Wednesday, August 26, 2009

Attitude, the Unmitigated Cost

If you are an aficionado of management literature, the mantra of a “habit” would not be foreign to you. I have often heard of ‘habit’ being the melding of knowledge, skill and attitude. It is tremendously important for organizations to ensure their staff operates under the corporate attitude, using their knowledge and skills. Interestingly, attitude is one thing that the organization can influence but cannot control.

A recent engagement for a national food service organization expounded how knowledge, skill even technology were no match for attitude. The scope of the engagement was to understand how, after a multi-million dollar investment in technology, recruitement and training didn’t present huge cost savings with inventory management. Several years ago, ABS ltd, invested several million dollars to implement an inventory management system to manage their 750,000 products that were warehoused throughout the continental United States. Through the use of hand held devices, workers had access to a wealth of information regarding the company’s products. The level of detail was phenomenal, including the knowledge of how many green widgets were shipped on the second Tuesday in March – for each of the last three years!

Concurrent with the implantation, the company invested in a complete training of all of the staff to ensure that they would have the skill necessary to operate the system and most importantly leverage on the system’s ability to mitigate costs in inventory management. Over the three years following implementation, the learning curve was replaced by cost savings. However the savings were never close to that of what the software vendor proposed.

For anyone in an industry which provides tangible products, there is no surprise on the number of forces acting on inventory management. Very basically, the organization must carry the products that customers are seeking. The products must be at the right quantities and at the right price to continue to attract buyers. Holding too much inventory ties up working capital and not having enough for demand attracts a high opportunity cost. Equally carrying products of zero or negative profit margin is the necessary anchor to more profitable product lines. To the astute organization managing the profit margin on inventoried products requires complex modeling. All of this complexity is further compounded when the products have a finite shelf life!

The ABS inventory management system basically informed the local purchaser when the inventory count went below the threshold. The threshold amounts were manually maintenance by the warehouse management and in some cases anyone who had a handheld device. As it turned out this was part of one of three main problems with ABS not realizing tremendous benefit from the system. The inventory management system, CAO, simply kept track of what was delivered, sold/shipped, damaged and where products where located. There was no related technology in the system to recognize the profit margin, or carrying cost, for each product. The result, orders were made on ‘feelings’ not on a concrete financial basis.

The haphazard order process brought a wealth of other problems. As product arrived they were stored in non-customary locations. This meant product moved around the warehouse many times before finding its resting place, and in the movement a certain percentage of products was lost or damaged. In one analysis, a product was ordered on five successive occasions until it was realized that each shipment was ‘temporarily’ stored throughout the warehouse.

A resolution for the organization was to link their CAO system with their sales/invoicing system through an analytical tool. Within the analytics each product was subject to the Harris (1913) economic order quantity model. This model examines the right time to order product and in the correct quantity to mitigate costs, although the model identifies carrying costs as warehousing, insurance, transportation, etc. We built a mathematical model that altered the cost based on the number of times the product had to be moved/handled until it came to its final resting spot. Depending on the product type, each move coincided with a probability distribution measuring potential breakage and expiration.

As a means of combating competitive pressures, several years ago the company opted to hire only part-time staff to operate the warehouse functions. As part of their vision, this labor pool could shrink or expand as demand changed, training costs could be low and there were no ancillary benefit costs. As it turned out, it was this ‘non-committed’ labor pool that contributed quite extensively to many of the inventory problems ABS were experiencing.

Although not explicitly realized, ABS experienced increasing differences between online inventory counts and actual counts. As a means of combating the problem the warehouse was peppered with surveillance cameras as it was believed that employee theft was the problem. However, even after all of the high tech surveillance there were inventory related discrepancies.

The study revealed that one of the sources of inventory discrepancies was related more to part-time employee ‘attitude’. As it turns out, the high turnover of the warehouse positions didn’t lend itself to those who sought out a career with ABS. To that end, they would mishandle inventory and equipment, often to the destruction of both. In addition, with the ‘I don’t care’ attitude, received product was randomly placed throughout the warehouse. This attitude infiltrated all the way to those managing inventory counts. Needles too say, inventory data would become increasingly more corrupted as time past the annual audit increased.

For the organization that seeks to shine above the competition, I think it is high time to merge the many silos of data that exist within the organization. Profits need to be driven by the knowledge of how much each product contributes to the bottom line. Finally, realize that one’s sphere of influence should extend to the human element of operations – getting to the right attitude of the right people