How To Fix Broken Inventory Processes

Subject: How A Broken Inventory System Can Ruin A Company

Case Study by Thomas Kingsley

This case study highlights the challenges and solutions related to broken inventory processes and demonstrates how these inefficiencies ripple across other areas of the business, negatively impacting overall performance.

Company profile

A retail company generating over $75B annually, ranking among the top ten largest retailers in the United States. The organization offers products through both physical stores and digital platforms.

Background

Thomas was contemplating a transfer to oversee logistics in a high-level role, second only to the general manager. After the interview, the general manager suggested, "Let's take a walk so you can get a feel for what you'd be dealing with before making your decision." During the walk, Thomas discovered a severely broken inventory process—the worst-case scenario. This dysfunction was impacting every department. After assessing the situation, Thomas confidently stated that he could resolve the issues and accepted the position.

Day One:

TThe general manager expects Thomas to decide by the end of the week whether he plans to let the employees go or attempt to retain them.

Day Five:

After Thomas reviewed the employees' methods, he discovered they were not adhering to corporate procedures. This deviation triggered a snowball effect, escalating into a full-blown catastrophe.

Simplifying The Process

Inventory is delivered to a brick-and-mortar location, where employees unload the truck and scan the merchandise into the Inventory Management system. The items are then immediately placed on the sales floor to stock shelves. Any excess merchandise that doesn't fit is stored in the warehouse as back stock, which is subsequently cataloged in the system by location.
When a customer makes a purchase, the Point of Sale (POS) system updates the Inventory Management system, notifying it of the sale of X SKUs. This triggers warehouse workers to pull the corresponding back stock to replenish the sales floor. As the Inventory Management system detects low stock of a SKU, it communicates with the Distribution Center (DC), automatically generating a replenishment order to ensure the sales floor remains stocked. This seamless process drives revenue when functioning properly.

Analysis Results

Thomas found:

The replenishment team was inefficient in unloading trucks and restocking merchandise onto the sales floor. Additionally, they were not properly organizing the shelves, leading to an excessive buildup of back stock.
The warehouse team struggled to keep up with both replenishment back stock and daily pulls. As a result, inventory was being placed on warehouse shelves and eventually onto pallets without being cataloged in the Inventory Management system. This breakdown led to 125 pallets of merchandise piling up in the warehouse aisles, with no way to efficiently locate specific items.

Failing to catalog merchandise in the Inventory Management system creates significant issues for the sales floor. Department managers rely on the system to identify low or out-of-stock items, but when the system shows inventory as available without assigning a warehouse location, it becomes impossible to pull those items from the warehouse and restock the sales floor.

The issue is exacerbated by the Inventory Management system showing positive inventory levels, which prevents the Distribution Center from automatically replenishing stock. To override this, inventory counts must be manually zeroed out for specific SKUs, triggering a replenishment order. However, this solution creates a new problem—excess capital is tied up in surplus inventory. This creates a vicious cycle: empty shelves lead to lost revenue, while manual ordering results in surplus stock and mounting debt. Eventually, the excess inventory must be liquidated, causing further revenue loss for the organization.
When a new delivery truck arrives from the Distribution Center, the replenishment and warehouse teams waste valuable time moving the 125 pallets out of the way to unload the truck. At the end of the shift, they spend additional time moving the pallets back into the warehouse. As a result, each employee loses nearly three hours of their shift on these tasks, diverting time and effort away from more productive activities.
In addition to the broken process, the situation made the warehouse environment hazardous. The excessive number of pallets cluttered the aisles, and employees were forced to step on them to access cataloged merchandise for daily pulls. This not only created safety risks but also disrupted the workflow, further hindering productivity.
Lastly, Thomas discovered a storage trailer at the back of the location, filled with thousands of dollars worth of merchandise. On top of that, the company was paying rent for the trailer. What made the situation even worse was that no one had questioned its presence or thought to investigate the contents, allowing valuable inventory to sit unused and unaccounted for.

Resolution

Retain the replenishment team to efficiently unload trucks, push merchandise to the sales floor, and correctly stock shelves to minimize back stock.
Retrain the warehouse team to correctly manage the back stock and daily pulls.
Retrain the sales floor team to perform daily pulls and correctly stock shelves to minimize back stock.
Review workers performance and provide feedback.
Empty storage trailer and return it to the vendor.
Reorganize the warehouse to accommodate all merchandise and rescan the entire warehouse to catalog inventory in the Inventory Management system.
Perform an inventory audit.

Conclusion

Identifying the issue was straightforward during the first week: the location's system had failed due to the previous management’s failure to properly execute their responsibilities. At a minimum, a manager’s role is to ensure employees have the knowledge and tools they need to perform their jobs effectively, while holding them accountable for their work. Thomas recognized that the current employees were already familiar with the tools; the real challenge was fixing the broken processes they followed. Replacing and hiring over 30 new employees for one location would have taken far more time than the location could afford. Additionally, management should have been consistently reviewing operational reports to ensure the organization’s books were balanced and operations ran smoothly.

The impact of the broken inventory procedures on the audit process was significant. However, Thomas simplified the inventory audit process. Auditors use various methods to verify that a company’s financial records align with the physical count of goods. In this case, the audit revealed a discrepancy of nearly $2M in inventory. Once the processes were corrected and the inventory systems were aligned with the financial records, the location was able to move forward as a fully functioning, revenue-generating operation.

At the time, the parent organization operated nearly 1,000 brick-and-mortar locations, and this particular store was ranked at the bottom. However, several months after addressing the issues, the store was ranked among the top 25 most profitable locations in the company. This turnaround demonstrated that implementing the correct procedures, ensuring employees have the knowledge and tools to perform their jobs effectively, and holding them accountable for their work are critical factors in creating a smoothly run operation that drives profitability.