LSCM 3960 ch 11

Discuss in detail the various tradeoffs that affect distribution operations

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. 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. Why is this so? 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 move toward decentralized inventory inhibits the ability to adopt a risk pooling strategy as each facility must hold additional safety stock. The tradeoff between distribution operations and customer service is another important issue. More distribution facilities in the supply chain create better service for customers. Buyers are more comfortable if they know the supplier has a DC within a day's drive from their operations. Decision makers must balance the value of better service levels with the additional costs of operating facilities and carrying inventory. Tradeoffs must also be made at the facility level between the primary resources available to distribution managers—space, equipment, and people. Space allows for the storage of goods when supply and demand are imbalanced. Warehouse equipment, including materials-handling devices ranging from racks to conveyor lines, supports the efficient movement and storage of product within the distribution facility. People are the most critical distribution resource, playing multiple roles in the facility over different schedules. Their capabilities can be increased through training, while their numbers can be quickly increased to handle demand surges.

Name the five product handling functions and discuss each

Product handling 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 check the goods in to ensure that they match the purchase order and packing slips. Once on the dock, the goods are sorted by SKU, stacked on pallets to the correct ti-hi (where 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. The delivery is also inspected for damage and shortages. Problems are noted on the carrier's delivery receipt, and the receipt is signed. 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 needed to immediately 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 quantities and product safety, verify the storage location on the pallet label, pick up the pallet, and scan the bar code on the pallet label. The product is moved to the proper storage location (or sometimes the picking location, if the product is new or the slot is empty) and placed in the rack. After the process is completed, inventory records are updated to reflect receipt of the item, its storage location, and availability for customer order. 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 items are secured to the pallet or cart by means of tape, stretch wrap, or strapping, and a shipping label is created and attached. Finally, the complete customer order is staged in a predesignated area for loading onto the appropriate outbound delivery vehicle. 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 fulfillment personnel 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.

Asset utilization is very important in a 3PL warehouse. t/f

false

Potential labor problems for distribution centers may be the result of

the graying of America

Name the four internal performance measures, and select two to discuss.

Distribution cost efficiency is critical, given the magnitude of warehousing and distribution- related costs—$119 billion in 2009. This is true whether functions are handled in-house or outsourced to 3PL providers. Aggregate cost efficiency measures focus on the total distribution spending versus goal or budget. Item-level KPIs focus on the distribution expense per unit of measure (e.g., cost per pallet, case, or order). It is a simple calculation of total distribution cost divided by the number of units processed. Understanding what is spent to process each unit in a customer's order highlights the impact of distribution on the overall cost of goods. This KPI also provides a baseline from which cost improvement efforts can be made. Asset utilization is a very important aspect of private distribution facilities. Organizations spend significant sums of money to build distribution facilities and outfit them with materials-handling equipment and technology. If the facility sits half empty, the company has wasted time and money on a poorly utilized asset. Space utilization is measured as a percentage of capacity used to capacity available in cubic feet or storage slots. An oft-cited goal is to consistently use 80 to 85 percent of a DC's capacity, which provides some available space for peak season volume. Equipment utilization KPIs can be used by managers to assess the need for additional forklifts, conveyors, and related equipment. Spending on new equipment should not occur unless comparisons of equipment up time (number of hours equipment was available to use versus total hours required) and utilization (number of hours used versus total hours equipment was available) reveal a real need. These KPIs provide an objective indication that equipment is effectively used, sitting idle, or offline for repair. Resource productivity impacts distribution cost and the ability of the operation to maximize throughput on a consistent basis. With distribution costs averaging nearly 10 percent of a sales dollar, productivity improvements will have a notable impact on the bottom line of the profit and loss statement. Productivity is measured as the ratio of real output to real input. An example of this is the number of units processed per labor hour, a widely used productivity KPI. Productivity KPIs and goals help distribution managers evaluate facility performance, estimate how much volume can be handled by the facility, and schedule labor. These easy-to-measure KPIs also provide early warning signals of distribution problems that must be addressed. Resource efficiency measures compare distribution activity completion time versus expected time. Engineered standards are created by breaking down a task into small elements that can be timed by a stopwatch. Allowances are added for fatigue and personal needs to determine an accurate, standardized measure of time for an operation. Efficiency is then measured as a ratio of actual time required for task completion to the engineered standard time allowed for the task. This KPI can be used to evaluate an individual employee's ability to accomplish key tasks and the overall efficiency of operations. The engineered standards can be used by management to set and communicate objective efficiency standards for each distribution function.

