is the true cost of doing business with an individual company. While this will be covered in more detail in a later White Paper on Business Intelligence, it is worth a short overview here.


The Vendor Report Card would include calculations for all aspects of the vendor experience. Among the many items to be measured and reported are:

  • Shipping accuracy (recent, running averages, and annual accumulation) for:
    • Product accuracy
    • Quantity accuracy
    • Timing accuracy (this also helps to determine lead times for ordering)
    • Quality measures
    • Compliance labeling accuracy
  • Damaged goods received (did not pass inspection or are returned by our customer)
  • Billing accuracy
  • Shipping costs
  • Reliability of drop shipments
  • Value of add on services
    • Training
    • Spiffs
    • Marketing material
    • Marketing support
    • Co-op monies
    • Ship and Debit concessions
    • Support at shows or other venues

These and other metrics should be automatically collected and included in the vendor report. Then, when the time comes to negotiate with a vendor for future pricing, there is an objective measure of their performance and an accurate picture of the cost that has been incurred due to their errors. Having an accurate picture of the existing relationship will put any buyer in the strongest position to negotiate the best deal possible.

This entry was posted in December 2010, Newsletter and tagged , , , , , , . Bookmark the permalink.

Leave a Reply