CH-10 Distribution – Supply Chain Management: A Logistics Perspective : Book Guide

CHAPTER 10 DISTRIBUTION LEARNING OBJECTIVES After reading this chapter, you should be able to do the following: • Discuss the strategic value-adding role distribution plays in the supply chain. • Recognize the tradeoffs between distribution and other supply chain functions. • Understand the analytical framework for distribution planning decisions. • Evaluate fulfillment strategies and distribution methods. • Describe the primary fulfillment processes and support functions in distribution center (DC) operations. • Use productivity and quality metrics to analyze fulfillment performance. • Describe how information technology supports distribution operations. • Discuss materials-handling objectives, principles, and equipment uses. CHAPTER OVERVIEW Introduction Distribution in the twenty-first century focuses on the continuous flows of product to fulfill customer requirements at the lowest possible cost and is no longer focused on long term storage of inventory in static warehouses. Distribution operations provide a variety of capabilities for the supply chain. While speed is of the essence, running efficient distribution facilities and networks is also critical. With U.S. warehousing and distribution-related expenses accounting for $143 billion of the $476 billion in inventory related costs, there is a great need to focus on fulfillment expenses in the supply chain. Role of Distribution Operations in SCM As production and consumption are not perfectly synchronized, transportation of individual units is too costly. To overcome such issues, distribution operations—distribution centers, warehouses, cross-docks, and retail stores—are established within the supply chain. These inventory handling, storage, and processing facilities help supply chains create time and place utility. The role of these facilities includes the following: • Balancing supply and demand. • Protecting against uncertainty. • Allowing quantity purchase discounts. • Supporting production requirements. • Fulfilling omni-channel demand • Promoting transportation economies Distribution Facility Functionality Distribution facilities can provide numerous services, depending on the requirements of the supply chain. In traditional distribution operations, four primary functions are carried out: (1) accumulation, (2) sortation, (3) allocation, and (4) assortment • Accumulation involves the receipt of goods from a variety of sources • Sortation focuses on assembling like products together for storage in the distribution facility or for transfer to customers • Allocation function focuses on matching available inventory to customer orders for a SKU. • Assortment involves the assembly of customer orders for multiple SKUs held in the distribution facility. Distribution Tradeoffs Supply chain professionals must determine how to best balance customer service and costs with an understanding of the tradeoffs between distribution and other supply chain functions, as well as within distribution facilities. Organizations may benefit substantially from the establishment of one or several warehouses to reduce transportation costs. However, there comes a point where you build too many warehouses and total costs increase. Another key tradeoff must be made between distribution and inventory. Generally, the more DCs and warehouses, the higher the total inventory carrying costs will be. A common fulfillment strategy of many firms is to use the normal distribution network for most items and maintain one centralized facility for their low velocity items. The tradeoff between distribution operations and customer service is another important issue. The primary tradeoffs and relationships include the following: • Space vs. equipment—the larger the facility and the more space used for distribution operations, the more equipment will be needed in the facility. • Equipment vs. people—the greater the use of equipment to automate materials handling and distribution activity, the lower the labor requirements of a facility. • People vs. space—the larger the facility workforce, the larger the facility size and operation possible. Distribution Challenges Chief among these challenges are labor availability issues, demand variation, and increasing customer requirements. In most organizations, distribution is a people-intensive activity. It is growing increasingly difficult to find and train high-quality personnel for DC operations. Demand variation is another supply chain challenge that affects distribution operations. These trends place a great deal of pressure on DCs to maximize speed and service while keeping costs under control. Distribution Planning and Strategy A series of interrelated distribution planning decisions must be made to ensure that the strategy can be executed at a reasonable cost while supporting supply chain demands. Capability Requirements Product characteristics must drive the design of the distribution process. Issues such as product value, durability, temperature sensitivity, obsolescence, volume, and other factors must be considered. Another issue that has a major impact on the distribution strategy and network structure is the product flow requirements of the supply chain. Two options are available: (1) direct shipment of goods from the manufacturer to retailer or retailer to consumer or (2) movement of goods through distribution facilities to customers. On the downside, it is expensive to deliver small quantities to buyers (reduced transportation efficiencies), and there is no safety stock readily available to protect against demand surges. Properly planned distribution facilities can address the shortcomings of direct shipping. It is necessary to analyze the inventory, transportation, and service tradeoffs before choosing between direct shipping and the use of distribution facilities. Network Design Issues This phase of strategic planning involves the determination of inventory positioning, the number and location of distribution facilities, and the ownership of facilities in the network. Inventory positioning focuses on the issue of where inventory is located within the supply chain. The drawback of centralized inventory is the long distance to customers, which typically produces longer lead times and higher transportation costs. The alternate inventory positioning strategy is to hold product in multiple customer-facing positions. The decentralized inventory strategy is not without challenges: • More facilities are required to stock the product, leading to higher handling costs, • Average inventory levels will rise as each facility will have to hold safety stock to cover demand variation within the region. There is no single answer to which inventory positioning strategy is best and many organizations use both strategies. The second and third network design issues focus on the number and locations of distribution facilities within the supply chain. Determining the number of facilities needed for a supply chain involves the evaluation of cost tradeoffs with other functional areas. • Transportation costs—Consolidation of inbound freight into truckload quantities achieves lower transportation rates per hundredweight and reduced transportation costs. On the outbound side, increasing the number of warehouses brings the warehouses closer to the customer and market area, reducing both transportation distance and costs. • Cost of lost sales—an increase in the number of facilities improves customer proximity and inventory availability. • Warehousing costs—these costs increase because the total amount of space increases with a larger number of warehouses. • Inventory costs—as discussed earlier, an increased number of stocking points increases the overall safety stock levels and inventory carrying costs in the supply chain. The final piece of a network design strategy is the facility ownership question—should an organization own and operate private distribution facilities or contract