Tom Kozenski of RedPrairie (an ARC client) sent me a video case study about a WMS implementation at Cummins Filtration that went very smoothly because of good project management: avoidance of customization, RedPrairie and Cummins folks that worked together seamlessly, and role-based training.
The benefits Cummins reported are what I would have expected for a paper-based facility moving to a WMS: better labor productivity, increased throughput, and fewer costly shipping errors. However, there was one benefit mentioned in the video that I bet most public companies moving from paper to automation don’t include in their business case: eliminating the need to shut down the warehouse for two or three days to physically count all of the inventory in the warehouse.
The Sarbanes-Oxley (SOX) Act of 2002 was created in response to major corporate accounting scandals (e.g., Enron) that avoided the radar of traditional financial reporting and led investors to lose billions of dollars. The goal of this U.S. legislation was to improve reporting processes at public companies to prevent future financial misstatements. Section 404 of the act is what applies to physical inventory audits.
Section 404 tightens the internal controls at companies. Auditors pay close attention to control points. In the warehousing area, this leads to questions such as “How robust is your cycle counting program and does it affect the amount of inventory you have on your books?” In tightening internal controls, the key issue is materiality. In other words, will the lack of a process control materially affect the financial results a company reports? Following the passage of SOX, more companies decided this was material and moved to physical inventory counts.
However, a WMS provides strong process control. And if you implement it in a way where a certain number of daily cycle counts are performed, and you can document very high inventory accuracy, accountants are usually willing to agree that a manual audit of the warehouse is not necessary.
And there is ROI associated this. This is three more days of the year where the warehouse is shipping product and labor is being used for productive purposes. And this is three days you don’t have to pay outside auditors to supervise the inventory count.
Bottom line: If you are a public company and are considering implementing a WMS, don’t forget the elimination of physical audits as an ROI bucket.
