Problems and solutions in logistics and warehouse management in SMEs

In this article we are going to develop a real case study that shows the reality of the logistics and warehouse management problems of many SMEs as well as the solutions and results achieved in this specific case.

In the current environment, increasingly competitive and with lower margins, organizations are continuously looking for improvement opportunities that make them more competitive. In this sense, they are increasingly aware of the importance of warehouse management (and logistics management in general) as an essential part of providing more value to their customers and reducing their costs.

The starting situation.

The present case takes place in an industrial company with a turnover of 34 million euros and a strong desire to align its logistics and warehouse management towards a Just in Time/Lean Manufacturing philosophy.

At the strategic level, the company - which is in a pure commodity market - had lost its leadership in terms of customer service and costs, a situation aggravated by the entry of international competitors.

In addition, the warehouses were oversized (valued at 7% of turnover), an excessively high value compared to its direct competitors and taking into account that production is made to order.

Although of lesser importance, there were also excessive costs in the processes related to purchasing, production and warehouse management due to the inefficiencies described below.

For this reason, the company's top management decided to launch a project to analyze, propose and implement the appropriate logistics solutions to achieve new competitive advantages aligned with the strategy, after a general analysis of the company at both strategic and operational levels.

To this end, a mixed work team is created between the external consultant and key people in the logistics area of the company who, after a diagnosis, identify four major areas for improvement:
  • Inadequate processes and information management in the logistics area.
  • Problems in procurement management
  • Physical layout of the warehouse
  • Availability and reliability of information due to manual data entry.
The following is a description of each of these problems.

Inadequate processes and information management in the logistics area

The lack of a global vision of logistics processes by the company was generating inefficiencies in the whole process, since both information and materials were not flowing correctly.

This problem was basically due to two reasons:
  1. Processes designed in such a way that there is no flow of information between the different departments. The processes had been defined by each of the departments having designed watertight processes that generate inefficiencies when the process crosses several areas. For example, the analysis found documents that were validated up to three times by several departments because some were not aware that the others were doing it, or material requirements planning generated by production and not used by purchasing because they were unaware of its existence.
  2. There were clear inefficiencies due to the information model used by the management software (ERP) recently implemented in the company, which did not meet the company's information needs, causing excessively manual processes and duplication of tasks between departments. Thus, there was a lot of information that could not be consulted in real time and, for example, to know the stock level of certain products, it was necessary to go to the warehouse and inspect it visually.
Problems in procurement management

In this sense, and associated with the process concept, the problem in the purchasing/procurement areas was particularly serious.

Due to the lack of information and procedures in the organization, the purchasing department could not make decisions based on information but on feelings, which led to a chaotic situation with oversized warehouses and at the same time with continuous stock outs.

All the aforementioned weaknesses made it impossible to analyze the rotation of products, both for purchasing the correct quantities and for their physical layout in the warehouse.

Physical layout of warehouses

The warehouses had a lay-out typical of small warehouses which, as they grew and were never rethought, showed some very common inefficiencies:
  • Incorrect plant layout that caused inefficiencies in the handling of warehouse materials.
  • Oversized workforce due to inefficiencies caused by lay-out, material handling and lack of procedures.
  • Inadequate type of storage for some products, such as those that were confined in cardboard boxes (especially considering that the warehouse was outdoors).
  • The storage system that had been chosen (stacked products without shelves) did not allow for a warehouse with a FIFO (First In First Out) philosophy, causing an inadequate rotation of products and therefore having items without rotation for long periods in the warehouse, considerably increasing the presence of obsolete items and shrinkage.
Availability and reliability of information due to manual data entry

Manual data entry, both in the case of the raw materials warehouse and the finished product warehouse, had two consequences:
  • The possibility of errors due to manual data entry.
  • The lack of knowledge in real time of the stocks in the two warehouses.
This last point was particularly serious if we take into account that the company produces during weekends, and that the manual entry of the products in the finished product warehouse implied the discounting of their components in the raw materials warehouse, which meant that there was a maximum time lag of 2.5 days between the consumption of the items and their entry in the system.