with third-party logistics providers for distribution services? Public warehousing rents out space to individuals or firms needing storage capacity. Contract warehousing is a customized version of public warehousing in which an external company provides a combination of distribution services that the organization itself has traditionally provided. These external distribution services should be considered as buying the services on an as-needed basis alleviates capital investment in private distribution and short-term commitments for 3PL capacity maintain maximum distribution network flexibility. Choosing between private and 3PL distribution options requires significant planning. Facility Considerations Should an organization choose to outsource the distribution function to 3PL providers, facility design strategies shift to these service suppliers. However, when the facilities are privately owned and operated, a great deal of planning is required. The first facility consideration is to determine the size of each operation within the network. Demand forecasts for the region to be served by the facility will drive the sizing process as follows: 1) develop a demand forecast, 2) convert the units into cubic footage, and 3) add space needs for aisles and other fulfillment activities. After the facility size is determined, attention shifts to the layout of the operations within the distribution operation. Product protection is another key objective. Proper use of automation and materials-handling equipment is an important goal. Another objective is process flexibility. The facility design should not be so permanent as to limit the facility from handling new product lines and providing value added services when new requests emerge. Continuous improvement is the ultimate facility objective. An organization should not design an initial layout and then assume that it will work perfectly forever. Goals and standards for costs, order-handling efficiency, and customer service must be set and monitored on a regular basis. If measurements reveal that optimal facility performance is not being achieved, steps must be taken to improve productivity. The final facility consideration is product placement within the facility. Before order fulfillment operations begin, goods must be located or slotted in the facility. Slotting is defined as the placement of product in a facility for the purpose of optimizing materials handling and space efficiency. Proper product slotting can improve labor productivity and generate other advantages for the organization and its customers. Three criteria are commonly used to slot product within a distribution facility: (1) popularity, (2) unit size, and (3) cube. The popularity criterion locates high volume (popular) items near the shipping area and the low volume (unpopular) items away from the shipping area. Reduced order-picking time and effort are achieved. Proper product slotting can improve labor productivity and generate other advantages for the organization and its customers. Several benefits will be generated by effective product slotting: • Picking productivity—A good product slotting strategy can reduce travel time, thereby reducing picking labor. • Efficient replenishment—By sizing the pick face location based upon a standard unit of measure (case, pallet) for the product in question, you can significantly reduce the labor required to replenish the location. • Work balancing—By balancing activity across multiple pick zones you reduce congestion in the zones, improve material flow, and reduce the total response time for a given order or batch of orders. • Load building—To minimize product damage, heavy product is located at the beginning of the pick path ahead of crushable product. Product may also be located based on case size to facilitate pallet building. • Accuracy—Similar products are separated to minimize the opportunity for picking errors. • Ergonomics—High velocity products are placed in easy to reach locations which reduce bending and reaching. Heavy or oversized items are placed on lower levels or in a separate area where material handling equipment can be utilized. • Pre-consolidation—Storing and picking product by family group can reduce downstream sorting and consolidation activity. Organizations are also bringing sustainability considerations into the facility design process. With mounting pressure from regulators, clients, and consumers to reduce carbon emissions and energy use, companies must develop strategies to improve their supply chains. Distribution Execution This section will focus on the processes that take place within DCs, warehouses, and cross-dock facilities. Product Handling Functions The primary facility operations focus on the movement and storage of product. However, maintaining proper product flows through efficient short-distance moves within the facility is a critical aspect of distribution. Product handling involves five primary processes including receiving, pt away, order picking, customer orders, replenishment and shipping. There are two keys to achieving an accurate, productive flow of goods into the facility. First, receiving clerks must be well trained to evaluate incoming goods and match up product with carrier counts, vendor documentation, and the purchase order. Second, coordination of the receiving and put-away operations is needed. The final movement process occurs at the shipping operation. For many organizations, order picking is the most labor-intensive and expensive distribution activity, accounting for 55 to 65 percent of DC operating costs. The replenishment operation plays an important supporting role for order picking, moving product from storage locations in the facility to the designated pick slots. Support Functions Chief among these support functions are: (1) inventory control; (2) safety, maintenance, and sanitation; (3) security; (4) performance analysis and (5) information technology. Establishing a safe, clean working environment is not only a management obligation, but it is also a distribution productivity booster. The security function seeks to protect the organization from merchandise theft and fraud. The management team is also responsible for evaluating and improving facility performance. Organizations rely heavily on information technology to receive, fill, and distribute customer orders. Distribution Metrics The activities performed in the distribution function can be readily evaluated through the measurement and analysis of key performance indicators (KPIs). Customers use distribution KPIs to objectively assess the quality of service provided by the distribution operation. Management uses KPIs to appraise the operational costs and productivity of company and 3PL fulfillment processes. KPI performance can be analyzed versus past history, current goals, and industry benchmarks. Customer-facing KPIs must target reliability of the distribution processes to provide accurate, complete, and timely fulfillment of orders. Table 10.5 reveals how the most common service quality metrics are calculated. • Order accuracy and order completeness are important service quality KPIs that influence customer satisfaction and retention. Accurate and complete fulfillment occurs when the products selected and shipped from the DC match the customer’s order. • Timeliness is a critical component of fulfillment customer service. Typically, timeliness is considered a transportation issue, but the distribution operation facilitates on-time performance. • Companies can evaluate the combined impact of KPIs via a metric called the perfect order index (POI). The Perfect Order Index (POI) is established by multiplying the results of four KPI measurements: complete orders (100% fill rate), damage-free condition, documentation accuracy, and on-time dispatch. Rather than look at each component separately, the metric highlights the total impact of an incorrect order. While service quality is the foundation of customer satisfaction with the fulfillment