Distribution facilities can provide numerous services, depending on the requirements of the supply chain. Which of these is not a typical service? -assortment -accumulation -allocation -activity

activity

The primary tradeoffs and relationships between resources include the following

all the above -space vs. equipment -equipment vs. people -people vs. space

The roles of the distribution center include __________

balancing supply and demand, protecting against uncertainty, and promoting transportation economies

A downside of direct shipping is

can create higher transportation charges.

5. A common fulfillment strategy of many firms is to use the normal distribution network for most items including their low-velocity items. t/f

false

After the layout of the operations is determined, attention shifts to the facility size of the operations within the distribution operation. t/f

false

Contract warehousing is different than 3PL warehousing. t/f

false

Asset utilization is a very important aspect of

private distribution facilities.

The drawback of centralized inventory is

that it extends lead times and results in higher transportation costs

One important interaction that must be considered is the tradeoff between distribution and ________

transportation

Inventory handling, storage, and processing facilities help supply chains create time and place utility. t/f

true

Discuss facility layout, and what factors should be considered

After the facility size is determined, attention shifts to the layout of the operations within the distribution operation. The company must make decisions regarding aisle space, shelving, materials-handling equipment, and the interior dimensions of the facility. Organizations design the interior of the distribution facility to support timely, accurate, and efficient customer order fulfillment. A number of objectives must be kept in mind during the planning process, with utilization of the facility's cubic capacity being first and foremost on the list. One storage area design feature that lends itself to this objective is the use of larger storage bays with more limited access. The turnover or throughput level will affect the storage bays' actual size. For example, when turnover is very low, as in supply warehouses, the bays can be wide and deep, with limited access, and the aisles can be narrow. Increased turnover necessitates quick access for better customer service and, consequently, smaller bays and wider aisles. Product protection is another key objective. The layout must accommodate the physical characteristics of the products being handled. For example, hazardous materials such as explosives, flammable items, and oxidizing items must be separated from other items so as to eliminate the possibility of damage. Also, high-value goods must be safeguarded against pilferage, and temperature-sensitive products must receive proper refrigeration or heat. Finally, distribution personnel should avoid stacking or storing light or fragile items near other items that could cause damage. Proper use of automation and materials-handling equipment is an important goal. Both offer great potential to improve distribution efficiency. Careful planning should include consideration of the risks of investing in automation—obsolescence due to rapid technological change, market fluctuations, and return on the large investment. Mechanized materials-handling equipment generally works best when items are regular in shape and easily handled, when order selection is the middle range of activity, and when product moves in high volumes with few fluctuations. 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. For example, reconfigurable racking and multifunctional materials-handling equipment can prevent the building from becoming obsolete if demand patterns change significantly. Continuous improvement is the ultimate facility objective. An organization should not design an initial layout and then assume that it will work perfectly. 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 take 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. The main objective of slotting is to minimize, or in some instances even eliminate, travel and the amount of time that a stock-keeping unit is handled. This is important because travel and other nonproductive tasks can account for up to 60 percent of distribution labor hours.

There are two options for product flow through the supply chain: direct shipments versus movement of goods through distribution facilities. Discuss advantages and disadvantages of both options.

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. On the downside, it is expensive to deliver small quantities to buyers (reduced transportation efficiencies), and there is limited 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

Discuss inventory positioning, and the differences between centralized and decentralized inventory.

Inventory positioning focuses on the issue of where inventory is located within the supply chain. One strategy is to hold a centralized stock of inventory at a single location such as the origin point or some other advantageous location in the supply chain. Product is distributed to customers across the network from this central stocking point. The benefit of this consolidation strategy is greater control over the inventory and reduced demand variability due to risk pooling. The central or national inventory pool supports higher in-stock availability, though there is a need for less safety stock. The drawback of centralized inventory is the long distance to customers, which typically extends lead times and results in higher transportation costs. Despite these drawbacks, manufacturers of high-value, low-weight products such as prescription pharmaceuticals often rely on one strategically placed inventory pool. The transportation costs associated with next-day and second-day order delivery are offset by the reductions in inventory carrying costs, the enhanced visibility of product flows, and the improved control over order-filling processes, product pedigree issues, and recall events. The alternate inventory positioning strategy is to hold product in multiple customer- facing positions. Stocking inventory regionally or locally helps to reduce customer delivery costs and order cycle time. Product is positioned closer to demand points and can be readily dispatched to meet customer requirements. This decentralized inventory strategy works well for high-volume, low-cost products with low demand uncertainty such as laundry detergent, pet food, and cereal. The decentralized inventory strategy is not without challenges. First, more facilities are required to stock the product, leading to higher handling costs, the risk of product damage, and the potential for product pilferage, not to mention the additional expenses of running the facilities. Also, average inventory levels will rise as each facility will have to hold safety stock to cover demand variation within the region. To combat these issues, some organizations have shifted toward more centralized distribution systems with fewer stocking points. Which inventory positioning strategy is best? There is no single answer, and many organizations use both strategies.

