You do. SCS has no vested interest in the stock, because we don’t own it, so we can’t insure it. If there was an insurance claim, you would claim on your insurer, they would pay you out and then they would attempt to recover money from SCS, in which case we’d be obligated to demonstrate we have acted in good faith with an acceptable duty of care.
We hold bailees insurance. Please speak to your insurance provider to get a clear picture on the insurance you need.
It is a trade custom in contract warehousing that stock accuracy is a commercial risk carried by the customer.
Standard pricing is always done on a cost plus basis in consideration to a reasonable and acceptable margin of error (or ullage) which is defined by the KPI‟s. E.g. a 99.7% pick by line accuracy may translate out to a 99.5% inventory accuracy by item based on your order profile, product labeling standard and packaging standard.
More info on this can be found in our document: Accuracy & Labelling.
Ullage defines inventory loss within a reasonable materiality threshold which we represent as a percentage. A more detailed explanation of ullage can be found at www.supplycs.com/ullage.pdf
If not specified otherwise the default ullage is 0.5% subject to a product type and labelling assessment, please refer to our Accuracy & Labeling document for more info on this and refer the example calculation in Q.6 later in this document to understand how this is applied.
A materiality threshold is a globally accepted accounting practice that provides a quantitative guideline which specifies the point at which it is no longer financially viable to investigate an imbalance. E.g. would you spend $100.00 to investigate a $5.00 imbalance? Would you spend $50k per annum on a security guard to mitigate an annual imbalance that might be theft or picking errors worth $5k and $5k represents 0.3% of your sales?
For accountants and auditors the materiality threshold is normally 5%. At SCS the ullage allowance can range between 1 and .01% depending on your product attributes, supplier accuracy and labeling standards.
For more information please refer to our Accuracy & Labeling document.
Our understanding is that through an insurance company the answer is no. Our discussions with insurance companies is that they will not cover ullage on your material damages policy (or any other policy). They deem this to be your commercial risk.
SCS can elect to offer this insurance if asked after it has studied the statistical probability around the risk of error and understands the value that the risk represents in order to construct an “insurance‟ premium and we agree to do so.
Please do not assume ullage is insured under standard rates, it’s not. That would be like tendering 1M of diamonds to an airline carrier in your luggage and not telling them and then claiming 1M if there is a misadventure where the luggage goes missing.
If you need additional peace of mind regarding high value items and loss beyond reasonable thresholds/industry standards please specify this request. Also please check with your insurance company. We have only checked with our own providers to form this view (current as at Nov 2009).
We calculate stock accuracy at a unit level based on set off (balance ups and downs) then measure this against unit throughput (sales) vs an ullage threshold (margin of error).
If the ullage allowance is 0.5% then the calculation using set off is as follows. Note: calculations are done at a unit level.
(C-B)/A = D as a % or (2000-1999)/6000 = 0.017%
Refer to our Ullage document to understand how pricing agreements effect claiming rights.
We don’t – in standard price agreements. This needs to be specifically requested and offered to include a levy or special rates that consider the value of the risk beyond reasonable service delivery standards.
Over 95% of our clients are happy to know we deliver to very high standards and don’t request 100% because they understand that incremental performances increases above our high standard of KPI‟s would come at disproportionate cost increases and make the solution commercially unviable.
To illustrate this logic, as a relative example, a large multi national courier company conducted a global taskforce to determine what additional costs would be incurred to increase our on time delivery standard from 98% to 100% where their global infrastructure at the time was 2Billion USD/annually, the determination of the taskforce was a) you‟d never get to 100% – that‟s impossible and b) if you got it to say 99.00% your infrastructure costs would need to at least double and for every fractional percentage increase there was a hugely and exponentially disparate increase in infrastructure cost. E.g. 99.5% was a 3 fold increase in infrastructure cost, etc…
One of the financial reasons outsourcing works is illustrated in the case that pricing has no consideration towards your margins or the value of your product, for example if we process an order and it incurs 20.00 worth of handling fees, SCS‟s net margin is likely to be between $1.00 and $1.40, so, if the sale of goods yields the client a profit of $100.00 or $10,000.00 it is of no concern to us and nor should it be, under this arrangement you reap the reward of your sales and carry the commercial risk of loss or damage. In the case of contracting us to manage your risk you decide if you‟re happy with our KPI‟s and ullage threshold, in the case of freight any loss or damage, you have additional cover under the Carriage of Goods Act 1979 this insurance is limited to NZD1500 per shipment (please read the act for an exact description) and if you have goods worth more than this then our recommendation is that you should make sure you have an extension on your marine cargo policy to cover this area of risk but this needs to be dealt with through your insurance provider.
Irrespective of our KPI in regards to picking errors, if we make an error we will cover the costs to remedy it. This is something extra SCS offers.
This is one of the most contentious issues in outsourcing. It becomes “he said”, “she said” and the reality is that the error may have occurred:
Because it is unclear where the imbalance occurred SCS won’t accept liability where our stock is accurate. Whilst it does happen from time to time, 9 times out of ten it is sporadic and it is the kind of issue that comes and goes (like an annoying noise on a car that you’re trying to explain to your mechanic that’s never there when looking closely for it!). Fortunately this issue accounts for a very small percentage of all orders.
We advise the best way to manage this is to manage the instances of issues and measure them against an acceptable materiality threshold and budget for it in your cost of goods, (this same logic applies to your car insurance, you could manage this yourself and self insure but its easier just to insure it to avoid the stress of managing the risk). If over a period of time the instances fall within the threshold then do nothing. If the instances exceed a reasonable threshold then escalate it so that more process and investigation can be applied to try and determine where the issue is stemming from.
In order to prevent the possibility of theft we have stringent security policies and procedures in place including CCTV, Access control, a comprehensive security policy (copy available on request), we conduct background checks on staff, carry out random staff and car searches but we can never 100% guarantee that a stock imbalance is not the result of theft.
We also employ a lot of technology to protect your goods in our facilities such as monitored alarms, point to point beams, PIR‟s and long range PIR‟s, glass breakers and fully fenced yards.
We can give you a comfort level that our stock take results almost always yield outcomes in the high 99 percentile and with many customers who have excellent labeling standards we consistently achieve results in excess of 99.9%. Traditionally there is no trend on the fraction of a percent that represents the remaining imbalance and the imbalance is just as likely to be positive as it is negative.
As the customer you need to be happy that the measures we implement on your behalf are acceptable in consideration to the rates we charge and the ullage allowance. For more info on Ullage we recommend you read our Ullage document.
This is the difference between gross stock accuracy and net stock accuracy. It’s important to understand these two terms. A full explanation of how we deal with this can be found in our Accuracy & Labeling document.
Again our recommendation is to treat this KPI within an acceptable materiality threshold. If we perform it all is well – we employ a lot of process and technology to manage stock location control and only in very rare instances do we ever exceed this KPI and for clients we have never exceeded it.
In the case of a item not being where the system says it should be and in rare instances where we are unable to resolve the issue in a reasonable timeframe, the standard process is to lock the stock and deal with the imbalance at stocktake time. Reasons for this are explained in our Accuracy & Labeling document. It’s a good idea to share this document with your key staff because we know it can be frustrating and education on the issue helps.