process, internal performance is also critical. Organizations must balance order fulfillment expenses with customer service requirements. To achieve low fulfillment costs relative to product value, effective utilization of assets and productive execution of distribution processes are needed. Table 10.6 identifies common DC operations metrics and how they are calculated. • Distribution cost efficiency of internal and 3PL operations is critical, given the magnitude of U.S. warehousing and distribution-related costs—$143 billion in 2014.6 Aggregate cost efficiency measures focus on the total distribution spending versus goal or the cost of goods sold. Item-level KPIs focus on the distribution expense per unit of measure (e.g., cost per pallet, case, or order). These metrics highlight the impact of distribution on supply chain costs and provide a baseline for cost reduction initiatives. • Asset utilization is important as organizations spend significant sums of money on distribution facilities, materials-handling equipment, and technology. All must be utilized regularly to justify current and future investment. • Resource productivity affects distribution cost and the ability of the DC to maximize throughput on a consistent basis. Productivity is measured as the ratio of real output to real input. With distribution costs averaging nearly 10 percent of a sales dollar, productivity improvements will contribute to an organization’s financial success. • Resource efficiency measures compare distribution activity completion time versus engineered time standards. Time and motion studies are used to observe how much time employees require to complete key operations and establish appropriate time standards. Consistent measurement and review of relevant distribution service quality and operational KPIs generates valuable insights. KPIs help organizations take a proactive, knowledge-based approach to managing fulfillment activities and resolving issues before they can negatively affect the supply chain. KPIs also help organizations pinpoint distribution inefficiencies and develop strategies for supply chain cost reduction. Finally, KPI data can be used to analyze cost–service level tradeoffs for decisions regarding distribution outsourcing, fulfillment process modification, and cost reduction initiatives. Distribution Technology While the distribution environment is dependent upon effective product flows, it also requires timely, accurate flows of information within distribution facilities and across the supply chain. Information must be shared regarding customer order status, inventory levels and location within the facility, labor performance, and more. Fortunately, distribution managers no longer need to manually track vast amounts of distribution information. Software and information technology tools are available to support distribution control and decision making. In this final section of the chapter, the primary technologies are presented. Warehouse Management Systems WMS is a software control system that improves product movement and storage operations through efficient management of information and completion of distribution tasks and is an integrated package whose components often include radio-frequency (RF) communications, dedicated localized computer hardware, and the necessary applications software. Beyond the main functionalities, WMS can also provide value-added capabilities and support a variety of supply chain activities. Other value-added capabilities include the following: • Labor management—the ability to link WMS with a related labor tracking module. • Automated data collection – Powerful WMS use automatic identification tools, to accurately capture data, provide visibility of puct flows in the DC and automate activities. • Task interleaving—Task interleaving involves mixing dissimilar tasks such as put-away and replenishment. • Fulfillment flexibility – A robust WMS will support multiple order types, including omnichannel orders for single units and commercial orders for full cases or pallets of product. • System convergence – The ability to interface the WMS with the enterprise resource planning (ERP) system, order management systems, and transportation management will provide a strong flow of information across the organization and the supply chain. Automatic Identification Tools Automatic identification (Auto-ID) describes technologies that help machines identify objects, such as barcodes, smart cards, voice recognition, biometric technologies, radiofrequency identification (RFID), and others. Barcodes and RFID are the auto-ID tools of choice in distribution to help track, locate, and move product quickly—with near perfect accuracy rates to consumers. The barcode sequence provides relevant data that scanners can translate into important information such as a shipment’s origin, the product type, the place of manufacture, and the product’s price. Basic EAN/UPC barcodes are printed on virtually every consumer product in the world. These 8 to 13 digit one-dimensional (1D) barcodes are used to scan goods at point of sale. RFID tags, which consist of silicon chips and an antenna that can transmit data to a wireless receiver, are being used to track everything from jeans to cars. SUMMARY Distribution managers play a critical role in the supply chain, facilitating product flows to manufacturing facilities, retailers, and directly to consumers. Fulfilling these orders accurately and quickly while achieving the lowest possible cost is a balancing game that distribution managers must play daily. They must coordinate people, processes, capacity, and technology to achieve customer satisfaction, meet internal goals, and provide value-added services to the supply chain. Managing the distribution system for maximum supply chain impact requires considerable planning, coordination of fulfillment strategy with the execution of distribution operations, analysis of key metrics, and information sharing. Additional concepts from this chapter include the following: • Distribution operations perform inventory handling, storage, and processing activities to create time and place utility for the supply chain. • A variety of supply chain challenges—balancing supply and demand, protecting against uncertainty, and promoting transportation economies, among others—can be addressed by distribution facilities. • Four primary functions are carried out by traditional distribution facilities: (1) accumulation, (2) sortation, (3) allocation, and (4) assortment. • Distribution operations are taking on value-adding roles—assembly, kitting, product postponement, sequencing, etc.—to complement their basic functionality and to support evolving supply chain needs. • Tradeoffs must be made between space, equipment, and people—the primary resources available to distribution managers. • It is critical to match distribution processes to the items being handled to protect product integrity, promote customer service and satisfaction, and provide greater control of the inventory. • Distribution network design issues involve centralization/decentralization of inventory, the number and location of facilities, and facility ownership. • Effective facility planning—operational size, layout, and product placement—positively impacts labor productivity and response time. • Distribution execution involves five primary processes related to the handling and storage of product: (1) receiving, (2) put-away, (3) order picking, (4) replenishment, and (5) shipping. • Fulfillment support functions provide coordination between key processes and across the supply chain, protect the organization’s inventory investment, and improve working conditions within the facility. • Distribution KPIs address asset utilization, labor productivity, and cost efficiency of the operation, as well as customer service quality issues and the ultimate goal of perfect order fulfillment. • Warehouse management systems software solutions improve product movement and storage operations