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No Long-Term Parking

Keep it moving! Your products belong on the shelves, not in a warehouse--and retailers won't have it any other way.

Manufacturers' warehouses used to be sleepy places where finished goods waited around in dusty cartons. But no more. Today's distribution centers are beehives of activity where factory-fresh products may alight for only hours before shuttling off via high-speed conveyors to trucks headed directly for sales floors.

Driving this change are the twin trends of lean retailing and product proliferation. You can see product proliferation everywhere from grocery stores, which typically stock more than 49,000 items-three times as many as 20 years ago-to online super-retailers such as Amazon.com and Buy.com that offer more than 1 million stock-keeping units apiece. The other trend, lean retailing, is retailers' effort to shift onto manufacturers an increasing share of the burden of product tracking and storage. Another development is too recent and, perhaps, too transitory to call it a trend. As increasing border inspections aimed at keeping terrorists out of the United States add serious delays for goods crossing the borders, it's even more difficult for entrepreneurs who import materials to meet inventory requirements. Add them up, and the old way of managing manufacturing is becoming unaffordable for an increasing number of manufacturers large and small.

Catch Your Balance

How well you walk the line between too much and not enough can make a big difference in your profits, says David Weil, associate professor of economics at Boston University and co-author of A Stitch in Time: Lean Retailing and the Transformation of Manufacturing (Oxford). Weil's comparisons show profit margins rising from 5 percent for manufacturers with bare-minimum inventory management to 12 percent with a full suite of management tools.

Up-to-date inventory management techniques and tools help boost profit margins by breaking down inventory levels according to individual stock keeping units, or SKUs. That makes it possible to, for instance, determine profitability for size 12 blue sweatshirts. Manufacturers then can mix and match their SKUs to maximize sales and create customized assortment packages for different regions or other market areas.

Manufacturers serving grocery and consumer goods retailers were the first to feel the pinch of lean retailing. But now it's spreading to many more industries. Emanuel Weintraub, a Fort Lee, New Jersey, management consultant, says clients in industries from apparel to automotive are being required to institute more inventory management. Rather than being able to ship large amounts, they now have to ship much smaller loads more frequently and on a far more prescribed schedule. And in most cases, it's not an option, Weintraub says. "If they don't do this," he says, "they're going to be out of business."

In addition to established tools such as bar coding and Electronic Data Interchange (EDI), many manufacturers are installing Warehouse Management Systems. These packages of computer software, hardware and services provide detailed information about how much stock is on hand and where it is located and match it with customer orders. They can include high-speed conveyor belts, radio-controlled wireless inventory tracking systems, and even complete new distribution centers employing cross-docking, where products are received in a facility and often repacked with other goods for the same destination before being shipped, without entering long-term storage.

You can spend from thousands to millions of dollars on warehouse management software, hardware and services. But, Weil says, you don't have spend a lot, or anything. Simply change your thinking: Analyzing your products by individual SKUs can be done without fancy technology and still yield impressive returns. "You just want to marry knowledge about variability in demand with basic inventory controls," he says. "This ain't rocket science."


Austin, Texas, writer Mark Henricks has covered business and technology for leading publications since 1981.

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This article was originally published in the January 2002 print edition of Entrepreneur with the headline: No Long-Term Parking.

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