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The Cost of Picking from the Wrong Inventory Bin

Whether you’ve built the latest, high-tech, data-driven warehouse fulfillment center or just set-up a few plastic totes in your garage, accurately delivering a customer’s purchase is crucial.  Being right 99% of the time seems like a pretty solid percentage—until you calculate what that 1% actually costs an organization. These costs include:

• Wasted man-hours
• Expensive shipping
• Increased customer support staff
• Customer aggravation
• Loss of customer goodwill
• Excessive production time

A recently published white paper looked at the costs and the effects of mispicks on distribution centers.  The results showed large scale operations could be losing in excess of 1.5 million dollars annually due to mispicked items.

 What is a mispick?

Most fulfillment operations function like big warehouses full of merchandise and equipment. Looking at the operations of the world’s largest retailers finds they essentially run like massive airport terminals filled with racks upon racks of goods stashed in bins. Workers, called runners, dash about the place with handheld scanners “picking” the items from the bins designated on their scanners. Orders stream in from the retailers’ websites and then warehouse employees run to fill them. Some items are easy to differentiate within the bins, but some product variations are more subtle.  These variations can cause the wrong item to be picked—a mispick. At the beginning of the inventory process, an item’s bin location is entered into the inventory management system for later recall and retrieval by the scanner and a runner. When this information is wrong, then the system itself creates time delays as runners look for alternative bins; with the increased probability of additional mispicks.

Costs

In the simplest explanation, a mispick is a missed opportunity for inventory procedures to run well. From that perspective, all of the investment, all of the modeling, and all of the planning devoted to ensuring smooth order fulfillment  are completely disrupted. Depending on the organizational structure, the cost of a mispick ranges between 22 and 100 dollars or more per instance. If an organization fills 1,000 orders per day, with an average order price of $100, then mispicks account for 220 to 1,000 dollars per day in lost revenues; which translates to losses of between $50,000 and $240,000 per year. These figures are based on the average of 240 operating days in a year and a relatively smaller operation of 1,000 orders per day. Most fulfillment centers are between five and eight times that size (with some being more than 20 times larger)—producing losses ranging from 1.2 million to 4.8 million dollars. Coca-Cola, IBM, and Microsoft have placed the value of brand goodwill on their balance sheets in excess of 50 million dollars. If these corporate giants recognize the significant importance and value of positive customer perception, then can any organization fail to acknowledge the necessity of superior fulfillment practices?  No. They can’t.

Nearly Flawless

No system is perfect each and every time.  The Six Sigma process of quality management, considered a gold standard of excellence, seeks to reach a 99.99966% error free rate. Achieving Six Sigma levels of success equate to a savings of $4,798,360 for the previous example of a 4.8 million dollar loss due to mispicks. While this is a very lofty goal, taking incremental steps toward it saves revenue and may well create new sales opportunities with customers.

Customer Satisfaction

If a business strives to reduce errors, avoid mispicks, and has implemented wise inventory controls, there will be a time when those efforts are realized and losses decrease. By reducing the instances of failure, strong organizations increase opportunities to surprise and satisfy their customers. In doing so, they create the positive feedback and organic growth opportunities that fuel expansion and success by effectively turning a negative into one of their greatest strengths.