through efficient management of information and completion of distribution tasks. • Barcodes and RFID are the auto-ID tools of choice in distribution for product control, visibility, and flow—with great accuracy rates. ANSWERS TO STUDY QUESTIONS 1. Discuss the role of distribution in the supply chain. Provide examples of how distribution operations can positively and negatively impact supply chain performance. In a perfect world, supply and demand would be balanced, with desired products being assembled on demand and delivered directly to the point of use. However, this goal is not feasible for most consumer products because production and consumption are not perfectly synchronized, transportation of individual units is too costly, and coordination of activity between such a large number of origin and destination points is very complex. To overcome such issues, distribution operations—distribution centers, warehouses, cross-docks, and retail stores—are established within the supply chain. These inventory handling, storage, and processing facilities help supply chains create time and place utility. By positioning raw materials, components, and finished goods in production- and market-facing positions, goods are available when and where they are needed. Shorter lead times can be achieved, product availability increased, and delivery costs reduced, increasing both the effectiveness and efficiency of the distribution operations. In highly contested markets, these responsive capabilities can help a supply chain enhance its competitive position. These facilities help organizations overcome challenges, support other processes, and take advantage of economies of scale. These roles include the following: 1. Balancing supply and demand. Whether seasonal production must service year-round demand (e.g., corn) or year-round production is needed to meet seasonal demand (e.g., holiday wrapping paper), distribution facilities can stockpile inventory to buffer supply and demand. 2. Protecting against uncertainty. Distribution facilities can hold inventory for protection against forecast errors, supply disruptions, and demand spikes. 3. Allowing quantity purchase discounts. Suppliers often provide incentives to purchase product in larger quantities. Distribution facilities can handle the quantities, reducing the purchase cost per unit. 4. Supporting production requirements. If a manufacturing operation can reduce costs via long production runs or if outputs need to age or ripen (e.g., wine, cheese, fruit), the output can be warehoused prior to distribution. 5. Promoting transportation economies. Fully utilizing container capacity and moving product in larger quantities is less expensive per unit than shipping “air” and moving small quantities at a time. Distribution facilities can be used to receive and hold the larger deliveries of inventory for future requirements. One important interaction that must be considered is the tradeoff between distribution and transportation operations. When a supply chain has no market-facing DCs or warehouses (product is sent directly from plants to individual customers), transportation costs will be very high. Organizations may benefit substantially from the establishment of one or several warehouses to reduce transportation costs. Why? Large shipments can be transported over long distances from plants to distribution facilities via truckload carriers; then the smaller shipments are delivered to nearby customers. However, there comes a point where you build too many warehouses and total costs increase. With so many facilities, operating costs will increase and transportation expenses will rise (inbound shipments will become less-than-truckload shipments which are more expensive than shipping full truckloads). Another key tradeoff must be made between distribution and inventory. Generally, the more DCs and warehouses, the higher the total inventory carrying costs will be. As facilities are added to a fulfillment system, the amount of inventory will increase in total, but at a decreasing rate. This phenomenon tends to occur because each additional facility somewhat duplicates the safety stock maintained by others in the system. Supply chain leaders must be mindful of this interaction and regularly evaluate the tradeoff between smaller inventories versus more facilities. 2. Compare and contrast the four primary functions of a DC: accumulation, sortation, allocation, and assortment. Accumulation involves the receipt of goods from a variety of sources. The DC serves as a collection point for product coming from multiple origins and provides required transfer, storage, or processing services. The accumulation function allows organizations to consolidate orders and shipments for production and fulfillment processes. As Figure 10.1 demonstrates, with accumulation there are fewer deliveries to schedule and manage. Also, significant transportation cost savings are achieved through larger, more cost-efficient deliveries. Sortation focuses on assembling like products together for storage in the distribution facility, processing or transfer to customers. During the receiving process, goods are segmented according to their key characteristics—production lot number, stock-keeping unit (SKU) number, case pack size, expiration date, etc.—and prepared for safe storage in the facility or immediate distribution. Proper sortation is essential for the effective management of inventory and fulfillment of customer orders. Allocation focuses on matching available inventory to customer orders for a SKU. The order is compared to inventory levels, and available units are retrieved from storage according to the quantity requested by the customer. This break-bulk capacity promotes product availability for multiple customers and allows them to purchase needed quantities rather than excess volume that is not desired. Assortment involves the assembly of customer orders for multiple SKUs held in the distribution facility. As Figure 10.2 highlights, the facility provides a product mixing capability, allowing customers to quickly order a variety of items from a single location. This avoids the expenses related to placing numerous orders and having them shipped from a variety of locations. Just as companies benefit from the assortment function, individuals gain from the assortment/product mixing concept when shopping for food. Rather than traveling to the butcher shop, bakery, dairy store, and produce market, we make a single trip to the grocery store, saving us time and transportation costs. Given the congestion, capacity, and fuel costs faced by industry today, this product mixing role is a key distribution facility capability. 3. Discuss the primary tradeoffs that must be made between distribution and other logistics activities. Determining the number of facilities needed for a supply chain involves the evaluation of cost tradeoffs with other functional areas. Figure 10.6 depicts the impact of increasing the number of warehouses on other logistics functional costs. As the number of warehouses increases, transportation cost and the cost of lost sales decline, though inventory and warehousing costs increase. At the optimal number of warehouses, the lowest cost will be reached. However, total costs begin to rise when additional facilities are opened. The increasing inventory and warehousing costs offset decreasing transportation costs and the cost of lost sales. Of course, the total cost curve and the range of warehouses it reflects will be different for each company. •Transportation costs—Consolidation of inbound freight into truckload quantities achieves lower transportation rates per hundredweight and reduced transportation costs. On the outbound side, increasing the number of warehouses brings the warehouses closer to the customer and market area, reducing both transportation distance and costs. •Cost of lost sales—an increase in the number of facilities improves customer proximity and inventory availability. This facilitates faster order cycle time and more complete orders. Fewer customers will be compelled to find substitute products or take their business to other suppliers, thus reducing defections and lost sales. •Warehousing costs—these costs increase because the total amount of space increases with a larger number of warehouses. For example, splitting a 200,000-square-foot facility in half will likely require two facilities of more than 100,000 square feet each. Office space, equipment storage, and other facilities have similar footprints in two facilities as in one, while aisles require a higher proportion of space in the two smaller warehouses. •Inventory costs—as discussed earlier, an increased number of stocking points increases the overall safety stock levels and inventory carrying costs in the supply chain. Moreover, as companies increase their number of warehouses, growing product lines will likely require more total space, even at the same sales volumes. 