The lack of reliability in the system seriously affected both Purchasing, which solved it by increasing stock levels, and Shipping, making it difficult to optimize them.

The proposed solution

After the diagnosis, the solution was proposed with three basic lines of work. Based on the strategy and the desired positioning - and with the process area as the central axis - solutions were designed as shown in the following figure:

Process reengineering

In this case, the entire logistics process was redefined from procurement to shipping, eliminating all the inefficiencies that occurred when the process "crossed" through the different departments and implementing process management instead of a pure departmental organization.

Based on the logistics process, the following sub-processes were redefined:
  • Purchasing management
  • Warehouse and stock management.
  • Dispatch management
  • Production management
In addition, the process leader concept was implemented to manage the process across all departments, thus creating a matrix organizational structure to make the processes and sub-processes more efficient.

In addition to process reengineering, personnel were also trained in continuous improvement techniques to ensure that processes and sub-processes become more effective and efficient over time instead of becoming less so.

The following methodology was used for this purpose:

Physical warehouse

For the problems related to the storage system, it was necessary to redesign the warehouses in order to achieve the following objectives:
  • Rationalize the number of people assigned to the warehouse due to the drastic decrease in the time of storage operations.
  • Improve rotation, and therefore reduce the level of stock and obsolete stock.
  • Decrease in the number of wastes.
  • Enable the implementation of procedures to ensure proper warehouse management.
To this end, at the physical level, there were two main lines of work:
  • Storage systems
  • Physical distribution (lay out)
In terms of storage systems, a warehouse was designed with palletization systems adapted to the characteristics of the product with modern FIFO storage systems and dynamic picking.

Regarding the warehouse layout, a proprietary methodology of the consulting firm was used to redefine all the functional areas of the warehouse (loading and unloading docks, goods preparation areas, picking area, etc.).

Information management

In the case of information reliability and availability problems, a data collection system was implemented (using radio frequency terminals) integrated with the ERP information system used in the company. This solution ensures the reliability and availability of data and greatly reduces management costs.

In this area, it is important to highlight the complexity of successfully combining business concepts with technology concepts. To achieve this, an "Information System Implementation Committee" was created with the participation of the same members of the consulting firm and the company as in the Project Committee, as well as representatives of the information systems solutions companies.

In this way, it was possible to avoid problems due to lack of information or communication, and the project plan for this area was completed in a timely manner.


For the development of the project, a mixed work team was created between the client and the external consulting company, where all the departments involved were represented (Logistics, Purchasing, Production, Warehouse,...), and different methodologies were used depending on the different elements of the project, although always with the following structure:

Problems and solutions for the proper logistics and warehouse management.

The entire implementation of the work methodology and the proposed solutions was carried out using a Project Committee under a project leadership shared between the external consultant and the company and with the full support of the Top Management.

Particularly noteworthy is the change management methodology, a key element for the success of any project and whose treatment had a specific methodology. It should never be forgotten that organizational changes end up being changes in people, so this element -although often complex to manage- is essential for the success of any project.

The Results

After the implementation of the project, some of the quantifiable results were:
  • Achievement of a competitive position in service lead times.
  • Decrease of the average warehouse stock by 34.5%.
  • Decrease in shrinkage by 27%.
  • Availability of real-time information for decision making due to the implementation of a logistics scorecard.
  • 23% improvement in administrative process costs.
  • Increased customer satisfaction due to improved service.
  • Increased team satisfaction due to clearly defined, communicated and implemented collaborative processes.
All these improvements, achieved with a very interesting return on investment, allowed the company to regain its leadership position in its sector.

To finish and complement the text we leave you with the webinar "Supply Chain Management: breaking down frontiers in logistics management" given by Juan Luis de los Ríos Sánchez, from IEBS, in which key aspects for the management of logistics in SMEs are discussed.