Define and discuss distribution KPIs, focusing on customer-facing measures.

The activities performed in the distribution function have a tangible output that can be readily evaluated. These evaluations are made through the measurement and analysis of distribution key performance indicators (KPIs). Customers use distribution KPIs to objectively assess the quality of service provided by the distribution operation, while management can appraise operational costs and productivity. Many aspects of distribution performance can be evaluated. Important issues include cost efficiency, inventory accuracy, order fill rates, and capacity utilization, among others. KPIs can be used to evaluate current performance of internal and 3PL operations versus historical results, internal goals, and customer requirements. They can also be used to benchmark results against those achieved by competitors, world-class organizations, and other links in the supply chain. The two primary categories of distribution KPIs include customer-facing measures and internal measures. Both internally and externally focused KPIs are needed to evaluate the success and impact of a distribution operation. Customer-facing KPIs must target reliability of the distribution processes to provide accurate, complete, and timely fulfillment of orders. Order accuracy and order completeness KPIs are important to both the customer and the organization. Simply stated, customers want to receive the exact products and quantities that they ordered, not substitute items, incorrectly shipped items, or wrong quantities. These KPIs are measured as ratios of correct received to total ordered. Order accuracy evaluates the number of items ordered delivered correctly versus the number ordered. Order completeness is typically evaluated by an order fill rate KPI which compares the quantity received to the quantity ordered. Continuous monitoring of these metrics is important, as is fast reaction when problems are discovered. Timeliness is a critical component of customer service. You may think of timeliness as being a transportation issue, but the distribution operation also plays a key role in delivering goods to customers on schedule. Order picking, preparation, and shipping each impact order cycle time. If these processes are not completed in a timely fashion, it may not be possible for the transportation system to make up the lost time. Therefore, it is very important to monitor the time required to process orders, from initial receipt until release to the transportation provider. Setting goals and measuring KPIs related to order processing time average, range, and standard deviation will direct attention toward improvement of order fulfillment velocity. Industry-leading companies are now evaluating the combined impact of these KPIs via a metric called the perfect order index (POI). This measure indicates that four basic elements are in place to promote successful fulfillment of customer orders. To be considered a perfect order, the right items must be (1) delivered to the right place; (2) at the right time; (3) in defect-free condition; and (4) with the correct documentation, pricing, and invoicing. A service failure on any component means that the order is not counted as perfect and indicates a need for improvement

Define and discuss Warehouse Management Systems (WMS).

The core software used to manage fulfillment processes is called warehouse management systems (WMS), a mature technology dating back to the 1970s. Widely used to support all types of distribution operations, WMS is a software control system that improves product movement and storage operations through efficient management of information and completion of distribution tasks. The goal is to achieve a high level of control, inventory accuracy, and productivity through directed picking, directed replenishment, and directed put-away. A WMS is more than a simple database that provides stock location information. Instead, it is an integrated package whose components often include radio-frequency (RF) communications, dedicated localized computer hardware, and the necessary applications software. The detailed setup and processing within a WMS can vary significantly from one software vendor to another; however, the basic logic will use a combination of item, location, quantity, unit of measure, and order information to determine where to stock, where to pick, and in what sequence to perform these operations. Beyond the main functionalities, WMS can also provide value-added capabilities and support a variety of supply chain activities. Advanced systems generate performance reports; support paperless processes; enable integration of materials-handling equipment, picking systems, and sorting systems; leverage wireless communication tools; and support automatic identification equipment data collection. Other value-added capabilities include the following: • Labor management—The ability to link WMS with a related labor tracking module allows the organization to create assignments based on engineered time standards, monitor the productivity of each employee, and audit the quality of their work. These labor-reporting capabilities support performance analysis and the use of incentive programs, and they help identify employees in need of additional training. • Task interleaving—This process involves mixing dissimilar tasks such as put-away and replenishment. In large warehouses, WMS-based task interleaving can greatly reduce travel time, not only increasing productivity but also reducing wear on the lift trucks and saving on energy costs by reducing lift truck fuel consumption. • Systems integration—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. Inventory availability, order status, advanced shipping notification, and delivery tracking are a few of the critical visibility benefits created by integration. This shared information can be used for distribution planning purposes. • Activity-based costing/billing—Financial functionality is an important WMS capability for understanding costs and assigning expenses to distribution customers. Primarily designed for 3PL operations, activity-based billing allows them to calculate billable fees based on specific activities. For example, 3PL providers can assign transaction fees for each receipt and shipment transaction, as well as fees for storage and other value-added activities. • Multifunction distribution—A strong WMS will support a variety of distribution methods, shipment sizes, and the execution of value-added services. The ability to support traditional case pick distribution and cross-docking, retailer orders and individual consumer orders, and light assembly and kitting operations creates flexibility for the distribution operation and the supply chain. Improved productivity, efficiency, and accuracy are key WMS benefits. By keeping track of item locations in the facility, the WMS reduces wasted efforts associated with warehouse personnel hunting for an item. This improves labor productivity, reduces the number of personnel required, and improves the order-picking accuracy. The WMS also provides essential information that enables businesses to quickly make accurate decisions that are based on up-to-date information. In addition, these systems improve space utilization by determining the optimal storage patterns to maximize space utilization. Finally, the WMS provides improved managerial control and effectiveness through point-of-work confirmation, accountability, performance measurement, and what-if scenario planning