4. Describe the major challenges faced by distribution managers in the current environment. Distribution managers play a critical role in the supply chain, facilitating product flows to manufacturing facilities, retailers, and directly to consumers. Fulfilling these orders accurately and quickly while achieving the lowest possible cost is a balancing game that distribution managers must play daily. They must coordinate people, processes, capacity, and technology to achieve customer satisfaction, meet internal goals, and provide value-added services to the supply chain. 5. What are the primary capabilities, advantages, and disadvantages of direct distribution, DCs, and cross-docks? An issue that has a major impact on the distribution strategy and network structure is the product flow requirements of the supply chain. Two options are available: (1) direct shipment of goods from the manufacturer to retailer or retailer to consumer or (2) movement of goods through distribution facilities to customers. Direct shipping operations bypass distribution facilities, fulfilling retail store requests from the primary production point (manufacturer’s factory or warehouse) rather than interim distribution facilities that hold inventory. Similarly, Internet retailers directly distribute goods to the end consumer without the need for retail outlets. Direct shipping avoids the need to build and operate distribution facilities, reduces inventory in the system, and often compresses order cycle time. Direct shipping works particularly well when customers place orders for truckload quantities or when product perishability is an issue. For example, it is better to have bread and milk delivered directly to a grocery store than to a DC as they are high-volume products and direct shipping maximizes product shelf life. On the downside, it is expensive to deliver small quantities to buyers (reduced transportation efficiencies), and there is no safety stock readily available to protect against demand surges. Furthermore, many companies are not capable of fulfilling orders for case and individual unit quantities. Thus, it is important to consider product characteristics, demand volume and variability, and related issues before making the decision to establish a direct shipping strategy. Properly planned distribution facilities can address the shortcomings of direct shipping. These facilities, including traditional warehouses, DCs, and cross-docking facilities, provide the supply chain with additional capabilities. Warehouses and DCs can hold goods in anticipation of customer orders, provide a buffer of safety stock to protect against contingencies, and handle small quantity orders efficiently from transportation and fulfillment standpoints. Cross-docks can provide a high-velocity alternative to direct shipping at lower transportation cost with product mixing capabilities. Of course, it is necessary to analyze the inventory, transportation, and service tradeoffs before choosing between direct shipping and the use of distribution facilities. The ultimate answer may be to employ a combination of the two strategies to ensure distribution efficiency and customer satisfaction. Many companies, like Walmart and Target, use a wide variety of distribution methods depending on product volume, size, and supplier proximity. 6. Why would a company such as Unilever, which produces a wide variety of consumer goods, use 3PL distribution services? 3PLs should be considered for several reasons. First, buying the services on an as-needed basis alleviates capital investment in private distribution facilities. Second, short-term commitments for 3PL capacity maintain maximum distribution network flexibility. If demand shifts to another region, you are not locked into a long-term lease or facility ownership. Instead, you simply lease the needed capacity in the new market. Another benefit of outsourcing distribution responsibilities is that you do not have to manage the personnel issues (hiring, training, benefits, etc.) associated with owning and operating the facility. Essentially, distribution becomes a variable cost activity that is run by 3PL experts who can often leverage their investments and capacity across multiple customers. 7. Using company Web sites, compare the distribution service offerings for the following 3PL organizations: a. Excel (http://www.exel.com) and AmeriCold Logistics (http://www.americold.com) b. GENCO (http://www.genco.com) and Neovia Logistics Services (http://www.neovialogistics.com/) Evaluate the students’ work on its own merits. 8. When designing a DC, what interior layout objectives and slotting principles must be considered? Why? The main objective of slotting is to minimize product handling and employee travel in the building. This is important because travel and other nonproductive tasks can account for up to 60 percent of distribution labor hours. Three criteria are commonly used to slot product within a distribution facility: (1) popularity, (2) unit size, and (3) cube. The popularity criterion locates high volume (popular) items near the shipping area and the low volume (unpopular) items away from the shipping area. Reduced order-picking time and effort are achieved. •Proper product slotting can improve labor productivity and generate other advantages for the organization and its customers. Several benefits will be generated by effective product slotting: •Picking productivity—Travel time is a significant portion of a picker’s daily activity. A good product slotting strategy can reduce travel time, thereby reducing picking labor. •Efficient replenishment—By sizing the pick face location based upon a standard unit of measure (case, pallet) for the product in question, you can significantly reduce the labor required to replenish the location. •Work balancing—By balancing activity across multiple pick zones you reduce congestion in the zones, improve material flow, and reduce the total response time for a given order or batch of orders. •Load building—To minimize product damage, heavy product is located at the beginning of the pick path ahead of crushable product. Product may also be located based on case size to facilitate pallet building. •Accuracy—Similar products are separated to minimize the opportunity for picking errors. •Ergonomics—High velocity products are placed in easy to reach locations which reduce bending and reaching. Heavy or oversized items are placed on lower levels or in a separate area where material handling equipment can be utilized. •Pre-consolidation—Storing and picking product by family group can reduce downstream sorting and consolidation activity. For example, grocery DCs may slot products according to store aisle location to facilitate rapid restocking. As this list suggests, proper product slotting is a foundation of facility productivity and sets the stage for a variety of other benefits. However, slotting is not a one-time, start-up event. 9. Identify and describe the five primary product-handling functions in a DC. Product handling functions involves five primary processes: (1) receiving—transferring goods into the facility from the transport network, (2) put-away—moving goods into storage locations, (3) order picking—selecting goods for customer orders, (4) replenishment—moving product from storage locations to picking slots, and (5) shipping—loading goods for delivery to the customer. All five involve short-distance movement of product, while put-away also focuses on the storage activity. At the receiving operation, the inbound carrier is scheduled to deliver the goods at a specific time so as to improve labor productivity and unloading efficiency. The goods are unloaded from the delivery vehicle onto the receiving dock. During the process, receiving clerks inspect the delivery to ensure that the goods match the purchase order and packing slips, the quantity received is accurate, and no damage is found. Problems are noted on the carrier’s delivery receipt, and the receipt is signed. Once on the dock, the goods are sorted by SKU, stacked on pallets to the correct ti-hi (ti is the number of cartons stored on a layer and hi is the number of layers on the pallet), and secured using tape or shrink-wrap. Prior to transfer, the items are tagged with pallet labels that assign storage locations in the facility or designate the goods for direct transfer to the shipping dock if immediately needed to fill a customer order. The put-away operation focuses on the physical movement of product from the receiving dock to assigned storage locations in the facility. Forklift operators check the pallet configuration to validate product safety, verify the storage location, pick up the pallet, and scan the bar code on the pallet label. The product is moved to the proper storage location or picking location and placed in the rack. It is critical that the forklift operator verify that product is being put in the correct location or it may become lost among the vast number of pallet locations and similar looking boxes. After the process is completed, inventory records are updated to reflect receipt of the item, its storage location, and availability for customer order. There are two keys to achieving an accurate, productive flow of goods into the facility. First, receiving clerks must be well trained to evaluate incoming goods and match product with carrier counts, vendor documentation, and the purchase order. Failure to do so will lead to a mismatch between the physical inventory and what is recorded in the system. This will subsequently lead to order-filling problems. Second, coordination of the receiving and put-away operations is needed. Most receiving docks have limited floor capacity, so pallets must be cleared away quickly to ensure that there is space to unload additional deliveries. One way to achieve coordination is to cross-train workers so that they can be shifted back and forth between receiving clerk and put-away forklift operator functions. Another option is to stagger the shift start time so that the receiving process is started early and work is generated for the later start time of the put-away function. The order-picking process focuses on the selection of goods to fulfill customer orders. Order fulfillment personnel travel through the facility from pick slot to pick slot and pull the requested quantity of each product identified on the pick list. The pick list may be generated as a paper checklist, labels that are placed on the carton, a computer display, or a voice-activated picking system. Once picked, the items may be labeled and put on a conveyor system for transfer to the shipping area or assembled on a pallet or cart designated for the customer. If the latter method is used, the order fulfillment personnel transfer the order to the shipment staging area and prepare it for delivery. The completed customer order is staged in a predesignated area for loading onto the appropriate outbound delivery vehicle. For many organizations, order picking is the most labor-intensive and expensive distribution activity, often accounting for more than half of DC operating costs. This function requires a great deal of travel throughout the facility and the handling of individual cases or units within cases. Thus, it is important for managers to focus on creating a productive, safe, and accurate order-picking operation, if the function is to be done correctly and at the lowest possible cost The replenishment operation plays an important supporting role for order picking, moving product from storage locations in the facility to the designated pick slots. These storage locations are often inaccessible to the order fulfillment personnel, and specialized equipment is needed to retrieve the product. Replenishment forklift operators focus on keeping an adequate supply of product in each pick slot. When a pick slot is empty, the order pickers will have to make a second trip to retrieve the required quantity of product. These additional trips are labor intensive and may cause split deliveries or delay the dispatch of customer orders. Hence, it is critical to synchronize order-picking and replenishment activities, shifting personnel back and forth between the functions as needed. The final movement process occurs at the shipping operation. In some facilities, empty trailers are dropped at shipping dock doors and loaded as orders arrive from the picking operation. In other operations, a “live” loading process takes place when the outbound carrier arrives at the shipping dock. The goods are moved from the staging area to the loading dock, counted and inspected as required, and loaded into the carrier’s vehicle. The carrier signs the bill of lading that has been prepared by the shipper, indicating receipt of the goods, and departs from the facility. Though it appears to be more of a transportation-related activity, the shipping operation has a major impact on the success of distribution facilities. The shipping personnel must take steps to protect the freight from in-transit damage, accurately load orders into trailers, and complete work in a timely fashion to meet dispatch deadlines. They also need to utilize trailer space completely to reduce the cost of each trip. Collectively, these efforts augment the customer service and cost efficiency efforts of the other distribution operations. 10. What are the key support functions in a DC? Why are they important? Key support functions are (1) inventory control; (2) safety, maintenance, and sanitation; (3) security; (4) performance analysis; and (5) information technology. One of the most challenging activities in a distribution operation is to maintain control over the inventory. With product flowing in and out of the facility on a daily basis, it is critical to ensure that the inventory database accurately reflects what is actually inside the facility. Inventory control specialists and analysts resolve stock discrepancies, search for misplaced product, conduct cycle counts and quality audits, and make inventory adjustments. Their efforts improve the reliability of inventory reports so that when customers place product orders, the right quantities of the right products are available and accessible to the order fulfillment personnel. Establishing a safe, clean, working environment is not only a management obligation but also a distribution productivity booster. The safety function focuses on preserving the health and welfare of distribution employees via an ergonomically sound working environment. Training employees on proper techniques for lifting, requiring industrial equipment training and licensing, and creating awareness of potential hazards will reduce costly workplace accidents and injuries. Preventive maintenance of equipment and timely repairs of problems also promote safe working conditions in the distribution facility. Finally, the sanitation function focuses on complying with regulatory standards and maintaining worker morale. Also, all three functions help keep product damage in check. The security function seeks