Discuss the choices for facility ownership, including public and contract warehousing

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? This issue is difficult to address without first determining facility roles, numbers, and locations. After these issues have been resolved, it is easier to understand the scope of tasks to be undertaken and to evaluate the organization's options for handling distribution requirements. They essentially have three choices: (1) private facilities, (2) public facilities, and (3) contract facilities. Private DCs are internal facilities owned by the organization producing or owning the goods. The focus of the facility is to store goods and distribute them to customers. Owning and operating facilities provide the organization with greater control over fulfillment processes and inventory. Also, economies of scale can be achieved if the volume of activity is high enough. If this is the case, the cost per unit delivered to the customer is less, and the retailer can charge a lower price or maintain a higher profit margin. Private facilities are company assets that can be depreciated and can also provide a source of income by renting or leasing excess space to those who need storage facilities. In order to make a private distribution cost-effective, the facility needs high product throughput, requires stable demand, and should be located in or near a dense market area. Additionally, the organization must have distribution expertise, the resources to build facilities, and the desire to operate them. If these attributes are not present, the firm should look to third party logistics (3PL) service providers to handle distribution and warehousing Public warehousing is the traditional external distribution option. A public warehouse rents out space to individuals or firms needing storage capacity. Additional service offerings vary by 3PL provider. Some provide a wide array of services including packaging, labeling, testing, inventory maintenance, delivery, data processing, and pricing to different types of customers. Others focus more on providing short-term storage solutions for specific types of goods—general merchandise, refrigerated goods, household goods, and bulk storage. Public warehousing capacity is often rented on a short-term, transactional basis without significant commitments or unique service requirements. 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 3PL providers dedicate space, labor, and equipment to a client's specific product needs with the goal of providing integrated, accurate distribution services. These facilities can meet the specialized handling requirements for critical products such as pharmaceuticals, electronics, and high-value manufactured goods. The customized nature of contract facilities leads to strong relationships between the 3PLs and a small group of highly important clients. These external distribution services 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. 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

Cross-docks typically increase transportation costs. t/f

false

Efficiency of distribution facilities and networks is not nearly as critical as their speed. t/f

false

It is not difficult to find and train high-quality personnel for DC operations. t/f

false

KPIs cannot be used in connection with distribution center activities as they do not provide tangible, relevant data. t/f

false

Order accuracy and order completeness are the same. t/f

false

Sortation refers a type of conveyer equipment. t/f

false

Which of these is not a support function?

movement and storage

The primary facility operations focus is

on the movement and storage of product.

Certain raw materials can be stored

outside

The first facility consideration is to determine

the size of each operation within the network.

One of the primary tradeoffs at the facility level is space versus equipment. t/f

true

Organizations may benefit substantially from the establishment of one or several warehouses to reduce transportation costs. t/f

true

Product handling functions include both receiving and shipping. t/f

true

Slotting is defined as the placement of product in a facility for the purpose of optimizing materials handling and space efficiency. t/f

true

The drawback of centralized inventory is the long distance to customers, which typically extends lead times and results in higher transportation costs. t/f

true

The first facility consideration is to determine the size of each operation within the network. t/f

true

WMS is more than a simple database that provides stock location information. t/f

true

When establishing a distribution strategy, the first and most obvious consideration is the product. t/f

true

The key financial consideration in choosing between private and 3PL distribution options is

volume of product being moved

Distribution operations help organizations overcome challenges, support other processes, and take advantage of economies of scale. Name and briefly discuss five roles that these operations play.

• 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. • Protecting against uncertainty - Distribution facilities can hold inventory for protection against forecast errors, supply disruptions, and demand spikes. • Allowing quantity purchase discounts - Suppliers often provide incentives to purchase product in larger quantities. Distribution facilities can hold the additional quantities until needed, reducing the purchase cost per unit. • 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. • 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.