to protect the organization from merchandise theft and fraud. Numerous techniques can be used in the distribution facility to prevent losses. Physical tools such as trailer seals, security tags, and monitored processing areas are used to reduce inventory losses. Personnel procedures can also be effective deterrents against theft. Prescreening potential employees, conducting inspections and audits, and limiting access to the facility can be helpful. Finally, a security staff can monitor facility activity and investigate problems. The management team is also responsible for evaluating and improving facility performance. Some organizations will have distribution analysts or software to measure productivity, quality, utilization, and costs for each aspect of the distribution process. A failure to monitor the performance of individual employees using labor standards and the accuracy of their work can lead to poor facility performance. Distribution measures are discussed in the next section. Organizations rely heavily on information technology to receive, fill, and distribute customer orders. Access to a strong team of internal or external technology experts is needed to build stronger information-sharing processes and enhance visibility of inventory and orders. Specific software tools for distribution execution are discussed in an upcoming section of the chapter. Together, these support functions facilitate product movement and storage within the distribution operation and the fulfillment of perfect orders. Without them, it would be difficult to protect workers and product from a host of challenges, maintain precise inventory records, or know how well the operation is performing. In short, the operation would quickly fall into disarray without the team of specialists behind the frontline managers and labor. 11. How would a distribution operation monitor its service quality? What types of metrics would be used to evaluate operating performance of a DC? The activities performed in the distribution function can be readily evaluated through the measurement and analysis of key performance indicators (KPIs). Customers use distribution KPIs to objectively assess the quality of service provided by the distribution operation. Management uses KPIs to appraise the operational costs and productivity of company and 3PL fulfillment processes. KPI performance can be analyzed versus past history, current goals, and industry benchmarks. Order accuracy and order completeness are important service quality KPIs that influence customer satisfaction and retention. Accurate and complete fulfillment occurs when the products selected and shipped from the DC match the customer’s order. Doing so avoids costly problems like customer returns of incorrect products, expedited fulfillment of backordered products, and inventory discrepancies at the DC. Hence, continuous monitoring of these KPIs is important for detecting and resolving order fulfillment errors, shortages, and overages. Timeliness is a critical component of fulfillment customer service. Typically, timeliness is considered a transportation issue, but the distribution operation facilitates on-time performance. An order must be picked, packed, and made available for loading by a shipping deadline. Otherwise, the order will not be dispatched as planned and will have to wait for the next carrier pickup, voyage, or flight. KPIs related to order processing time average and percentage of orders completed by shipping deadlines direct attention toward improvement of order fulfillment velocity. Of course, the goal is to meet customer expectations across all KPIs to support perfect order fulfillment. The DC plays a key role in achieving perfect orders by picking the right products in the right quantities for the right customer order. The DC must also ensure that the products are in the right condition (damage-free) and the orders meet the ship-by deadlines, respectively. Perfect execution avoids customer frustration, customer service intervention, and DC rework to correct the order. Companies can also evaluate the combined impact of these KPIs via a metric called the perfect order index (POI). The Perfect Order Index (POI) is established by multiplying the results of four KPI measurements: complete orders (100% fill rate), damage-free condition, documentation accuracy, and on-time dispatch. Rather than look at each component separately, the metric highlights the total impact of an incorrect order 12. Using Internet search engines, identify three WMS solutions providers. Describe the capabilities and supply chain impact that their tools promise. This information was directly taken from http://www.supplychaindigital.com/warehousing/1792/The-Top-5-Warehouse-Management-Software-Vendors EPICOR Epicor was founded in 1984 and serves over 20,000 customers in more than 140 countries, providing solutions in over 30 languages. Epicor delivers end-to-end, industry-specific solutions for manufacturing, distribution, retail, hospitality and services that enable companies to drive increased efficiency, improve performance and build competitive advantage. Epicor’s WMS offers a uniquely comprehensive warehousing, supply chain management and supply chain execution solution. Without the interferences of a black box, middleware or interfaces to maintain, Epicor’s WMS provides a powerful solution to address all aspects of an order fulfillment, warehousing and distribution requirements. Epicor’s WMS solution is part of the company’s extensive range of SCM software--part of its end-to-end ERP solutions. Based on an industry leading service-oriented architecture (SOA), Epicor SCM is complemented by the gamut of enterprise capabilities, including customer relationship management (CRM), supplier relationship management (SRM) and supply chain execution (SCE). NETSUITE NetSuite Inc., provides an on-demand suite of integrated business management software services worldwide. These services include a suite of applications that provide accounting/enterprise resource planning, customer relationship management, and e-commerce software to enable customers to integrate front-office, back-office, and e-commerce management capabilities into a single platform. NetSuite delivers its retail management solution over the Internet as a subscription service using the software-as-a-service or on-demand model, as well as through relationships with channel partners. NetSuite is the number one integrated, web-based business software. It helps businesses manage their entire company with one complete system. This WMS includes online accounting software, enterprise resource planning (ERP), customer relationship management (CRM), and ecommerce. SYSPRO SYSPRO was formed in 1978 as one of the first software vendors to develop an enterprise resource planning solution. Currently, SYSPRO is a global business solutions vendor with offices on six continents and over 1500 channel and support partners. SYSPRO is an internationally recognized, leading provider of enterprise business solutions. According to Business-Software.com, “SYSPRO’s Advanced Warehouse Management System ensures that material is located correctly, delivered to the shop floor just-in-time, stored and then accurately picked for dispatch to the customer. “With SYSPRO’s WMS solution, transactions are captured at the source, ensuring accuracy of stock information. Operators can pick against a pick list, in conjunction with bar-code scanning, removing the problems typically associated with dispatch errors.” CDC SOFTWARE CDC Software, The Customer-Driven Company, is a global provider of enterprise software applications designed to give its customers the business agility they need to change and evolve along with their customers, respond to shifting needs, market changes, and new opportunities as they arise. According to Business-Software.com, “CDC Software offers a diverse set of industry-specific solutions built to reflect the business processes and demands of distinct lines of business. By embedding industry-specific functionality and best practices in our solutions, we offer faster implementation, lower total cost of ownership, and superior business fit. We also rely on regular feedback from customers, industry user groups, industry analysts, industry associations, and regulatory bodies to shape our solutions to meet critical industry requirements and fit unique business processes.” TECSYS TECSYS is recognized as a market-leading provider of warehouse management, transportation management and distribution management software and industry-expert services to mid-size and Fortune 1000 corporations in healthcare, third-party logistics and general high-volume distribution industries. Business-Software.com states: “TECSYS’ software solutions are Internet-based; they can be deployed on premise, on such servers as IBM P-Series, they can also be hosted applications or be deployed as a SaaS model. TECSYS’ software can easily be interfaced to other complementary software applications and materials handling equipment. Internet-based with SOA architecture, TECSYS’ software applications can be deployed anywhere and can be accessed from any device at anytime.” Evaluate the students’ work on its own merits. Case Studies CHAPTER CASE 10.1 Power Force Corporation 1. Compare and contrast the three options from the perspective of customer service. Which do you believe will provide the best level of service? Why? Option 1 will allow PFC to handle a wider variety of orders in the DC. This should improve picking flexibility and efficiency. However, the single facility will struggle to provide the level of service demanded by retailers and end consumers unless it uses premium transportation. Option 2 will allow PFC to handle a wider variety of orders in the DC. This should improve picking flexibility and efficiency. Furthermore, multiple regional facilities will increase customer proximity, helping PFC to support the level of service demanded by retailers and end consumers without using premium transportation. Option 3 gives PFC an opportunity to focus on manufacturing. If the 3PL has fulfillment expertise backed by solid IT systems and a strong network of facilities, then PFC’s customers will benefit. They will be able to gain access to the smaller, more frequent orders that they desire. Students should pick either Option 2 or Option 3 as the most logical solution due to customer proximity and distribution of the workload to multiple facilities. 2. Compare and contrast the three options from the perspective of cost. Which one do you believe will provide the most economical solution for PFC? Why? Option 1 requires some capital investment in retrofitting the existing facility. Automation is not cheap. Operating costs will increase as long distance moves from one DC to customers is not as efficient as multiple regional facilities. Option 2 requires major capital investment in procuring sites and constructing DC facilities. This is very costly and each facility will require a management team to operate the facility. The good news is that outbound transportation costs will decline due to improved customer proximity. Option 3 requires little capital investment as the 3PL will leverage its existing network to support PFC’s requirements. It is the most economical option in that contracts can be set up with the 3PL that are based on facility capacity used and orders filled. It is the variable cost option for which PFC pays as they use 3PL services. Students will likely choose Option 3 as it has little capital investment requirements. Effective contracts can be negotiated for normal and peak season requirements. 3. What types of functional and cost trade-offs will Himmer need to analyze? There are multiple trade-offs to work through. Students should discuss the pros and cons of each option under consideration. A few of the primary issues include: •Distribution vs. transportation – If PFC builds more facilities, it will incur higher facility operating costs but lower outbound delivery costs. •Distribution vs. inventory – if PFC builds more facilities, it will incur higher total inventory carrying costs as it must spread safety stock across the network. •Distribution vs. customer service – the single PFC facility gives the company more control but limits its ability to quickly adapt to changing demand levels. Also, being far away from markets makes it costly to expedite small shipments long distances. 4. Which distribution option do feel gives PFC the best opportunity for future success? Why? Given the changing buying patterns of retailers and the increasing potential for drop shipping to customers’ homes, students should understand that it will be difficult for PFC to stick with Option 1. Students should discuss the need for PFC to either expand geographically (Option 2) or outsource its fulfillment to a 3PL (Option 3) to meet the requirements of the marketplace. CHAPTER CASE 10.2 TV Gadgetry 1. Help McDavis with the analysis by calculating KPIs for: (a) Unit fill rate; (b) Fulfillment accuracy; (c) Document accuracy; (d) On-time dispatch; and (e) Productivity. Metric September August Unit Fill Rate* 287,333 / 300,000 = 95.8% 192,507 / 200,000 = 96.3% Fulfillment Accuracy 247,385 / 287,333 = 86.1% 188,263 / 192,507 = 97.8% Document Accuracy 46,310 / 50,000 = 92.6% 39,124 / 40,000 = 97.8% On-Time Dispatch 49,188 / 50,000 = 98.4% 38,791 / 40,000 = 97.0% Productivity* 287,333 / 2,000 = 143.7 units per hr. 188,263 / 1,500 = 128.3 units per hr. *picking errors not accounted for by this traditional measure. If only correct filled units were considered, both unit fill rate and productivity would drop. 2. Compare your KPIs to the following TVG goals and comment on the problem areas: Metric Goal September August Commentary Unit Fill Rate 95% 95.8% 96.3% Both months exceeded goal but Sept. performance slipped slightly. Fulfillment Accuracy 98% 86.1% 97.8% August was very close to goal but September performance was poor. Document Accuracy 99% 92.6% 97.8% Neither month met the goal, though September performance dipped. On-Time Dispatch 95% 98.4% 97.0% Both months exceeded goal with September better than August. Productivity (units per hr) 135 143.7 128.3 September productivity looks great on the surface but was offset by major accuracy issues. 3. Based on your KPI calculations, what is the perfect order index for TVG? Month POI Commentary September .958 x .861 x .926 x .984 = 75.1% At worst, 75.1% of September orders were perfect, at best 86.1% were perfect. August .963 x .978 x .978 x .970 = 89.3% At worst, 89.3% of August orders were perfect, at best 96.3% were perfect. 4. What actions should TVG management take to address the problems that you identified? Special emphasis should be placed on improving order filling accuracy when demand increases. It appears that people are working faster to handle the peak but they are filling orders incorrectly which leads to customer service problems, returns, rework, and cost. Attention should also be paid to document accuracy which has slipped. Taking care of these issues should help to reduce the number of customer service complaints. 5. What benefits could TVG gain by adopting a warehouse management system? Some of the problems with the TVG manual operations and paper-based systems could be addressed with a WMS. A WMS would provide TVG with a software control system to improve product movement and storage operations through efficient management of information and completion of distribution tasks. Through properly deployment of a WMS, TVG should be able to achieve high levels of control, inventory accuracy, and productivity through directed picking, directed replenishment, and directed put-away. The labor management component of the WMS will allow TVG to create assignments based on engineered time standards, monitor the productivity of each Solution Manual for Supply Chain Management: A Logistics Perspective John J. Coyle, John C. Langley, Robert A. Novack, Brian J. Gibson 9781305859975